INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707130001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 22, 2016
• Document Release Date: October 18, 2010
• Sequence Number: 1
• Publication Date: August 17, 1984
• Content Type: REPORT

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Directorate of S
Intelligence
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International
Economic & Energy
Weekly
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17 August 1984
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DI IEEW 84-033
17 August 1984
copy 695
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Weekly
International
Economic & Energy
17 August 1984
iii Synopsis
Z
5 Briefs Energy
International Finance
Global and Regional Developments
National Developments
USSR: The Economy at Midyear 1984
A entina: Financial Imperatives Ve
truggling Democracy
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ALA
33 aire: The "Bitter Pill" of Economic Reform
LA
37 Smaller Gulf States: Cutting Back on Foreign Aid
NESA
43 estern Europe: Growing Demands for a Shorter Workweek
EURA
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Comments and queries re arding this publication are welcome. They may be 25X1
directed to Directorate of Intelligence,
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17 August 1984
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International
Economic & Energy
Weekly
Synopsis
21 USSR: The Economy at Midyear 1984
The Soviet economy continued a moderate recovery in the first six months of
1984. Taking into account the declining prospects for agricultural production,
we estimate that GNP growth probably will be in the 2-to-3-percent range for
the year.
27 Argentina: Financial Imperatives Versus Struggling Democracy
President Raul Alfonsin believes creditors should ease the repayment burden
to support Argentina's fragile democracy, but his attempts to strike deals with
creditor banks so far have failed. Even with an IMF program, Argentina
.
probably will face recurring financial crunches throughout the 1980s
33 Zaire: The "Bitter Pill" of Economic Reform
Zaire has been making a strong effort this year to stick to its latest economic
stabilization program. To achieve economic stability, it will have to maintain
strict economic adjustment policies for several years.
37 Smaller Gulf States: Cutting Back on Foreign Aid
Kuwait, Qatar, and the United Arab Emirates have tried to use foreign
assistance-as much as $6.1 billion or 10 percent of GDP in 1981-to bolster
their security. The current oil glut, however, caused them to slash aid
disbursements about 70 percent last year, and the flow will remain depressed
at least through 1985.
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DI IEEW 84-033
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43 Western Europe: Growing Demands for a Shorter Workweek
Settlement of the West German metalworkers strike by shortening the
standard workweek from 40 to 38.5 hours with no cut in pay has opened the
door for similar labor demands throughout Western Europe. We believe the
shift to shorter workweeks will continue but will have little impact on Western
Europe's double-digit unemployment because it does not address the underly-
ing causes of the problem.
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Energy
PEC Production Slips OPEC production in July averaged 17.7 million b/d, down 1.5 million b/d
from the June level. Saudi Arabia-acting as OPEC's swing producer-cut
output to relieve recent downward pressure on prices. Saudi production
dropped about 1 million b/d, despite Riyadh's recent oil-for-planes barter deal
with Boeing. Nigeria's production slipped 200,000 b/d below its OPEC-
mandated quota because of marketing and storage problems, while Iranian oil
production rose slightly above its OPEC ceiling in July. Most other OPEC
members continued to violate their quotas and so far this year OPEC has not
held production to its ceiling of 17.5 million b/d. Continued cheating will put
additional downward pressure on prices and will threaten the cartel's already
tenuous accord unless oil demand experiences an unexpectedly strong rebound
in the coming weeks.
Million b/d
Ecuador
0.2
0.2
0.2
0.2
Gabon
0.15
0.2
0.2
0.2
Indonesia
1.3
1.5
1.5
1.4
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a Preliminary.
b Neutral Zone production is shared equally between Saudi Arabia and Kuwait and is included in each
country's production quota.
Saudi Arabia has no formal quota; it acts as swing producer to meet market requirements. 25X1
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In an unprecedented move, London recently requested that several private oil
To,Maintain Oil Prices companies cooperate with the British National Oi1,Corporation (BNOC) to
support oil prices. BNOC-the state corporation that normally sets UK crude
prices-has so far refused to lower its official prices despite several contract
terminations that resulted in trading losses of as much as $600,000 per day in
July. London's decision to intercede-because of British concern that a price
reduction would trigger an uncontrolled slide in world prices-was taken after
the British learned of a sharp decrease in Saudi production, which they
expected would cause the oil market to firm. Public announcements by British
Petroleum and Royal Dutch Shell that field maintenance would reduce UK oil
production by as much as 500,000 b/d during August apparently were
designed to help support prices. Although maintenance operations normally
reduce British oil production at this time of year, the maintenance schedules
Spot Oil
Market Firms
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17 August 1984
prevent new declines in spot oil prices.
The fall in OPEC oil production and the actions taken by the British
Government to support its official oil prices have caused spot crude oil prices to
firm in recent weeks. Spot prices for Saudi Arab Light crude increased about
70 cents per barrel in August to $27.70, although they are still well below the
official price of $29 per barrel. Since the end of July, the price of UK Brent
crude has jumped about $1.50, to $28.50, while Nigerian Bonny Light is up
about 60 cents to $28.20-compared to official prices of $30 per barrel. The
increase in spot oil prices caused one US company late last week to rescind its
$2 per barrel July price cuts. Spot prices for most crudes remain about $1.50
below official levels, however, and we expect OPEC will have to restrain its oil
production to near the organization's ceiling for at least several more weeks to
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O D Nuclear Power According to the trade press, nuclear electricity generation in the OECD
Output Increases countries was up nearly 20 percent in second quarter 1984 compared to the
same period a year ago--reaching 4.3 million barrels per day oil equivalent
(bdoe). Nuclear power generation in Western Europe jumped nearly 40
percent, led by large increases in France and West Germany, which are now
producing 800,000 and 400,000 bdoe, respectively. The majority of.the 25X1
increase in nuclear power generation resulted from the introduction of new-
generating capacity, although improved plant-operating factors also were
important. Twenty nuclear reactors have started commercial operation in.the
past 12 months: six in the United States; three in the United Kingdom; two
each in Canada, France, Japan, Spain, and West Germany; and one in
Sweden. We expect nuclear electricity generation to continue to surge in the
year ahead. Twenty-five additional nuclear reactors are scheduled to come on
line by the end of this year, and the spread of economic recovery throughout
the OECD is stimulating electricity demand. 25X1
OECD: Gross Nuclear Electricity Generation .
Terawatt-hours
(except where noted)
Second Second Percent
Quarter Quarter Change
1983 1984
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Sakhalin Gas
Development Plan
Annpunced
Dekastri, where it would be liquefied for shipment to Japan.
According to the Embassy in Tokyo, the Sakhalin Oil Development Corpora-
tion, jointly owned by a Japanese consortium and the Soviet Union, announced
a technical plan for development of the Chayvo gasfield off Sakhalin Island.
The plan calls for four offshore platforms producing roughly 5 billion cubic
meters of gas t er year for 20 years. The gas would be piped 230 kilometers to
in limbo since the early 1970s.
Japanese Export-Import Bank financing-necessary for completion of the
$3 billion Chayvo project-is contingent on purchase commitments from the
Japanese power companies that would buy the gas. The companies, however,
are reluctant to make any promises, having contracted for supplies into the
,1990s, while gas demand is projected to remain flat. These and other delays
probably will further postpone Sakhalin development, which already has been
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Soviet Bank
Seeks New Branch
in Netherlands
West German
About Trade
ResI ictions
Concern
the Soviet-owned Moscow Narodny Bank in
facilitate oil sales.
London expects to receive permission soon from the Dutch Government to
incorporate in Amsterdam. The opening of a branch in Amsterdam would
mark the first successful expansion since 1974 of the Soviets' overseas banking
network. Soviet banking officials have stated the new branch would be
involved in organizing broad-based Eurocurrency loan syndications for the
Soviet Foreign Trade Bank. Moscow probably also hopes that a branch near
Rotterdam-the major entry port for Soviet oil into Western Europe-will
Global and Regional Developments
technology in West Germany.
West German Economics Minister Martin Bangemann said last week that
Bonn probably would enact overriding legislation if the United States imposes
tough new extraterritorial trade restrictions. The law would be similar to the
British Protection of Trading Interests Act, which London used in 1982 to
circumvent a US ban on exports for the Soviet gas pipeline. Former Economics
Minister Lambsdorff directed his staff this spring to draft a bill that would
block application of US trade laws to US subsidiaries and importers of US
countries about a possible joint approach to Washington.
however, that Bonn, as recommended in the study, is canvassing other
Bonn long has considered US policy on trade in strategic items overly strict.
This latest expression of concern almost certainly was prompted by pending
renewal of the US Export Administration Act and by the recent leak of an in-
ternal West German Government study that concluded that US export ~
restrictions on high-technology trade are increasing and affecting not only the
USSR, but also Japan and Western Europe. West German officials deny,
Reaction to US Textile Textile and apparel exporters have mounted a major diplomatic and media
Irrp'ort Moves campaign attacking a US Government proposal announced this month that
would tighten rules of origin for all clothing imports. They also have taken aim
at petitions recently filed by US textile firms that claim unfair export
subsidization by 13 exporters-Argentina, Colombia, Indonesia, Malaysia,
Mexico, Panama, Peru, Philippines, Portugal, Singapore, Sri Lanka, Thailand,
and Turkey. Exporters have asserted that:
? The US measures would violate the Multifiber Arrangement and the GATT.
? The US law, which denies an import injury test in countervailing duty
investigations to countries that have not signed the GATT subsidies code, is
unfair and illegal. (None of the 13 exporters named in the suit is a signatory.)
? Financially troubled LDCs need to expand earnings to cope with their
international debt problems.
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Textile and
Apparel Exports, 1982
Share of
Manufactured
Exports
A meeting in late July of textile exporting LDCs in Karachi denounced the
possible US actions and asked members to appeal to public opinion in
industrial countries. Last week the group requested a GATT textile committee
meeting in September to examine the measures. Although the 13 countries
listed in the subsidy complaints accounted for only 11.25 percent of US textile
and apparel imports in 1982, some small producers or new entrants into the
market, such as Sri Lanka or the Philippines, are highly dependent on the US
market
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Economic Impact Saudi Arabia, Italy, Egypt, and Iran are likely to suffer most if more mines
of the Red Sea Mining are laid in the Red Sea because of their large volumes of trade through the
Suez Canal. Statistics of the Suez Canal,Authority show that Saudi Arabia is
by far the biggest user of the route. Last year, 48 million tons of its exports and
imports moved through the Canal. The Saudis have a major stake in ship 25X1
movements through the Canal, as well as the cargo tonnages. With 946
transits last year, their fleet was the third most active in Canal traffic among
shipowning nations. Only the fleets of Greece with 2,436 transits and the
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tive
Italy had the second-largest stake in Suez trade last year, and ranked 10th
among shipowning users of the Canal. The volume of Egypt's trade via the wa-
terway was third largest in tonnage of cargo, but its own ships made only 104
transits. Iran's volume of cargo through the Canal was almost as high as
Egypt's. Iranian ships, however, made even fewer transits--only 98.
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Status Report Initial R&D projects and participants have been selected for the Esprit
J
in the information and computer industries. The Esprit program will focus on
five areas of research and development: microelectronics; software technol-
ogies; advanced information processing; advanced office systems; and comput-
er-aided manufacturing. Earlier this year, the EC allocated $1.3 billion for the
first five years of the project. Late in July, the EC chose 90 research projects
involving 300 West European companies, research labs, and universities to
receive the first $350 million of funding. Much of the research is similar to Ja-
pan's efforts under its Fifth-Generation Computer Project.
When the Esprit Project was established, participation was open to any
company that was performing R&D in information or computer technologies
in the EC. The EC, however, may be applying selection criteria unevenly. In at
least one case, the EC attempted to exclude major
participation by IBM. Although IBM is now involved in some Esprit projects,
IBM and other large US firms have only been awarded minor roles.
National Developments
Developed Countries
IMF Threatens To
Suspend Credit
Ankara
According to press reports, the IMF is threatening to suspend the $57 million
tranche of the current standby agreement that is due to be drawn this month,
because of Ankara's failure to meet agreed monetary targets. The limits for
net domestic assets of the Central Bank and credits to the public sector have
been exceeded by about 11 percent as of early last month, while the money
supply soared almost 20 percent between May and July. The Fund will almost
certainly insist on a tightening of monetary policy to combat Turkey's 55-
percent inflation rate. Despite increasing domestic pressure to ease policy,
Prime Minister Ozal is likely to try to meet IMF demands to slow monetary
growth. The Central Bank has recently boosted interest rates by 1 to 4
percentage points, interest rates for six-month time deposits have been raised
from 48 percent to 52 percent, and the Treasury has begun issuing high-
interest bonds to reduce excess liquidity. Failure to comply with the IMF's
conditions would hurt Turkey's ability to attract loans to meet sharply rising
debt-service needs in 1985, when rescheduled debt payments fall due.
panish
Economic Projections
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Madrid recently projected optimistically that real growth will average
3 percent annually during 1984-86. Even so, the government projects that
unemployment would fall only from 20.3 percent at the end of this year to 19.6
percent in 1986. The Gonzalez administration predicts that, at best, 279,000
jobs would be created by the end of its mandate in 1986 if trade unions accept
a 1-percent real wage cut next year and a further 0.5-percent decrease in 1986.
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on the Esprit Project Project, the European Community's effort to improve its competitive position
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The government also is counting on lower salary demands to help bring
inflation down to 6 percent over the next two years and boost real investment
8.8 percent annually. Madrid probably intends to use these forecasts to
attempt to extract concessions from trade unions-negotiations on a social
pact between government, business, and labor began last week. Even if the
government succeeds, as we expect it will, wage moderation alone will do little
to promote economic recovery. The Gonzalez administration still faces several
difficult and politically unpopular, tasks: putting industry on a sounder footing,
reforming the social security system, and cutting the budget deficit
Rome Completes
Policy Review
Italy's Socialist-led government recently agreed on its economic policy objec-
tives through 1985. The five-party coalition, however, set only broad goals
such as reducing the inflation rate from about 10.5 percent-the highest in the
Big Seven-to 7 percent, lowering the budget deficit as a share of GDP from
last year's 17-percent figure, and creating new jobs, especially in the depressed
southern region. Meeting these goals-particularly on the budgetary objec-
tive-will prove difficult: - 25X1
o Labor unions already have criticized government proposals to reduce
mounting pension costs by gradually increasing the retirement age from 60
to 65 for men and from 55 to 60 for women.
o A tax-amnesty proposal-a key part of the deficit-cutting package-is
stalled in Parliament.
c New proposals to broaden the tax base and reduce tax evasion by small
businesses and professionals face substantial opposition from the private 25X1
sector:
Continued wrangling within the coalition itself is likely to impede policy,
implementation. For example, Christian Democratic Treasury Minister
Goria's vague plans for spending cuts are meeting sharp criticism from
coalition members such as Socialist Labor Minister DeMichelis. At the- same
time, the US Embassy in Rome reports that Italy's moderate recovery and
lower inflation rate are easing short-term pressures on Prime Minister Craxi
and most coalition partners to deal effectively with the budget-deficit issue.
Japan Changes Japanese press reports indicate that MITI has decided not to renew the 25X1
Industrial Support Extraordinary Measures Law for Promotion of Specific Machinery and
Levislation Information Industries when it expires in June of 1985. This law has been the
basis for MITI support of microelectronics, data processing, optoelectronics, 25X1
and other information industries. MITI officials have stated that support is no
longer required for industries such as computers because they are now mature
and able to compete in the global marketplace
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 Despite the failure to renew the legislation, we believe that Tokyo will continue
to support the computer industry in other ways. Indeed, MITI has already
proposed new legislation-New Industrial Technology Guidelines-that would
cover the biotechnology, materials, and electronics industries (excluding
computers). In addition, there are myriad support. programs that will be
unaffected by the lapse of the Extraordinary Measures Law.
La Or Party Continues of tariffs instead of import licenses-with the aim of lowering the overall level
ade Liberalization of trade protection. Wellington also decided to continue its phaseout of the $1
New Zealand Prime Minister Lange this week accelerated the government's shift to the use
billion a year export subsidy program. Lange, however, was forced by leftwing
parliamentarians to extend the phaseout by two years-until 1987-in the
hope of softening the adverse impact on employment. Unless Lange can
consolidate support within the party, he will be forced over the next several
months to make additional compromises in im lementing his relatively
conservative economic policies.
Less Developed Countries
Record Argentine Consumer prices jumped 18 percent in July and are 615 percent higher than
Inflation Complicates the same month last year, according to press reports. This makes Argentina
T lks With IMF the world leader in inflation and adds to the government's problems in
reconciling budget, exchange rate, and wage policies with the IMF. Moreover,
the failure of the Alfonsin government to curb inflation-prices were rising at
a 430-percent rate when Alfonsin took office last December-is encouraging
union leaders to be more aggressive in demanding wage increases. Despite
ongoing efforts at establishing a social contract between government and
labor, the Trade Union Confederation (CGT) is already asking for a 23-
percent increase for August. Such an increase would be approximately in line
with the President's promise of a 6-to-8-percent real increase in wages this
year. Although Alfonsin claims that workers have enjoyed a 4-percent real
gain since last December, the US Embassy calculates
7
that the large public-sector work force has received - few
if any gains. We believe the unions are becoming aware that nominal wage in-
creases are quickly eroded because of the government's inability to control
inflation, and we foresee increased strikes. Alfonsin has not been willing to
confront the unions and, barring a shift in his approach, it is unlikely his
government will achieve the social pact needed to control the wage-price spiral
and make progress in reaching an agreement with the IMF.
New Mexican Develop- Mexico's National Program for Industrial Development and Foreign Trade,
ment Plan Underscores announced late last month, is unlikely to boost private-sector investor confi-
Policy Drift dence. Moreover, the difficulty in constructing the program underscores.
growing divisions in the economic Cabinet concerning future policy directions.,,
The plan calls for the development of internationally competitive firms in order
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to promote the expansion of manufactured exports. Despite objections from the
private sector, the plan retains the government's paramount position in setting
public- and private-sector investment goals, although some objectionable
passages were tempered or deleted during a six-month consultation period. The
plan offers no new incentives to foreign investors, promising only that state
interests in several "nonstrategic" industries such as food processing, textiles,
and appliances will be sold to the private sector. While the financial press
reported friction between the plan's authors in the Commerce Ministry and
officials in the Finance Ministry who argued for less government intervention,
President de la Madrid apparently sided with those favoring government
direction of the economy. Similar divisions among policymakers over the role
of foreign investment also have been reported, but once again those favoring
tight restrictions appear to be in control.
PhiliiEp ne Foreign The Philippine Central Bank's foreign exchange holdings declined from almost
E eliange Reserves $900 million in March to $560 million last month-the lowest level since last
all October, when Manila imposed a principal repayments moratorium on foreign
Cost ica Plans
T ost Economic
'onference
pressure to reach agreement with the IMF will grow.
debt. The IMF attributes declining reserves to a disappointing export perform- 25X1
ance and the Central Bank's strategy of relying heavily on the black market to
allocate foreign exchange. Althrough this approach has softened the impact of
the foreign exchange shortage by allowing businessmen to import manufactur-
ing inputs, it has prevented the Bank from capturing sufficient foreign 25X1
exchange. With current reserve levels now equal to slightly more than one . .
month's imports, Manila will find it increasingly difficult to pay for critically'
needed goods while maintaining interest payments on foreign loans, and 25X1
Costa Rica plans to host an economic conference in late September which will
include participants from the European Economic Community, Central Amer-
ica, and the Contadora countries. The principal agenda item calls for opening
negotiations to create a new structure for increased EEC economic cooperation
with Central America, similar to the preferential tariff pact between the EEC
and the Association of Southeast Asian Nations. The impetus for this meeting
grew out of President Monge's state visits in June to 12 West European
capitals, where he proposed the conference and also sought bilateral economic
aid. According to US Embassy reports, Costa Rican officials believe that
negotiations for a pact between the EEC and Central America would take at
least a year, in part because British Prime Minister Thatcher is opposed to giv-
ing aid to Nicaragua. For the foreseeable future, most West European
assistance to the region will continue to be in the form of bilateral aid.
thiopian
Debt Problems
Ethiopia probably will have to reschedule its debt to Western governments and
banks unless it quickly takes steps to reverse negative financial trends. The?-
current account deficit is widening because exports are stagnating while the
government remains reluctant to cut imports as it prepares for the September- _
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celebration of the 10th anniversary of the Ethiopian revolution. The burden of
servicing the largely official debt continues to grow: servicing obligations are
expected to jump about one-third this fiscal year, reaching almost 25 percent
of projected earnings from exports of goods and services. Moreover,. the US
Embassy reports that foreign exchange reserves are sufficient to cover six
weeks of imports at most, compared with the 14 weeks' coverage of a year ago.
additional commercial loans, or begin to build up arrearages.
The government still has several options before resorting to a formal resched-
uling. Addis Ababa already has approached the IMF to discuss balance-of-
payments assistance, but has not requested formal negotiations. The regime
also is likely to ask Libya or the Soviet Union for hard currency support,
although substantial assistance probably will not be forthcoming. In the
absence of increased aid flows, Ethiopia will have to slash imports, seek
USSR Moving Early The current marketing year is only six weeks old, and the USSR has already
on Grain Purchases contracted for about half of the 40 million tons of grain it will need to import if
it is to sustain growth in meat and dairy products. The United States will be
the dominant supplier over the coming year. Some 10 million tons have been
purchased in the United States since early July, including most recently 1
million tons in early August for immediate shipment.
pace
The latest purchases from the United States add a sense of urgency to Soviet
behavior. Although the USSR is possibly planning political or military actions
that would raise the risk of a US embargo, there are other sufficiently
persuasive reasons for the early grain purchases. The Soviets may be
concerned that the 1984 harvest, now estimated at about 190 million tons, will
not reach that level. In addition, the production of potatoes-potatoes are a
substitute for grain-is expected to be nearly 10 percent below last year's
production, and the harvesting of forage crops is still running behind the 1983
marketing year. The Soviet leadership would be reluctant to give up the hard-
won gains in meat and dairy production made in the past year and a half.
Moscow has demonstrated a capability to handle at least 50 million tons of im-
ports annually, but to do so shipments must be scheduled fairly evenly
throughout the year. Almost all of the recent purchases are scheduled for
delivery during the July-December portion of the marketing year. Current low
international grain prices provide the USSR an opportunity to rebuild stocks
drawn down by a series of poor to mediocre harvests. Imports would have to
exceed 40 million tons for any stock rebuilding. If Moscow's need for grain in-
creases substantially over 40 million tons because of shortfalls in domestic
production of feed, it will have to choose between reducing feed rations and
pushing imports beyond the record 45 million tons imported in the 1981-82
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The United States probably will supply the largest share of grain to the USSR
during this marketing year, even though world wheat production and stocks
are expected to reach near-record levels. Less-than-favorable weather condi-
tions in Canada, Argentina, and Australia may prevent these countries from
satisfying sharp increases in Soviet demand and maintaining exports to their
other customers. Even if total imports are limited to 40 million tons, purchases
Purchases Additional Total
to Date Commitments Commitments
Under LTAs
that rely on it for power.
This major project in the northern Kazakstan coal basin is scheduled to
provide about 15 percent of Soviet coal and nearly 5 percent of'electricity
output by 1990. The power plant has been plagued with design and operating
problems since its startup in 1979, however, and the Soviets may need
considerable Western assistance to resolve the difficulties. West German and
Italian manufacturers of coal-cleaning equipment have already won multi-
from the United States could rise to at least 15 million tons.
USSR: Grain Purchases for Delivery
During the July-June Marketing Year
1983/84 1984/85
Purchases
ajor Soviet Coal One of the largest Soviet projects for integrating coal mining with "mine
Project in Trouble mouth" power plants has received sharp criticism for its poor performance.
According to Pravda, the first of five planned coal-fired power plants at
Ekibastuz has failed to operate at better than two-thirds of capacity, in part
because of the poor quality of the coal being produced. Interruptions in
electricity output from the flawed plant cause costly disruptions in industries
East German
Recovery Continuing
million dollar contracts for the project.
East Berlin announced earlier this month that national income in the first
seven months of the year was 5.1 percent above the year-earlier period,
indicating that the recovery that pushed income growth to 4.4 percent last year
is continuing. The steadily improving monthly reports suggest that growth in
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17 August 1984
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Unev Impact
of ngarian Economic
[:forms
1984 will again be relatively high by East European standards. Industrial
production reportedly rose 4.3 percent in the January-July period, and
productivity growth reached 7.4 percent. Retail sales climbed 4.9 percent, a
sharp change from 1982/83, when real personal consumption probably
declined and consumers bore the brunt of East Germany's efforts to avoid a fi-
nancial crisis. Foreign Trade Bank officials meanwhile told the US Embassy
that East Germany ran another trade surplus with the West in the first half
and that the chronic trade deficits with the USSR had been eliminated with
the help of an 18-percent increase in exports.F__~
? Improved use of investment resources.
We attribute the recent strength of the East German economy largely to the
efforts of the Honecker regime, including:
? Structural changes that have improved the efficiency of the economy and
produced marked savings in the use of energy and raw materials and
provided more salable export goods.
? A successful export push that allowed renewal of growth of imports from the
West.
? Administrative changes designed to boost managerial and worker incentives.
Budapest is concerned that stagnating living standards have created serious
social tensions and could lead to public disturbances,
private-sector income has climbed 45 percent.
creasing income disparity between poorl aid industrial workers and more
prosperous private sector employees. since 1982 the
real income of a worker receiving only a state salary has been dropping, while
major problems growing inflation and the in-
Closer inese-East
Euro Wan Economic
Tie
Secret
17 August 1984
government to retreat from its reform policies.
The problems result from austerity measures that Hungary has adopted to
meet foreign-debt obligations and from the uneven impact on the population of
the economic reform program. Reforms to reduce consumer-price subsidies
and encourage private initiatives are hurting individuals on fixed incomes and
those with fewer economic opportunities. The resulting tensions, however, are
almost certainly not serious enough to cause unrest soon or to cause the
and to probe the limits of Soviet tolerance.
China will establish bilateral economic commissions with Poland, Hungary,
and Czechoslovakia, according to agreements signed in June and July during
the Chinese Foreign. Trade Minister's visit to Eastern Europe. China also
signed bilateral agreements on economic and technological cooperation with
all three countries. US Embassy contacts in Warsaw and Budapest say that
Moscow approves such measures. In addition to the economic benefits that
both sides will derive, Beijing has been pursuing better relations with East
European countries to encourage them to be more independent from Moscow
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The Soviets may see benefits for themselves and their allies in allowing the
East Europeans to move ahead on economic cooperation with the Chinese.
They are in no mood, however, to tolerate much diversity on any key political
issues. Beijing could be signaling an interest in moving ahead with the USSR
on economic issues, an area where progress slowed following the Soviet
postponement of First Deputy Premier Arkhipov's visit in May. Since then the
Chinese have sought to put themselves in a position to be the more flexible of
the two parties while portraying the USSR as increasingly intransigent and
isolated internationally. Such a policy costs China little as it tries to put
pressure on Moscow to adopt a more flexible position.
19 Secret
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USSR: The Economy
at Midyear 1984
The Soviet economy continued a moderate recovery
III LIIC IIUSL Six IIlUI1l11S U1 17O'+. 111t 111ULLSL1111
sector, in particular, appears to be sustaining the
better performance of last year, when growth in
output picked up after several sluggish years. The
railroads also are continuing to do a better job of
moving freight-bottlenecks and freight car short-
ages have become less frequent. Taking into ac-
count the declining prospects for agricultural pro-
duction, we estimate that GNP growth probably
will in the 2-to-3-percent range for the year.
Industry-On a Par With 1983
Soviet industrial production in first half 1984 was
3.5 percent above the year-earlier level, according
to our calculations. The industrial sector's record
during the past year and a half represents an
improvement over recent years-industrial output
grew 2.5 percent a year on average during 1979-
82-but is still well below the pace of the early
1970s.F___1
Industrial Materials. The production of industrial
materials grew at about the same rate as in first
half 1983, although performance fell off in several
key branches. Output of ferrous metals and con-
struction materials, for instance, increased at a rate
below that of first half 1983 because of shortages of
critical raw materials and skilled labor as well as
inadequate investment. However, most branches of
the chemical industry, nonferrous metals indus-
tries, and the wood and paper industry equaled or
bettered last year's performances.
In the energy sector, results were mixed. Oil output
was down slightly in the first six months because of
inadequate inventories of good-quality oilfield
Half
Half
1983
1984
Industry
2.3
3.4
3.7
3.5
Machinery
3.8
3.5
4.1
4.1
Industrial materials
1.4
3.4
3.3
3.4
Ferrous metals
0.4
4.0
2.5
1.8
Crude steel -
0.9
4.0
2.3
2.0
Rolled steel -
0.7
4.0
1.9
2.1
Steel pipe -
2.0
4.0
5.0
0.7
Fuels
1.8
1.2
1.7
1.0
Coal
2.0
-0.3
-0.1
-0.5
Oil (including
gas condensate)
0.6
0.6
1.3
-0.1
Gas
7.7
7.1
. 7.3
8.7
Electric power
3.1
3.6
3.5
5.5
Chemicals
1..8
6.0
5.2
4.9
Mineral fertilizer
2.7
11.1
9.0
4.0
Synthetic resins and -
plastics
0.8
8.9
7.0
11.0
Wood, pulp, and paper
products
0.4
3.0
3.4
4.0
Construction materials
0
3.1
3.4
2.8
Consumer nondurables
1.3
3.3
3.7
2.2
Soft
goods -
0.5
0.9
0.8
1.0
Proc
essed foods
2.8
5.2
6.0
3.2
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1983
First
Half
First
Half
1984
1983
1984
Plan
Projected
Oil (million b/d)
12.18
12.25
12.33
12.38
12.31
12.45
12.23-12.35
Coal (million metric tons)
704.0
718.1
716.0
363
361
723
710-715
Gas (billion cubic meters)
465.3
500.7
535.5
265
288
578
582-585
equipment, shortages of well-maintenance crews
and other skilled labor, bad weather early in the
year, and delays in the massive program to add
pumps to West Siberian oil wells. The production
goal for 1984 now is beyond reach, and Moscow
will do well to match 1983's output. Coal produc-
tion was also down somewhat in the first half, and
the modest 1-percent growth planned for 1984 is
probably also unattainable; output could fall below
last year's level of 716 million tons.
On a more positive note, gas and electric power
production both advanced at rapid rates. With
first-half gas output above plan, this year's goal
should be easily surpassed. Production of electricity
increased by a healthy 5.5 percent compared with
first half 1983-well above the 3.5-percent rate of
increase planned for the year. The major reason for
the improvement has been the ample fuel supplies
available this year because of a mild winter and the
conversion from oil to gas at a number of power
plants.
Machinery. Machinery output increased by about 4
percent in the first six months of 1984, above the
average for industry as a whole but considerably
lower than the 7-percent rate planned for 1981-85.
Machine building is a pivotal sector, producing
military hardware as well as consumer durables
and machinery for investment. Reduced availabil-
ity of rolled steel products and inadequate invest-
ment in the machinery industries, however, have
held back growth in this sector during the 1981-85
Consumer Goods. Growth in the production of
nondurable consumer goods slowed in the first six
months of 1984. The dropoff was especially appar-
ent in processed foods such as butter, vegetable, oil,
and canned foods. Production of other nondurables
increased at about the same low rate as last year.
Transportation
Total freight turnover totaled 3.8 trillion ton-kilo-
meters during the first half of this year-up over 3
percent compared with first half 1983, and slightly
ahead of plan. The road and river transport sectors,
however, did not do well, and the decline in high-
way traffic is the only one in the last 10 years.
Transport of natural gas, on the other hand, ad-
vanced rapidly.as new pipelines were commis-
sioned. Five of the six gas pipelines planned for
construction during 1981-85 have now been com-
pleted.
.Plan.
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17 August 1984
Much of the responsibility for the dropoff in indus-
trial performance in recent years can be traced to
the railroads, which bear the major share of the
transportation burden in the USSR. This sector
now appears to be in the process of righting itself.
Rail freight traffic increased by about 2 percent
during the first half-less than last year's 4-percent
growth but still a solid showing in view of the major
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1981 1982 1983 First Half
1984
problems in this sector since the late 1970s. Al-
though plans for shipping some commodities-such
as coal and lumber-were not met, the problems
appear to be local and not a signal of widespread
Percent USSR: Growth of Capital Investment Percent
disruptions in the rail network.
Investment and Employment
State capital investment, which typically accounts
for about seven-eighths of total capital investment,
rose 2 percent in the first six months of this year-
one-third the rate at which it increased during first
half 1983. It is too early to tell whether this reflects
a conscious effort to slow the growth of investment.
Earlier during the current five-year planning period
a decision apparently was made to step up the
growth of investment, and it has been rising at an
average annual rate of about.4 percent, more than
double the rate called for in the 1981-85 Plan.
Growth in employment continued to slow during
January-June 1984, reflecting demographic trends.
Total employment rose less than 1 percent and the
increase in industrial employment was even small-
er. Using last year's trends as a guide, we assess
that the biggest gains probably occurred in the
service sectors-particularly education and
health-and in state agriculture.
1981 1982 1983 1984 Plan
1981-85
First Plan
Half
a State capital investment.
b Average annual rate of growth.
Consumer Well-Being
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Data for the first six months of 1984 do not
indicate any shifts in the Kremlin's policies in the
area of consumer welfare:
? Support for the Brezhnev Food Program has
continued. Over one-third of state capital invest-
ment was allocated to the agro-industrial complex
during January-June 1984, roughly the share
called for in the 1981-85 Plan.
? Rationing of selected food items is continuing.
The system of special distribution of foodstuffs
through the workplace (which originated in the
1970s and is considerably more extensive than
the traditional special stores for selected elites) is
still in use.
Meanwhile, increased supplies of some foodstuffs
and many nonfood items in the first six months of
this year have reduced the imbalance between
consumer purchasing power and the availability of
consumer goods. Meat output is at record levels as
meat production on state and collective farms-
which account for about two-thirds of the total-
rose 8 percent. Production of clothing, textiles, and
? The increase in the average monthly pay of wage
and salary workers was in line with the 2.7-
percent annual rate called for in the 1981-85
Plan.
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the statements Soviet leaders have made about the
need to rely less on Western goods and technology.
These statements reflect the Soviet reaction to
Western trade restrictions and a longstanding de-
sire to conserve hard currency.
Percent increase in
average monthly
wages of workers and
employees
Percent increase in
retail trade turnover
1981
1982
1983
First
Half
First
Half
1983
1984a
2.1
2.8
2.7
2.3
2.4
4.1
0
2.8
1.6
5.1
a Compared with first half 1983.
b Although the Soviet series reflects some disguised inflation, the
difference in growth rates between 1982 and first half 1984 is
substantial.
knitwear also increased. Reductions in retail prices
of selected consumer goods early in the year may
have boosted consumer spending as growth in retail
trade turnover tripled during first half 1984. Still,
imbalances in consumer markets continue, mainly.
because of the inability of the planners to get
enterprises to produce the right assortment of goods
and services, the failure to adjust relative retail
prices, and the lack of effective quality control.
Hard currency exports and imports both declined in
the first quarter. However, because exports
dropped much less than imports, Moscow recorded
a $700 million trade surplus as opposed to a $500
million deficit in the year-earlier period. Imports
from Italy, Japan, and West Germany fell sharply
mainly because of lower purchases of machinery
and equipment and reduced imports of large-diam-
eter pipe for the nearly completed Siberia-to-
Western Europe natural gas pipeline. Imports of
agricultural commodities from Argentina, Austra-
lia, and Canada also were down, while purchases
from the United States remained at about the level
of first quarter 1983. The decline in exports was
mainly the result of a reduction in military sales to
less developed countries. The Kremlin offset a
more-than-10-percent fall in oil prices by boosting
the volume of its oil exports to the West.
The hard currency surplus helped the Soviets boost
their assets in Western banks during first quarter
1984 by about $1.8 billion; liabilities increased by
approximately $1.3 billion. We estimate that Mos-
cow's total net hard currency debt was about $10.5
billion at the end of the quarter.
Foreign Trade .
Moscow finally appears to be making progress in
implementing its foreign trade policy for 1981-85,
which calls for an increasing share of trade to be
conducted with Communist countries. Trade turn-
over with the Communist Bloc rose 11 percent in
first quarter 1984 compared with the year-earlier
period-slightly above the 10-percent increase
called for in this year's trade plan-and the Com-
munist share of total Soviet trade rose from 56 to
60 percent. As in 1983, a sharp increase in pur-
chases of East European machinery and equipment
probably accounted for the bulk of the growth in
imports from the Communist countries. The trend
in machinery deliveries is generally consistent with
Secret
17 August 1984
Reasons for the Better Performance
We believe that much of the recent economic
improvement is the result of earlier policy
decisions:
? Some major personnel and management changes
were made. Last year's replacement of the Minis-
ter of Railroads and the special responsibility
given Politburo member Geydar Aliyev to oversee
the rail system, for example, appear to have
streamlined rail operations and improved disci-
pline and morale.
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? The decision to raise capital investment above
planned levels was also important, because plan-
ners have been able to direct badly needed invest-
ment resources to troubled areas.
? The cumulative effect of what we estimate as
little or no growth in military procurement during
1976-82 relieved pressure in the machinery sector
and made it possible to support a larger invest-
Particularly encouraging to the regime is the ap-
parent accelerated growth in labor productivity in
the face of tighter labor supplies. Andropov appar-
ently succeeded in his efforts to boost productivity
through his discipline and anticorruption cam-
paigns. Chernenko, in turn, has continued if not
intensified these programs. Nevertheless, the posi-
tive effect of these efforts probably would not have
occurred if food supplies and the availability of
other consumer goods had not improved.
Another important factor in the recovery has been
the attack on various bottlenecks in the economy.
Problems in the transportation, power, and metals
sectors all have eased. One of the reasons for the
more comfortable position has been better weather.
Relatively benign winters the last two years, for
instance, have helped to ease rail freight snarls.
Hydroelectric power production also has improved
because of higher water levels resulting from more
typical rainfall in Siberia.
The new regime appears to have had little impact
on economic performance in the first half of the
year. Chernenko took power well after the 1984
-Plan had been approved and put into effect, and he
has largely adopted the tactics and programs of his
predecessor. Few new initiatives have been put
forth, although Chernenko has advocated an in-
creased role for local governments in overseeing the
economy and has called for trimming the size of the
bureaucracy and for educational reforms. Such
programs, in effect for only a short time, will have
minimum impact on the economy this year
We estimate that Soviet GNP will increase by 2 to
3 percent this year. For GNP growth to be at the
high end of the range, both the industrial and
livestock sectors will have to maintain their recent
performances. Livestock production in turn will
depend on Moscow's willingness to spend hard 25X1
currency on grain imports needed to cover any
deficits caused by lower domestic production. The
outlook for the hard currency. trade balance will
depend mainly on how oil prices hold up and on
how much grain Moscow imports.
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Argentina: Financial Imperatives
Versus Struggling Democrac
President Raul Alfonsin believes creditors should
ease the repayment burden to support Argentina's
fragile democracy, but his attempts to strike deals
with creditor banks so far have failed. Even sympa-
thetic governments in the industrialized world have
told Buenos Aires that new financing will become
available only after an IMF stabilization program
is established. Despite the difficulties, there is a
strong chance that Argentina will conclude an
economic stabilization accord with the IMF this
year. Even so, we believe Buenos Aires will make
only partial progress in arranging the debt resched.
uling and new loans to resolve financial difficulties.
This would hinder the chances for a strong econom-
ic recovery and cause political troubles for Alfonsin
but probably would not be serious enough to desta.
bilize the government. Even with an IMF program,
Argentina probably will face recurring financial
crunches throughout the 1980s.
There is, however, a substantial possibility that the
Argentine debt talks could collapse because of
inability to conclude an IMF agreement or a new
clash over repayment terms. In this worst-case
scenario, the inevitable payments moratorium
could snowball into an outright debt repudiation
with grave consequences for the Argentine econo-
my, the civilian government, and world bankers.
The Roadblocks to Financial Progress
President Alfonsin took office in December 1983
with an electoral mandate that would have permit..
ted him, in our view, to deal with Argentina's debt.
problems. He failed to meet his goal of securing a
package of new loans and reschedulings under IMF
auspices by June 1984, however, primarily because
of the social democratic philosophy of Alfonsin's
Radical Party, domestic political pressures, techni-
cal problems with the IMF, and inexperience in Orlin
Alfonsin 's Views. Alfonsin has publicly reiterated
that the austere adjustments advocated by the IMF
are neither relevant nor politically feasible for
Argentina. Instead, he believes that debt servicing
must be reconciled with the need to create more
jobs and to raise real wages to maintain social
peace. Alfonsin's Radical Party believes that its
commitment to honesty has produced a more trust-
worthy government and that bankers should show
more flexibility in negotiations. The Radicals also
believe they deserve an IMF program at least as
favorable as that accorded the previous military
regime. Because the IMF approved a 5-percent-
growth target as an integral part of that program, it
has become a minimum negotiating position for the
Alfonsin government. Alfonsin is also seeking pref-
erential repayment terms from creditors.
Political Pressures. Pressures from within Alfon-
sin's electoral coalition as well as from his political
rivals have confused the administration's approach
to debt management. His party is divided into at
least two major blocs on the debt issue:
o Hardliners, led by Economy Minister Grinspun
and Foreign Minister Caputo, favor confrontation
with international creditors to obtain more favor-
able terms.
o Moderates, led by special presidential adviser
Raul Prebisch and Central Bank President Gar-
cia Vasquez, argue for accommodation.
Secret
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The Peronists-the leading opposition party, which
is fragmented but dominates organized labor-
have been even more troublesome. Peronists have
vowed to resist IMF and lender pressures for .
austerity measures and are insisting that Alfonsin
honor his commitment to economic growth and real
wage increases. In late June, for example, an
estimated 90,000 people demonstrated in the
streets in Buenos Aires against "international usu-
ry" and the IMF. Alfonsin, fearing political unrest,
has thus far acceded to their demands for wage
increases.
Labor rank-and-file has been even more vocal in
demanding economic concessions-such as reinsti-
tuting monthly indexation of wages to offset infla-
tion-and local strikes have increased dramatically
since mid-May. Congress has yet to exercise a
direct role in the IMF negotiations but must ap-
prove the federal budget-the linchpin for any
accord with creditors. As submitted in late June,
the budget was already out of line with banker
requirements, according to the press, in part be-
cause Congress was insisting on increased social
welfare spending.
Technical Disagreements with the IMF.
the most difficult issue bogging
down the IMF negotiations has been the target for
1984 public sector deficit. Because of the political
difficulties encountered in cutting expenditures and
raising taxes, Grinspun has abandoned his initial
view that the deficit could be cut to 4 percent of
GDP and now believes the target should be 8
percent-a figure the IMF considers too high.
Argentine wage policy has proved to be another
major sticking point. Alfonsin has sought to placate
labor by setting monthly salary hikes to fulfill his
pledge to boost real wages. Because this policy fuels
inflation-now above 600 percent-it has proved
unacceptable to the Fund. According to recent
Embassy .reports, the Argentines are willing to
modify their wage policy but have not yet been able
to develop a compromise acceptable to the IMF.
Secret
17 August 1984
According to US Embassy and press reports, Bue-
nos Aires has been unable to resolve several other
policy disagreements with the Fund over exchange
rate, credit, and commercial policies:
? Although the pace of small daily exchange rate
adjustments has been increased, the IMF is push-
ing for a large devaluation.
? Despite the IMF's desire for tight monetary
policies, Grinspun contends that credit expansion
is necessary to. support economic recovery.
? Because of rules requiring equal treatment
among its members, the Fund is insisting that
Buenos Aires lift restrictions on remittances to
British banks and businesses and work towards a
plan for clearing interest arrearages.
Tensions in the Negotiations. Grinspun's inexperi-
ence in conducting financial negotiations has com-
plicated the situation
Under pressure, he has become aggressive
and even combative in dealing with bankers. As the
30 March US regulatory deadline for reviewing the
status of Argentine loans approached, creditors
insisted that Argentina pay overdue interest and
lay out a stabilization program. Grinspun reacted
angrily, and refused to use
Argentine reserves to make interest payments.
Only direct intercession by President Alfonsin and
support from a Latin lending consortium averted a
collapse in the. debt negotiations. In June, the
dramatics continued with Grinspun threatening to
walk out on bank negotiations. Eventually Argenti-
na paid $325 million in overdue interest when the
banks temporarily dropped their demand that an
IMF agreement be in place and agreed to lend
$125 million to cover the remainder of the amount
due.
Challenges Ahead
Alfonsin's inability to move the IMF discussions
along rapidly has precluded any progress in negoti-
ations with commercial banks. An agreement with
the Fund is a prerequsite, in our view, for Buenos
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Aires to reschedule $16 billion in outstanding 1982-
84 debts. We expect the Argentines will request a
10-year repayment period with five years of grace,
comparable to the terms approved for other Latin
debtors such as Peru and Brazil. We also believe
the Argentines will petition for a reduction of front-
end fees and the interest rate spread in order to
reduce the impact of higher US interest rates.
Without an IMF plan, commercial bankers have
been unable to discuss new loans necessary to close
Argentina's projected balance-of-payments gap for
1984. The Argentines will probably request about
$3.5 billion in new money, although the US Embas-
sy calculates that as much as $4.5 billion might be
required. At a recent banking conference, most
lenders recognized the need to extend additional
credit but indicated that any new lending would
only be in support of an IMF program. Even so,
these bankers also believe that it will be quite
difficult to get all 320 banks in the consortium to
agree to any substantial increase in exposure be-
cause of the ill will toward the Argentines stem-
ming from past negotiations.
Although Alfonsin's unprecedented step in June of
proposing a stabilization program directly to IMF
management has complicated matters, we judge
that the Argentines are willing to make additional
compromises in order to reach agreement with the
Fund. On 29 June, for example, the Central Bank
announced a sharp increase in interest rates, fol-
lowed by hikes in gasoline prices and transport
fares aimed at eliminating subsidies to public-
sector corporations. By the end of July, Alfonsin
was urging top economic officials to reach an
agreement with the IMF, and the peso was deval-
ued 3 percent. We believe the IMF will compro-
mise with the Argentines on wage increases-the
Fund acceded to Brazil's more generous wage
settlements last year-but will insist on additional
spending cuts to control the deficit. In the end, we
believe this stumblingblock will be overcome
Convincing the Argentine electorate to accept any
IMF agreement will be very difficult. We believe it
will require substantial expenditure of Alfonsin's
political capital and almost certainly entail conces-
sions to Peronist labor bosses. He will be under
pressure to demonstrate that the program is
growth-oriented-a tactic the military used to sell
the 1983 IMF agreement-and leaves room for
real wage increases and social welfare spending.
Hints of Alfonsin's emerging strategy surfaced in
late June, when, in a national address, he claimed
that further public sacrifices would be required to
resolve debt problems, but that the adverse impact
of any austerity measures would be blunted for the
poor.
We expect Alfonsin to use a "carrot and stick"
strategy to buy him the manuevering room re-
quired to reach agreement with the IMF. His
personal popularity and appeals for national unity
will give him some protection from opposition
attacks. We judge that the Peronist factions will be
unable to unite and block an IMF accord because
many members fear it would leave the party
vulnerable to charges.of destabilizing Argentina by
blocking access to funds needed to sustain econom-
ic recovery.
Outlook For Debt Negotiations
Although the Alfonsin government's current will-
ingness to compromise makes an IMF accord like-
ly, we believe formal Fund approval will be time
consuming. It may become necessary for creditors
to provide another bridge loan at the end of
September to prevent writeoffs of Argentine cred-
its. Even when an IMF accord is finally in hand,
however, we believe that progress in completing
debt agreements with commercial banks will be
through higher taxes.
slow and uneven
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Debt Talks Collapse?
We believe that the danger of a collapse in debt
talks stems from the Argentine penchant to react
impetuously to unanticipated events. If the volatile
Grinspun has trouble concluding an IMF accord,
he could in alit of pique advise Alfonsin to halt
negotiations abruptly. The President will also re-
main vulnerable to congressional attacks on the
IMF agreement. Resurgent labor unrest could
cause Alfonsin to scuttle a wage policy favored by
the IMF.
Continued rises in international interest rates
could also cause financial negotiations to collapse.
With interest rates rising, we believe Argentine
negotiators will exert even stronger pressure on
creditors to reduce spreads and lending charges for
new loans and for rescheduling of 1982-84 maturi-
ties. We judge that bankers would be only partially
responsive to such requests because eased repay-
ment terms have generally only been used as a
reward for successful economic adjustments.
Under these circumstances, the chances that the
Argentines would walk out of the talks would
increase materially.
A breakdown in financial negotiations probably
accompanied by a temporary moratorium-would
entail major dangers, in our opinion. Alfonsin 's
inclination to verbally attack lenders would proba-
bly increase, straining foreign bank and IMF will-
ingness to support the rescue program. We judge
that he would also become more assertive in
coordinating joint action by Latin American. debt-
ors. Because these developments probably would
cause banks to resist new lending at a time when
cash strains would be mounting, the likelihood
that Buenos Aires would re udiate its debt would
increase sharply.
We believe there is a strong chance that Argentina
will be unable to conclude its negotiations with
commercial banks on debt restructuring and new
credits by yearend. Even if an accord with the IMF
Secret .
17 August 1984
is reached before the end of September-when US
bankers will be legally obligated to set aside loan
loss reserves-Buenos Aires probably will only be
beginning talks with the bank advisory committee.
We expect, however, that as soon as a letter of
intent is agreed upon in principle, bankers would
probably release frozen loans to enable Buenos
Aires to settle past due interest payments. The
foreign bank advisory committee would then begin
the difficult task of developing a plan for providing
new financing. Given recent experiences with. Bra-
zil and Chile, negotiations for new money will be
tough and the loan difficult to syndicate.
Even if-both sides cooperate fully, the restructuring
of some $12 billion in loans will require protracted
negotiations, because the Argentines have already
indicated publicly that they expect easier repay-
ment terms. Should bankers resist a substantial
softening of terms, Alfonsin-who was dismayed at
recent interest rate hikes, probably would toughen
his negotiating stance., In this case, we believe that
only partial progress would be made in completing
debt rescheduling this year. In our view, protracted
debt negotiations probably will impede domestic
economic recovery. Difficulties in obtaining trade
financing would continue to curtail imports neces-
sary for industrial reactivation. Buenos Aires would
experience temporary cash flow difficulties during
seasonal export declines and would probably again
resort to temporary suspension of payments to ease
We believe that protracted debt negotiations would
also erode Alfonsin's popular support. With an
electorate anxious for economic improvements, the
Peronists could profit from an apparent financial
deadlock. Labor and the media would probably
begin to question continuing economic sacrifices for.
few apparent benefits. Members of Alfonsin's own
party might also press him to abandon the IMF
program to preserve social peace. Governing would
become more difficult, although the strains proba-
bly would not be serious enough to destabilize the
Alfonsin government
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Longer Range Prognosis
Beyond 1984, Argentina will remain vulnerable to
a resurgence of cash problems:
? We expect that Buenos Aires will be clearly out
of compliance with any IMF program by early
1985.
? This breach would again cut Argentina's access
to fresh flows of foreign exchange, resulting in
another moratorium on debt payments.
? Our research also indicates that Argentina proba-
bly will face a large bulge in payments during
1986-87, when-on top of the increasing interest
burden from past heavy borrowing-government
bonds covering private-sector debts come due.
Even under favorable economic conditions, we be-
lieve bankers may need to offer substantially
stretched-out repayment terms in order to avoid
demands from Buenos Aires for some innovative
form of relief from interest payments.
Implications for the United States
We believe that Buenos Aires expects the US
Government to bolster Argentine democracy by
taking extraordinary steps to help resolve its finan-
cial difficulties. In our opinion, the Argentines
believe Washington has the power to elicit coopera-
tion from bankers and the IMF and to control the
interest rates that banks charge. We believe this
perception made Buenos Aires responsive to US
demarches in March and June to take actions to
prevent the debt talks from collapsing. On the other
hand, developments that the Argentines perceive as
detrimental to their interests-such as a rapid rise
in interest rates-could cause Buenos Aires to
attempt to take retribution against US banks.
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Should Argentina reach an IMF agreement by 30
September, we would expect interest payments to
get back on track and remain reasonably current
through the end of the year. The earnings of US
banks and the integrity' of the international finan-
cial system would escape serious damage. Under 25X1
these conditions, however, we believe that large
money center banks will face growing pressure to
.lend more to Argentina. Alternatively, if the IMF
financial program derails, US banks would see only
a trickle of payments and probably would begin
writing off Argentine credits. In this situation, we
would expect Alfonsin to call on other Latin debt-
ors to act in concert against lenders.
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Zaire: The "Bitter Pill" of
Economic Reform
Zaire has been making a strong effort this year to
stick to its latest economic stabilization program.
The country has been experiencing economic and
financial difficulties almost continuously since
1974 and has had only limited success with a series
of earlier corrective measures. To achieve economic
stability it will have to maintain strict adjustment
policies for several years. Expected low levels of
new investment and continued foreign exchange
shortages promise slow economic growth for the
rest of the decade.
Following negative economic growth in 1982, a
near-record current account deficit of $432 million,
and the virtual exhaustion of foreign exchange
reserves, Kinshasa introduced a number of stronger
measures last year to halt the economic and finan-
cial deterioration. These measures, programed for
1983-84, were intended to smooth the way for a
new IMF standby arrangement for balance-of-
payments support. Kinshasa's actions anticipated
restrictive conditions that the IMF probably would
have required. The measures included:
? A massive 77-percent devaluation of the zaire in
terms of the IMF's Special Drawing Rights
(SDR).
? A floating exchange rate and the temporary
establishment of a dual system of official and free
market exchange rates in September 1983. (The
two rates were unified in March 1984.) -
? A program of fiscal austerity, with strengthened
budgetary controls and tax reform, including a
new fiscal regime for GECAMINES, the huge
parastatal mining concern.
Zaire: Selected Economic Adjustment Measures
Economic Adjustment Measure Status
Devaluing the zaire by 77.5 per- September 1983
cent in terms of the SDR.
Floating the zaire and introduc- September 1983
ing a temporary dual exchange
rate system.
Adopting a new fiscal regime for September 1983
GECAMINES.
Easing controls on prices. September 1983
Rescheduling official debt to December 1983
the Paris Club.
Establishing a blocked Bank of January 1984
Zaire account for external debt
service payments.
Unifying official and free mar- January 1984
ket exchange rates.
Auctioning Treasury Bills to June 1984
help create a domestic money
market.
Substantially reducing customs Incomplete
duties.
Listings of all government em- Incomplete (s)
ployees.
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? Liberalization of the trade and exchange system
by reducing, for example, restrictions on trade in
diamonds and gold, removing restraints on com-
mercial bank retention of foreign exchange re-
ceipts, and simplifying import licensing
regulations..
? A substantial easing of controls on consumer
prices and agricultural producer prices.
These economic stabilization measures contributed
substantially to the halt in Zaire's economic and
financial decline last year. Real GDP grew by 0.5
percent, after a 2-percent fall the previous year,
while the budget deficit was reduced to 2 percent of
GDP, compared' with 9 percent in 1982. Export-
volume increases for cobalt, zinc, diamonds, and
crude oil also helped. The foreign trade surplus rose
to $410 million, up from $326 million in '982,
while the current account deficit fell by $110
million to $320 million.
Some developments clouded the economic picture,
however. The inflation rate doubled to 76 percent,
mainly because of the currency devaluation. The
agricultural sector was also disappointing, particu-
larly for the main cash crops. Production of coffee,
Zaire's chief agricultural export, was down 21
percent while palm kernel output fell 30 percent,
sugarcane 21 percent, and rubber and tea, 7 per-
cent each.
Zaire's success in rescheduling some $920 million
of Paris Club debt obligations in December 1983
enabled the present 15-month IMF standby ar-
rangement to become effective later that month.
The standby will provide some $240 million in
balance-of-payments support, payable in install-
ments and subject to periodic review of perform-
ance criteria. Kinshasa also received in December a
$122 million loan from the IMF's Compensatory
Financing Facility, for previous shortfalls in export
Current account balance -424 -432 -320 -338
Trade balance 210 326 410 465
Exports f.o.b. 1,500 1,454 1,523 1,642
Copper 757 791 781 778
Imports f.o.b. 1,290 1,128 1,113 1,177
Oil 249 187 171 194
Net services and -634 -758 -730 -803
transfers
a Estimated.
b Projected.
of fiscal austerity. The key objectives are to curb
the budget deficit, reduce the rate of credit expan-
sion, remove excess liquidity from the banking
system, develop the interbank foreign exchange
market, and establish a money market to help
absorb domestic currency and reduce the demand
for foreign exchange.
Zairian President Mobutu and his principal eco-
nomic advisers, including Prime Minister Kengo
Wa Dondo and Bank of Zaire Governor Sambwa
Pida, have shown unusual resolve this year in
implementing the economic reforms. In addition,
the country has been meeting its newly negotiated
debt service obligations.
earnings
Adjustment Program Remains on Course
The current package of economic reform measures
goes far beyond previous efforts. To strengthen
budgetary controls, an increasing number of gov-
ernment operations have been centralized under the
Zaire's 1984 economic adjustment program focuses Ministry of Finance. A comprehensive listing of
on improved financial management under a regime ' government employees-compiled for the first
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time-will tend to eliminate payments for nonexis-
tent workers while Kinshasa seeks to control a
salary mechanism that preempts some 25 percent
of government receipts.
The June 1984 dissolution of SOZACOM, the
parastatal marketing agency for GECAMINES,
has been an additional important move toward
greater financial responsibility. The elimination of
the marketing middleman should speed both
GECAMINES' receipt of export earnings and its
payments to the Zairian Treasury. In addition, a
major source of leakage of foreign exchange re-
ceipts-unaccounted-for minerals sales through
SOZACOM-has been removed.
Kinshasa has passed three IMF reviews of perform-
ance criteria this year, for the periods ending in
December, March, and June. During the IMF
reviews, Zaire obtained minor waivers of perform-
ance criteria or slight modifications in its program,
because of mitigating circumstances.
Sluggish Economy in 1984
In our estimation, Zaire's economic performance
this year will not be vigorous. We expect only a 1-
to-2-percent increase in real GDP, mainly because
of the tight fiscal and monetary policies in an
economic program that emphasizes longer term
stability over short-term economic expansion
In the international accounts, the foreign trade
balance should improve slightly. Prices for cobalt,
zinc, and coffee are climbing, and higher export
volumes are expected for cobalt, diamonds, and
Zaire: Selected Economic Indicators,
1980-84
Real GDP Growth
Percent change
Copper Export Volume
Percent change
Consumer Price Inflation
Percent change
Debt Service Ratio 2,b
Percent
L11 17
o Is
Composition of Exports, 1982
Percent
Cobalt-6.6
Diamonds-
11.7
I Debt service payments as a percent of exports of goods and services.
b Based on actual or projected payments.
c Projected.
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crude oil. Copper production by GECAMINES
through midyear has been on target at its produc-
tion capacity of 470,000 metric tons annually.
Copper prices, however, remain soft and show no
signs of an early recovery. Imports should rise only
slightly, because of the austerity program and
foreign exchange shortages. We believe the current
account deficit will widen by perhaps $20 million,
mainly because of increased interest payments to
non-Paris Club creditors.
? Servicing its large foreign debt-estimated at
$5.2 billion at the end of last year-will leave
Zaire little room for applying new resources to
economic growth. Even with the latest reschedul-
ing, debt service consumes 50 percent of govern-
ment expenditures. The IMF believes that debt
rescheduling will be required each year for the
rest of the decade,
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The Longer View
Zaire's economic problems do not lend themselves
to an early solution. Even with continued resolve by
the Zairian authorities, serious obstacles to eco-
nomic recovery remain:
? The inflation rate-expected to be around 50
percent this year- needs to be reduced.
? Much of the economic recovery program depends
on the ability of GECAMINES to maintain its
productive capacity and, consequently, its key
contributions to foreign exchange earnings and
government revenue (about 50 percent and 22
percent, respectively, this year). GECAMINES
urgently needs capital for plant rehabilitation. In
the recent past, it has postponed capital invest-
ment and has fallen behind in removing the
overburden of the open-pit mines at Kolwezi that
supply 60 percent of its copper. To further com-
plicate the problem, the deteriorating rolling
stock of the national railroad may not be able to
move sufficient copper concentrates from mines
to refineries.
? Agricultural production probably will continue to
be restrained by the shortage of investment funds,
both for agricultural projects and for improving
the domestic transport network for moving crops
to markets. World Bank Group funds are avail-
able for railroad and road improvement projects
in both agriculture and mining, but the required
counterpart funds are hard to come by because of
the tight budget.
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17 August 1984
Despite its hardships, we do not expect the econom-
ic adjustment program to seriously threaten Presi-
dent Mobutu even if it is maintained for several
years-as now appears necessary. There may even-
tually be protests by mineworkers, students, and
civil servants, but Mobutu remains firmly in con-
trol, following his election this month to a third
seven-year term. Zaire's living standards have been
falling for nearly a decade and most of the popula-
tion has apparently adopted a fatalistic attitude
toward hard times. We believe that none of the 50
or so anti-Mobutu groups-mostly outside Zaire-
seriously challenge the regime.
President Mobutu apparently has resigned himself
to swallowing the self-described bitter pill of rigor-
'ous and more honest economic and financial man-
agement. However, even if sustained economic
.adjustment programs eventually succeed, aspects of
the present regime will continue to prevent the
country from realizing the full economic potential
of its rich endowment of natural resources. These
negative attributes include pervasive corruption at
high levels, a concentration of power in Mobutu's
hands that stifles administrative initiative in the
government, and the official practice of favoring
certain groups and regions at the expense of the
national economy.
36
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,Secret
Smaller Gulf States:
Cutting Back on Foreign Aid
Acutely sensitive to external pressures and threats
from revolutionary forces in the region, Kuwait,
Qatar, and the United Arab Emirates have tried to
use foreign assistance to bolster their security.
With the surge in their oil revenues, these countries
boosted foreign assistance to phenomenal levels in
the late 1970s and early 1980s. Indeed, total aid
disbursements reached $6.1 billion in 1981, or 10
percent of GDP, compared with the one-half per-
cent provided by the United States.
The current oil glut, however, caused the Gulf
states to slash aid disbursements by about 70
percent in 1983. Foreign assistance, nonetheless,
remains a major policy tool for these countries and
they will attempt to maintain their present aid
levels through 1985.
Foreign Relations
We believe the smaller Gulf states provide aid to:
? Strengthen other conservative, pro-Western Arab
states, particularly Morocco, Jordan, Tunisia,
and the poorer Gulf states.of Oman and Bahrain.
? Ingratiate themselves with countries, especially
Syria and Iraq, that threaten their security.
? Prevent the spread of Iran's Islamic revolution by
supporting Iraq's war effort.
? Bolster their legitimacy at home by supporting
the Palestinians.
? Enhance their international prestige and make
LDCs more responsive to Gulf Arab desires in
international forums.
While foreign assistance has become a principal
foreign policy tool and a vital element in the
security policy of the smaller Gulf states, these
Smaller Gulf States: Bilateral Economic Million US $
and Military Disbursements to LDCs,
1981-84 a
Iraq 4,000
3,570
1,250
1,000
Jordan 535
360
255
240
Lebanon 90
30
0
0
5
140
5
0
40
50
NEGL
0
775
935
180
\ 180
Others 215
165
40
60
Non-Arab Islamic states 140
200
10
10
Bangladesh
25
0
NEGL
NEGL
Pakistan
85
185
NEGL
NEGL
Other
30
15
10
10
Non-Islamic states
55
80
35
30
a Data is rounded to the nearest $5 million.
b Estimated.
c Projected.
d Includes PLO and Israeli-occupied territories.
states have had only limited success in buying allies
and conciliating enemies. Aid to Syria and the
Palestinians has afforded some protection from
extremists in those camps, but it has achieved only
limited influence in Arab and Islamic capitals. For
example, Kuwaiti financial assistance to Iraq has
not softened Baghdad's claim to Bubiyan Island,
and the Gulf states were unable to influence Syrian
policies toward Lebanon or Iran:
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The effectiveness of the Gulf states' foreign aid
programs has been reduced by the current oil glut,
which caused oil revenues to fall from $34 billion in
1981 to $22 billion last year. Cuts in foreign
assistance have far outpaced- overall budget reduc-
tions as the governments of these states have
attempted to minimize cuts in politically important
domestic welfare and subsidy systems and to ex-
pand military capabilities in response to the Iran-
Iraq,war.
Total aid disbursements probably will reach only
$1.6 billion, or about 3 percent, of GDP this year.
Contributions to multilateral lending institutions
will amount to only an estimated $100 million.
Bilateral assistance-which includes economic and
military grants and loans-probably will reach only
$1.5 billion compared with a peak of $5.9 billion in
Kuwait is the leading aid donor of the smaller Gulf
states, providing more assistance-over 11 percent
of GDP in 1981-than Qatar and the UAE com-
bined. Although the weak world demand for oil has
reduced Kuwait's earnings by about 25 percent
since 1981, this is not as significant a problem for
Kuwait as for most other oil-exporting countries,
because Kuwait now earns almost as much income
from investments as it does from oil production.
According to Embassy reporting, some Kuwaiti
financiers believe that Kuwait's leaders are exag-
gerating domestic economic problems and the im-
pact of weak oil demand to avoid fulfilling aid
requests.
Kuwait has given over $6 billion to Iraq since
1981-more than 65 percent of Kuwait's total
foreign aid disbursements over this period-to sup-
port Baghdad's war effort. In 1983, however, we
estimate that Kuwait gave Iraq only $800 mil-
lion-a decrease of 60 percent from the 1982
level-almost half in oil sales on Baghdad's behalf.
Kuwait last year began selling about 70,000 barrels
Secret
17 August 1984
per day of crude oil from its share of the Saudi-
Kuwaiti Neutral Zone to some of Iraq's customers,
turning the receipts over to Iraq.
Under the Baghdad Agreement of 1978, Kuwait
pledged $291 million annually to Syria, $196 mil-
lion to Jordan, and $63 million to the PLO. The
Kuwaitis maintained these aid levels until 1983,
when payments to Syria and the PLO were reduced
by some $150 million. The US Embassy in Amman
reports that Kuwait's National Assembly recently
cut the country's total Baghdad Agreement pay-
ments by 38 percent to $340 million annually.
Syria probably will
receive $180 million, while $160 million will be
divided between Jordan and the PLO-with Jordan
receiving most of this sum. The Assembly turned
down a proposal by its financial committee to stop
all aid to Syria, according to some Arab weeklies.
The US Embassy in Kuwait, however, reports that
the government intends to apply any future pay-
ments reductions primarily to Syria.
Kuwait's aid to other countries also has been
reduced. It gave $5 million to Morocco and nothing
to Lebanon in 1983, compared with $115 million
and $30 million, respectively, the previous year.
The United Arab Emirates was one of the most
generous aid donors in the world, giving as much as
20 percent of GDP in 1979. A 45-percent decline in
oil revenues since 1981, however, has resulted in
the UAE's sharp reduction of aid payments. We
estimate that total bilateral grants and loans
amounted to almost $2.2 billion in 1981, but
dropped to $580 million in 1983. Abu Dhabi, the
richest and most generous donor of the seven
Emirates, is all but halting foreign aid, according to
the US Embassy. To our knowledge, the UAE gave
no assistance to non-Arab countries in 1983
Since the start of the Iran-Iraq war, we estimate
that the UAE has given about $3.5 billion to Iraq.
We believe that about 80 percent of all UAE aid in
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Smaller Gulf States: Economic Indicators, 1981-85
Gross Domestic Products
Billion US $
1981 82 83 84b 85b 0
Government Expenditures and Bilateral Foreign Aid as a Share of GDP
Percent
Government
expendituresc
Bilateral foreign
aids
25
1981 82 83 84b 85b 0
" Current dollars.
b Estimated.
For Kuwait fiscal year I July through 30 June.
It Mulilateral aid is not included because of difficulty in distinguishing each
country's contribution. In any case, it represents a small portion of total aid.
c Budget year lasted 18 months as the Qatari Government changed to Hijri fiscal
year-roughly mid-April to mid-April. This expenditure figure is prorated to represent 12 months.
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1983 went to Iraq. The government paid $200
million to Iraq early this year, but we judge that
the Emirates are unlikely to give any more. The
UAE, because of its traditional commercial and
cultural ties to Iran, is more susceptible than the
other Gulf states to Iranian pressure to reduce aid
to Iraq. The UAE President Shaykh Zayid, who
dislikes Saddam Husayn, threatened to stop aid to
Baghdad in 1982 and now has a financial excuse
for doing so.
The UAE has pledged to give about $400 million
annually to Jordan, Syria, and the PLO under the
Baghdad Agreement. The UAE was late in provid-
ing its Baghdad payments in 1982, however, and
met only 15 percent of its commitments in 1983,
The UAE has paid $15
million to Jordan toward its 1984 commitment,
according to the US Embassy. The Embassy be-
lieves-and we concur-that the UAE is unlikely
to make significant additional Baghdad payments
this year.
Qatar once gave as much as 16 percent of GNP in
concessional assistance during the mid-1970s. Aid
payments dropped by one-third in 1982, when oil
revenues fell by a similar amount, and Qatar
reportedly terminated all foreign assistance in
1983. In sharp contrast to last year's austerity
measures, Qatar's FY-1984 budget probably will
include expenditure increases of 19 percent, pri-
marily because of higher oil production. Although
aid payments in 1984 have revived slightly, we do
not expect them to match earlier levels.
We estimate that Qatar had disbursed about $1
billion to Iraq between 1980 and late 1982 when
payments were stopped. Qatar's Amir Khalifa in-
sists that his country ended aid to Iraq to avoid
antagonizing Iran.
Under the Baghdad Agreement, Qatar is supposed
to give $122 million annually to Syria, $83 million
to Jordan, and $26 million to the PLO. The US
Embassy in Amman reports that all these payments
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17 August 1984
ceased following the November 1982 summit of the
Gulf Cooperation Council states-primarily to
punish Syria for its ties with Iran-we have no
evidence that the government made any of its
scheduled Baghdad payments in 1983. Qatar has
made a partial payment of $27 million to Jordan so
far in 1984, and Jordan's Central Bank expects
more aid, according to the US Embassy. However,
we expect Doha to delay subsidy payments as long
as possible.
Outlook and Implications
Because of aid reductions, potentially troublesome
recipients like Iraq, Syria, and the Palestinians now
may be more antagonistic toward the smaller Gulf
countries. In part because of concern over this, we
believe that Gulf states will not cut aid further in
1985. However, it is not likely that they will be able
to increase aid disbursements until the oil market
We believe that aid recipients will turn first to
Saudi Arabia to fill the gaps created by reduced
Gulf assistance. We doubt, however, that the Sau-
improves.
dis, given their own aid priorities and lower oil
revenues, will compensate for the reduced assis-
tance from Kuwait, Qatar, and the UAE.
Some Gulf aid recipients-particularly Jordan,
Morocco, Pakistan, and Sudan-probably will turn
to the United States and international aid organi-
zations for additional assistance. We judge that
they could request a total of almost $1 billion.
Without such assistance, these states will have to
curtail development or military modernization pro-
grams.
The greatly reduced amount of Gulf aid in 1984
and 1985 particularly threatens the economies of
the non-Arab Islamic states. Bangladesh and Paki-
stan-the major recipients of Gulf aid to non-Arab
Islamic countries over the last decade-will be the
most affected. Pakistan had been trying to line up
about $800 million in military assistance from the
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Secret
Gulf states since 1980, and probably delayed or
canceled weapons purchases from Western Europe
in 1983 when it did not receive the requested aid.
Pakistan has since had to rely more heavily on
Saudi Arabia and the United States to finance
military purchases.
Syria, which has been hardest hit by Gulf aid
reductions, probably will try to offset the cutbacks
by maintaining ties with Iran, which provides sig-
nificant economic aid to Damascus.. We believe
that the Syrians could also try to intimidate the
smaller Gulf states into loosening their purse
strings by threats of terrorism.
41 Secret
17 August 1984
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Western Europe:
Growing Demands for a
Shorter Workweek
Settlement of the West German metalworkers
strike by shortening the standard workweek from
40 to 38.5 hours with no cut in pay, has opened the
door for similar labor demands throughout West-
ern Europe. Unions view this as a device for
reducing joblessness and are bracing for difficult
negotiations with employers and governments. We
believe the shift to shorter workweeks will continue
but will have little impact on Western Europe's
double-digit unemployment because it does not
address the underlying causes of the problem.
Indeed, restructuring the region's industries will
become even more difficult if shorter hours boost
costs and erode competitiveness
The Trend Toward Shorter Working Hours
Average weekly working hours in Western Europe
have declined steadily for two decades. As recently
as 1965, industrial workers in most countries were
working 44 to 46 hours a week. By the late 1970s,
the average actually had dropped to about 40.
The downward trend is likely to continue. French,
Belgian, British, and Swedish unions are expected
to be particularly adamant in their demands for a
shorter workweek with no loss of pay; Dutch,
Italian,'and Danish unions appear to be more
willing to give up part of their salaries in return for
shorter hours.
In several countries unions have laid the ground-
work for demanding shorter workweeks in upcom-
ing contract negotiations and seem likely to get
government support for their demands. A number
of government leaders and the OECD are pushing
for reduced working hours because they believe it
will lower unemployment:
? Dutch Social Affairs Minister Jan de Koning has
called for a 36-hour workweek by 1986-87 pro-
vided that real wages fall.
? To maintain employment, Italian Labor Minister
De Michelis has endorsed a reduction in working
time-not necessarily through a shortened work-
week, but perhaps by providing additional vaca-
tion time and holidays.
? Socialist Party leaders from the 10 EC countries,
Spain.and Portugal on 1 June called for an
EC-wide 35-hour workweek, a lower retirement
age, and longer vacations to help cut
unemployment.
? The OECD, in a report last winter, suggested
that reduced working time can play a major role
in alleviating unemployment.
Implications
We believe that shortening the workweek will have
little impact on unemployment in Western Europe.
In our view high labor costs are a major cause of
the region's unemployment problem and one that
would be aggravated by a shorter workweek if there,
is no offsetting reduction in pay or increase in
productivity. Nor would reduced working hours
affect underlying causes of unemployment such as
structural rigidities, continued support of outmoded
industries, and lack of adequate investment in new,
more dynamic industries. With a gradual decline in
working hours, most firms will have time to adjust
both capital and labor without additional hiring. In
fact, the relatively high labor costs-both wage and
Secret
DI IEEW 84-033
/7 August 1984
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Western Europe: Recent Developments
Concerning Shorter Workweeks
West Germany
The recent metalworkers strike settlement granting
workers a 38.5-hour workweek beginning next
April marked the end of a six-year struggle by
labor unions to break the 40-hour barrier. Al-
though the metalworkers publicly have stressed
the job-creating aspects of a shorter workweek, job
creation was not part of the negotiations, and
neither West German economic experts nor em-
ployers believe the cut will bring more jobs.
France
The Socialist government reduced the standard
workweek to 39 hours in January 1982, but Presi-
dent Mitterrand has since shied away from his
plan to progressively cut it to 35 hours partly
because of France's deteriorating international
competitive position. Nonetheless, since the West
German strike, the CFDT, France's largest union,
has increased its calls for a 35-hour week. Even
before the West German strike ended, Andre Ber-
geron, the leader of the FO-a relatively apolitical
union-stated that if the metalworkers obtained a
shorter workweek, the European Trade Union
Confederation (ETUC) would call for European-
wide movement in the same direction. Bergeron
promised that the FO would support ETUC efforts
to introduce the 35-hour week throughout Europe.
Italy
In June, Italian Labor Minister DeMichelis advo-
cated reduced work time to maintain employ-
ment-perhaps by increasing vacation time and
holidays rather than a shorter workweek. He
called for flexibility in defining the workweek with
more part-time and flex-time work. The response
by organized labor and the employer's association,
Confindustria, has been positive. Both groups fore-
see automation displacing many workers and be-
lieve that new job creation is essential. They
disagree on whether workers should receive a
proportional reduction in pay in return for working
fewer hours. In principle, labor is willing to accept
Secret
17 August 1984
some reduction in wages and benefits provided the
costs are shared by labor, government, and man-
agement. "Solidarity contracts, " whereby proposed
worker dismissals have been replaced by shopwide
reduced working hours, have been signed by unions
with several firms.
United Kingdom
British unions have followed events in West Ger-
many with close interest. Peter Evans, National
Secretary of Britain's Transport and General
Workers' Union, declared in late 1983 that "if the
German unions break through, it does away with
the argument that British employers can't do it
because the German workers are working more
hours. " The Amalgamated Union of Engineering
Workers has again raised demands for shorter
hours; the engineering industry had previously
reduced working hours from 40 to 39 in 1982. At
least one British firm, General Electric Company,
has been successful at work-sharing, and the gov-
ernment agreed in 1982 to a small subsidy plan to
persuade others to follow suit.
Belgium
Belgium was a leader in cutting work hours during
the 1970s, when the average workweek declined by
14 percent. Nonetheless, Belgium's unemployment
rate is the third highest in the EC. Since 1983,
Belgian Government employees have been hired for
a 32-hour week at 20 percent less pay than their
predecessors. As part of. its two-year austerity
program, the government is encouraging teachers
to take early retirement and promoting discussions
with employers and unions on a maximum 38-hour
workweek. During the West German strike, both
major Belgian trade union confederations ex-
pressed solidarity with the West German workers.
National labor-management negotiations began in
July with shorter working hours and job creation
as the main issues.
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Netherlands
The Dutch Government announced in June that it
will support a 38-hour workweek together with a
proportional cut in real wages. Dutch Social Af-
fairs Minister de Koning has also suggested that
pay raises next year be given up in return for new
agreements on workweek reductions.
Both major union federations, the FNV and CNV,
accept that workers must be prepared to make
some financial sacrifices in order to safeguard the
total number of jobs. The Dutch printing industry
moved to a 38-hour week on 1 January 1984, and
so far the total number of jobs-which had been
falling steadily-has stabilized. The government
also began actively encouraging work-sharing
agreements a year ago. Over I million workers
have negotiated such deals already, although none
will take effect until 1985. -The CNV, the smaller
union federation, called for a indexed wage in-
creases to which workers are entitled under Dutch
wage price legislation.
Norway
The Norwegian Federation of Trade Unions is
demanding a 37.5-hour workweek in upcoming
wage negotiations this year as a first step toward
the goal of a 6-hour workday. The union position
on pay adjustments for reduced work hours is
unclear. The government has appointed a commit=
tee to look into cutting the workweek but remains
opposed to any radical steps because of Norway's
precarious international competitiveness.
Denmark
The Danish Federation of Trade Unions will pre-
sent demands for a gradual reduction to a 35-hour
workweek at its fall labor congress. The unions are
demanding reduced hours with "differential com-
pensation'-that is, probably a partial drop in
wages except for the lowest paid workers. The
federation and its close ally, the opposition Social
Democratic Party, stress sharing available work
and are demanding that the current high unem-
ployment rate-about 10 percent-be reduced by a
third in the next three years. The largest industrial
employers' union has laid the groundwork for
difficult negotiations in the fall by announcing in
May that they would rather see large-scale conflict
Sweden
Earlier this year the Swedish Confederation of
Trade Unions made an unsuccessful bid for a
38-hour workweek, with full pay, for persons
working alternate shifts. This demand probably
will be repeated when contracts begin to come up
for renewal beginning in early 1985. The govern-.
ment regards as a model the 1983 agreement
between the SAB railway equipment company and
its workers. The settlement called for a 35-hour
week with a 5-percent cut in real wages except for
the lowest paid workers.
Spain
Madrid's Socialist government reduced the stand-
ard workweek from 43 hours in 1980 to 40 hours
in mid-1983, with no cut in salaries. New negotia-
tions among unions, employers and the government
began in July, and although the small Communist
union, the CCOO, is pressing for a 38-hour work-
week, it does not have the support of the larger
socialist union, UGT.
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Western Europe: Average Workweek non-wage-make it likely that businesses will ex-
in Manufacturing, 1965-838 pand capacity by acquiring labor-saving equip-
ment-as they have consistently done throughout
the 1970s and early 1980s. The high cost of hiring
Hours worked new workers also points to more use of overtime
West Germany France rather than new hires
48 48 Shorter workweeks without offsetting pay cuts
46 46 would add to the difficulty of restructuring tradi-
tional industries. The higher hourly labor costs
as as would reduce profits and thus slow the transition to
42. az innovative production methods. In addition, should
ao ao production costs rise because of shorter hours,
traditional industries may increase their demands
38
38
36
I I I I I I I
36
I I I I I I I I I I I I IL IIIIIIIIIII 1
3a
34
Italy
United Kingdom
48
48
46
46
as
44
N ON
az
az
40
ao
36
36
1111111
111111111111 1111111111111111111
34
34
for subsidies at a time when West European gov-
ernments are attempting to reduce their support of
these industries and shift funds to newer high
technology industries
Any increase in costs associated with shorter work
hours is likely to be passed on to consumers and
exporters, thus eroding international competitive-
ness. At present, this effect is swamped by the
weakness of most West European currencies rela-
tive to the US dollar but could become a serious
problem should the dollar depreciate.
36 36
IIIu Viii ]111 Iii 1111111111111111111
34 1965 70 75 80 34 1965 70 75 80
" West Germany: average weekly. hours paid; United Kingdom: average
weekly hours worked; Belguim, France, Italy, Netherlands: average weekly
scheduled hours.
Secret
17 August 1984
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