INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707380001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 22, 2016
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: February 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
, - 4 ~-, ~-_: --1 ~,17 n ~n-
International
Economic & Energy
Weekly
D11EEW 85-005
1 February IQ8
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International
Economic & Energy
Weekly 25X1
1 February 1985
4 iii Synopsis
Perspective-Brazil's Unfinished Economic Adjustments
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3 Briefs Energy
11 Brazil: Economic Plans of the Civilians
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15 ,- United Kingdom: Dealing With the Miners' Strike 25X1
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21 _ No Quick Recovery for the Saudi Economy I 25X1
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27 CEMA: Planning for Long-Term Cooperation 25X1
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31 orld Trade Balances: Dramatic Shifts 25X1
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
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1 February 1985
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Secret
International
Economic & Energy
Weekly F-
Synopsis
1 Perspective-Brazil's Unfinished Economic Adjustments
In striking contrast to past predictions of doom, numerous observers now have
renewed confidence in Brazil's economic future. Although there is much to
cheer, we believe the economy remains vulnerable to adverse external shocks
and major domestic imbalances.
11 Brazil: Economic Plans of the Civilians
Brazil's President-elect Tancredo Neves inherits an economy that remains
seriously troubled. Neves's highest economic priorities for 1985 are to
strengthen growth and employment, reduce inflation, obtain a multiyear
rescheduling of foreign debt, and promote a more equitable distribution of
income.
15 United Kingdom: Dealing With the Miners' Strike
Prime Minister Thatcher is well on the way toward winning her battle with the
striking coal miners and their Marxist leader, Arthur Scargill.
21 No Quick Recovery for the Saudi Economy
We do not believe that Saudi Arabia can significantly boost oil revenues or cut
spending sufficiently to avoid another year of large current account and budget
deficits.
27 CEMA: Planning for Long-Term Cooperation
The Soviet Union has initiated discussions on a wide array of multilateral and
bilateral economic agreements with other members of the Council on Mutual
Economic Assistance (CEMA) designed to limit CEMA's dependence on the
West and exert tighter control over the East Europeans. The commitments,
however, appear too weak and nonspecific to assure that Soviet goals will be
met.
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31 World Trade Balances: Dramatic Shifts
Worldwide trade balances have shifted dramatically since 1981. The factors
precipitating these trade shifts probably will persist through 1985, heightening
tensions among trading partners and fueling protectionist pressures.
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Perspective
Weekly
International .
Economic & Energy
1 February 1985
Brazil's Unfinished Economic Adjustments
to adverse external shock and major domestic imbalances.
In striking contrast to past predictions of doom, numerous observers now have
renewed confidence in Brazil's economic future. At home, the return of civilian
rule has heightened popular expectations of restored prosperity. Abroad, Brazil
has won high marks from foreign bank creditors for its remarkable balance-of-
payments gains under the current IMF stabilization program. A record $13
billion trade surplus in 1984 exceeded ambitious IMF-supported targets by $4
billion, eliminated the need for further foreign borrowing, and even provided
the impetus for a mild recovery after more than three years of recession.
Although there is much to cheer, we believe the economy remains vulnerable
in exports.
'A closer examination of last year's payments performance is indicative. A
23-percent rise in export earnings fueled the trade surplus, although a
moderate decline in imports-mainly reflecting rising domestic oil produc-
tion-also contributed. Although the military government's aggressive devalu-
ation policy partly, explains the export surge, much of the credit goes to
developed-country recovery and substantial price rises for key agricultural
exports such as coffee and orange juice. Moreover, Brazil remains heavily
dependent on the US market that absorbed about one-half of the 1984 increase
the spread over LIBOR.
with public support for the package. During negotiations in New York last
month, Brazil and its bank committee agreed to reschedule $45 billion of debt
principal due between 1985 and 1991 but have not yet overcome differences on
also expect President-elect Tancredo Neves to follow up
payments achievements and expect to agree soon to a multiyear debt
restructuring package comparable to the one obtained by Mexico. Bankers
Brazil's bank creditors are reportedly impressed with the country's balance-of-
Progress in rescheduling debt, however, should not obscure the economic
challenges ahead for the new administration. Brazil's domestic economic
performance has fallen substantially short of original IMF program targets
that have had to be continually revised. Inflation rocketed from just under 100
percent in 1982 to over 200 percent in 1983-84. Although some of the inflation
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has resulted from adjustment measures, such as rapid devaluation and the
lifting of price controls, Brasilia also has failed to implement effectively fiscal
and monetary reforms urged by the IMF:
? Little headway has yet been made on the public-sector deficit, because of the
complex budgetary system that undercuts spending controls. Also, the
indexation system continuously drives government financial obligations
higher. As a result, public-sector borrowing requirements have held at 18
percent of GDP for the past two years-double the initial IMF target-
contributing to high domestic interest rates that impede private-sector
investment.
? The government permitted the monetary base to expand by nearly 250
percent last year against an IMF target of 95.percent. Although the trade
surplus complicated efforts to contain monetary expansion, a particularly
sharp jump in the monetary base in the final two months of 1984 indicates
that political factors still override adjustment needs.
Under these conditions, it is unlikely that improvements in Brazil's foreign
payments and domestic growth can be maintained so long as the government
remains unwilling to tackle economic reform. The Neves government will need
to do a better job than the military regime in reversing Brazil's inflation
psychology to encourage greater productive investment and domestic saving.
Turning the tide on inflation, we believe, would require reform of public-sector
banking to improve management of the money supply and long-term lending,
tougher measures to cut the still-bloated public sector, and a gradual
dismantling of the pervasive indexation system. Also, incentives are needed for
the dynamic private sector to increase production and exports, as well as steps
to attract direct foreign investment.
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Energy
New OPEC Pricing A majority of OPEC's members agreed this week to cut the price differential
between high- and low-quality oil from $4 to $2.40 per barrel. As part of the
new pricing scheme, the organization's former benchmark crude price fell
from $29 to $28 per barrel. Iran, Libya, and Algeria refused to accept the
agreement, however, and Gabon abstained. The price cuts are largely symbolic
because they merely authorize members to sell oil at previously discounted
rates. Because the oil market has little faith in OPEC's ability to restrain
output and adhere to its pricing guidelines, downward pressures on prices are
not likely to abate. Without uncharacteristic discipline, the organization could
face the necessity of another price cut as early as this spring.
Egypt Moves Oil Despite public announcements that it would cut production to support OPEC,
foduction Steadily Egypt pushed its oil output to an alltime high of 870,000 b/d for the months of
Higher November and December, up more than 100,000 b/d from year earlier levels.
supplemented by the new off-
I Z The Gupco field led this surge with 600
000 b/d
,
,
shore production in Zeit Bay of around 20,000 b/d. Egyptian output will
continue to increase in 1985 with the development of the Umbaraka and
Meleika oilfields in the western desert, virtually assuring achievement of the
goal of 1 million b/d by 1987, set more than a decade ago. Sharply increasing
domestic demand-up nearly 15 percent annually in recent years-and weak
oil prices, however, are likely to limit any increase in hard currency revenues.
Turkey and Iran To Turkey and Iran have agreed on a joint committee to oversee engineering and
Study Pipline Options cost-benefit studies for two export pipelines from Iran through Turkey: one to
transport crude oil to either the Mediterranean or Black Sea, the other to carry
natural gas to West European markets. A memorandum of understanding
signed during Iranian Prime Minister Musavi's visit to Turkey specifies that
each country would finance and construct the portions in its own territory.
Although Turkey has long been interested in joint pipeline projects, Iran's
response is, in our view, mainly political maneuvering to improve trade
relations. Despite Tehran's desire to develop alternative crude export outlets,
the high cost of an Iran-Turkey pipeline-even longer than the oft-proposed
line to the Strait of Hormuz or a recently proposed one to Lavan Island-
makes this project unlikely. Moreover, the West European gas market is
already saturated and. Iran has long-range plans for increasing domestic gas
use.
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South African
Energy Prices Soar
W st European
as Market Trends
the past.-
Pretoria has announced sharp increases in domestic fuel prices as a result of
the declining value of the South African rand, which has fallen nearly 40
percent against the dollar in the past year. The price of gasoline, for example,
has risen 40 percent. Although Pretoria claims these energy price increases
will add only 2 points to the prevailing 13-percent inflation rate, some private
economists are predicting rates as high as 18 percent for the year. Moreover,
energy price increases probably will be passed. along in higher utility charges
for residents in black townships, increases that have triggered racial unrest in
West European gas consumption rose 9.3 percent above year-earlier levels in
the first nine months of 1984, continuing the revival in gas demand begun in
Soviet Union rose by 8 percent.
percent, largely as a result of deliveries to Italy through the trans-Mediterra-
nean pipeline that entered its first full year of service. Gas imports from the
On the supply side, however, West European production was up less than 2
percent. As a result, West European imports of Algerian gas rose over 20
1983. Demand in the United Kingdom-currently Western Europe's largest
gas consumer-rose nearly 5 percent, while the. Netherlands, France, and
Belgium experienced increases of about 10 percent. Consumption in electric.
power stations accounted for nearly half of Italy's 24-percent demand increase.
hanistan Seeks Kabul has asked several countries including West Germany, Japan, Iraq, Iran,
'Debt Relief
Yugoslavia, Kuwait, and the United Arab Emirates to convert old loans to
grants or at least extend the period of repayment. A UN representative was
asked to convey a similar request to the IMF and the World Bank. All the re-
sponses have been negative. Kabul is seeking financial assistance because of its
crumbling payments position and the reluctance of the Soviets to provide
foreign exchange. Afghanistan paid about $25 million in FY 1984 on its
roughly $500 million debt to non-Communist countries. Kabul's foreign
reserves have declined to about $200 million, one-half the preinvasion level.
IMF Suspends - The IMF last month suspended indefinitely Hanoi's access to Fund general
Vietnam's, Borrowing resources-the first such action taken against a member. Vietnam had made
P/Ivileges , i only partial payment on its roughly $25 million in IMF arrears by the 15 Janu-
in arrears, and has had no success in arranging a multilateral rescheduling.
ary deadline and was apparently unable to convince the Fund that depleted
foreign exchange reserves precluded full repayment. The suspension, however,
is unlikely to have much impact on Vietnam's' already bleak economic
prospects. Hanoi has for two years been in de facto default on its $1.7 billion
debt to non-Communist countries, accumulating approximately $350 million
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Secret
Moroccan Official
ebt Problems
military equipment purchases.
Morocco has suspended almost all payments to official creditors and has asked
the Paris Club for a multiyear rescheduling of its official debt. The US
Embassy in Rabat says that Moroccan finance officials believe this notifica-
tion relieves Morocco's debt responsibility until a new rescheduling agreement
is signed. The Moroccans may anticipate that the Paris Club will agree to
forgo its usual policy and include unpaid obligations in any rescheduling
package. Complicating Rabat's position with Club members is Morocco's foot-
dragging on an IMF-supported stabilization program. Rabat's worsening
financial problems, coupled with its recent failure to repay US-blended credits
for agricultural goods, presage more difficulties in bilateral financial dealings
with the United States. A major-test will be the $655,000 due in March for
ominican Republic
Edges Closer
to IMF Accord
requirements, however, and barring a change in bankers' attitudes, we do not
expect financing problems this year. The IMF refused Lisbon a waiver for 25X1
overshooting its September ceiling on public-sector domestic credit because of
an even larger overrun in December. Consequently, Portugal cannot draw
further funds under the standby program that ends in February. According' to
the Embassy, the Soares government is also running out of time to tie down a
$250 million structural adjustment loan from the World Bank this year. After
more than a year of discussions, Lisbon remains deadlocked with the Bank
over politically contentious institutional reforms. If the negotiations are not
completed by March, the program probably will slip into 1986. F 25X1
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I February 1985
After more than a year of contentious negotiations, President Jorge Blanco
late last week announced new austerity measures aimed at securing a $65-70
million standby accord. A new standby could be signed as early as March, al-
lowing Santo Domingo to reschedule its foreign debt and gain access to much-
needed new lending. The measures include unification of the exchange rate 25X1
and hefty export surcharges. The exchange rate adjustment caused price hikes
for many basic commodities. Prices for gasoline and kerosene soared 34
percent and 87 percent, respectively, and-electricity rates for residential users
increased as much as 68 percent. Although there has been some backlash, the
popular reaction so far has been less violent than last April when similar price
hikes sparked riots that left over 60 dead. Quick actions by security forces, in-
cluding the occupation of a major union headquarters, almost certainly
dissuaded opposition groups from mounting violent protests. Nevertheless, to
soften the impact of these new measures, the President announced plans to
increase the minimum wage by 20 percent and pledged to continue subsidies
for some food and medicine. He also promised improved housing and other
services for the military and a new health plan for teachers. F__~ 25X1
Portuguese Difficulties Problems in recent talks with the IMF and World Bank probably will reduce
With the IMF and the amount of money that Lisbon can obtain from those institutions in 1985. A
World Bank sharp improvement in its current account deficit last year eased financing
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Finnish-Soviet
Industrial Cooperation
Global and Regional Developments
The Finnish-Soviet Economic Commission recently accepted Moscow's pro-
posal for closer industrial cooperation as a means of expanding trade. Projects
include joint production in Finland of machinery, equipment, and textiles, with
the Soviets to provide the materials. Finland also is to construct several
factories in the USSR, with Soviet repayment in the products of those
facilities. The Finns have yet to work out financing for the projects and
marketing of the products they would receive. The Soviets stand to gain
technological and marketing advantages from these efforts. Helsinki is
primarily interested in the arrangement because, under the balanced trade
system between the two countries, the declining value of Soviet oil exports has,
in turn, limited Finnish exports to the USSR.
P gress on
NCTAD Reform
The yearlong US effort to reform UNCTAD, the principal UN forum for
North-South discussions, is making headway. The acting Secretary General,
Alister McIntyre, is willing to address US concerns about issues such as
budget overruns and secretariat favoritism toward the Third World. Moreover,
the developing countries recently agreed to enter into a dialogue on the subject.
This momentum, however, could be halted or reversed if UN Secretary
General Perez de Cuellar appoints someone unsympathetic to the US initiative
to head UNCTAD. The post became vacant in January, and the African
regional group is putting intense pressure on Perez to appoint an African since
one has never held the position. Perez is unimpressed with the announced .,
African candidates and postponed a decision by naming an interim secretary
general.
National Developments
Developed Countries
sustained economic growth. It calls for a 1.3-percent decrease in real spending
in the fiscal year beginning in April and zero real growth the following two
years. London plans no increase in real defense spending next year, a 6.6-
percent cut in capital spending, and only a 1-percent hike in social expendi-
tures. We believe the government is unlikely to meet its ambitious targets
because of the inflationary impact of the falling pound on defense outlays, the
effect of the coal strike on government borrowing requirements, and continued
pressures to combat unemployment.
British Government The Thatcher government's 1985/86 Public Expenditure White Paper contin-
Unveils Spending Plans ues to stress slower inflation and reduced public borrowing as the keys to
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Cutback in French
Supercomputer Project
New Greek
Labor Agreement
Australian
Labor Protests
A French computer manufacturer's joint marketing agreement with a US
supercomputer supplier may be the cause of a cutback in French supercom-
puter research. CII-Honeywell Bull has agreed with the US firm to submit a
joint bid when a prospective sale involves both supercomputer and conventional
computer systems. Just as this agreement was concluded, the French Govern-
ment reduced the status of a national supercomputer research project.j
largely ineffective.
The new national collective labor agreement signed by the General Confedera-
tion of Greek Workers (GSEE) and representatives of three Greek employer
organizations is likely to keep inflationary pressures strong in Greece in 1985.
The agreement provides for automatic cost-of-living adjustments every four
months and is consistent with Athens' 1985 incomes policy, which allows a
2-percent rise in real disposable income. The wage increases will fuel inflation
that is currently about 18 percent. Despite Athens' generous wage policy, the
new labor agreement drew heavy criticism from the Communist-affiliated
trade unions that called a 24-hour general strike last week, although it was
South Wales.
Prime Minister Hawke's wage and price accord with the Australian Council of
Trade Unions is being seriously tested by a rash of strike activity in the wake
of the Labor Party's slim victory in the December election. Flight attendants
and engineers began the unrest by disrupting pre-Christmas domestic air
travel. Railroad engineers hauling coal and wheat to New South Wales ports
then staged a walkout jeopardizing export contract negotiations with Japan.
More recently, civil servants have struck to protest a decision by the Federal
Conciliation and Arbitration Commission to deny them a "catch-up" wage
hike.
The Labor government is giving
no quarter. New South Wales Premier Wran is threatening to fire railroad
strikers. Civil servants face layoffs and suspensions, and the persistently
troublesome Builders' Laborers' Federation has just been deregistered in New
Less Developed Countries .
Philippine The country's largest savings bank, Banco Filipino, was forced into receiver-
anking Crisis
Bank (PNB}-the Philippines' largest commercial bank.
ship last week after an unsuccessful six-month government rescue effort. A
weak economy, combined with the stringent austerity measures under the IMF
program, aggravated a liquidity crisis that began last July with a-panic run on
deposits. In a move designed to protect the 3 million depositors, savings
accounts are being transferred to the government-owned Philippine National
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These
developments herald a new round of bank closings and consolidations-similar
to the ones in mid-1984-and will further erode public confidence in the
Philippines' shaky financial institutions.
Record Palm Oil / Malaysian palm oil production rose 19 percent in 1984, and USDA is
Production in Malaysia estimating a record crop of 4 million metric tons in 1985. With only slight in-
creases in domestic, consumption, successive large harvests have led to a
14-percent increase in processed palm oil exports for 1984-mainly to India,
Singapore, Pakistan, and the USSR. Malaysia, the world's lowest cost
producer of crude and refined palm oil, encourages exports of processed oil
products through differential export duties and tax incentives for foreign and
domestic investors. Malaysian processed palm oil products-which represent
over 75 percent of the world's trade in palm oil-are currently priced well
below competing US products and will make further inroads into traditional
US markets.
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ico Says
Mexico's recent rejection of a $10 million IBM- microcomputer plant- indicates
growing domestic opposition to'foreign'investment. Approval of the 1002
percent foreign-owned, export-oriented facility foundered on opposition from' 25X1
domestic assemblers of personal computers; who 'have been insulated from
outside competition.
The rejection will further chill Mexico's foreign investment 25X1
climate because the IBM proposal was widely viewed as a test of President de
la Madrid's pledge of flexibility, especially for export-oriented equity ventures.
'exico To Buy
According to USDA estimates, Mexico will import 250,000 tons of rice in
1985, which, following imports of 170,000 tons last year, is a significant jump
in the country's usual modest import requirements. For its $64 million
purchase, the government food-purchasing agency is looking to Asian suppliers
such as China, Vietnam, and Thailand, bypassing US rice, which would cost
an additional $20 million. In spite of a government drive to boost production,
Mexican rice harvests have declined in recent years. Production has stalled at
about the level of a decade ago, and consumption-has increased by 34 percent
over the period.
Record Chilean
We estimate that Chilean copper exports reached a record 1.3 million metric
tons in 1984-a slight increase over 1983. Since 1980 mined output in Chile
has grown more than 20 percent and, based on planned capacity increases,
1985's output should grow by about 5 percent. Despite record shipments, 25X1
Santiago expects low world copper prices to cut export earnings by nearly $260
million-a 14-percent drop from the 1983 level. This loss of hard currency
places increased strains on Chile's troubled economy, which depends on copper
sales for roughly 40 percent of its export earnings. 25X1
rge East German
/Trade Surplus With
West Germany V
Although its overall hard currency trade surplus probably declined in 1984,
East Germany achieved a DM-1.3-billion (over $400 million) surplus in trade
with West Germany. This is, by far, the largest trade imbalance between the
two countries and contrasts with a DM-69-million deficit in 1983. We believe
the sharp turnaround reflects East Berlin's desire to reduce its dependence on
the Federal Republic. Moreover, the surplus probably enabled East Germany
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Soviet Ministries
Impede Progress Under
the Industrial
Experiment
China Buying
JS Polyester Again
Secret
1 February 1985
products, machinery, iron and steel, and steel products fell sharply.
to reduce its debt to West Germany by one-fourth, to under DM 3 billion. As a
result of East Berlin's continued export drive, good harvests, and controls on
imports of capital goods, East Germany's exports rose 12 percent and its
imports declined 8 percent. Export growth was concentrated in chemicals,
nonferrous metals, and electronic products; and imports of agricultural
additional 21 ministries in 1985.
A recent Izvestiya editorial blamed ministerial interference for shortcomings
in the economic experiment begun last January in five industrial ministries. It
said that most enterprises under the experiment have not experienced percepti-
ble benefit from having their own source of finance for modernizing production
and improving conditions for workers. Some ministries and departments, have
not relinquished planning functions and other authority to enterpri ses and
arbitrarily changed plan goals. Furthermore, the ministries for heavy and
transport machine building and for electrical equipment did not release bonus
funds to enterprises last year for modernization and, in some cases, took funds
enterprises were supposed to retain. The Soviet leadership last August
announced intentions to improve the experiment and extended it to an
China will buy
pendence on the Japanese.
about 85,000 metric tons of polyester fiber from US firms in 1985, about half
its expected import requirements. This amount would match the peak volume
imported from the United States in 1981. China discontinued purchases of US
fibers in 1982, ostensibly in reaction to US controls on textile trade, but
largely because of massive fiber inventories. in
spite of continuing differences over textile trade, China considers the political
climate conducive to increased trade with US suppliers and wishes to avoid de-
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Brazil: Economic Plans of
the Civilians
Brazil's President-elect Tancredo Neves, whose in-
auguration on 15 March will end 21 years of
military rule, inherits an economy that, despite
some recent improvements, remains seriously trou-
bled. Although GDP rose an estimated 3.5 percent
in 1984 after three years of recession, growth has
been narrowly based on exports while domestic
incomes continue to languish. The record $13
billion trade surplus last year improved Brazil's
foreign exchange position, but the new government
is still burdened with a $100 billion debt and huge
annual debt servicing obligations. Moreover, infla-
tion has stubbornly remained above 200 percent for
a second straight year under Brazil's IMF stabili-
zation program, contributing to further erosion of
living standards and critically needed investment.
Neves's highest eco-
nomic priorities for 1985 are to strengthen growth
and employment, reduce inflation, obtain multiyear
rescheduling of foreign debt, and promote a more
equitable distribution of income.
Although Neves indicates he will adhere to IMF-
backed stabilization measures, we believe he wants
some major economic policy initiatives to distin-
guish his administration from that of the military.
Neves has touted resumption of growth as the
centerpiece of the new administration's economic
program. The task will be made easier by last
year's export-led recovery, which should, in the
view of the IMF, pick up speed in 1985. Although
Neves has said he intends to maintain an austerity
program, he hopes to ease restrictive measures on
domestic credit for private industry, subsidies to
agriculture, and government investment in small-
scale public works projects. He also wants to create
more industrial jobs, raise real wages for lower
income workers, and increase social spending to
promote more even income distribution.
Reducing inflation probably will be his most diffi-
cult challenge. Inflationary pressures will be espe-
cially intense at the outset because of the relaxation
of monetary controls at the end of 1984. As a
stopgap measure, he has proposed an emergency
"social pact" between business and labor to limit
wage and price increases and alter Brazilians'
inflation psychology.
Over the longer term, Neves believes that public-
sector deficits must be restrained. He reportedly
favors budget and tax reforms, divestiture of some
nonessential state enterprises, and cutbacks in
large-scale public projects. Neves also wants to
reduce domestic interest rates-a principal cost of
production.
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Coping With Interest Groups
We believe Neves's economic policies will be chal-
lenged. Labor, political parties, and small busi-
ness- groups with little voice under the military-
will now press for their widely diverging interests to
shape economic policies. At the same time, those
who have wielded significant influence over the
past 20 years, such as the public-sector technocrats,
the middle class, and the large industrialists, will
attempt to protect their positions.
Neves, whose constituency spans all these groups,
will probably attempt to accommodate their com-
peting agendas without undermining his economic
plans. According to the US Embassy, he is espe-
cially concerned that labor demands for higher
wages, together with business calls for improved
profits, could add to inflationary pressures early in
his administration. Although the proposed "social
pact" has achieved some support from business and
labor, other contentious issues such as economic
austerity to meet debt commitments may be nearly
irreconcilable.
According to the US Embassy, two major groups of
advisers are competing for his attention-moder-
ates willing to follow orthodox policies and expand
Brazil's international economic ties and the leftists
who are more unorthodox and nationalist in their
approach. We believe Neves will offer government
positions to both groups but will reserve key policy-
making posts for moderates such as the highly
respected banker, Olavo Setubal. Neves has indi-
cated his preference for those businessmen and
bankers with proven ability to manage financial
affairs. To placate his leftist supporters, we believe
he will find less influential posts for some of
Brazil's leading leftwing economists, such as aca-
demic Celso Furtado.
We believe the civilian administration will make a
determined effort in 1985 to continue Brazil's
stabilization program under IMF auspices so long
Secret
1 February 1985
as economic recovery'is not jeopardized. We believe
Neves wants reasonably tough anti-inflationary
measures this year to pave the way for a stronger
recovery in 1986, when he hopes to reap consider-
able political gain in scheduled Congressional and
gubernatorial elections. To help achieve stabiliza-
tion objectives, we believe Neves's moderate eco-
nomic policy team will seek greater fiscal disci-
pline. Key advisers have endorsed budget reforms
to enhance government control over spending. Also,
they probably will take initiatives to reduce the pay
and fringe benefit excesses that pervade the govern-
ment bureaucracies and cut back nonessential
large-scale public works projects.
As a result, in our view, the odds are slightly better
than even that the new government will succeed by
the end of this year in slowing inflation. We judge
that Neves and his economic team will be able to
exploit their anticipated honeymoon, as' well as
popular concern about inflation, to maintain the
cooperation of business and most of labor in re=
straining price and wage increases during 1985.' If
Neves fully carries out the military regime's finan-
cial reforms, in our view, he will also'be in a better
position to limit Brazil's monetary growth, which
would further lessen inflationary pressures.
Barring adverse international economic develop-
ments, Brazil's payments position this year should
remain strong. Neves's economic team has asserted
its intention of maintaining current sizable foreign
reserves. Accordingly, we believe the new adminis-
tration will continue to offer major incentives to
exporters, especially those in industry. Neves prob-
ably will prefer to devalue the cruzeiro only gradu-
ally to soften the inflationary impact, but he is not
likely to permit the currency to become overvalued.
We believe that, with modest export growth, Bra-
zil's trade surplus could approach last year's record
$13 billion level keeping the current account deficit
small.
We expect no major shifts from the military gov-
ernment's foreign debt policy so long as Brazil's
balance-of-payments performance remains favor-
able.
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Neves and his economic team probably will occa- with eventual harmful effects on the domestic
sionally criticize the IMF and the banks about the
terms they have imposed on Brazil, but we believe
his administration is unlikely to break commit-
ments made by the military regime.
economy and Brasilia's relations with its creditors.
Implications for the United States
Major Downside Risks We believe that the Neves administration will
continue the military government's efforts to main-
We remain concerned that efforts by Neves to tain strong ties with Washington.
accommodate the views of all his advisers could
result in the adoption of inconsistent and misguided
policies, such as highly expansionary measures to
spur rapid, domestically driven growth. Under
these conditions, Neves's plans to stabilize prices
would be undone. Many Brazilians already are
skeptical about the new administration's determi-
nation to fight inflation and will be alert to its first
signs of wavering. A decision by Neves to shift to
expansionary fiscal and monetary policies would Even in our most likely scenario, foreign investment
likely lead to a rapid escalation of speculative price and trade issues could become serious irritants.
increases, perhaps resulting in annual inflation in
the 300- to 500-percent range.
Sharply higher international interest rates and an
unexpectedly severe drop in industrial-country eco-
nomic activity probably could quickly swell Brazil's
current account deficit some $3-4 billion. Even
without new credit, Brasilia could accommodate
such a deficit without great difficulty this year,
mainly by drawing down its recently replenished
foreign exchange reserves. At the same time, it
would likely come under considerable domestic
pressure to take a more antagonistic position in its
relations with its foreign creditors. In that event,
we believe the new government would press Wash-
ington and the international banks-individually or
as part of a Cartagena debtors' movement-to
pony up new funds or agree to a much more
J Neves proba-
bly will react quickly to perceived US protectionist
actions and, in addition, will demand reciprocal
concessions on Brazilian import liberalization
measures sought by the United States.
generous debt relief scheme.
If Neves's modest economic policies fail, the new
President will likely find it increasingly difficult to
maintain a centrist course. The ascendance of
leftwing radical economists to positions of signifi-
cant influence would portend major shifts to expan-
sionary policies. The results could be heavier gov-
ernment controls over prices and economic activity
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United Kingdom: Dealing With
the Miners' Strike
Prime Minister Thatcher is well on the way toward
winning her battle with the striking coal miners
and their Marxist leader, Arthur Scargill. The
miners have failed to significantly disrupt the
economy-in dramatic contrast to the 1973-74
strike-and have not persuaded other unions to join
their walkout. Although the cost has been substan-
tial-in terms of lost foreign exchange earnings
and a higher budget deficit-there has been almost
no impact on the average Briton. No energy short-
age is in prospect primarily because London has
maximized the use of oil-fired power stations.
Miner solidarity is rapidly crumbling. Since the
first of the year, more than 7,000 strikers have
returned to work, and other unions are pressing the
miners to settle before the strike simply peters out.
Origins of the Miners' Strike
Elected on a pledge to boost industrial efficiency
and end Britain's long economic slide, the Thatcher
government tried to restructure the inefficient coal
industry in 1981. London abandoned the attempt
apparently believing that it lacked enough public
support to tackle strenuous opposition by the Na-
tional Union of Mineworkers (NUM). The coal
industry's increasing financial deficits and produc-
tion surpluses have made the need for restructuring
even more clear. Over the past five years, losses by
the National Coal Board (NCB) have totaled $3.5
billion, of which $3.3 billion was made up by grants
from the government. Thatcher also has made some
progress in her effort to reduce the power of labor
unions. Several laws enacted since 1980 to make
unions more "democratic" have reduced union
leaders' power to call strikes, run closed shops,: and
raise money for the Labor Party without union
members' approval.
United Kingdom: Shares of Primary Energy
Consumption, 1950-83
80
70
Coal
Natural gas
Nuclear and
hydroelectricity
In 1982 Thatcher made Ian MacGregor, who
implemented a sweeping rationalization of British
Steel Corporation (BSC) during 1979-82, Chair-
man ofAhe-NCB. Soon thereafter, MacGregor had
laid out a plan to close 20 of the most unproductive
coal pits and eliminate 20,000 jobs over 12 months.
A relatively small number of mines account for the
bulk of NCB losses. Some of MacGregor's critics,
however, question his decision to announce all the
pit closures at once. In fact, a South Wales Coal
Board official told the Embassy that a much more
tactful approach would have been to reveal and
implement the plan in stages.
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Arthur Scargill, the fiery, power-hungry, Marxist
leader of the NUM, took the position that no mine
should be closed until exhausted of coal. One of the
architects of the 1973-74 confrontation with the
Heath government, Scargill had been looking for a
chance to fight Thatcher since becoming NUM
president in 1982. In response to MacGregor's
plan, he first orchestrated an overtime ban in
November 1983, and then called a nationwide
strike on 12 March 1984. Scargill refused to hold a
strike vote, however, probably because the miners
had twice before voted against a walkout. Partly for
this reason, about 25 percent of the miners ignored
his call, saying the strike was illegal.
Whatever his motives in calling the strike, Scargill
has demonstrated leadership by keeping it going.
Although there has been a significant drift back to
work, 60 percent of the workers-about 114,000-
have stuck with him for more than 10 months with
no strike pay and little hope of an early settlement.
He has been aided, of course, by the NUM's
tradition-of militancy and by- the feeling of many
strikers that they have nothing to lose because their
communities and lifestyles are threatened by Mac-
Gregor's plan. Moreover, there is fear of physical
intimidation at the picket lines and ostracism in the
close-knit mining communities.
Throughout the strike, the NUM has received only
lukewarm support from other unions. The Trades
Union Congress (TUC) has not authorized sympa
thy strikes, in part because its members fear a loss
of jobs. Leaders of some unions may believe that a
strike call would be ignored by workers who see no,
economic rationale for the strike and dislike Scar-
gill's tactics. Moreover, Scargill is unpopular with
the British public, and neither the TUC nor the
leadership of Labor Party wants to be associated
with him publicly.
The Government's Response
The government moved quickly to reduce the eco-
nomic impact of the strike by greatly increasing the
use of oil-fired power stations and by boosting coal
imports. Meanwhile, Thatcher took a backseat in
MacGregor's negotiations with Scargill, probably
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1 February 1985
The National Union of Mineworkers
and Arthur Scargill
Although its membership has declined dramatical-
ly-there are now fewer than 190,000 coal miners,
as compared with more than 1 million in the 1920s
and 1930s-the NUM retains its reputation as one
of the most militant unions in a country noted for
the militancy of its labor movement. The NUM's
reputation was earned by its aggressive participa-
tion in several major British strikes over more
than half a century. It sparked the general strike of
1926 and continued to hold out for nine months
after the other unions had settled. In 1973-74 the
coal miners staged a strike that brought the entire
economy to a standstill and precipitated the defeat
of the Conservative government of Prime Minister
Heath. The NUM's aggressive stance has frequent-
ly won wage increases far exceeding those of other
unions.
In Arthur Scargill the miners' union has found a
leader more than worthy of its militant tradition.
Scargill ascended through the ranks and became
NUM president in 1982. A charismatic leader, he
is perhaps best known for his radical political and
economic views. Scargill is viscerally opposed to
virtually every facet of Prime Minister Thatcher's
free market economic policies.
in hopes of keeping the issue out of the political
arena. The Coal Board, in turn, refrained from
using the powerful new labor laws for fear of
solidifying the miners' cause. The court-ordered
freeze of the union's funds came about after its own
members brought suit under the new laws against
an illegal nationwide strike.
The government is stepping up efforts to lure
miners back to work. Several thousand strikers
went back to their jobs before Christmas to receive
special bonuses, and the Coal Board now is empha-
sizing income tax breaks to those who return to
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work before the end of the tax year this March.
The government is also stressing that the strike will
not bring about an energy crisis. Energy Minister
Walker recently extended to the end of 1985
Thatcher's promise to avoid power cuts, while
appealing to miners to end their walkout.
Economic Impact of the Strike
The strike has hurt the economy. We estimate that
the foreign exchange cost alone-mostly in the
form of foregone oil exports-is running at about
$5 billion annually. This, in turn, likely has contrib-
uted to the fall of the pound over the past year that
has raised the price of all imported goods. Lost tax
revenue, police overtime, and the higher cost of
burning oil in power stations, has added an estimat-
ed $2.8 billion to the budget deficit. We believe the
strike has shaved GNP growth by about 1 percent-
age point, due almost entirely to the lost coal
output and the substitution of higher cost oil.
Aside from some cut in steel production, the strike
has had very little effect on other industries or on
consumers. There has been no energy shortage, and
taxes have not been raised to offset the increase in
the budget deficit. Even electricity users have not
been asked to pay for the higher cost of using oil-
although Cabinet ministers are considering a one-
time, 20-percent surcharge on electricity bills early
this spring.
The economic impact of this strike is dramatically
less than in 1973-74 when the miners' walkout put
British industry on a three-day workweek:
? Nonstriking miners have maintained a substan-
tial level of output-currently about 40 percent of
normal, according to the Coal Board.
? As a result of the shift to coal-burning power
stations over the last decade, the country had a
large amount of idle oil-fired electricity generat-
ing capacity.
? Because of the surplus production of the previous
four years, coal stocks at the beginning of the
strike were exceptionally high.
United Kingdom:
Energy Status
Million tons of coal
or coal equivalent
(except where noted)
Mar-Oct Mar-Oct Percent
1983 1984 Change
Fuel used for electricity generation
Total
63.0
63.0
0
Coal
49.0
29.0
-41
Oil
4.0
23.0
475
Other a
Coal balance
Production
80.1
31.1
-61
Consumption
72.8 '
46.0
-37
Exports
4.4
0.8
-82
Imports
3.4
6.0
76
Coal stocks b
Nov
1983
Oct
1984
59.8
38.5
-36
At power stations c
33.3
15.5
-53
Other
26.5
23.0
-13
a Including the fuel equivalent of nuclear and hydroelectricity
generation.
b The overtime ban began in November 1983; October 1984 is the
latest month for which data are available.
c The "danger level" at power stations is 6 million tons. At that
level the government would be forced to start making power cuts.
Moreover, London has succeeded in bringing coal
supply and demand back into balance, despite the
strike:
? The power industry had slashed its use of coal by
more than half by the end of last summer.
Although it probably cannot match this figure
during the winter, when electricity demand is
highest, an average reduction of close to 50
percent seems possible over a full year..
? Other coal users have reduced their consumption
by about 30 percent.
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United Kingdom: Dealing With the Coal Strike, 1980-84
Million metric tons at
an annual ratea
-Power station
consumption
-Other consumption
20 20
III iiiiiiii IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII IIIIIIIIIII IIIIIII IIII IIIII IIIIIIIIIIII 111111111111111
0 1980 81 82 83 84 0 1980 81 82 83 84
Feb Feb
While boosting coal imports and Bringing supply and demand
cutting exports ... back into balance.
Exports
-Imports
IuuwwIuin 11111 wi~muiuw~uuu1 1miuwi1iiwuuuIwuwmItowuwIII,
0 1980 81 82 83 84 -45 1980 81 82 83 84
Feb Feb
? London also cut coal exports by 82 percent and
boosted imports by 76 percent, bringing net im-
ports up to almost 1 million tons a month by last
fall.
After a rapid drawdown earlier in the year, coal
stocks have been stabilized at a comfortable level.
Although the public, opposition leaders, and most
trade union representatives have expressed frustra-
tion at the impasse, neither side has budged. For
Thatcher, the strike has become a key test of her
credibility and her entire industrial restructuring
policy, and its outcome could have a major impact
on her political future. On the other side of the
fence, Scargill remains even more unyielding. Only
strong pressure from other unions fearful of a
complete defeat for the miners or-more worri-
some for Scargill-evidence that rank-and-file sup-
Secret
1 February 1985
port is collapsing are likely to induce him to come
to terms. Many of the miners still on strike proba-
bly believe they no longer have much to lose by
staying out-although the government is arguing
that deterioration of the closed pits is jeopardizing
even more jobs.
We believe that Thatcher is gradually gaining the
upper hand, mainly because of her remarkable
success in minimizing the strike's impact on the
public. Although the budgetary and foreign ex-
change costs of the strike are high, we believe she
will pay these costs indefinitely, rather than give in
to Scargill. In this situation, the miners' primary
hope of victory-even more than at the outset-
rests on the unlikely chance of other major unions,
such as the dockworkers or transport workers join-
ing their strike.
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Pressure on the union to settle is mounting as more
miners drift back to work-the pace has acceler-
ated since the first of the year, with about 7,000
returning in less than three weeks. If the share of
working miners reaches 50 percent by the strike's
anniversary in March, Thatcher probably will de-
clare victory. To avoid the ignominy of the strike
simply petering out, the TUC is pressing the miners
to compromise. In negotiations that resumed this
week after being suspended last October, the Coal
Board has the upper hand. We believe the most
likely result will be a face-saving agreement-the
union's acceptance of some mine closures with an
arbitration body in which the Coal Board has the
final say to offer advice on the scope and timing of
closings. This arrangement apparently was part of
the accord reached between the Coal Board and the
foremen's union, but it has been rejected thus far
by Scargill.
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No Quick Recovery for the
Saudi Economy
We do not believe that Saudi Arabia can signifi-
cantly boost oil revenues or cut spending sufficient-
ly to avoid another year of large current account
and budget deficits. Oil revenues, in fact, will slide
further as Riyadh backs away from its singlehand-
ed effort to uphold the benchmark price. A policy
of price cutting to boost oil revenues would entail
high risks, however, because there is no guarantee
that the Saudis can market substantially more oil
even at a sharply lower price.
The poor outlook for oil earnings will force the
government to consider cutting imports, but we
doubt strong action will be taken soon. The Saudis
also will promote nonoil exports-especially petro-
chemicals-in US and other markets. Indeed, dur-
ing the upcoming visit of King Fahd, Saudi officials
are likely to raise their concerns about access to the
US market for their expanding petrochemical out-
put. Because of the kingdom's economic setbacks,
there is unprecedented criticism of the royal fam-
ily's lavish spending and its failure to bear a fair
share of the burden. This criticism is likely to grow
in 1985.
Impact of the Oil Slump
Saudi Arabia's oil revenues have plunged from a
peak of $112 billion in 1981 to $38.4 billion in
1984. The Saudis expected a recovery in 1984, but
revenues fell by about $6 billion from their 1983
level. Crude oil output slid to only 3.8 million
barrels per day (b/d) in the final quarter of 1984
compared with peak output of 10 million b/d in
early 1981.
The impact of declining petroleum output has been
widespread:
? Real GDP fell roughly 10 percent in Saudi fiscal
year 1984 (ending in April). A further decline is
expected in the current fiscal year.
? The Saudi budget shifted from a $30 billion
surplus in FY 1982 to an officially announced
deficit of $10 billion in FY 1984. We believe the
actual deficit was close to $17.billion.
? Government spending, which serves to inject oil
wealth into the economy, fell from $84 billion in
FY 1982 to $64 billion in FY 1984.
? The current account turned from a nearly $50
billion surplus in 1981 to a $16 billion deficit in
1983 and an estimated $14 billion deficit in 1984.
Usable official foreign assets-that is, excluding
loans to Iraq-have been drawn down from a
peak of $135 billion in 1982 to about $105 billion
by yearend 1984.
Although no group in Saudi society has been
entirely immune, the government has sought to
shield Saudi citizens, while letting foreigners bear
the brunt of the recession:
? Budget cuts have hit the foreign-dominated con-
struction industry hardest with projects put on
hold or bills paid late.
? The government has refused to bail out two large,
insolvent construction firms(
? A new law requires public bidding on all govern-
ment contracts and has caused some existing
contracts to be rebid. This effort has succeeded in
securing lower prices on many projects.
? The Saudis reduced foreign aid programs in FY
1984 by nearly $2 billion, primarily involving
non-Arab and non-Islamic nations. Riyadh con-
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Saudi Arabia: Foreign Assetsa and Investment Saudi Arabia: Crude Oil Exports and Gross
Income, 1975-85 Oil Export Revenues, 1981-84
Crude Oil Exports a
Million b/d
a These official assets include loans to Iraq.
b Estimated.
C Projected.
Gross Oil Export Revenues b
Billion US $
15
I I I I I I I I I 1 1
0 1981 82 83 84
a Including Saudi exports from Neutral Zone.
b Quarterly data at an annual rate.
tributed, only about half of the, $3 billion it ceived full funding. This $15 billion investment will
pledged in emergency funding to the Internation- start to pay off in 1985 when petrochemical exports
al Monetary Fund. produce urgently needed net earnings instead of
being a budget expenditure. Most subsidies-such
Only high-priority sectors have been relatively un- as free health care and cheap electricity-have not
scathed. Most military programs-especially air been targeted for serious cuts because they are
defense-remain intact. Petrochemical develop-
ment-the main industrialization effort-has re-
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Saudi Arabia: Current Account
High-Import Low-Import High-Import Low-Import
Option d Option e Option d Option e
Trade balance
33.8
7.2
4.3
-6.0
1.0
4.5
11.5
Exports, f.o.b.
72.8
45.2
39.3
29.0
29.0
39.5
39.5
Oil
72.6
44.8
38.4
26.5
26.5
37.0
37.0
Imports, f.o.b.
39.0
38.0
35.0
35.0
28.0
35.0
28.0
Services and private transfers
-21.0
-21.3
-16.7
-14.0
-11.5
-16.0
-12.5
Freight and insurance, net
-7.0
-6.8
-6.3
-6.0
-5.0
-7.0
-6.0
Investment income
16.0
14.5
12.9
12.5
12.5
12.5
12.5
a Estimated.
b Oil Scenario 1 assumes that 1985 oil prices stabilize at $27/barrel
and that Saudi Arabia restricts production to an average of about 3
million b/d.
e Oil Scenario 2 assumes a steep oil price decline to $20/barrel
caused, in part, by increased Saudi Arabian oil production to an
average of about 5.5 million b/d. Under this scenario, the Saudis
also increase grant aid, primarily to Iraq, to offset Baghdad's lower
oil earnings.
d High-Import Option assumes that Saudi Arabia seeks to maintain
imports at 1984 levels.
e Low-Import Option assumes that Saudi Arabia cuts imports for
consumption and development to reduce its current account deficit
and foreign reserve drawdowns.
r Excludes loans to Iraq.
considered politically sensitive.
The 1985 Outlook-Tough Choices Ahead
We foresee no feasible combination of oil policy
and domestic spending cuts that can rescue Saudi
Arabia from significant current account and bud-
get deficits this year. Current account deficits
deficit of around $6 billion.
would reach $22 billion if the Saudis attempt to
uphold OPEC oil prices by cutting production,
while maintaining current imports. Even under a
scenario where Saudi Arabia halts the steep slide in
oil revenues and makes a 20-percent cut in imports,
the kingdom still would face a current account
Oil Options. Saudi Arabia, unlike most other oil
producers, has significant choices-in its 1985 oil
policies. If the Saudis continue to support OPEC
unity through strict limits on output, 1985 oil
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earnings will plummet. For example, Saudi oil
production of 3 million b/d at a stable price of $27
per barrel would cause oil earnings to fall by $12
billion, to $26.5 billion.
Alternatively, Saudi Arabia could raise output
sharply in an effort to increase revenues. This
would force prices down. Nevertheless, Riyadh
would reverse the steep decline in earnings that
occurred in the second half of 1984 by boosting
production to 5.5 million b/d, even if such action
caused prices to fall to $20 per barrel. There is no
guarantee, however, that Saudi Arabia can quickly
regain lost market shares even with aggressive price
cutting.
Import Options. Saudi living standards and the
pace of economic development remain critically
dependent on imports-food, machinery, vehicles,
building materials, and the entire array of modern
consumer goods. Spending reductions caused a
greater decline than was anticipated in 1984 im-
ports. Nonetheless, further cuts in construction
materials and other durable goods probably could
be achieved.
The Saudis probably will attempt to maintain
imports at their 1984 level of $35 billion. This
import option represents a "muddling through"
approach with the least amount of domestic disrup-
tions, but it would produce large current account
deficits. At the other extreme, import cuts of 20
percent would save about $7 billion, but reductions
of this magnitude so far have been considered
unacceptable by the government.
On balance, we believe the Saudis initially will
attempt to uphold OPEC solidarity, while at the
same time maintaining 1984 import levels. As the
year progresses, however, a Saudi failure to shore
up world oil prices, combined with large draw-
downs in foreign assets, could cause the Saudis to
abandon this approach. Should this occur, the
Saudis then would seek higher oil revenues through
increased output and would be forced to consider
import reductions.
Secret
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Within Saudi society, Islamic fundamentalists
would welcome a further slowdown of the economy.
They have long expressed concerns about the rapid
pace of Westernization. The government, however,
is likely to move cautiously. There is no widespread
support for more austere policies that would limit
subsidies or the economic opportunities of Saudi
Foreign Aid
Saudi foreign aid programs are used to placate
potential regional threats, mold a moderate Arab
consensus, reduce Soviet regional influence, and
enhance Riyadh's international prestige. For these
reasons, we judge that Riyadh will not substantially
reduce aid in 1985. A steep oil price decline could
even cause the Saudis to increase outlays, princi-
pally to Iraq. An oil price decline to $20 per barrel,
for example, would reduce Baghdad's revenues by
$3 billion, and Iraq would demand and probably
receive compensating aid from Riyadh as well as
from Kuwait.
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Implications for the United States
Saudi Arabia is the largest Middle East customer
for US goods and services. Previous AWACS and
F- 15 sales make Riyadh one of the most important
purchasers of US arms among the developing coun-
tries. Moreover, close to two-thirds of the Saudi
investment portfolio is held in US dollars- and
much of this is in the United States. While lower
Saudi revenues would hurt US exports, this would
be more than made up by the gains the US
economy would receive from lower oil prices.
Lower oil earnings, however, will stiffen Saudi
Arabia's determination to penetrate world markets
for its emerging petrochemicals industry. With
about 5 percent of non-Communist basic petro-
chemicals capacity-in plants partly owned by US
firms-free access to global markets has become a
vital Saudi concern. We expect Saudi officials will
raise the issue of access to the US market when
King Fahd visits Washington later this month.
Saudi Arabia has warned the United States public-
ly that it will retaliate-as it did to the EC with
tariffs on electric cable imports last summer-if
Washington adopts protectionist measures.
We believe Saudi Arabia will be less willing to
respond to US requests for financial assistance to
other countries while it faces large current account
deficits. Moreover, continued tight revenues proba-
bly will make Riyadh less receptive to US requests
to provide Saudi oil on concessional terms to select-
ed LDCs.
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CEMA: Planning for Long-Term
Cooperation
The Soviet Union has initiated discussions on a
wide array of multilateral and bilateral economic
agreements with other members of the Council on
Mutual Economic Assistance (CEMA)' designed
to limit CEMA's dependence on the West and
exert tighter control over the East Europeans.
These will be long-term arrangements to guide
economic relations within CEMA for the rest of the
century. Although Moscow can cite these frame-
work agreements as guidelines for cooperation and
trade, the commitments appear too weak and non-
specific to assure that Soviet goals will be met.
Multilateral Programs
Science and Technology. Perhaps the most impor-
tant result of last June's CEMA summit was the
"Long-Term Comprehensive Program for Coopera-
tion in Science and Technology for the Next 15 to
20 Years." Still incomplete, the program has .been
billed as equal in significance to CEMA's highly
touted 1971 Comprehensive Program for Economic
Cooperation and Integration.
The program appears to be a Soviet effort to make
technology CEMA's primary concern, and aims to
coordinate development of high-technology indus-
tries. Although it does not rule out a role for
Western imports, a major reason is to defend
CEMA against Western controls on exports of
technology. The program emphasizes cooperation
in five key areas-electronics,.flexible manufactur-
ing systems, nuclear energy, advanced materials
technology, and biotechnology. A basic goal is to
avoid duplication of effort and make CEMA's
high-tech products compatible by sharing data and
' CEMA members include Bulgaria, Czechoslovakia, East Germa-
ny, Hungar Poland Romania, the USSR, Cuba, Vietnam, and
Mongolia.
research. Although CEMA technology is largely
unsophisticated by Western standards, pooling re-
sources'could provide badly needed gains in pro-
ductivity. A more ambitious-and contentious-
goal would be to assign certain tasks and responsi-
bilities to individual countries. Most East European
countries continue to resist Soviet or CEMA meas-
ures that would dictate which industries must be
located in which country.
The program appears to be going slowly, and the
goal of completing it by the end of this year may
not be met. In an unusually blunt public criticism,
Czechoslovak Premier Strougal-a proponent of
the program-recently noted that "there are in-
stances of serious delay in this work." He recom-
mended that CEMA's Executive Committee review
the drafting of the program and urged the Commit-
tee to assure that it be accompanied by measures
linking it to cooperation in production.
Other CEMA-Wide Agreements. The major ac-
complishment announced at the October 1984 Ha-
vana gathering of CEMA premiers was agreement
on "Long-Term Comprehensive Measures for Co-
operation in the Sphere of Energy, Fuel, and Raw
Materials for the Period Through 1990 and Be-
yond."
the USSR will continue to supply fuel and
other raw materials at present levels in return for
more and better quality East European goods,
greater conservation efforts, and increased invest-
ments in joint projects. In addition, members
agreed to work out plans for building nuclear power
plants through the year 2000. Finally, in January,
the CEMA Executive Committee discussed a pro-
gram for joint electric power development up to the
year 2000, and a complex program of cooperation
in transport for 1991-2000.
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Bilateral Cooperation Through 2000
The USSR is also negotiating long-term bilateral
agreements with each East European country in
science, technology, and economics. Bilateral ac-
cords can be tailored to fit the Soviet relationship
with each country, and they reflect the reality that
CEMA has little real authority as a multilateral
organization. Agreements already signed with Po-
land and East Germany repeat many of the provi-
sions of planned multilateral programs.
Poland. On 4 May 1984, General Jaruzelski and
party. leader Chernenko signed the "Long-Term
Program for the Development of Economic, Scien-
tific, and Technical Cooperation Between the
USSR and Poland for the Period Up to the Year
2000." A harbinger of subsequent accords, the
agreement covers cooperation in all major areas of
the economic relationship.
In machinery, both sides are to modernize existing
industries, as well as devote special attention to
emerging industries-microelectronics, robotics,
and flexible manufacturing systems. Although the
agreement specifies some 15 sectors in which each
country will specialize, the list does not represent
any change from the status quo.
The fuel and energy section guarantees Soviet
deliveries of energy. In return, Poland will help
with the construction of natural gas pipelines in the
USSR and, according to a Polish official, produce
machinery to manufacture large-diameter pipe.
The key innovation is the encouragement of ex-
panded relations.between planning organizations,
enterprises, and institutes (including the Polish and
Soviet Academies of Science). The Polish press has
cited several efforts to implement the commitment:
e Jaruzelski met last September with about 60
Polish enterprises to discuss ways to stimulate
further cooperation with Soviet counterparts.
c Beginning in 1985, annual trade protocols
will allow some Polish and Soviet enterprises to
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1 February 1985
bypass foreign trade organizations in both coun-
tries.
East Germany. After two and a half years of
negotiations, a program for long-term bilateral
cooperation was signed on 6 October 1984 by
Soviet Minister of Foreign Affairs Gromyko and
East German party leader Honecker. Agreement
was reached at a time of political strains in the
relationship with Moscow, one month after the
postponement of the Honecker visit to West Ger-
many. Unlike the Polish-Soviet program, the text
of the "Program for the Development of Coopera-
tion Between the USSR and the GDR in Science,
Technology, and Production for the Period Until
the Year 2000" was not published, but the press
carried several details of it.
The program is similar to the Soviet-Polish pact:
o The industries specified for cooperation are
roughly the same.
It calls for modernizing manufacturing plants in
both countries.
Energy supplies from the Soviet Union are to be
secured in part through East German construc-
tion of capacity to produce equipment for the
Soviet oil and gas industry.
Differences vis-a-vis the Soviet-Polish agreement
appear to be mainly ones of emphasis. In particu-
lar, the East German program puts greater stress
on cooperation in science and technology, in recog-
nition of East Germany's strength in these fields. It
emphasizes all aspects of microelectronics-manu-
facturing, developing new technologies and applica-
tions, and exchanging equipment and material in-
puts.
More To Come. In recent months, communiques
from bilateral meetings between Soviet officials
and those in Bulgaria, Hungary, Czechoslovakia,
and Romania have announced negotiations on pro-
grams for cooperation through 2000. We have few
details on the status of these preparations, but the
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Soviets probably would like to ink pacts modeled on Predecessor Programs: False Starts of the 1970s
the Polish and East German programs by the end
Obstacles to Integration
Rhetoric aside, there are several reasons to be
skeptical that a breakthrough to achieve genuine
economic integration in CEMA is in the offing.
Remarkably similar programs launched in the
1970s with great fanfare were billed as blueprints
for CEMA for 15 to 20 years, but they were
quickly overtaken by events. The Comprehensive
Program for Integration of 1971 failed to offer an
attractive alternative to opportunities then opening
up for CEMA members to trade with the West.
The Long-Term Target Programs of a few years
later were designed to inject new life into the
Comprehensive Program and to guide cooperation
through 1990, but the Polish crisis and Eastern
Europe's financial difficulties consumed the eco-
nomic efforts of the region in the early 1980s and
The current drive to wrap up. agreements that will
guarantee and direct cooperation for the long term
resembles two major CEMA programs launched in
the 1970s with the same purpose. Although they
are nominally still in effect, both fizzled after only
a few years.
The Comprehensive Program. Two-years after it
was proposed at. the 1969 Summit, CEMA adopted
"The Comprehensive Program for Further Expan-
sion and Improvement of Cooperation and Devel-
opment of Socialist Economic Integration Among
CEMA Member Countries. " The Comprehensive
Program, considered one of the most important
tracts in CEMA's 35-year history, was designed to
stimulate and guide economic integration for the
following 15 to 20 years. It called for extensive
plan coordination, joint investment projects, and
increased multilateral financial relations, includ-
ing covertibility of the transferable ruble. Progress
in achieving these goals has been largely disap-
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disrupted plans for cooperation.
The present drive for increased integration, like
past efforts, relies heavily on jawboning. It leaves
virtually untouched the chronic obstacles to cooper-
ation: deficient financial mechanisms; the East
Europeans' continued desire for a measure of politi-
cal and economic autonomy; bureaucratic and inef-
ficient management; and discrepancies between the
types and quality of goods being offered and de-
manded.
The only significant exception is the seemingly
genuine encouragement for improved links among
lower'level economic units in different countries,
Z Soviet programs for bilateral cooperation through 2000 are not
limited to the East European CEMA members. Vietnam in October
1983 and Cuba in October 1984 signed similar "year 2000"
programs. The Mongolians and the Soviets announced in Novem-
ber that preparatory work is under way. The East European
countries are also negotiating bilateral programs through 2000 with
each other. Poland's Deputy Premier Messner, for example, an-
nounced last October that Warsaw had concluded agreements with
Bulgaria, Hungary, and Romania and was involved in talks with
Czechoslovakia and East Germany.
pointing.
Long-Term Target Programs. In the late 1970s,
CEMA initiated long-term programs to single out
five areas for special emphasis in applying the
provisions of the Comprehensive Program. Pro-
grams for energy and raw materials, agriculture
and food industry, and machine building were
approved in 1978; those for industrial consumer
goods and transportation were approved the next
year. The Target Programs were accompanied by
Soviet bilateral agreements with each East Euro-
pean country. Signed in 1979 and 1980, the bilater-
al accords also were to cover economic relations
through 1990, but these too have shown few con-
crete results.
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particularly the USSR. Previous programs have
stalled in part because lower levels ignored the
directives of the political and planning authorities.
Even this is new only in degree, and there is still
sure to be substantial resistance from foreign trade
ministries and other entrenched bureaucracies.
Despite the record of false starts and failed efforts,
it is too early to write off the present drive as yet
another doomed Soviet attempt to exert economic
control over Eastern Europe. Lessons from past
failures may even offer experience that will im-
prove future cooperation. With some of the coun-
tries feeling abused or disillusioned by the results of
their turn to the West in the 1970s, there is now a
stronger consensus for making cooperation work.
The programs probably will be important guides in
setting the directions and patterns of economic ties,
but, in their present form, they are statements of
intention whose ultimate impact will only be deter-
mined by more concrete and binding agreements.
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Dramatic Shifts
Worldwide trade balances have shifted dramatical-
ly since 1981. For the United States, the strong
dollar, and for the Middle Eastern OPEC coun-
tries, the weak oil market have been principal
factors in their deteriorating trade positions. Japan
and Western Europe have been major beneficiaries
of the surge in US import demand, and a group of
10 key troubled debtors ' have markedly improved
their trade balances through import austerity. The
factors precipitating these trade shifts probably will
persist through 1985 heightening tension among
trading partners, fueling protectionist pressures,
and complicating the launch of a new GATT trade
round.
Although US public attention has focused on the
role in the US trade deficit of the growing Japanese
surplus with the United States-a record $35
billion last year-there have been large trade shifts
worldwide driven by differential growth rates, ex-
change rate movements, and shifts in international
competitiveness:
? The US trade balance with Western Europe, for
instance, shifted from an $11 billion surplus in
1981 to an estimated $14 billion deficit in 1984, a
larger shift than occurred in US-Japanese trade.
This stemmed from a $17 billion increase in US
imports and $8 billion decrease in US exports, a
result of the strong US recovery, the generally
sluggish West European economies, and the ap-
preciation of the US dollar against the West
European currencies.
? In contrast to the $17 billion improvement in its
trade balance with the United States, Japan
experienced worsened balances with the key debt
I The troubled debtors include Argentina, Brazil, Chile, Colombia,
Ecuador, Mexico, Nigeria, Peru, the Philippines, and Venezuela.
troubled LDCs and Western Europe, chiefly be-
cause of sluggish or declining exports to these
countries. Japan, however, boosted its surplus with
the East Asian NICs through continued export
gains.
? In addition to the improvement in its US and
Japanese trade positions, Western Europe nar-
rowed its deficit with the East Asian NICs and
substantially improved its balance with the Mid-
dle Eastern OPEC nations through a marked
cutback in its oil imports from these countries,
particularly Saudi Arabia. Its deficit with the
troubled debtors, however, widened by $15 bil-
lion, over the three-year period.
? The troubled debtors dramatically improved their
trade positions, largely through massive import
reductions. Their trade surplus with the United
States, for instance, grew nearly sixfold as the
result of a $14 billion cut in imports and a $3
billion increase in exports.
? Despite generally rapid economic growth and
rising imports, the East Asian NICs greatly
improved their trade positions, chiefly because
their trade surplus with the United States grew
by $11 billion on the strength of a $13 billion
surge in their exports. Continued growth in sales
of textiles, electrical machinery, consumer elec-
tronics, and other manufactures accounted for
much of the gain. In contrast, their trade position
with Western Europe and Japan worsened some-
what as they achieved only minimal expansion in
sales to these markets.
? The trade position of most of the Middle Eastern
OPEC countries worsened. The global economic
recession, austerity measures by many oil import-
ers, and falling oil prices all contributed to the
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Bilateral Export and Import Shifts, 1982-84 a
United Japan Canada
States
7.1
17.8
a Most 1984 figures are annualized from partial-year data.
b Boldfaced data show trade shifts from 1981 to 1983.
Western Troubled Asian Middle Eastern
Europe Debtors b NICs b OPEC b
sharp reversal in the fortunes of this group.
Although the $37 billion deterioration in their
trade balance with Western Europe was the most
striking, problems also occurred in their trade
with the United States, Japan, and to a lesser
extent the troubled debtors and Asian NICs.
Secret
1 February 1985
In our judgment, many of the factors that precipi-
tated the trade shifts in 1981-84 will continue to
influence trade patterns in, 1985. The US dollar
remains strong, and the oil market will probably
soften further in the nearterm. According to the
OECD, US economic growth is forecast to remain
more rapid than in Western Europe, and Japan is
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Overall United Japan Canada Western Troubled Asian Middle
States Europe b Debtors c NICs d Eastern
OPEC e
Troubled
debtors
a Most 1984 figures are based on annualized partial-year data. All d Hong Kong, Singapore, South Korea, and Taiwan.
countries are not included. e Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab
b Western Europe excludes Portugal, Iceland, and Turkey. Emirates.
c Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Nigeria, c Boldfaced data show trade shifts from 1982 to 1983.
Peru, the Philippines, and Venezuela.
expected to boost export volume by over 8 per-
cent-again outstripping the growth in imports.
The NICs will continue to push for a greater share
of industrial country markets and may, in turn,
further widen their trade surplus with the United
States. The bilateral trade surpluses of the troubled
debtors, however, may narrow this year if these
countries increase their purchases as OECD import
demand slows. Continuing large trade imbalances
could heighten trade tensions and increase protec-
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I February 1985
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