INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807590001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 22, 2016
• Document Release Date: September 1, 2010
• Sequence Number: 1
• Publication Date: June 28, 1985
• Content Type: REPORT

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Intelligence
Directorate of Seec^et
Weekly
International
Economic & Energy
Seeret
DI IEE~W 85-026
28 JJ(ne 1985
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secret
International
Economic & Energy Weekly (u)
iii Sypopsis
1 Perspective-Latin American Debt: Austerity and Political Strains
3 Aatin America: Alternatives to IMF Programs
1 / ' 1r3~o
11 Xnternational Financial Situation: Political Update
13 / Romania: Relentless Squeeze on Living Standards
~-i35
Energy
International Finance
Global and Regional Developments
National Developments
Authorized personnel may obtain copies of reports by contacting their local intelligence liaison office
or the Information Management Center of the Office of Current Production and Analytic Support,
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Comments and r"es retarding this publication are welcome. They ma be
directed to Directorate of Intelligence, telephone 25X1
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DI !EEW 85-026
28 June 1985
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International
Economic & Energy Weeklyn 25X1
Synopsis
1 Perspective-Latin American Debt: Austerity and Political Strains 25X1
Latin America is passing through its most severe postwar economic crisis at a
time when the region is experiencing a resurgence of political democracy.
IMF-supported adjustment programs are sputtering, and the progress achieved
by r a few debtor countries in putting their economies in line is limited at best.
3 Latin America: Alternatives to IMF Program
Since the LDC crisis broke in 1982, most Latin American countries have
adopted IMF-supported adjustment programs to stabilize their external
finances. As 1985 wears on, we believe popular dissatisfaction with economic
hardship is likely to conflict increasingly with the stablization requirements of
international lendersJ
LDC members increasingly are failing to meet their payments on time,
causing arrears outstanding to the Fund to rise sharply. With a large bulge in
payments to the IMF falling due over the next several years, we foresee
worsening problems with arrears that may cause the Fund-for the first
time-to agree to reschedule some of the debt.)
11 International Financial Situation: Political Update
In recent months political events have introduced new dimensions to the
international debt problem
13 Romania: Relentless Squeeze on Living Standards
President Ceausescu responded to the financial crisis of 1981 by imposing
severe austerity measures in order to pay off rapidly the country's hard
currency debt. Since then, living standards have fallen t -subsistence
level, and the outlook for improvement is not promising.
17 Australia: On the Eve of the Tax Reform Summit
More than 100 delegates from leading domestic interest groups will assemble
in Canberra on 1 July to discuss Prime Minister Hawke's program for
stimulating the economy through tax reform. If the meeting bogs down,
Hawke's bold political gamble would fail, threatening not only tax reform but
iii Secret
DI IEEW 85-026
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International
Economic & Energy Weekly)
Perspective Latin American Debt: Austerity and Political Strains
Latin America is passing through its most severe postwar economic crisis at a
time when the region is experiencing a resurgence of political democracy. The
restoration of civilian government throughout Latin America continues to
complicate national management of financial rescue programs. IMF-supported
adjustment programs are sputtering, and the progress achieved by a few debtor
countries in putting their economies in line is limited at hest
')F XI
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The Andean debtors-Bolivia, Colombia, 25X1
and eru-continue to avoid adopting a formal IMF-supported program,
fearing domestic political consequences. 25X1
Nonetheless, progress toward democracy and the popular pressures the
transitions have unleashed have not forced the civilian leaders to act precipi-
tously, in our opinion. Despite dire predictions in the press, the new leaders
have avoided the temptation to form a debtors' cartel to extract easier debt re-
payment terms from creditors. Moreover, these leaders still recognize the need
to stabilize their economies to maintain creditor support and lay a solid
foundation for democratic institutions. Even so, public statements
now indicate a growing number of Latin leaders are coming
to believe that continued implementation of IMF-supported adjustment pro-
grams is politically risky and, if not executed with caution, could precipitate
Recent history indicates that rigorously followed adjustment programs can
spur violent protests against such measures as higher taxes, increased prices,
and reduced subsidies. For example, new austerity measures enacted in Bolivia
sparked a paralyzing general strike in March that seriously threatened the
Siles government. We believe that tough economic adjustments will probably
provide a rallying point for leftists as well as military opponents of the new
civilian government in Argentina.
On the financial side, we judge that, with the injection of domestic political
considerations, country negotiations with the IMF will become more conten-
tious. There is a modest chance that some Latin American debtors will opt out
of the IMF-supported financial rescue programs in 1985. Some, such as Brazil,
might negotiate directly with creditors for financial support while others may
suspend payments in an attempt to force concessions. The failure to achieve
initial adjustment targets has led to a virtual halt in the modest progress
toward economic reform in the region, which-if not reversed-could more
seriously undermine economic performance and heighten vulnerability to
external shocks for the rest of the decade0
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On the political side, continued financial turmoil will provide new, albeit
limited, opportunities for the Soviets and their surrogates. Moscow has already
moved to take advantage of Peru's financing difficulties by rescheduling its
debt payments in exchange for commodities. The US Embassy expects this
will result in a growing trade relationship the Soviets believe will pay political
dividends. Havana has also begun to exploit the debt crisis for its propaganda
value. In a recent series of published interviews, Castro advocated the
formation of a debtors' club to combat economic imperialism-rhetoric that
has popular appeal in the region
For the longer run, we judge that continuing uncertainty surrounding Latin
America's external financial situation adversely affects US interests in a
number of other areas. We expect these conditions will improve prospects for
the election of more radical leaders, provide incentives for increased narcotics
trafficking, and impede the ability of regional governments to control insur-
gency movements by limiting funds available for social spending programs as
well as military action.
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Latin America: Alternatives
to IMF Programs
Since the LDC debt crisis broke in 1982, most
Latin American countries have adopted IMF-
supported adjustment programs to stabilize their
external finances. Their relationship with the Fund
has been uneasy, however, and US embassies
throughout the region report that it is worsening as
the financing crisis persists. As 1985 wears on, we
believe popular dissatisfaction with economic hard-
ship is likely to conflict increasingly with the
stabilization requirements of international lenders.
Adjustment programs probably will be the battle-
ground, and the risk is that Latin debtors will opt to
bypass the Fund and seek alternative arrangements
to service their debt, including the $84 billion owed
to US banks. Beyond the immediate threat to debt
repayment, such a break would undermine both
creditors' willingness to provide continued financial
support and the debtors' long-run economic per-
formance.
Financial Rescue Programs Sputtering
Various financial sources note that Latin American
debtors' compliance with IMF programs is still the
key to $5- 10 billion in new foreign financing as well
as the rescheduling of $40 billion in payments due
in 1985. According to US Embassy reporting and
generally reliable sources, however, all signs point
to continued difficulty in meeting IMF perform-
ance criteria this year:
? Brazil-declared out of compliance in Febru-
ary-is publicly indicating that tough IMF aus-
terity is unacceptable and that the Fund will need
to become more flexible.
Major Latin American Countries: Billion US $
Debt Owed to US Banksa
84.0
23.6
26.6
8.2
3.0
2.2
a Includes short- and medium-term loans owed by public- and
private-sector borrowers to US banks.
? Argentine President Alfonsin will be concerned
that compliance with the new IMF-supported
adjustment program will provide a rallying point
for his political opponents.
? Peru's President Belaunde has let IMF assistance
lapse rather than implement tougher measures,
which he views as socially destabilizing, while
Alan Garcia, who will assume the presidency this
July, has publicly called for bypassing the Fund.
? Bolivian President Siles and Colombian President
Betancur refuse to implement IMF-supported
stabilization programs for fear of the political
consequences
Foreign bankers will likely continue to react to the
spate of noncompliance by delaying rescheduling
agreements and new loans for Latin American
debtors. Bankers had postponed for six months the
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Consequences of Brazil's Abrogation of
Its 1962 IMF Agreement
Stagnant exports and a falloff in foreign invest-
ment led to a Brazilian foreign payments crisis in
1961. The civilian Quadros government agreed to a
$2 billion refinancing package in cooperation with
the IMF, international bankers, and the US Gov-
ernment, but the succeeding Goulart administra-
tion did not follow through on promised economic
stabilization measures. The IMF halted disburse-
ment of standby credits in mid-1962, and Brasilia
abrogated the accord, causing a cutoff of foreign
funding.)
According to academic studies, Goulart was un-
able to implement austerity and comprehensive
economic reforms in the face of civilian demands
for sustained growth. Brazil's economic difficulties
intensified throughout 1963-manifested in accel-
erating inflation, growing joblessness, and recur-
rent payment crises. Some academic sources con-
tend that this decline helped bring about the 1964
military takeover. Three months after assuming
power, the military government of Castello Branco
concluded an agreement with its creditors by im-
plementing tough financial reforms.
Political Challenges on the Horizon
With the inaugurations of civilian presidents in
Brazil and Uruguay last March, almost all the
Latin American heads of state are civilians. Al-
though we judge that these leaders recognize the
necessity of economic stabilization to maintain
creditor cooperation and to foster recovery, they
are of necessity more sensitive than military presi-
dents to the political vulnerabilities posed by the
IMF's recommendations. In our judgment, the new
civilian authorities-elected on promises of change
and improvement-feel they must demonstrate
economic progress or see civilian rule threatened.
The principal challenges to the stabilization pro-
grams, in our opinion, will come from an array of
domestic interest groups and the conflicting de-
mands they make on the governments:
? Labor unions in Argentina, Bolivia, Brazil, Peru,
Uruguay, and Venezuela are becoming strident in
their demands for higher wages.
? Business is seeking wage restraints, price hikes,
import protection, and growth policies.
? Middle-class constituents are questioning the ad-
visability of IMF-recommended adjustments, ac-
cording to public opinion polls.
? Legislatures will likely become more involved in
formal conclusion of Mexico's $49 billion debt
restructuring program until the IMF approved a
revised program in March, according to the finan-
cial press. Brazil's bank advisory committee-
which had reached tentative agreement on a mul-
tiyear rescheduling of some $45 billion in debt-
and the Paris Club halted their respective debt
negotiations pending a new accord between Brazil
and the IMF. Argentina's bank creditors are with-
holding the $4.2 billion loan package signed last
December until Buenos Aires's new Fund accord
and bridge financing are finalized. Financial assist-
ance packages for Peru and Bolivia remain stalled
over their unwillingness to negotiate with the IMF
and clear interest arrears
financial matters; Brazil's Congress has already
served notice that it intends to scrutinize any new
debt accords.
? Leftists, including radical factions in Argentina,
Brazil, and Peru, are advocating repudiation of
the foreign debt to restore social spending and
accelerate growth.
? Military leaders-watching these moves closely
in the event they need to intervene to quell
unrest-are criticizing cuts in the armed forces'
budgets.F_~
If the Fund proves relatively uncompromising in
setting economic targets, we believe there is a
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moderate chance that some Latin American debt-
ors will seek to bypass the IMF and negotiate
directly with creditors. There is also a small risk
that some debtors may simply refuse to make fiscal
responsibility their top priority and instead seek to
"go it alone."
A Separate Deal With Creditors. Venezuela has set
the precedent for debtors seeking to cut a deal with
bankers that excludes an IMF role. Strengthened
by $14 billion in annual oil exports and $13 billion
in foreign reserves, Caracas refused to adopt a
formal IMF-supported program in return for debt
rescheduling. Instead, Caracas imposed its own
adjustments and in September 1984 negotiated an
agreement in principle with bankers to reschedule
$21 billion of its public-sector debt. F_~
We judge that no Latin American country can
pursue autarky indefinitely, but some debtors may
choose to "go it alone" temporarily to force conces-
sions from creditors:
? Argentina's self-sufficiency in food and fuel puts
it in the strongest position to repudiate its debt. If
Buenos Aires's financial rescue package falls
through, it may again consider plans to suspend
interest payments in an attempt to gain easier
repayment terms.
? Peru's next president, Alan Garcia, has publicly
threatened to break relations with the IMF, and
we believe he may also suspend all commercial
debt repayments and pursue policies aimed at
achieving economic and financial self-sufficiency.
We believe that Colombia will-and Brazil may-
also seek to set a more independent course:
? Colombia has publicly stated it wants to avoid
IMF conditions that will fuel popular criticism.
Bankers are now working on a debt restructuring
and new money package that would include
informal IMF monitoring of Colombia's self-
imposed stabilization program.
? Brazil is increasingly unwilling to acquiesce to
IMF demands for tough austerity. If the Fund
insists on measures Brasilia regards as draconian
in order to achieve a sharp cut in inflation, we
judge Sarney would abrogate relations and prob-
ably press foreign bankers for a multiyear debt
rescheduling without an IMF program.F_~
Go It Alone. Although we believe that Latin Amer-
ican governments are not likely to repudiate their
debts, Bolivia established something of a precedent
in June 1984 by declaring a moratorium on com-
mercial bank interest and principal repayments.
Bankers reacted by cutting off all credits, and
Bolivia's international trade is now conducted
largely on a cash-and-carry basis. Bankers have not
taken legal action to attach Bolivian assets, but
many have written off loans, and it is highly
unlikely that La Paz will be declared creditworthy
any time soon. F__7
On the basis of reliable reporting, we judge that the
Latin countries participating in the Cartagena
Group at present lack the unity to form a debtors'
cartel. They will probably continue to support
positions that do not interfere with bilateral debt
renegotiation. We also believe, however, that, if
Latin debtors see little financial relief in sight, they
will be increasingly inclined over the longer term to
seek joint action. Creditor banks and developed-
country governments would then face demands to
share the adjustment burden by granting easier
repayment terms and trade concessions.F___1
Even in the absence of organized collective action,
we speculate that a refusal by one country to pay
debt could conceivably produce a domino effect.
Or, the smaller debtors could quietly suspend pay-
ments and receive the tacit support of larger debt-
ors hoping to benefit from any concessions granted
by creditors. Finally, we can also envision a sponta-
neous debtors' rebellion wherein most of the Carta-
gena countries withhold debt repayments as their
negotiations with creditors individually reach an
impasse.
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The Consequences of Breaking With the IMF
In our judgment, commercial bankers may soon be
forced to reassess their partnership with the IMF.
On the basis of reports of creditor reactions to date,
we believe a debtor break with Fund programs
would lead to a near cessation of new credit to the
region, immediately straining repayment capabili-
ties for many debtors. For the longer run, we
believe lending and repayment decisions would be
more discretionary, heightening both the potential
for confrontation between creditors and debtors
and the risk of prolonged payments suspensions.
We believe the cessation of new lending would
markedly hurt Latin growth prospects. A recent
academic study concludes that the forced import
cutback that would follow a retrenchment in lend-
ing would reduce Latin American output by over 6
percent in the first year-an economic plunge twice
as severe as the region's 1983 recession, the worst
on record. Without foreign lending, according to
this study, Latin America probably would follow a
lower growth path for a decade with reduced
imports undercutting investment in productive ca-
pacity. Moreover, prolonged economic stagnation
would: (1) provide incentives for increased narcotics
trafficking, (2) impede the elimination of domestic
insurgency by reducing resources for rural develop-
ment as well as military action, (3) present opportu-
nities for Soviet inroads, and (4) provide a rallying
point for antidemocratic forces.
We believe Latin debtors, faced with such bleak
prospects, would have little choice but to try to
revive their economies through nationalistic poli-
cies. Foreign exchange scarcity would encourage
countertrade, greater intraregional barter trade, a
new round of import substitution, and tighter con-
trols on foreign direct investment. The major dan-
ger is that the weakest civilian governments would
follow Bolivia's example and resort to more populist
policies-deficit spending, large wage increases,
and rapid monetary expansion-that would boost
growth in the short run but drive inflation higher.
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IMF:
Problems With Arrears
LDC members increasingly are failing to meet
their payments on time, causing arrears outstand-
ing to the Fund to rise sharply. Overdue payments
this year will cause a net deficit for the IMF, and
the need to bolster reserves to hedge against further
loan problems may require increasing interest rates
on loans to members. With a large bulge in pay-
ments to the IMF falling due over the next several
years, we foresee worsening problems with arrears
that may cause the Fund-for the first time-to
agree to reschedule some of the debt. F__1
The IMF has had little difficulty with overdue loan
repayments from its members in the past. From
1975 through 1980, only about 11 percent of all
payments were late. Almost all of these delays were
resolved within two weeks. Since 1980, however,
the Fund's LDC members increasingly have failed
to meet their payments on time, causing the total
amount of arrears outstanding to rise sharply, from
about $31 million at the end of 1980 to about $174
million at the end of 1984. By the end of this
month, we estimate outstanding overdue obliga-
tions will have climbed to $265 million, half of
which will be over three months' past due. F_~
The sudden increase in arrears has far outpaced
growth of the Fund's reserve cushion. Although the
IMF has steadily increased its reserves by more
than its 3-percent-per-year target since 1981, out-
standing arrears have risen by an average of 65
percent annually, climbing from about 4 percent of
total reserves to 15 percent over the last three
years. Outstanding arrears could rise to almost 70
percent of reserves over the next several years,
according to an IMF study.
Outstanding Arrearsa to the IMF,
1980-85
I II
a End of period, arrears include: quarterly and semiannual charges; SDR
charges; Trust Fund repayments and charges; repurchases under credit
tranche, CFF, EFF, SFF, BSF, and enlarged access.
e Estimated.
Of the roughly 10 members currently behind in
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some to the Fund:
? Sudan-with the largest arrears-has piled up at
least $110 million in obligations since it fell out of
compliance with its IMF-supported program in
July 1984. In February 1985 the IMF halted
Sudan's use of Fund resources until the country
becomes current in its obligations. In response to
a request by Sudan's new government for time to
evaluate the country's financial position, the
Fund has postponed a decision on further action 25X1
until later this summer.
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? Although Zambia missed its first payments only
this past April, its arrears have mounted quickly
to about $50 million. The Fund has not yet taken
action against Zambia.
? Vietnam has accumulated about $30 million in
arrears since February 1984. The IMF suspended
Vietnam's use of Fund resources in August 1984,
reviewed the limitation last November, and this
January declared Vietnam ineligible to use Fund
resources.
? Cambodia halted payments to the IMF in 1975
and owes about $25 million in arrears. In Novem-
ber 1978 the Fund halted Cambodia's use of
Fund resources but has taken no further action
against the country. The Cambodian Government
has not communicated with the Fund since 1975
and has effectively defaulted on its obligations.
? Liberia has $23 million in overdue obligations
that have accrued since December 1984. Li-
beria's recent suspension will be reviewed this
August.
? Guyana owes some $19 million in overdue pay-
ments dating back to May 1983. After a June
1984 cutoff, Guyana made some payments and
won several reprieves but was finally declared
ineligible in May 1985.F_~
Implications for the Fund
In expectation that members would clear their
arrears quickly, the IMF has been treating overdue
interest charges as current income for accounting
purposes. Outstanding arrears now have become
large enough to seriously distort the Fund's balance
sheet, however, and this year the Fund-for the
first time-will shift some $55 million in interest
overdue by six months or more into a "deferred
income" category. As a result of this change, the
Fund expects to incur its first net deficit since 1977
and will have to draw down reserves to cover the
gap.
IMF Disciplinary Procedure for Arrears
Because protracted arrears are a new experience
for the IMF, its disciplinary procedure for late
members is still evolving. Over the last 18 months,
however, measures taken by the Fund have gener-
ally followed this pattern:
? After an obligation has been overdue about three
months, the Fund's managing director issues to
the executive board a complaint that the member
is not fulfilling its membership obligations.
? The executive board meets to consider the com-
plaint one to two months later, to allow the late
member time to prepare a reply. If the executive
board and the member do not reach agreement
on settling the arrears, the board can limit-that
is, prohibit-the member's further use of Fund
resources until all arrears are settled. This limi-
tation is automatically lifted when the member
becomes current in its payments.
? The executive board reviews a limitation about
three months after imposing it. If the member
has made some repayments, or, if prospects for
repayment have improved, the board can extend
the limitation and schedule another review. If a
member has not made progress, however, the
board can declare the member ineligible to use
the Fund's resources. Unlike limitation, ineligi-
bility is not automatically lifted when the ar-
rears are settled, but must be reversed by the
executive board.
As a final-and as yet unused-step, a member
who still has not made progress in clearing overdue
payments can be required to withdraw from the
Fund. Expulsion of a member requires a decision
by a majority of the Fund's governors holding
85 percent of the total voting power. F_~
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To recover from this year's deficit and to hedge
against the possibility that more members will
follow Cambodia's lead and refuse to repay, the
Fund will need to strengthen its reserve position.
Bolstering reserves, however, will require increas-
ing the Fund's annual income targets, which in turn
means members could face higher interest charges
for use of Fund resources. Some of the Fund's
executive directors believe the annual growth target
for reserves should be raised substantially in re-
sponse to growing arrears. This move could require
boosting the current 7-percent interest rate accord-
ing to Fund calculations.
To date the IMF has relied on the threat of losing
Fund credit to motivate late members to clear
arrears, but this tactic has had only limited success
in recent years. The Fund has taken disciplinary
steps against at least seven countries, but only two
have regained their standing with the Fund. The
IMF also can impose penalty charges on late
members, but it believes, as we do, that a penalty
large enough to be meaningful probably only would
Estimated Principal Falling Due on
IMF Loans, 1984-918
aggravate repayment difficulties.
Another possible approach-one the IMF has been
reluctant to take-is to reschedule debt owed to the
Fund. Fund regulations allow rescheduling of prin-
cipal payments (but not interest charges) in cases of
"exceptional hardship," but Fund officials believe
this would compromise its intermediary role in the
international monetary system and have refused to
participate in the Paris Club resheduling process.
The Fund also can postpone payments within an
existing loan term, but this only increases amounts
due later, likely leading to even greater repayment
difficulties. In 1981 and 1982 the Fund postponed
several of Guyana's and Nicaragua's payments, but
neither was able to pay its obligations by the
extended deadlines
the Fund. The two largest IMF debtors-Brazil
and Mexico-are due to start repaying their cur-
rent loans in 1987. With the LDC aggregate
current account and reserve positions showing only
limited improvement recently, we believe the LDCs
will have increasing difficulty meeting this large
payments bulge.
If more members begin falling into arrears on their
IMF loan repayments, we foresee new political
pressures on the Fund to reschedule-either bilat-
erally or within the Paris Club framework. Finan-
cial pressures to reschedule also would mount, since
allowing members to default on their loans would
deplete the Fund's revolving stock of credit, making
borrowing or a new round of quota increases
According to IMF estimates, principal payments
due from the LDCs will rise sharply over the next
several years as grace periods expire on loans
arranged in 1983-85. Scheduled repayments will
climb from $3.4 billion this year to a peak of about
$8 billion annually during 1987-89, according to
necessary
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International Financial Situation:
Political Update
In recent months political events have introduced
new dimensions to the international debt problem.
Fidel Castro has called for a general strike by
debtor countries to force creditors to renegotiate.
We believe he is using the issue to step up attacks
against the United States while increasing his ties
with other Latin American countries. In Chile,
President Pinochet recently lifted the seven-month-
old state of siege. Interior Minister Garcia justified
the relaxation citing improvements in internal secu-
rity, but the move is more likely an effort to
accommodate US concerns and break the impasse
in debt negotiations
Other debtor country governments are continuing
to encounter difficulties in trying to balance the
need to implement austerity measures against the
demands of increasingly restive populations. Some
of these measures are being implemented to comply
with IMF targets, while others are being forced by
domestic economic straits.)
Last week's agreement between Argentina and the
IMF for a $1.2 billion loan portends continued
labor troubles for the Alfonsin government. The
agreement calls for maintaining tight monetary
policy, freezing wages, decreasing government
spending, and aggressive devaluations. Opposition
from labor makes Alfonsin's position a difficult
one. The government had pledged to consult labor
on economic policy, temporarily avoiding protest,
but the exclusion of labor from recent loan negotia-
tions points to recurring conflicts. Alfonsin also
faces opposition to drastic economic measures from
his own Radical Party in the face of November
congressional elections.
In Nicaragua, wildcat strikes took place in response
to the government's refusal to allow workers to be
paid in merchandise in an effort to avoid the
reduced buying power brought about by rampant
inflation. More than 500 workers were involved in
the strikes in Granada, an important industrial
center. Arrests and injuries resulted. The govern-
ment continues to blame Nicaragua's economic ills
on the United States, and uses actions like the
recent embargo to justify stricter controls
Nigerian Head of State Buhari faces mounting
opposition as economic deterioration continues,
largely as a result of falling oil prices.
Shia Muslim group, reported to receive guidance
from Tehran, has formed in the north, according to
a generally reliable source. Although not expected
to commit any acts of violence in the near future,
this group could present an additional destabilizing
force in Ni eria a country with over 40 million
Muslims
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In Bolivia, last month's 50-percent devaluation of
the peso, combined with shortages and inflation at
an annual rate of 8,200 percent, provoked panic
buying and labor unrest. This unrest has caused
export production to drop, especially mineral ex- 25X1
ports, on which Bolivia is heavily dependent. The
lure of profits from coca production has also
prompted a shift from legal export crops. This
decreased export volume plus falling prices will
produce a $100 million drop in Bolivia's official
export earnings this year, according to our esti-
mates. IMF assistance is precluded by La Paz's
refusal to negotiate an adjustment program.
Secret
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I'll Secret
Romania: Relentless Squeeze
on Living Standards
President Ceausescu responded to the financial
crisis of 1981 by imposing severe austerity mea-
sures in order to pay off rapidly the country's hard
currency debt. Since then, living standards have
fallen to a near-subsistence level, and, during the
harsh winter of 1984-85, the populace experienced
hardships probably unprecedented since the imme-
diate postwar period. Moreover, the decline in
consumer welfare apparently has contributed to a
sharp rise in mortality rates. The outlook for
improvements in living standards is not promising.
Ceausescu's drive to recover last winter's produc-
tion and export losses and to eliminate the debt will
claim the bulk of available resources, and economic
plans for 1986-90 allocate most growth to invest-
ment and exports. F_~
From the outset of the financial crisis, Ceausescu
has been determined to pay off the debt quickly in
order to return to rapid growth without interfer-
ence from foreign creditors. Apparently confident
in his powerful security apparatus, he has squeezed
the domestic economy to boost export earnings.
This is in sharp contrast to most financially
strapped East European regimes, which, for fear of
popular discontent, have given greater priority to
protecting consumer welfare.
Bucharest's adjustment effort quickly produced a
major improvement in the foreign payments perfor-
mance, but at high cost to economic growth and
living standards. Between 1980 and 1984 hard
currency trade shifted from a $1.5 billion deficit to
a $2.3 billion surplus largely through sharp cut-
backs in imports. Although the debt fell from $10.1
billion in 1981 to $7.5 billion at yearend 1984,
economic growth sagged to an average annual rate
of about 1 percent in 1981-83-compared with an
average 4 percent per year during the 1976-80
period. A modest recovery begun in 1984 was cut
short by the severe weather earlier this year. The
decline in production and a shift of resources to the
external sector slashed domestic consumption-
already lower than any other East European coun-
try except Albania. F__-]
The Romanians achieved much of their trade gain
by slashing oil imports nearly in half, and bartering
food, consumer goods, fertilizer, and agricultural
machinery for most of the remainder. To shield
industry from energy shortfalls, the authorities cut
supplies sharply to the household sector and in-
creased consumer energy prices by 80 percent over
1980-83. In the winter of 1983-84, the government
ordered a 50-percent reduction in household energy
consumption and cut off electricity sporadically. In
early 1985, the authorities mandated a further 50- 25X1
percent cut in electricity usage, and cut off gas and
electricity to residential neighborhoods in many
cities for several days during exceptionally cold
weather. Households were limited to one 15-watt
lightbulb and one appliance with militia inspecting
residences, fining violators, and sometimes plaster-
ing over electrical outlets. Transport suffered seri-
ous disruptions, interrupting deliveries of food and
other goods and causing employees difficulty in
getting to and from work. The use of private
automobiles was banned from January until late
March this year, and gasoline has been rationed
since 1981. Schools in many areas were closed for
up to two months this winter for lack of heat and 25X1
electricity
The regime reacted to food shortages in late 1981
and early 1982 by imposing formal rationing on
sugar, flour, and cooking oil. Since 1982, the
agricultural performance-despite official
claims-has deteriorated in large part because
inputs such as fertilizer have increasingly been
redirected to export markets. The regime's response
has been to decrease food supplies to local distribu-
tors, causing a reduction of about 25 percent in
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State Retail Food Price
Increases, 1981-84
Percent Selected Countries: Infant
Mortality Rates,a 1983
rations below the 1983 level. Meat and milk are so
scarce that they are not formally rationed. Al-
though Bucharest claims per capita meat consump-
tion is about 60 kg per year, our analysis indicates
it is less than half of this amount. Moreover, food
prices at state stores have surged by over 50 percent
since 1981, with only bread prices remaining rela-
tively stable.F_~
Despite official data to the contrary, we believe real
incomes have fallen sharply-at least 20 percent-
during the 1980-84 period. In addition to increases
in prices for energy and food, many emigres have
reported that rents have doubled, the prices of
clothing and durable goods have jumped steeply,
and the quality and variety of consumer goods have
deteriorated. Meanwhile, some 2 to 5 percent of
worker wages are being withheld under a manda-
tory "investment" program
23.2
19.0
16.5
15.6
12.0
United States 10.9
East Germany 10.7
Spain 10.0
Increased Mortality Rates
As a result of poor nutrition, inadequate heat, the
unavailability of medications, and Ceausescu's ban
on abortions, mortality rates have increased in the
past few years. The infant mortality rate, already
significantly higher than elsewhere in Europe,
climbed by 35 percent in November 1984-January
1985 compared with January-September 1984, ac-
cording to a Romanian medical official. In some
areas, baby formula is not available, and young
children can obtain milk only with a doctor's
prescription. Maternal mortality rates apparently
have increased as well. Ceausescu's ban in early
1984 on abortions has made deaths from illegal
abortions common, according to several reports
from emigre physicians. These sources also report a
jump in the death rate among the elderly. The
crude death rate for the entire population since
1980 has increased far more rapidly than in any
other East European country.
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Secret
Eastern Europe: Crude Death Rates
? The regime has cracked down on black-market
activity to limit shortage-caused disruptions in
retail markets.
? To increase control over private agriculture,
Ceausescu imposed price ceilings in 1983 and
compulsory deliveries to the state in 1984. Private
farmers, who provide about half of all livestock
products and some crops, responded by cutting
output and sales. The regime has retaliated by
limiting food sales in rural state stores to spur
more local production and by making supplies of
animal feed and other inputs contingent upon
Deaths Per 1,000 Population
Percent
Change
1980
1983
Romania
10.4
12.3
18
Bulgaria
11.1
11.4
3
Hungary
13.6
13.9
2
Czechoslovakia
12.2
12.0
-2
Poland
9.9
9.5
-4
Tightening the Screws
Bucharest's reaction to the effect of deteriorating
popular morale on worker productivity has been a
steady increase in coercion, a heightening of the
campaign to foster Romanian nationalism, and
exhortations to work harder. Worker discontent
since a rash of disturbances in 1981-82 has general-
ly been limited to grumbling, increased absentee-
ism, and apathy. The security apparatus has in-
creased surveillance of workers in industrial
installations where unrest has occurred in past
years and among the Hungarian minority. Except
for special food supplies for coal miners and work-
ers in some large plants, the regime has not relied
upon positive incentives. F__1
? The regime in 1983 raised production goals and
installed a new wage system closely linking sala-
ries to production targets. Workers in factories
where targets are not met may lose 25 to 30
percent of their monthly base wages. In addition,
workers receive only a small portion of their base
wages when a factory shuts down for lack of
energy or raw materials.
? Retirement ages have been raised, pensions cut,
and workers in some factories and mines are
being forced to work double shifts.
delivering animals to the state
The Coming Years
The next few years, in our judgment, will see little
improvement in living standards. Ceausescu has
shown no indication of easing his drive to pay off
the debt. Despite good performance in reducing
debt so far, the bunching of obligations in the next
few years will continue to strain the economy.
Indeed, a financial scare in May 1985-when an
emergency short-term loan was required from
Western banks to make a payment on rescheduled
debt-is likely to spur Ceausescu to push exports
even harder at the expense of the domestic
economy.
In its effort to generate exports, the regime proba-
bly has aggravated its structural economic prob-
lems. While relying on energy-intensive exports,
such as steel and heavy machinery, it has failed to
make industry more efficient in its use of raw
materials and energy. Cutbacks on imports of spare
parts for industrial equipment and neglect of main-
tenance have further undercut efficiency. Mean-
while, it has undermined its natural advantage in
agriculture by exporting inputs desperately needed
at home. Ceausescu also has continued to push
ahead with grandiose investment projects that will
not produce meaningful economic returns for many
years.F_~
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The populace-cowed by the pervasive security
forces and preoccupied with day-to-day existence-
expects worsening conditions. Under the current
energy conservation program, the priority for ener-
gy is industrial production and stockpiling to pre-
vent the serious industrial shutdowns of the past
two winters. Widespread rumors circulate that the
authorities will completely cease supplying heating
fuels to households next winter, and many families
are scrounging for coal and wood in preparation.
Food supplies are unlikely to improve much, with
grain crop prospects only mediocre and a decrease
in animal herds last winter. The regime has shown
no inclination to reduce food exports, and may well
attempt to increase agricultural exports to recoup
first-quarter 1985 export losses. Because goods and
services needed to maintain health and welfare are
likely to remain curtailed, we expect mortality rates
will continue their upward trend.F_~
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Secret
Tax Reform Summit
More than 100 delegates from leading domestic
interest groups will assemble in Canberra on 1 July
to discuss Prime Minister Hawke's program for
stimulating the economy through tax reform. Trea-
surer Paul Keating-the primary architect of the
program-has persuaded his fellow Cabinet minis-
ters and the Australian Council of Trade Unions
(ACTU) to approach the summit with "an open
mind," despite the serious reservations of both
groups about his proposal to impose a retail sales
tax. We believe Keating has at least a 50-percent
chance of maintaining support at the summit for
his radical revision of the tax system. On the other
hand, delegates may have saved their strongest
arguments for the summit. If the meeting bogs
down, Hawke's bold political gamble will be a
failure, threatening not only tax reform but also his
chances in the next election.
The Challenge of the Summit
Australia's tax system is long overdue for reform.
The average Australian wage earner now pays one-
fourth of his income in federal income taxes-up
from 10 percent in 1955-because inflation has
pushed workers into higher brackets. Although the
top marginal tax rate has been reduced from 67
percent to 60 percent, it is now applied to incomes
of less than twice the average wage, compared with
about 20 times the average wage 30 years ago. As a
result, tax avoidance has become rampant. Govern-
ment data show that workers earning more than
two and a half times the average wage paid nearly
half of total tax revenue 1955, but they now pay
less than one-tenth.
Hawke promised to correct these anomalies in his
first campaign for office in 1983. His November
1984 campaign renewed the commitment and add-
ed three objectives for the national budget that we
judge will shape what tax reform he finally
achieves. Hawke believes:
? Government spending should not increase as a
proportion of total output-about 31 percent of
GNP in fiscal year 1984.
? The total tax burden as a percentage of total
output should not rise.
? The budget deficit should be reduced both abso-
lutely and as a proportion of total output-about
US $4.8 billion in fiscal year 1984 or 3 percent of
GNP.
The task of tax reform has been complicated by
Hawke's budget objectives because the level of
government spending for the fiscal year beginning
1 July has been set. Many business groups believe
the primary issue-the level of federal spending-
will be ignored.)
The Tax Proposal
One of Keating's reform objectives is improving the
efficiency of tax collection. For years local econo-
mists have been suggesting Australia shift its de-
pendence on high, but avoidable, income taxes to
enforceable consumption taxes. Canberra's chief
goal, however, is to reduce the personal income tax
burden in hopes of sparking economic growth. In
order to provide incentives for both entrepreneurs
and average wage earners, Keating proposes to cut
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Australia: Impact of Tax Reform Billion US $
on Government Revenue a
Retail sales tax 9.6
_ Capital tax and tax evasion crackdown 1.3
Revenue losses 9.2
2.6
1.7
both marginal tax rates and overall income tax
payments. The top rate is to fall from 60 percent to
46 percent and the zero bracket rate will rise by
about one-third. Income taxes for the average wage
earner would be cut approximately 30 percent,
according to the government's calculations
Canberra is considering a variety of measures to
replace anticipated revenue losses. After debates
within the Treasury Department and Labor Party
over the merits of value-added, wholesale, and
retail sales taxes, Keating is recommending a 12.5-
percent retail sales tax. In addition, he is proposing
a capital gains tax, a tax on various fringe benefits
for high-salary employees, and a crackdown on tax
evaders.
Keating's sales tax plans have faced serious obsta-
cles from the outset. Trade unions, charitable
organizations, and the Labor Party left wing have
complained that all consumption taxes are regres-
sive. According to Keating's calculations, however,
the average wage earner will more than recoup his
sales tax payments from income tax reductions
netting a yearly savings of about $350. Moreover,
under the new tax system, the government esti-
mates it will take in more than it forfeits, enough to
compensate those low-wage earners and pensioners
who presently pay little or no income tax. F__1
Managing the Political Challenges
Although the tax summit is intended to involve the
public directly in the decisionmaking, some Austra-
lian observers have labeled it a purely political
exercise, saying delegates will be asked to rubber-
stamp what the government is already determined
to do.' Many complain that the deck is stacked in
favor of the ACTU-labor's most important con-
stituency-because over one-fourth of the delegates
represent the ACTU. Employers' organizations
have received at least twelve invitations. The Na-
tional Farmers Federation and the Australian Min-
ing Industry Council, however, were granted only
one delegate apiece in the original distribution,
despite the Labor government's insistence that the
two industries are vital to the country's prosperity.
ACTU Secretary Crean has laid out three condi-
tions for ACTU approval of any proposed change in
the mix of income and sales taxes:
? That ACTU members be better off.
? That Australians in the lowest income brackets
be better off.
? That the government not cut vital welfare
spending.
Keating met six weeks ago with the ACTU Execu-
tive Council and won approval of a six-option tax
package ranging from the ACTU's preferred op-
tion-no sales tax-to Keating's 12.5-percent sales
tax. By avoiding approval of any specific plan, the
ACTU has left itself room to maneuver at the
summit
ACTU cooperation is essential if reform is to
proceed. In the coming months the government's
Arbitration Commission will face several wage
' This is Hawke's second exercise in domestic summitry. Immedi-
ately following his March 1983 election, Hawke called together
business, labor, and government representatives to forge a consen-
sus on economic policy. Hawke's primary triumph at the first
summit was obtaining agreement to a new, less confrontational
wage ne otiating process-now called the Wage and Price Accord.
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Secret
demands unrelated to tax reform: raises linked to
productivity increases, pension plan extensions, and
cost of living adjustments-which are likely to be
larger than last year's settlements because the 20-
percent depreciation of the Australian dollar dur-
ing the first four months of 1985 is boosting
inflation. Cabinet ministers have cautioned. unions
not to expect both pay hikes and income tax cuts to
compensate for the effects of the new sales tax on
prices. Many Australian economists, however, are
predicting new wage demands, new rounds of in-
dustrial disputes, and the end of Hawke's Wage
and Price Accord if the Arbitration Commission
refuses to award pay increases. If Hawke hopes to
avoid this, he must gear tax reform to the wishes of
the ACTU. F_~
Within the often fractious Labor Party caucus,
leftwing leaders have called the proposed retail
sales tax "electoral suicide" because it is regressive.
Moreover, several members of Foreign Minister
Hayden's Center-Left faction-which has the
strength to veto any measure in a caucus vote-
have denounced various aspects of Keating's plan
and made their own proposals. They argue that a
broadly based consumption tax would boost infla-
tion dramatically and take 18 months to imple-
ment, jeopardizing Labor's chances in the next
election, which must be held by the end of 1987. In
their view, a 5- to 10-percent sales tax on selected
services added to the existing wholesale tax on
some "luxury" goods is an achievable target. They
also claim lowering marginal tax rates is unneces-
sary because the same results could be achieved by
raising the income brackets.
the debate heats up at the tax summit, however, the
Center-Left version of tax reform is likely to
resurface as a compromise all can live with
After the Summit: Outlook for
Parliamentary Action
The opposition coalition-Liberal and National
Parties-has declined to attend the summit, claim-
ing that the proper place for tax debate is Parlia-
ment. Although media commentators have criti-
cized the decision, in our judgment, the opposition
has made a politically shrewd move. With its
attention focused on the nonparliamentary interest
groups, the government at this stage would pay
little attention to opposition suggestions. Moreover,
we believe there is about an even chance that the
tax summit will erupt into a brawl between the
factions of the Labor Party or between various
interest groups, providing the opposition an issue to
exploit in public and in Parliament. In addition, by
boycotting the summit, the opposition has avoided
involving itself in the same debate twice. This will
allow its leaders time to reach consensus on tax
reform goals and reduce the risk of arguing contra-
dictory positions.
In any case, we judge that the opposition will
contest the capital gains tax if it is adopted at the
summit and may defeat it in the Australian Senate.
Keating's original capital gains tax proposal has
drawn intense criticism from the farming sector
because it makes no exception for family-owned
farms. Business opinion is divided: real estate bro-
kers and builders are displeased, but many compa-
nies believe they will profit if investors turn away
On the surface, Keating has overcome internal
party dissent-primarily by winning over reluctant
Cabinet ministers-as summit delegates prepare to
convene. With the continued support of the 27
Cabinet ministers, we believe Hawke's faction
could pass the Keating package in a caucus vote. If
' Keating's plan has a technical advantage over alternatives. Ac-
cording to Treasury projections of economic growth and inflation
over the next yer, it satisfies Hawke's campaign criteria for
spending and deficit restraint. Any alternative must mathematical-
ly be proved as acceptable in order to win government support and
pass through Parliament.
from currently popular tax shelters.
The fringe benefits tax stands a better chance of
passage. Keating has removed most of the dangers
by excluding items such as company cars that are
offered to employees at all salary levels. The oppo-
sition, therefore, will appear to be blatantly partial
to the rich if it opposes the tax. In the end, the
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opposition may support the new income tax sched-
ule and the retail sales tax because those are
"conservative" positions and the party is trying to
regain its conservative constituencies.F___-]
In our judgment, Australia has much to gain from
tax reform, even if Keating has to accept compro-
mises. If Keating is able to reduce marginal tax
rates and implement a capital gains tax of any
significance, his tax reform will spur savings and
thus investment growth-the one element of eco-
nomic recovery that was lacking in the Australian
rebound of 1984, when real GNP growth reached 6
percent, up from about 1 percent the year before.
Some economists argue that increased retail prices
will choke off consumption spending, but we believe
reductions in monthly income tax payments and
increases in pension benefits will be timed to offset
price increases. Recent estimates of Australian
economic growth in fiscal year 1985 have been
revised upward to 4.5 percent. This is achievable, in
our judgment, with Keating's tax program and
barring a severe bout of industrial disputes. If
Keating's plan fails at the summit, however,
Hawke's political standing would suffer. An equal-
ly bad outcome would be the economic uncertainty
that would result from a stalemate that prolonged
the acrimony over tax reformF_-]
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Secret
Energy
Saudi Arabia
to Aggressively
Market Oil E/
Meanwhile, the US Embassy reports
25X1
that an oil barter arrangement also may be in the offing for military
equipment but is skeptical that the barter deal will be completed. A similar oil-
for-airplanes deal last year with Boeing, however, was viewed by the rest of
OPEC as a major change in Saudi oil policy and as justification to violate the
organizations's pricing guidelines. Such aggressive marketing tactics will make
it more difficult for the Saudis to restore faltering OPEC discipline.
The Austrian state oil company, OMV, has agreed in principle to buy 25
percent of a major US oil company's production interests in Libya, according
to press reports. Occidental of Libya is 51 percent owned by the Libyan
Government and currently produces about 140,000 b/d, or 14 percent of
Libya's estimated oil output. OMV's equity purchase would give it access to
low-sulfur crude equal to about 9 percent of Austria's 200,000 b/d demand.
The deal should also benefit the Austrian state-owned oilfield supply company,
Voest-Alpine. Tripoli probably welcomes Austrian equity involvement as a
means to acquire Western petroleum technology and equipment for its
deteriorating petroleum infrastructure and to further diversify its sales during
Aus ria Buys US Oil
1 Interests in Libya
the ongoing crude oil supply glut.
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Tokyo may back out of the 25X1
y
J an ,Ma .Withdraw
rom Soviet Oil
and Gas Project
I/
Sakhalin Project because Japanese electric power companies are reluctant to
sign long-term liquefied natural gas (LNG) contracts. Although the Japanese
firm Sodeco has invested about $175 million in Sakhalin exploration over the
past decade, Japanese electric utilities have shown little interest in buying the
anticipated production of 20,000 to 40,000 b/d of oil and 3 million tons a year
of LNG. Moscow, however, may develop Sakhalin's offshore oil and gas fields
independently, A final decision is expected by
Japan this fall. Japan now has numerous other options in covering expected fu-
ture energy needs-Australia, Indonesia, Malaysia, Thailand, Qatar, Canada,
and Alaska. The extent of participation by Japanese steel and trading firms in
these projects will weigh heavily in Tokyo's choice of energy suppliers) 25X1
21 Secret
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C15lombian Oil Harassment by guerrillas of the National Liberation Army and unfavorable
weather conditions are constraining development of Colombia's oil potential.
In late May, guerrillas dynamited an oil drilling camp causing approximately
$2 million in damages and shot down a helicopter carrying a number of
Occidental Petroleum employees.
r
,Alorth Yemen
Oil Update
25X1
2& ??(1
hina Pushing China recently kicked off a new drive to conserve energy last week with a na-
Energy Conservation Conservation tional conference and an exhibition of foreign energy conservation equipment
and technology. Vice Premier Li Peng told the conference that enterprises
must use technical innovations as well as economic reforms to improve
conservation. The drive builds on past conservation measures that have
attempted to ease chronic energy shortages impeding the growth of industrial
production. According to Chinese statistics, enterprises saved an equivalent of
30 million tons of coal in 1984, about 4 percent of total energy production.
Most of these savings were the result of economic reforms. The cost for above-
quota energy supplies has been allowed to rise above state prices. In addition,
Beijing is pressing to hold enterprises responsible for their losses, which has
discouraged wasteful practices.
The Huaneng Energy Corporation was officially established this week to
Chinese w
Power Corporation import thermal power plants for cities willing to pay for the plants. This
underscores Beijing's increasing reliance on coal-fired power and off-budget
financing of electricity supplies. Cities desiring more power capacity than is
funded by state plans can petition Huaneng to negotiate and sign contracts
with foreign suppliers, import equipment and materials, and solicit foreign
investment. Huaneng has already sought bids from 10 international firms to
Secret
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Secret
Red Sea
Ethiopia
Gulf of Aden
People's Democratic
Republic of Yemen
(South Yemen)
HUNT Lease holding company
Lease limit
- - - Approximate lease limit
Secret
0 50 100 Kilometers
0 50 100 Miles
Secret
28 June 1985
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Package Progress indicated it will accept a proposal to reschedule some of its $170-190 million in
official credits and guarantees coming due between July 1985 and the end of
supply eight generators for Dalian, Nantong, Fuzhou, and Shijiazhuang.
Chinese Vice Premier Li Peng, a strong supporter of the new corporation,
wants these four plants on line within three years to help solve worsening
power shortages on the east coast.
hile's Debt Chile made progress on relieving its acute financial bind last week. Santiago
1986, according to US Embassy reporting
ese moves,
S/udi Arabia Considers
~rivate-Sector Bailout
Secret
28 June 1985
early 1986, leaving Chile under financial strain well into the fall.
together with the Pinochet regime's decision to lift the state of siege, have
increased bank creditor willingness to lend new money and conclude a debt
package. Although banks are pressing the government to guarantee resched-
uled private debt, we believe a compromise will be worked out. We believe
Chile probably will wrap up its bank negotiations and conclude an IMF
agreement by the end of July. While this will remove the immediate threat of a
debt moratorium, major loan disbursements will not occur until late 1985 or
tronics sectors
East Germany has received a commitment from a group of Western banks for
an eight-year, $600 million loan after asking for $200 million-its third large
oversubscription since late 1984. According to the US Embassy, the East
Germans will pay 0.75 percentage point over LIBOR for most of the money.
The syndicate is led by the Arab Banking Corporation of Bahrain and includes
about 75 banks; seven US banks reportedly will lend $50-60 million. East
German Foreign Trade Bank President Polze told the US Embassy that East
Berlin will use the funds to maintain reserves and boost imports from the West
in 1986-90. Polze said it is now East German "national policy" to maintain
hard currency trade surpluses, but indicated interest in Western capital goods
to modernize the coal mining, oil refining, chemicals, textiles, and microelec-
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Credit Arrangement
/opposition to -"'
v' lWest German EC
Grain Price Veto
Lz
9ebate on the
Airbus A330
Global and Regional Developments
claim to subsidized credits
The OECD Secretariat is expected to propose a plan for automatically
reclassifying recipient countries by relative wealth under the Export Credit
Arrangement at next week's meeting, according to US Embassy reporting. If
implemented, Singapore, Hong Kong, Venezuela, Netherlands Antilles, Trini-
dad and Tobago, and Oman would graduate to the highest category and
therefore be ineligible for subsidized credits. The last reclassification, in 1982,
graduated the USSR into this category. The plan recommends reclassification
whenever the World Bank issues new per capita GNP data or revises its list of
countries eligible for IDA credits. In order to avoid repeated crossovers
between categories, countries would be reclassified only after they had met the
criteria for the new category for at least two consecutive years. Countries with
no new per capita GNP data would not be reclassified but would be subject to
periodic review. The EC is reportedly concerned about Portugal's accession.
Other OECD participants would be able to undercut EC export credit offers
because Community nations cannot subsidize credits to fellow members.
According to US Embassy reporting, the EC probably will delay progress on
the plan until agreement can be reached with Portugal to give up Lisbon's
Domestic opposition to Agriculture Minister Kiechle's stand against EC grain
price reductions is strong. Kiechle, whose Christian Social Union Party is
worried about the farm vote, invoked West Germany's first-ever EC veto on 12
June to block a proposed cut in the subsidized price paid to cereal farmers.
Economics Minister Bangemann and Foreign Minister Genscher, for whose 25X1
Free Democratic Party the farm vote is relatively unimportant, have been most
outspoken. They contend that continued resistance to price cuts is inconsistent
with West Germany's longer term goals, such as reducing overproduction,
limiting West German financial contributions to the EC, and reducing
tensions with EC trade partners. Moreover, they lament the setback to Bonn's
push for European integration and the addition of another irritant to strained
ties with the French. Barring a last minute compromise, grain prices will be a
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Thailand Eying Trade The Thai delegation to the ASEAN-Japan ministerials in Tokyo later this
Deficit With Japan month will likely present proposals to redress Bangkok's $2 billion annual
trade deficit with Tokyo, according to Thai press reports. Bangkok intends to
call for immediate action to open Japanese markets to Thai exports as well as
longer term assistance in developing Thai export capabilities. Suggested
measures focus on liberalizing Tokyo's foreign investment policy to promote
export-oriented Thai industries, to increase local content, and to step up
technology transfer. Bangkok also wants to use countertrade, triangular trade,
and buy-back arrangements to boost exports. Tokyo has announced that it will
cut tariffs on some agricultural products but is unlikely to offer any
meaningful response to the rest of Bangkok's demands.
Developed Countries
ies Improve
oroccan-East Bloc
Japanese Tariff
Tuts Announced Announced
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28 June 1985
After intense internal debate, Tokyo this week announced that it would reduce
tariffs by 20 percent on 1,850 products as part of its "action program" to ease
trade friction. Most cuts will take effect next April. Duties will be abolished on
35 products from the United States, and tariffs on special interest items for Ja-
pan's other trading partners-such as boneless chicken, bananas, and palm oil
from Southeast Asia-will fall by more than 20 percent. Tokyo also called for
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reciprocal tariff elimination on manufactured goods to promote a new round of
global trade talks. Strong ruling party and Agricultural Ministry opposition
blocked original plans for tariff cuts on all 2,400 items now carrying duties.
The cuts on Southeast Asian products were clearly designed to avoid criticism
at the Japan-ASEAN Economic Ministers Conference held in Tokyo this
week. The reductions probably will have little affect on Japan's trade surplus
because tariffs were already low. Government officials also have said Tokyo
may suspend specific cuts if an import surge harms domestic industry
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uccessfful Belgian
Employment Program
A year-old government program that allows unemployed individuals to start
small businesses by borrowing against future unemployment benefits appears
to be successfully promoting entrepreneurial spirit, as well as generating new
jobs. According to government officials, roughly 5,000 people-about 1
percent of those drawing unemployment compensation-are participating. The
Caikse Nationale de Credit Professionnel, the government's small business
bank, issues the loans at below market rates in amounts up to $8,000-roughly
equivalent to three years of unemployment compensation. While the national
government provides the capital, the Flemish and Walloon regional govern-
ments subsidize the interest rates. If the fledgling entrepreneur is unable to re-
pay the loan, he risks forfeiting as much as three years of otherwise open-
ended unemployment benefits. At present about 90 percent of the businesses
are current on their payments. Although the program will have only a small
impact on the country's 13.5-percent unemployment rate, it will nonetheless
score some badly needed points for the center-right coalition, which faces a
general election by December.
Less Developed Countries
I t Argentine Reaction Domestic reaction to President Alfonsin's tough anti-inflationary program has
'o Economic Program been mostly favorable, but difficulties in carrying out the program may
eventually undermine much of this support. The program features wage and
price controls, increased taxes, higher utility rates, cuts in public spending,
monetary reforms, and aggressive devaluations. Several steps already have
been taken on price controls, but the new currency, the "austral," will enter
circulation gradually. The government intends to maintain the currency's
value by ending the practice of printing money to balance the budget and
relying instead on increased taxes and foreign financing. While media polls
indicate widespread public support, some businessmen worry that it may cause
a recession, according to the US Embassy. The opposition Peronist party and
the Peronist-led labor confederation argue that the program will aggravate
unemployment and reduce real wages. Leftist parties have denounced the plan
as a "sellout to the IMF," while conservatives criticize price controls but
support other provisions. According to press reports, the armed forces favor the
new program, viewing it as similar to measures taken under military rule.
Alfonsin's plan is basically sound, but its success hinges on the government's
ability to freeze prices, while deterring union protest strikes. Considerable
risks remain even if prices can be controlled. Argentina's last bold attempt to
crush inflation, in the early 1970s, led to widespread shortages and unrest.
Kuwaiti Aid Payments
J to Syria in Doubt
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Egypt's 1985
Military Budget
for domestic items
Egypt's Defense Minister said the military will receive 2.4 billion Egyptian
pounds (about $3 billion) in the current fiscal year, 38 percent of which is for
debt repayment to the United States. The Defense Minister told US Embassy
officials that the military budget has not grown since 1983 and that current
defense expenditures represent 13 percent of the national budget and 10
percent of GNP. The military reportedly will devote 51 percent of the
remaining funds after debt repayment to wages and salaries. The Defense
Ministry also expects to receive additional funds for military procurement-
$150-200 million for hard currency purchases abroad and about $240 million
'ndian Textile
Policy Reforms
New Delhi has announced long-term plans to restructure India's huge textile
industry, which has many factories that are underutilized and unprofitable.
Tax and industrial licensing policies that discriminate against large mills and
against the use of popular synthetic fibers and high-quality cotton will be
gradually phased out. Private corporations will be permitted to establish or
expand capacity for manmade fibers and yarn. In order to modernize
production and make exports competitive, the government will allow imports
of textile machinery not produced in India at near-international prices-which
implies low import duties. Extensive provisions to protect displaced factory
workers suggest that the government is serious about permitting some
hopelessly obsolete units to close. Production of cloth for distribution by the
government will be shifted away from nationalized factories to private
handlooms, a move that will probably lead to increased government subsidies
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 but also help protect low-wage jobs for almost 10 million workers. The reforms
were quickly praised by corporate leaders and criticized by spokesmen for
small factories and labor unions. US officials in India caution that the new pol-
icy may have to be watered down as it is implemented
Cautious Tanzanian A much overvalued exchange rate is likely to blunt the impact of a number of
Budget Initiatives limited economic liberalization measures in the fiscal year 1985 budget,
introduced on 13 June. To improve economic efficiency and bolster anemic
agricultural exports, the budget calls for sharp reductions in export and
customs duties, the elimination of export taxes on a number of agricultural
products, and 50-percent reduction of the income tax on cooperatives.
Contrary to expectations, the announcement did not include a devaluation.
Despite repeated devaluations over the past six years, the shilling has
appreciated in real terms by about 60 percent against the dollar since 1979.
This effectively guts any production incentives from the new budget proposals.
In the absence of more substantial reforms, the economy will continue to falter
as Tanzania makes the transition this October to the post-Nyerere era, and the
new president could face growing popular discontent.
Possible Expansion At a recent meeting with General Secretary Gorbachev, Occidental Petroleum
of US-Soviet Chairman Armand Hammer proposed to expand an existing 20-year agree-
Fertilizer Exchange ment for the exchange of superphosphoric acid (SPA) for Soviet ammonia,
urea, and potash. The original agreement, signed in 1973, provides for annual
shipments of 1 million metric tons of SPA by the US firm and 1.5 million tons
of ammonia and 1 million tons each of urea and potash by the USSR. The
Soviets have yet to deliver the stipulated quantities. In 1984 the USSR shipped
only 886,000 tons of ammonia, 380,000 tons of urea, and 125,000 tons of
potash. Occidental supplied 720,000 tons of SPA last year. The United States
supplies at least three-fourths of Soviet imports of SPA. Needed to hasten the
maturing of grain crops during the short Soviet growing season, additional
quantities of SPA would be an important input for increasing grain produc-
ncreased Soviet
Purchases of
US Fungicides
tion, a major goal of the Food Program.
Soviet imports of US fungicides and miticides for treatment of grain and other
crops in 1985 continue at the high 1984 level, more than double that of the
early 1980s. Purchases of these pesticides from the United States may reach
$9 million this year. The Soviets are pressing US suppliers to accept barter ar-
rangements. Moscow has stepped up purchases of Western pesticides dramati-
cally in 1984-85, particularly herbicides for use on grain. Some are being used
in an experimental program, under the direction of General Secretary
Gorbachev, to increase wheat yields. These imports underline the priority that
the Soviets have accorded the role of pesticides in helping to meet the output
goals of the Food Program. Despite the push for barter arrangements,
Moscow, if necessary, will use foreign exchange to obtain the needed amount.
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Vietnamese Economic The Central Committee has ratified long-debated measures to curtail expen-
Reforms sive food and salary subsidies, according to the communique of the eighth
plenum released last week. Although the communique offers few specifics, the
new policy follows efforts over the past few months to revive the economy
including a sharp devaluation, rescheduling $160 million in overdue debts with
Japanese banks, and encouragement of private foreign investment from
Western Europe. The language of the communique suggests top Vietnamese
leaders are in agreement on the need for economic reform, but opposition on
Marxist ideological grounds by party officials and a sluggish bureaucratic
system will make implementation of subsidy cuts difficult. Hanoi may also be
considering another attempt to reschedule its $1.6 billion hard currency debt.
The IMF has told Vietnam that it must reduce subsidies as well as further de-
value the currency and repay its $30 million debt to the Fund before official
creditors will consider a debt rescheduling package.F__-]
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