INTERNATIONAL ECONOMIC AND ENERGY WEEKLY FOR 3 JULY 1986

Created: 7/3/1986

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Philippine

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Prcirfeni Aquino's Konorrue advisers areommitment io runthe cornerstone of ihcgovernmenrt programeconomic recovery.

Thc Philippines: Aquino's Critical Challenge-Re.Ling lhe Economy

Pfcsidcni Aquino recognizes thai her political future depends primarily on reviving lhe troubled economy, and. in some respects, her fc-overnmeni is offood start Nevertheless, maintaining the economic recovery be>ondand. in lurn. undercutting lhc Communistrequire major economicgriculture, governmeni finance, the banking system, and

trade poKy

abysmal economy is drjvingVnuch of the once-thriving Lebanese population lo the brink of poverty and is impinging on the activilies of thewhich control most of the country. Rival militias arc forced to seek funds more aggressively from local and foreignprocetsthat will almost certainly intensify factional struggles and violence.!

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hilippine Economy: Pulling Up on In Rural Bootstraps

In ourood case can be made for Ihe rural strategy on ihe grounds thai traditional development programs will not significantly improve thc living standard* of the average Filipino. Import-substitution policies of the Marcos government, for example, foisted high ccsis on man ufocl uteri, discouraged agricultural cxpori production, and eteaied few industrial jobs. Moreover. Aquino's economic planners cannoi count on suslaining growth simply by opening unprocessed agricfliuial commodities or manufactured goods: corn-modiiy prices Ihis year arc at their lowest levels relative to those of manufactures since, and most economists expect little improvement for at least thc next few years. Furthermore, the low cost of Philippine labor is no longer sufficient by itself io ensure thc competitiveness of manufacturedusc. forecade, new product ion technologies have lowered labor's share of lOial manufoeiurini I

Alternatively, by boosting rural ouipui and incomes through improved rural infrastructure, agrieullural extension services, and market-orienied pricing policies, the Philippines, we believe, could develop an internal market capable of supportini economic growth while avoiding the inefficiencies of import-substitutionecessary component of this strategy would be an exchange rate depreciation that directly raises incomes for rural exporters and makes it profitable to invest in agribusiness enterprises. We believe the peso'spercenl devaluation sinceor example, helped boost agricultural ouipui byercentontrastpercent decline in the economy's overall production, fMm%*

Aquino'sert he less, faces numerous political hurdlesural-focused development strategy. Urban interestwere responsible for oustinglikely to oppose exchange rate, tariff, pricing, and lax policies designed to boost the rural economy if theyihosc policies would hurt urban industries or raise consumer prices. Furthermore. Aquino's economicbusinessmen, bankers, and academics with little undersianding'of small-scalenot be sufficiently committed to rural development io overcome lobbying by urban

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iroups. Complice: ling Ihc picture is lhc time il takes lor rural development id succeed und:rihc best of circumsiunccs. nnd Aquinu has said publicl) that she ha>eliver tangible bcnclilt quickly in the country-

projected largeeficitercent of nationalalso restrict the scope ol the government's rural developmentigh-impact rural development program requires large outlays for roads, postharvesi food storage, irrigation,evitalized agriculture extension service. In addition, improving farmers' welfare will require costly improvements in both lhc civilian and military counierinsur* gency programs lo increase rural sccurityj

The Philippines: Aquino's Crilical Challgngc Revilingonom

Aquino recognizes thut he potii^uldepends primarily on reviving :he Irotib'cd economy, and. in some respecis. her governmentohTooo start. IT investor confidence continues to firm, (he economy could growercent this year and byercent next year, accotding to our econometric simulations.aintaining the economic recovery beyondand. in turn, undercutting the Communistrequire major economic reform! in agriculture, government finance, Ihe bankingand trade policy Conservative-mindedsuch as Finance Minister Ongpm. will face considerable opposition to these reforms fromand nationalists in Aquino's Cabinei.

cmomlc Opportunity

Despite (he fact thai thc Philippine economy has been ravaged over the past decade. Aquino comes

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Continued economic recovery in the short term depends heavily on private-sector confidence as Manila finds it increasingly ditRcuU to use more traditional fiscal and monetary tools to prime theillion projected budget deficit for

thisresult of preelection spending by Mjrros -in our view, forceio trim spending or raise taxes io reduce the deficitanageable level. In addition, ihc deficitajor paint of contention with the IMF in negotiation*ew standby credit agreement. Finally, export growth will provide little help to ihclower demand growth in ihe United States and Japan and low prices for thc Philippines' leading commodityandwill probably keep overseas sales flat ihis yeai.

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For their part, domestic investors are responding enthusiastically to Ihc change in government.this confidence, flock prices on thesmall Philippine stock exchange have in creased by almostercent since Aquino look office and capital flight, which was rife in ihelut two years under Marcos, appeals to have ended. II domestic business confidence continues to firm and lhe confidence of foreign investors strengthens, the economy will grow byercent this yearand byercentccording to our

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On thc financial side, an improved foreignposition Over the next two years hinges on foreign creditors agreeing to reschedule principal payments falling duerincipal payments on the foreign debt are scheduled to jump by more than SI billion next year becausegreemen. included only debts maturing through thc endescheduling of both public and private debt will atlnw Manila toforeign exchange reserves at relativelylevels ofillion over the next few years with lillle additional external financing. Moreover, ibe Philippines' external finances will proU.blv improve this year because of the dramatic

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in world oil prices and international imciesi raics thai togetherave lhc governmeni nearly SI billion in foreign exchange

There is considerable downside risk in lheContinued business confidence is notand foreign investors arc especiallyfor at",

least si* months of economic and politicalbefore risking investments of new money. In particular,'Japanese busirr/ worried about strength and longevity of the Aquino government. *

Agricultural Productivity. Agriculture, whichmore than one-fourth of national output and provides livelihood for TO percent of Ihe population, was severely damaged under thc Marcosby monopolies, misdirected investment, and an overvalued eichange rate. Freeing agriculture from the control of marketing rnonopotiesmajor first step to irurjease rural incomes. We estimate, for example, (hat ihe lifting in Marchof the four-year ban on thc export ofthc oil-bearing meal of thcincrease domestic copra prices by at least SO percent over the neat year as oil mills and exporters compete for domestic copra. In addition, allowing the peso to depreciate further would boost exporters* incomes and help direct investment into more profitable rural ventures, such as food-processing industries.'

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Government Budget. Manila rati annual budget deficits since lhe, half of which wore financed by overseasajor source of lhe budget problem is inefficiency in the domestic la* system,ase and poor collect ion Import duties and capon uica. which account for almostercent of revenues, have been shaiply reduced as foreign trade declined over the past few years. At the same lime, money-losing government corporationsajor drain on the budgei from the spending side, costing Manila almost IIear in operating subsidies. Narrowing the deficit would reduce the country's

reliance on foreign capital and spur domesticby freeing savings for private use.iling corporations to the private sector would slash government expenditures, but. given their weak balance sheets, Manila may find it difficult to find buyers. The government, for example, believes thai the private sector is interested in purchasing only five of lheompanies held under ihe National Developmenlgovernment holding companyg

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FlmtmtUi System. The Philippine banking system is undercapitalized and has been threatened over the tail several year* by failing public banks and deteriorating loan portfolios. Banks are stuck wiih nearly Si billion in problem loans primarilyIhey financed the government's acQuisitinp ol financially distressed firms, reany'of which were purchaseei from political allies of Marcos

Moves to shore up the financial system would include merging some private banks, as well as limiiing new lendiOB by government financialand transferring some of their functions to the privatetrengthened banking system would, in our view, more effectively channelto high-return investment projects and reduce the country's reliance on foreign borrowing by encouraging domestic

^Philippinewithin an extensive network ol tariff and nontariffhad the lowest eaport growth among developing countries in East Asia over the last several years. High tariffs have insulated domestic firms from tough import competition and.esult, have kefl motV of the economy plagued with high-cost, inefficient production la addition, aa overvalued exchangelo benefiturban consumers under Marcos-discourages exports, encourages imports, andinvestment to enterprises that can only sell to the domestic market. Under pressure from Manila's financial creditors, limited progress was

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Although most of Aquino's economicincluding Finance Minister Ongnin and Trade Minister Coneepeion -support economic reform, progress will probably be *kt* in coming Manyquino's closest advisers would prefer that the new government moveopulist direction, chiefly toward more social spending and continuedof inefficient domestic industries andSeveral important politicalconsumers, small businessmen, and organizedlikely to mount stiff resistance to tax. trade, foreign investment, and financial reforms because, despite thc potential long-term, benefits, these reforms entail short-term costs atn^jjj

If Aquino indulges lhe populists, the economy could become her biggest liability, particularly because expectations for improvement amongare so high. Short-term economic recoveryiecemeal approach to economic reforms, for example, will not be enough to provide the boost in rural living standards needed to undercut lheinsurgency Even if the economy grows by aa averageear afterdifficult task without majorcapita income could not return to1 peaka. Without an injprovement in lhe distribution- income, the Communists will continue to make political and military ir roads in the countryside no matter how well, thc middle class in Manila is doing taVH

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Lebanon:

Financing lhe Militias

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Lebanon't abysmal economt it driving much of tin: once-thriving Lebanese population lo Ihc brink of poverty and i: impinging on the activities of the militias, which control most of the country Rival militias are forced to seek funds more aggressively from local and foreignprocess, thai will almost certainly intensify factional struggles and violence The militias have become morein shifting alliances and patron> in order to survive. The result will be further destruction of what Is left of the economy, and fadrnj hope for any reunification, i

Militia Money Woes

All ofor militias have experiencedrevenues, especially from sources abroad, and ive stepped up illegal activities to raise funds.

Muslim West Beirut recentwo-week cutoff of petroleum deliveries after transport trucks refused io cross the Green Line because their cargoes were likely to be stole

The militias depend on financial support from residents of cities and villages in their respective cantons. The relative" poverty of many rural areas, however, it pushing the militia leaders to turn to alternative sources for funds:

The Christian Lebanese Forces seek money frommerchants and other commercial establish-menu in East Beirut,pecial tax on restaurants, petroleum, cinemas, and the Casino du Liban. In addition, lhe Christian militia controls three illegalhe Christian enclave, and leases themhristian entrepreneurs for large sums. We believe that revenues from these port rxjeraiions dropped significantly after Syriails border in January to stem illegal imr.

Foreign Support Dwindling j

We believe that funding from majorand Iran, at well as Libya, hasover thc patt two years atuffered economic problemsesult, the rrval militias havewith opposingmilitias aad farther

Syria gives inancial aad mil'tary support toallies in Lebanon, including the Shia Amal organization, thc Syrian Socia'ist National Party, the Ba"th Parly, and the Lebanese Communist Party. Amal receives the lion's share, and there are reliable reports thai Amal It now almost totally

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Impact on thc Economy

lhc miliiias ultimately represent aelement in the economy, financialreceive from Iron. Syria, the PLO.horl-tcm economiconly bright spot1 was asurplus0fjjpjj|jgajppj^^

"unidentifiednflows grewast year toillion.ortion of

this came from increased worker remittances as more Lebanese found work abroad, outsidesupport for the militias probably accounted for much of the increase. Paleiiinian money flowed back into Lebanon beginning ini at expelled PLOfignters returned. The PLO has alio substantially increased arms deliveries andsupport since Its departureJ

In addition, the rival militias offer young,Lebanese men one .of the few remaining Job opportunities available in Lebanon. Unemployment Is nearercent, and real annual per capita income has fallen to0 fromn

ilitia salaries and the money and goods acquired as "protection fees "from localappearir '" many:

Nonetheless, on balance, militia violence andsecurity hove devastated the economy.activity is currently atercent of capacity, and lhe chances of external financial

] In addition, much of the skilled, professional class has finally opted to leave ihe countr, ajaagagt.

Amal leader Nabih Bam hathia fundraisioB conference fcr Africa in July to aiiraci funds from Lebanese expatriates in Siena Leone, Ivory Coast. Liberia, and elsewhere. Amal.faces increasing competition for Shia African money from other militias. Including Hiiballah and the Syrian Socialist National Party.aajjjfjajjgt,

rincipal surrogate. Hiiballah. is financially dependent on Tehran and ishortage of funds as the war with Iraq saps Tehran's resources. The Iranians typically funnel support throughbut Tehran also provides funding through representatives in Beirut. Iran's financial support for Ihe militia has fallen behind, and salaries for

militiamen are several months in arrears. Hiiballah faces the prospect of losing militiamen to rival groups. We believe that Hiiballah now regularly receives military aid and large sums of cash from Arafat to help undermine Amal and SyrianIn Lebanon,]

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The Druze and their political party, thePartyre better organizedLebanese militias and arc perhaps theat attracting funds from thcj

Lebanon: Militias and Their Sources of4

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The economic decline in Lebanon will almostincrease ihcependence on external sources, which will probably lead to even greater outside Inierf rence in Lebanon. Foreign players will probably take advantage of Lebanon'schaos toPvenee among rival factions. Continued militia violence will further destabilize the country and diminish the prospects forrecovery and breaking ihe political stalemate.

Thc shortage of mone> both'Urtud will intensify factional rivalries and helpiiii-lionalne ihe practice of *Hgunt fu*onrvii-lion for fundi will encourace ntihiu* io verve several masters, farther complicating iSc LfCiv scene. In addition lo robber) and cawriioa.taivcd militia* ma)ngage in ami iraff<ching Both rival and jlled militias "ill vk more fiercely for turf io com penult fo* thnnkinga development (hai will.irici fightingangerous new levels |

Finally, ihe pressures toward can ionization increase wiih ihe decline in Lcbanc.f< security situation. The growing violence will inhibit Ihc human and commercial traiTic between cjnions. At rival groups seek io establish autonomous economic enclaves, ihe prospects for political reintegration become less likely

Brief*

Energy

Inconclusive OPEC Meeting

ectins without any formal agreement on produc* tion or pricinghe members agreed to reconvene in Geneva onuly. In thc interim, oil ministers will review proposals on individualquotas with heads of states. The inconclusive meeting probably means that OPEC production will remain high, nonmcmbers will hate little in^ntlvc to Cut output, and world oil prices will dip below thc current average ofet barrel. Oil ministers at least have proposals to take home and this may set thc stage far an accord laler in the year, when seasonal increases in demand will make agreement easier. Iran indicated some willingness toemporary price targeterconcession that could helpewsubstantial differences remain between Tehran and the majority of OPEC members on the Issue of production t

Oil Dealings

appears to havecured sufficient petroleum to meet its needs through6 and hopes to obtain at least an additional year's worth from other donors. In late May, Saudi Arabia agreed to supply crude oil in exchange for Sudanese sorghum. Thc final shipment from thc Saudis arrived' in June and is expected to last through July. In addition. Libya haso cover Sudan's petroleum needs for August and:illion worth of bcef.l

Increasing Coal Exports

is planning to triple its coal exf&rts to JO million metric tons annually0 to help offset losses of foreign exchange from lower oil prices. China announced on Sunday that its coal exports should reachillion tonsercent increase over exportshina has developed new markets for coal in South Korea, the Netherlands, and Turkey. Some of thewill come from China's share of coal from the Sino-US joint-venture coal mine at Pingshuo, which will open next year. Because of lowercoal prices, however, additional exports thii year will offset little of the S2 billion China probably will lose in oil exports. Beijing has the resources to .meet its goalnd, if necessary, it will drop its price for coal tonew markeUaflsssssV

Mozambique Preparing for IMF iSegotiaiions

Finance

Th* MezambKan Government haiackage of economic re for mi designed tobk reiionse from an IMFjcam scheduled to visit Maputoon? til attSNtoMM

a lubttantial devaluation, reduced budget deficit^ credit restrictions,price controls. Moumbtoueanagreement topercent economic contractiont> causedimurgent activity. An IMF roan alto -ould round out aby Maputo to increase iu economic tica to Western institutions andits reliance on socialist economic programs. Although Mozambique with IMI aaaaTaTJfJgajpanjagagga^^

negotiations probably "ill be drawn out and tlic elTectivencn of new economic reform measures will depenc1 heavily on the course of Ihe insurgency and the willingness of Wnitro countries to increase aid doni;

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Global and Regional Dciclopmcms

Bogotadelegatesiin Amerka's major colTce producer* (Brazil. Colombia.

of Latinand Central America, mcl in Bogota recently to prepare for ihe

meeting of thc International Coffee Agreement in London, where

producers and consumers determine world coffee quotas for thc next year.unprecedented decision.lhc producers agreed to BSC* juintefforts to maintain current high prices in the world coffeewas recently affected by speculative buying after Brazil'searly this year. Brazilian Coffee Institute President Cracianothat he would not permit any reduction in Brazil's quota, despi'ccrop losses: he backed the Colombian position that quotas

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should be based, in part, on stocks held by producer countries. Colombia is the only produce- that will have sizable stocks on hand next year, and Colombian Federation of Coffee Growers officials believe these would serve to maintain coffee prices at reasonable levels. All delegates urged continued US adherence lo thc International Coffee Agreement. <

Paying Oil to Cuba

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Angola has persuaded Cuba toillion barrels of crude oil over the

next six months as compcnsation for Cuban construction projects inwhat

considered unfairly low prices fc^ngolan oil on world marketsnduced Luanda to ask Cuba to accept lhe oil deal. In early June for example. Angola's state-owned oil company was able to getarrelarrels of ^rude oil delivered to European companies, accordingreliable^

| At the current world average price, thehipments would beillion, about one-third of Angola's estimated annual bill for non military services from Cuba

WeakNorwegian parliament'*million ausiernj package falls far short of

AusterityOtto's liscal problems because oil lux revenues sre expected to decline

by at least S1 billion this year and another S3 billion next yea* Afterersonal income lax increase, thcinority Labormany proposals from the opposition parties. Thc resulting includes spending cuts as well as increased national pension system contribu-

tions and hieher taxes- on gasoline, tobacco. annVnlrnhnl. Thcote of confidence on any of the items, indicating it wants to stayfor now Meanwhile, although lhe opposition parties cooperated toLabor proposals. the> do not want to contest Labor's hold on powerNorway facing an cwonomic slowdown and the prospect ofthe opposition will hope that discontent with thcgrows. More intense conftonlat-on on economic issues isarliament resumes in the Ijii.ajajajajj

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Iran Searching for Foreign Exchange

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India's Export Incentives

Lower oil price! arc ousting Tehran totr> to collect ionv- olS billion lied up in dispute* with Ihe United Smtcs and France. Iran is seekingxpedite unresolved eases before the Iran-US Claims Tribunal, crcoied1 to settle bilateral commercial disputes. Thc National Iranian Oil Company may iryeach settlements wiih US claimants outside the Tribunal in two cas

_JTehran also has recentlyt to cnoru to ol

repaymentI billion loan to Trance by the Shah. Tehran had previously insisted thai all unresolvedat, including several large claims rnoofviaf US oilsettled individually: ii probably .it* be more willing to tfpeditc claimsut Quick settlements rC' main unlikely Iran has about SJ billion in readily accessible foreign exchange reserves but would like to free funds lied up inSIlimit import reductions, argfajagtay

New Delhi isackage of Income tat relief measures designedsir expected

to be submitted for parliamentary approval this summer. India's exports declined till year and its trade deficit exceeded S6 billion. India's five-yearplan callsercent average gro-th in export volume duringo. butis the first major attempt by lhe government to stimulateThe proposed measures include special lax credits for foreign exchange earningspercent tax credit for export profits*>sss|Bgag (hf export incentives may Include subsidies that would violate GATT codes and open India to countervailing duty action by,trading partners^

Soviet Grain Import* Tumble

oviet Guidelines for Higher Education

Estimated Sc-ict grain purchases uf almostillion mciric lom during ihc marketing year I'aat endedune wereive-year lowarkedfrom the record S4 million ions purchased inarketing year. Improved domestic crop production and lower matkci grain prices helped cut lhe hard currency grain impou bill by an estimated S3 billion io5 billion. These savings were partially offset, however,ore than doubling of soybeanossible reflection of plans to improve ihe mix of livestock feeds. Heavy Soviet buying of USmillion ions over the past year- -contrasted sharply with Moscow's activity in US wheat markets, where reduced Soviet demand and high US prices limited purchases toons. Despite some probable small wheat purchases. Ihe overall pace of Soviet grain buying shows lin Ic sign pf picking up as continued favorable crop production forecasts and hard currency constraints willlimit grain imports in [lie I }

Moscow recently published draft guidelines to make higher education more responsive to requirements for critical technical skills to support the industrial modernization program. The new guidelines callystem of contractual relationships between higher educational institutions andinstitutions will supply grarJuatcs in needed specialties in return for funding io upgrade educational facilities and equipment. Higher educational instilintens are to make their research more relevant to lhc needs of industry, cut down, on the proliferation of specialties, androad general scientific background that will enable students io better adapt to changing technology. Students arc to spend more lime in independent work and practical training In new "educational-scientific-production complexes" and regional trainingsponsored by enterprises. To address the serious problem ofof skilledone-half of college-educated specialists are in jobs that do not uiiliee theirschools are to graduate more midlcvcl technicians, while standards for admission to higher schools will be raised for engineering and other technical specialties. There will bt higher wages for the relatively low-paid engntccring profession as well as more pay differentiation according to thc quality of work and the complexity of the job. The new program for restructuring higher education Is the latesteries of measures aimed al alleviating the shortage of skilled labor. Success will depend on whether the new system of contract relationshipseal incentive to increase their investment in the educational process as well as on whether the enterprises will have the funds to invest.

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Czeehoslavokia Forms First Joint Venture

has agreed tu form ill first joint ventureestern company inest of the fca^ibilit? of direct foreign investment. Thc new emit} will produce measuring cuuipmcni and -illodest S2 million investment by the Dani'h partner Scnctec. Thc Czechoslovaks are also ncaring agreementtirgc joint venture with thc Dutch lirm Philips to produce compact disk plajcrs, and have been in touch with thc Japanese firms Toshiba and JVC. Complicated legal arrangementsesultmccM inly over the rights of Western partners have hampered formation of these experimental joint ventures. Reservations by hardline elements in the leadership have also been an inhibiting factor, although increasing Soviet Interest in joint ventures may help reassure them. If successful, the experimental joint ventures couldoost to thc Czechoslovak electronicsey sector in leading industrial modernization imdctivc-Vearlead to more extensive joint venture formation in the future, i

To Inertase Nonferrous Metols Exports

Chintse Flan Dairy Expansion

Chinese apparently plan to increase exports of selected nonferrous metals, including tungsten and tin, and use the earnings to purchase technology for China's copper and aluminum industries. Chinese purchases of copper and aluminumajor drain on Beijing's foreign currency reserves; we estimate that Imports of these metals reached nearlySI billionsmalt copperto upgrade domestic production to reduce imports. On the other hand, China's rich bauxite deposils may support enough growth in its aluminum industry to make China an exporter

una plans to increase its dairy herd from theillion head to: million bead by ihc0 The Chinese stated that they were focusing on US breeding stock, and have already purchased several hundred US dairy cattle this year. However, China is purchasing even more dairy cattle from Western'Europe, and, aJJKfftalMLftaaaaaaW will continue to do soo'. EC subsidies for medium-quality breeding cattle.MHftVnattaat*Chinese plan to purchase some high-quAy dairy cattle from US breeders to improve he.tJ quality, but would purchase more if prices were more competitive with EC cattle."

Beijing Reaffirms Emphasis on Science end Technology

nd part* officialsscientist* of iheir tuppori for SJtT reform it ihe Chinese Atsocuifon foe Science and Technology (CAST) Congress last week. Hu Oili, member of ihc Politburo andommittee Secretarial, urged more Support for SAT management reforms to increase the contribution of SftT lo economic development. Furthermore. Hu endorsed the concept of greater academicey concern among China's sceniihe community; the assembly lateradipiid this principle as part of the CAST constitution Song Jian, State Councilor and Minister of the State Science and Technology Commission, also noted that laws are beini draftedrotcci scientists from outside interference Although manyhave reacted enthusiastically to incentives to work closely wiih industry, for others iherc is confusion over what is permitted, concern that political support for the changes would lessen, and fear that their own power or prestige would decrease Bci;ing probably hopes that thc high-level show of support, aimed at a* organiiationillion men.bcri. will peempt the footdrag-gers to more speedily carry out the'

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