SURVEY OF THE ECONOMICS OF THE SINO-SOVIET BLOC (CIA RR 101)

Created: 9/13/1957

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ECONOMIC INTELLIGENCE REPORT

SURVEY OF THE ECONOMIESTHE SINO-SOVIET BLOC

37

CENTRAL INTtLLIGFNCE AGENCY

OFFICE OF RESEARCH AND REPORTS

This report has been prepared to acquaint the reader withfacts and issues required for an analysis Of the economies of the Sino-Soviet Bloc. Thu results of thetion by the Sino-Soviet Bloc of their material arid human resources Can vitally affect US foreign policy, whether the utilization bp in foreign trade, in military programs, or ir* domestic economic programs. In this context, attention is paid to evidences Of economic strengths andto evidences of the aims and purposes of economic policy.

The predecessoreport is CIA/lUlconomicSurvey of Uie Sino-Soviet Bloc,ECRET, wblch contains rauch information relating to events3 andhat vlll not be covered in this report.

The content of this report conforms in general to the contributions of ORB to the National Intelligence Estiaiatee. In the event ofhereinational Intelligence position, the latter controls, for this reportnot intendedew substantive contribution.

Attention of the reader is directedompanion report, CIA/RRconomic Intelligence Statistical Handbook,ECRET, wherein may be found detailed facts and figures omitted fron this report.

CONTEIvTS

Sunmary

I.

and Regional Characteristics

and Growth of the

1;. Population and

S. Agricultural

H. European

and Regional Characteristics

and Growth of the

and

Production

III. Conmrunist China and the Asiatic

and Regional Characteristics

and Growth of the

and

fcl. Agricultural

IV. East-West Comparison

Tables

Page

in the Sino-Soviet B'.oc Relative

to Production la the US and the NATO

in Output in the European Satellites,

by Economicnd

J. Increases in Output in Coasrunlct China,

by Econoaic5

Socialization of Industry in Coteeunict China,

6

ustrations

Foil OMl rifi ftt;

Figure 1. The Sino-Soviet Bloc (Map)

Figure 2, USSR: Distribution of Industrialaria Industrial LaborChart)

Figure 3. USSR: Gross National Product, by End

Figure USSR: Trends in Industrial Output, lndustriaJtiductivi ty,ndustrial Fixed Capital, XtykQ and

(Chari )

Figure 5. USSR: Geographic Distribution cfof Foreign

- vi -

;;* *

Following Page

Figure 6. USSB: Production ofChart)

7. European Satellites: Production of

22

Figure 8- European Satellites: Percentageof Gross Hational Product, by86.

FlfTurr: 9. Cexaaunist China: Production of Selected

6

(ORR)

SURVEY OF TiIE i'CCSCMiKi! Or 'HIS SriC-SOViET BLOC*

The coofidence in the economic strength and solidarity of the Sino-Soviethich was expressed so firmly at the Twentieth Party Congress of the Communist Party of the USSR ln6 weakened by the end Streogth is still there, but the solidarity has been proved not so strong as had been thought, and the internal economic problems of the various countries loom larger than expected. To the critics of the Communist system, events have been encouraging; to the Coranuniats, sobering. Bloc countries are noweriod of transition and of unstable relationshipsa period of reorganization, of re-planning, of renegotiation, and of regrouping.

By6 the Sino-Soviet bloc had become an impressiveof economic power. Its population was 9CO million. Its total gross national product (GNP) wasercent that of the NATO countries, almostercent Lhut of Lhe US. Its rote Of economic growth was significantly rac-re rapid than the present growth of the NATO powers or of the US-

Despite the confidence expressed ineep economiclurk under the surface today. In the USSR, pressure isagainst the developed resource base which would require expensive investment, particularly in ferrous metallurgy, fuels, and energy, if rapid growth is to continue. The rate of additions to the labor force will begin to fall8ecessitating greater emphasis upon the increase of labor productivity- New pressures foron-

faction have been generated which will require increased In agriculture and housing and which will require anof consumer goods. In the European Satellites, there is

I mates and conclusions contained in Lhis report represent lament of ORR as

(Albania

Rumania) map, Fig

he European Satellites Scrmuny, Hungary, Poland, and nd Worth Vietnam. (See the

a modest reorientation of economic objectives away from the exclusive concern with the Soviet-Inspired rapid development of heavy Industry which characterizederiod. The emphasis upon theof metallurgy in spite of an inadequate resource and power base and the diversion of resources Into capital investment instead of consumption has led to balance-of-payments difficulties,high productionerious weakening of agriculture, and unsatisfactory improvement in living standards. Economic reforms of theears have only partially alleviated the situation.

Political, factors created instability In Intra-Bloc relationships The old order of interrelationships had been precised upon the existence of undisputed Soviet authority. With Stalin's death and the partial liquidation of his apparatus of terror, direct Soviet dictation of Satellite economic policy became less feasible, and Soviet control became more diffused. In addition, changes in the pattern of central control within the USSRrowing preoccupation withproblems wer* not unmarked in the Satellites. cries of speeches intended for Western consuaption stated that the Leninist principle was one of "many roads to socialism" and that rigidto the Soviet model was not necessarily warranted, an opening was created for the Satellites to press for greater autonomy inpolicy than was contemplated in the then-current Soviet plans for Bloc econoaic coordination.

By* the countries of the Soviet Bloc were completing detailset of coordinated econoaic plans by which the Satellites would continue to industrialize, but on the ba^io of increasedof production. The60 was seeneriod of transition preparatory to the operation of theore Integrated master plan covering the0 Completion of the transition according to the original plans would likely have meant reduction of the degree to which the Satellite states could determine economic policy on an Independent basis.

All factors combined tc lead significant Party and non-PartyIn Poland and Hungary to try to gain greater independence of the USSR in There was discontent created by economicimposed by the USSR, there was discontent craatcd by national pride, there was Leadership for the political expression of thethere was the weakening of Soviet authority Implicit In the dc-Stal:nizatlon campaign, and there were the examples of Yugoslavia

and the misinterpretation of the Moscow line of "many roads to Poland succeeded, at least for the moment; Hungary did not. The USSR demonstrated that it would use armed force to prevent any further apostasy, and the other Satellites remained "faithful."

Subsequently, the government of the USSR has taken action designed to stabilize the situation, at Leant for the present. It has permuted

reduction of the0 Plan targetslowing down of It has supplied Immediate assistance designed to maintain the Satellite economies and to alleviate discontent. It has begun to exercise subtle pressure on Poland to convince that country of the: "wisdom" of maintaining its economic relations with the Bloc. It has supplied relief to Hungary. It has disavowed Yugoslaviaroper economic model for the Satellites. Yet even granting thesuccess of these measures, several facts confront the Soviet officials. First, the Satellites have become more uootly to the USSR in an economic sense, although this does not necessarily imply that they are In to to an economic liability. Second, Soviet authority in the Satellites now rests more obviously upon Soviet militaryrd, tl* spirit of nationalism lies smoldering. And, finally, the present economic policies being undertaken by tbe Satellitedo not offer great prospect of substantial long-term Improvement in living utandnrda. To these factorse added the obviousof present political und economic relotionehips, wherein the Hungarian economyiability that must be held and the present Polish regime is toleratedecessary evil which prevents greater evils. The USSR haftreat deal of initiative in Eastern Europe and can be profoundly affected by events which aay be largely out of itB control.

Under these circumstances the Council of Mutual Economic(CSKA)ifferent role at. present from that originally foreseen. InEMA was lo provide theloc-wide economic buildup, in economic competition with the West. After the revolt in Hungary the Supportoordination" by the Soviet Army become more obvious than had been intended, and the more Important economic relationships were negotiatedilateral basis between the Individual Satellite and Moscow. CEMA operateduch less positive capacity, however, until quite recentlyultilateral ciearlng system was organized in the BLoc. Multilateral econoaic relationsultilateral clearing system) can be made to seess necessary to Poland and arc apparently being usedechanism for recon&olldatlng Soviet power over Poland and the other

Satellites.

Soviet economic relations with Communist China are aluoransitional phase. The growthowerful Chinese Industrial complex ln Northeast China, adjacent to relatively underdeveloped Soviet areas, has improved the bargaining power of Communist China. Nevertheless, Communist China continues to be dependent upon ohipmcnts of machinery and equipment controlled by the USSR. In the not-too-distant future, Comnunlst China hopes to be able to reduce Itsupon imports froa the USSR and to satisfy more of its needs from domestic materials and manufacturing.

In many respects lt can bc seen that the massive unity of the Sino-Soviet Bloc la an exaggeration. There Is, however, anaggregation of economic power which has supported the military preparations of the USSR. Although the data appear to show an obvious economic superiority for the SATO powers over the countries of the Sino-Soviet Bloc, thia superiority is less clear cut when military power is considered. ubstantial proportion of the resources of the West la consumed ln maintaining and Increasing living standards. Tlie Sino-Soviet Bloc, on the other hand,uch higher share of its resources to military purposes and to expansion of the economy.hows production in the Sino-Soviet Bloc relative toin the US and the HATO countries.

Table 1

Production in the Sino-Soviet SlOC Relative to Production ln the US and the NATO Countries

Percent ofof

Hard

Crude

Crude

5 and in6 the Soviet leaders apparently thought

of Industrial production at rates significantly higher than in the NATO countries, they were encouraged by signs or division among the NATO powers, and they were confident of their ability toeasonable unity of the Bloc for their most vital political andaims. At the Twentieth Party Congress in Koscow inlear challenge was issued for long-term economic competitionthe Communist world and the Free World.

Subsequent events in6 caused extensive reexamination of the aims and methods of policy, both economic and political. It is important to note that the performance or the domestic economy as well as intra-Bloc relations has been of concern to the Soviet Byew programs had been formulated, or were in the process of formulation, which combined some measures purely expedient (such as economic assistance to the Satellites which was remedial but not preventative of further afflictions) and some measures offar-reaching effect, suchasic reorganization of Soviet Industry and construction. In many Important respects, such as the long-term development of resources in Siberia, the USSR has notlong-term economic expansion in favor of an immediate gain. The USSB and its allies appear to have modified their program for long-term economic competition with the Free World, but the program does not appear to have been abandoned. The question remains, Are the present programs consistent with the forces of change operating within the various economies and societies of the countries of the Sino-Soviet Bloc?

I. USSR.

A. Introduction.

Although the direction of Soviet economy is so organized as to make it responsive to the policy decisions or the Communist Party, the verynd complexity of the economy limit the flexibility of response to policy changes; imposed from the top. esult, unless grave mistakes arc to be made, decisions in the economic sphere must be based not on arbitrary direction but yn knowledge and anof the economy. Thisreat premium on the management and planning functions. The price of poor planning and management

production cost- "rain upon raw materials supplies,

nonfnlfilWt of production and investment plans, failure to meet quality standards, and laggard introduction of new technology.

U^Iproblems of decision-

al^.? entiv" havc bee" discussed with greater frankness and less attention to Stalin-era dogma. Housing construction and agriculture have both been given higheresourcethan ever during the Stalin era, and the regimentation of the populace has been reduced. rastic reorganization of the Soviet

of develop-

mentbeing begun in the Asian areas of the USSR in an effort to broaden the resource base needed for future economic growth.

eFormBnot irreversible-and the economy could conceivably be once again shackled in the old bonds, yet it would

resfZrT 0nd1eo8tServor could be

restored, the only path for the USSR in the present economic competl-

tn^f StC" 1SS6CUrc more operation from ST

tu,Jt,0fl^Productivity is eLn-tlul to future Soviet growth.

. Q vlct svstcB1 Is lull of contradictions and dilemmas,

predicted. Economic deeisJon-

^nSv ^ ,eVelBf the

economy, yet adequate criteria for sound decisions are lacking. The

Of thf LllTa' yethe efforts of the lowest worker and peasant. He, in turn, is expected to put

o demand too much'in th/way of Prices Of industrial goods must be related to costs, yetare low relative to demandhortages. XTaged, yetn oneresult In underfulfillment elsewhere. Education must ^ inindustry, and yet not endanger the

Theconomic administration made by thef Ministers. Party coi through key Party membci

Eunist Party is at thp apex of the SSR. Once tht- policy decisions. i the governmental mechanism islso top officials of government.

crea- lc,rPflJjnc'* 6erive economic gain fromlrixde vet cunnot riak overly great dependence On

Untilhe planning function was exercised by Gosplan (long-term) and Gosekonkccunlsya {short-term) and the control function

by the Ministry of State Control, the Central Statisticaland the State Bank (and the various specialized banks).

The implementation of economic policy has been theof functional economic ministries (organized mostly along Industrial lines) which have been subordinated to the Council of Ministers. There are three types of such ministries: he All-Union ministries, which are those of overriding national significance, such as the Ministry of Defense;he union-republic ministries, which are republic counterpartsinistry at the union level and occur comaonly where there is an unusual concentrationype of activity in one or two republics, such as nonferrous metallurgy In Kazakhstan and coal production in the Ukraine;he republic ministries, such as the various ministries of local industry, which arc concerned with the local economic affairs of each republic and for which there is no corresponding ministry at the union level.

5onsiderable share of Soviet industry was transferred to republic control, generally ia the form of union-republic ministries. This was an attempt to move intermediate policy decisions closer to the field, but it did aot go far enough to redress glaring management problems imposed by sheer distance. Eachministry tended to operate in its own little vacuum without considering the impact of its own shortfalls or nearsightedness on other ministries. Particularly during the first phases of the present program for Eastern development, it became apparent that there must be more adequate provision for coordinated regional development. Khrushchev in7 recommended substantial abandonment of the former organizational systemeorganization of the economy along regional lines, with the power previously centered in functional economic ministries to be transferred to regional economic councils -

In7 the Supreme Soviet approved the basic outline of Khrushchev's proposals, andravda editorial called upon the new regional economic councils to begin their tasks. It is premature to predict at this time how wellouncils will operate und what their success might be ln solving the pressing management problems of the national economy. It is noteworthy that the Cosplans of the individual republics willajor role of coordination andreat attempt is being made to preserve the central government as the source of basic determination of policy and as the point, of central control.

D< Geographic and Regional Characteristics.

The immense land mass of the USSR makes available rich natural resources to the economy; yet it islessing unmixed with the resources needed for future expansion of the economy lie deep in Asia, far distant from the muin population center of the In future years the USSR will become more of an Asian power -as industry, the labor force, and the consuming population moveeastward.

The resources of the USSR have made possible substantial realization of its dream of relative self-sufficiency. the very distance between its population center and its future sources of power and rawistance which must be covered by expensive overland transport, may compel the USSR to give greaterhe future to foreign trade, at leastemporary measure until its Asian development is well under way.

The costs of transport imposed by distance haveource of concern to Soviet planners. Present policy is attempting topossible transportation burdens by basing economic development on local resources and by reducing regional interdependence in bulk commodities. Despite such effort, the average length of haul per ton

by rallroad has increased6 kilometers30 and

- _. 'i7ie industrial Strength of the USSRresentlyEuropean areas of the USSR as shown in InUo percent of manufacturing activity,ercentactivity, andercent of services (includingcommunications, trade, and construction) were located r:ul rie*. {J

cnceiaralior of

In the future the Asiatic regions of the USSR will 8dinmportance tne "new lands" program has already shifted Soviet ag-'i-ulture toast, und the Sixth Five Year Plancas^iv plan Tor ecu mlc development in the east, with nearly half of Sov'et cacital In vestment to go into the area including the Urals and to the east.

Mneh nrncludes vast areas of little or no productivity. Much of Its territory lies further north than the northern boundary

J0 percent of lie land Is available for cultivation

grasslands, and pastures are included). the Urals ko percent of the land Is utilized for agriculture. Ukraine,ercent of the land is under cultivation. In only slightly moreercent is farmed at all,restricting agriculture. '. to

he USSR has made great effort! to increase the area under cultivation and has expanded grain culture into the "new lands" area of Kazakhstan and Siberia. This Is "opportunity" farming country,good harvests in those years when rainfall is good but subject to drought. The expansion is partially based on the unlikelihood of suffering simultaneous drought In the "new lands" and in the Ukraine.

Despite large areas of poor soils, of swamp, of desert, and of severe cold, the USSR has the largest area of fertile chernozem in theCOO square Biles. These soils, rich and deep have high humus and are only slightly leached, being located in areas of moderate or light rainfall. In general, however, crop yields are not ae high as they are in the US, and in the area of dry-farming they are appreciably lower. Timber resources, on the other hand, are the largest in the world, covering anillion square miles. Mineral resources are abundant.

The USSR has encountered grave problems in the establishment or ita transportation systemroblems of space, of rivers that flow north when the tranaport requirement is east-west, and of capital. In the European ureas, where the river locations are more favorable, extensive use is made of water transport. The railroad system,only one-third the mileage of the US system,reat bulk of traffic efficiently. Air transport is becoming increasingly important, and the USSR is proud of Its commercial jet airliners.

c- Structure and Growth of the Economy.

6 the Soviet economy war. aboutpercent the size of the US economy, measured in terms of the total output of goods and services (GNP). The end use breakdown of the Soviet GNP6 is shown In Soviet defense outlays were approximately equalefense expenditures, compared on the basis of appropriate ruble-dollar conversion ratios. Administrative outlays were almost one-fifth greater than in the US. Investment expenditures were aboutercent

* Following p. ic.

- 9

of those in the US. In contrast, Soviet consumption,opulationercent larger than that of the US, was only about one-third as great as US consumption.

, Soviet CNP grew at an average annual rate almost double US experience during the same period. At the present time, growth is at an average annual rateercent per year but may fall appreciably The comparable US figureercent per year.

The maintenance of the highest possible growth rate in the futureasic aim of present Soviet economic policy but presents great problems. Because of changes in political aims and increased emphasis on worker motivations, for example, greater attention is now placed on an increase in consumption levels, especially in housing, but this draws on resources that could be used for industrial (The point where the diversion of resources from industrial investment outweigh the productivity gains stemming from improved motivation of the Soviet worker is not known.) Furthermore, both military expenditures and foreign economic commitments such as aid to Hungary draw on resources needed for growth.

The theoretical problems associated with economic growth have stimulated extensive Soviet discussion of the process of What price structure acts as the best 1. growth unimpeded by either gluts or shortages? What are the best criteria for deciding among investment alternatives? What are the economic gains from foreign tradeV When should capital equipment be retired und what weight should be giver, to obsolescence? How can innovation and technological advance be stimulated? How car. specialization and Subcontracting be encouraged? What should be the goals for anin living standards?

These and similar questions have long been discussed in Western economic literature, but Only since thef Stalin have thebeen discussed in Soviet literature with such intensity. The intensity beers witness both, to the complexity of problems nowandew flexibility of response. Whether the answers can be foundere adjustment of Marxist-Leninist ideology remains to be seen.

- IC -

SECRET

GROSS NATIONAL PRODUCT

BY END USE

illionubles)

SECRET

D. Population andwer.

The population of the USSR wasilliou int is growingate or slightly moreercent per year. Of the total population,ercent are in the age range ofoears.

Startinghe USSR willeriod of relatively slow natural increase in the labor force which will last for several years. This will be the result of wartime population losses, when infant mortality was high and the birthrate was low, androlonged postwar period during which the birthrate continued to be low. In contrast to the past, labor willesource to be husbanded carefully. The reduction of the armed forces7 made available manpower needed by the economy. ost of measures designed to increase the productivity of the individual worker reflects an awareness of this problem.

3efcre World War II, when the labor supply available towuS inadequate, labor resources were shifted from agriculture to industry with relative ease, as agricultural labor productivity was so low as to indicate underemployment of agricultural labor Now, virtually the only way to transfer labor resources irom agriculture to industry without impairment of agriculturalgoals is to greatly increase labor productivity in agriculture through mechanization, development of high-yield crops, and similar measures.

The rapid growth Of Soviet education is expected to continue in accordance with the demands of the times for highly trained high school attendance, involving raising the total number of school yearss to be compulsory Higher education, especially in the sciences and technical subjects, continues to flourish.

K. Agricultural Production.

Soviet agriculture has been the problem Sector ir. the Soviet economy from the very bcgi:ming of the Communist regime. apidly growing population and with the soil and cliaatoiogicalprevailing in the USSR, it hasonstant battie tofood production to levels sufficient to maintain per capita consumption levels. T'he emphasis upon heavy industrial investment and upon Industrial production in general has been to the relative

neglect of agriculture. 3 tlie concern of Soviet leaders over agriculture boo produced specificesigned to expand agricultural production through greater investment and throughinto marginal lands. Despite all efforts, however,continues toeak point ln the Soviet economy.

Soviet agricultural growth Is circumscribed by certainfactors of climate, soil condition, and water resources which limit the arable area of the country to someercent, as compared withercent in the US. In addition, political and institutional factors have produced inefficiency, passive resistance from the peasants,reat waste of Investment and labor resources. here have been bold assaultsactors limiting agricultural output, culminating ln on extremely successful harvesthanks to timely assistance from the weather. Many constraints on output still exist, but new approaches and programs may be expected. There la every indication that the USSR intends to Improve agricultural output, primarily by investing more capital, by Improving the level of technology, and by Increasing incentives to the agricultural labor force. These efforts are not likely to be as successful as planned but nevertheless are likely to produce an improvement in the quality of the Soviet diet

F. Industrial Production.

The industrial economy of the USSR is second only to that of the US. The subordination of tie economy, within limits, to theof tho Communist Party 'ind of the Soviet state makesore powerful instrument in support of the Soviet power position than indicatedirect comparison of the size of the Soviet economy in comparison to the economy of the US. Cengrallyigher proportion of the Industrial productloo of the USSR could be mobilizes more rapidly in support of military or political programs than could be done In the US. Thisonsequence of the Soviet system, and lt isenefit to the Soviet power position which is costly to the Soviet people. Nevertheless, the might of the Soviet economy must be respected even as the weaknesses arc examined.

5 the Soviet economy was stronger in the sinews of war than the economy of the German Reich ut its peak. Soviet5 matched German coal productionxtraction of petroleum was almostimes as much ns extracted in Germany9 (excludingrude steel, two times aB much; nnd electric power

moreimes as much. But5 the Soviet economy was not as strong, measured in these terns, as the wartime economy of the US ints coal production wasercent of the; petroleum extraction,ercent; crude steel,ercent; and electric power,ercent. Nevertheless, the present-day Soviet economy is adequate toajor war effort, and Soviet military technology hasigh proficiency.

Soviet industry has been.characterized by growth more rapid than the present growth of US industry; thus the size of Sovietrelative to US industry has been increasing throughout the years. Whether the USSR achieves its announced long-term intention of overtaking the US in the per capita production of the more basic industrial commodities depends on many factors. The rate of growth of Soviet industry has been slackening. The moderate but steady growth of the US economy may make the goal difficult to achieve, but interruptions to the growth of the US economy, such as prolongedwould simplify the task for the Soviet economy.

Comparisons of the size and rate of growth of Soviet industry with the US economy are made difficult by the fact that the USSRa different measure of industrial production and uses different indexes of industrial growth- In addition, complex technical problems are created in the comparison of ruble valuations of Soviet economic activities with comparable activities in the US, measured inontinuing effort is being waged by government analysts and byscholars to improve the quality of international economic.

It has been estimated that Soviet heavy industry, which has been the court favorite of Sovie* economic policy, was about one-third the size of US heavy industry5 and will increase ite proportion to some 'iO percent 1ccording to CIA indexes, Soviet industry grew byercent; heavy industry, byercent; and light industry, byercent. 6ccording to the Soviet index, the planned growth of industry isercent, which is significantly below theercent claimed.

Soviet industry is now encountering significant constraints to the rate of future growth. Some of these constraints are temporary, Others less SO- nd throughout the Seventh Five Year, additions to the labor force will be in smaller numbers

rj -

onsequence of the low birthrate of the war yeara and the immediate postwar period, and of wartime Infant mortality. At the present time, the construction industry is handicapped by such factors aaproblems, shortages of construction materials, and high turnover rates among construction laborers. Problems of technology and oftend to prevent realization of the long-term plans lo Increase the productivity of labor.

Tbe patterns of industrial development are displaying somechanges. The USSR plans to increase substantially tbe rate of growth of chemicals output, ln contrast to the surprisingly low growth rate during The growth rates for energy, construction materials, and forestry products are to continue more or less It ia planned, for instance, to increase0 electric power outputercenthich la an absolute expansionillion kilowatt-hours in comparisonain ofillion kilowatt-houro- The rates of growth for metals,metal fabricating, and consumer goods will slacken during the Sixth Five Year Plan. The machinery and metalworking branch of heavy industry, however, vill continue to growatehigher than industry. Expansion of transport facilities ond communications continuesate commensurate with the requirements of the Soviet economy although the investment effort in those fields has not been remarkably large by US standards.

The slackening of the rate of growth of Industrial outputevealed in The same figure also shows that60 more effective utilization of the labor forceowerful factor in maintaining growth of output. Tftisattern to be expectederiod of recoveryreat war; the number of people in need of employment Is greater than the amount of plant and equipment at hand. 0 the expansion of plant and equipment (fixed assets) has been more rapid than the increase in labor productivity.

Since the end of World War II, Soviet defense expenditures have been maintainedigh level. In terms of the dollarSoviet defense expenditures5 were approximately equal to US defense expenditures. 6 the planned explicit Sovietexpenditures were toercent lower than the allocation Df the preceding as this comparison was not made in comparable pricen and was exaggerated by the effectsrice

Following

t P

secret"

l

A

USSR: TRENDS IN INDUSTRIAL OUTPUT, INDUSTRIAL LABOR PRODUCTIVITY, AND INDUSTRIAL FIXED

- 1

!

*'

:

;

VM 1W W9 0 l ? Wis

reduction, it remained possible that, although there was someof the size of the armed forcesxpenditures on military end items actually increased.

C- Foreign Trade.

The USSR, which is endowed with abundant resources, isa self-contained economy for which foreign trade is not as vital to existence as le the case in the UK, or even Czechoslovakia.rucial period which terminated ln thes, during which expansion of the Soviet economy was largely dependent uponof foreign capital equipment, the Soviet authorities openlyourse of basic self-sufficiency. The motives for this course were as much political as economic -

In recent years, new political and economic factorsignificant expansion of Soviet foreign trade which will probably continue in future years. Following World War II, the USSR acquired its European Satellites, and its economic relations with these countries ledreat expansion of tradeJ. Trade with the European Satellites was almost double total Soviet tradend6 trade with the Satellites and Communist China increased to four times8 level. Total foreign trades shown ln Figurewas more thanillion9ompared withillion6 billion)8illion5 billion) Of the total trade, more thanercent was with the countries of the Sino-Soviet Bloc6 compared with more thanercent'Q- 2 percent of Soviet trade was vith Bloc countries.)

Machinery and equipment play'a leading role in Soviet foreign trade. Trade in this eutegory comprisedercent of Soviet imports andercent of Soviet exports The USSR haset Importer of machinery and equipment, although the volume of itsof those items has been increasing. It imports machinery and equipment from the industrialized nations of the Free World, and from the industrialized Satellites. It exports to Communist China, the underdeveloped European Satellites, und the underdeveloped Free World countries. For East Germany and Czechoslovakia, exports of

* Following p.

** All dollar values ln this report are in US dollars, unlessindicated.

-

machinery and equipment and metal-fabricated products amount toercent of their total exports to the USSR. Conversely, machinery, equipment, and metal-fabricated products comprise someercent of Soviet exports to China. Generally speaking, the USSR laports specialized types of machinery and equipment and exports more basic types of machine tools, transportation equipment, and industrial installations. The imports ore important to the improvement of the technological level of Soviet industry; the exports are Important to the development of the Sino-Soviet Bloc economies and to the expansion of Soviet trade Into new market areas.

Although Ln the years before World War II the USSR wasan exporter of agricultural products, the recent advance of Soviet Industry and the comparative retardation of Soviet agriculture have led to basic shifts in the Soviet export pattern. Raw materials and petroleum products aro now the leading Soviet exports. There isistinct trend, portentous for the future, for Soviet exports of machinery nnd equipment to increase. This wouldatural development In view of the rapid expansion of production of machinery and equipment which vould probably shift the USSRosition of comparative advantage in exporting machinery and equipment, given the development of satisfactory foreign markets. At present the underdeveloped countries are being developedarket, yet it is possible that other markets may bo required, both ln terms of ability to absorb Soviet goods and to supply goods desired by the USSR.

In general, the USSR exports foodstuffs, industrial rawand some industrial equipment to the Satellites. In return it receives machinery, transportation equipment, and rav materials {iDcludlng uranium ore). In response to the growing economic crisis In the Satellites, the USSR In6 and7 lncreaaed its export commitments to the Satellites in on effort to promote economic stability there. These shipments, which consisted of cool, steel products, iron ore, nonferrous metals, and grain, tended to aggravate domestic Soviet economic difficulties connected with the relative shortage of many of the same commodities. In addition, Polish exports of coal to the USSR were reduced. In its trade relationship with the European Satellites, the USSR possesses preponderant economic power, as shovn in

Following

-

> II

NT

Soviet trade with Communist China consists largely of Chinese exports of agricultural products and nonferrous ores in exchange for military and industrial equipment and technical assistance.

II. European Satellites.

A. Introducti on.

The question of whether the European Satellitesiability to the USSR cannot be answered on the basis of economic considerations alone but must reflect also the political and military considerations which govern the foreign policy of the USSR. In an economic sense the Satellites do present problems to the USSR. The industrialisation of the Satellites has outstripped their domestic resource base, and the USSR presently supplies iron ore, ferrous and nonferrous metals, petroleum products, and large quantities of agricultural products, especially grains.

As the Soviet economy is somewhat strained by an Inadequate immediate supply of fuels and raw materials, it can be argued that support ol* the sagging Satellite economics increases the strain upon the domestic Soviet economy. On the other hand, the USSR imports products manufactured from many of the materials it has supplied, and in effect, avails itself of the productive capacity and skilled labor of the industrialized Satellites. In the past, when thewere often exploited flagrantly, the Soviet economy gainedby this trade pattern. In recent years, and especially inhe USSR has had toigher price for its imports, in terms of an increasing volume of exports. If the terms of trade do not now prove as favorable to the USSR, the cost of its economic relations with the Satellites may neverthelessoundand military investment.

The various countries identified as the Europeanlbania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Rumaniaere brought into the Soviet sphere of influence during and following World Was* II by means now familiar. 8 these countries have been under Communist Party control politically, and the economic resources of these countries have been utilized subject to Party control. In many instances, however, the USSR has utilized much more direct and blatant forms of economic control, such as "Joint ownership" of industrial property, reparations, and direct supervision by Soviet experts and supervisors. Although the more

-

direct and obvious forms of control have been disappearing from Soviet-Satellite economic relationships. Satellite economic policy tends to remain responsive to Soviet direction and to Soviet Interest. At the present time, Poland has achieved somewhat greater autonomy of economic policy than the other Satellites.

The Council of Mutual Economic Assistance (CEMA) provides the USSR with an important mechanism of coordination and conlrol over Satellite economic policy. CEMA was created, largelyoviet expedient to counter the Marshall Plan, which had been set up in Western Europe. ItouncilermanentSecretariat ln Moscow. Its stated purpose was to channel Soviet aid to the peoples democracies of Eastern Europe and tocooperation among "equal partners" of the Soviet Bloc. CEMA has acted in various fashions at various times, in response to changing Soviet policies. At times it has been dormant, at times an instrument of Soviet control, atorum for discussion and negotiation. In sum, CEMA has furthered the economicof the USSR and the European Satellites and is presently an instrument for the coordination of economic plans among the USSR and the European Satellites. Detailed joint planning is conducted via on interlocking multitude of blnational commissions andsuch as the Soviet-Czechoslovakian Ccamilsaion fcrCooperation, to name but one commission in one sphere of cooperation.

The Soviet policy goal with respect to the Satellites has been to maintain the several regimes in effective control of their economies, and,o encourage the rapid growth andof the economies. reater emphasis was placed upon selective industrialization which concentrated onmore particularly adapted to the resources of the individual countries, and upon specialization or production among the various Satellites. About the same time. Satellite trade with Communist China began to increase significantly. 5 the Satellitesin trade moves that were partloc-wide plan totrade with Lhe underdeveloped countries of the Free World.

Since World War II, each of the countries in Eastern ICuropc haa undergone drastic changes in its internal political andstructure. 'Ihc immediate postwar years were years Of political revolution, internal change, and reconstruction of war-ravaged It was not2 that the output of goods and services

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achieved prewar levels. 0 torimary emphasis was placed on the rapid expansion of heavy industry. Lateimultaneous with similar changes in tho USSR, greater emphasis was placed upon increasing agricultural output and output of consumer goods.

The drafts of the new Five Year Plans to cover the, issued inotably lower rateeconomic growth in comparison with the breakneck* speed- Subsequent events iu Poland and Hungary have caused further reduction in the rate of growth, as reflected in7 plans and in revisions to the Five Year Plans. Economic conditionsto be unsettled. Popular resentment smoulders over the slow increase ln living standards and grossly Inadequate housing Several countries, notably Poland and Hungary, have serious balance-of-paymento difficulties. All the Satellites ore concerned with raw material ahortages, the declining rate ofin labor productivity, and inadequate agricultural output. The situation is further unsettled by uncertainty as to economic policies of Poland in relation to the other Bloc countries, by fear of further Military action, and by the necessary costs of somehow maintaining the Hungarian econ-eay-

The relationship of the European Satellites to the rest of the Sino-Soviet Bloc in terms of the production of importantlo given in

B. Get-grnphic snd Regional Chara:terlstics.

The European Satellitestrategic bufferetween Western Europe and the USSR. Theof Poland, Rumania, and Bulgaria have important ports that are available to the USSR, and command of these coasts has increased Soviet control over the Baltic and Black Seas. The USSR has attained at last warm-water ports,the Satellite coastlines are on interior seas, but the USSR continues to be without warm-water frontage on major oceans.

The lowlands of Southeastern EuropePoland, Hungary, and Rumaniare suitable to large-scale, mecnanlxed agriculture. In fact, the lowlands of Poland and Rumania arc westward extensions of the plains and steppes of Russia and provide easy access to and

Following p. SO.

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fron the USSR. Tne central mountain belt of the Carpathians (the Beskids, the Tatras, and the Sudctens) and the Balkans form abarrier for the USSR against easy Invasion routea froa the West. At the same time, the mountainous terrain in the center and south makes transportation difficult both within individualand betweenR and the Satellites. For instance,and Hungary have only one direct rail line each to the USSR.

Numerous rivers and lakes provide adequate water supply in general as welleans of cheap transportation for goods between the Satellites. The Important systems of the European Satellites, however, do not connect directly with the USSR, being oriented either north-south or westward. Poland la an exception, having an east-west canal system which does connect with tbe USSR. Yugoslavia, which ls astride the Danube waterway, severs the direct waterbetween Rumania and Hungary.

Despite periodic droughts in the Rumanian and Hungarian plains, In the European Satellites generally, precipitation and growing seasons are favorable to temperate zone crops and livestock production. The soil is relatively rich, particularly in the plains areas. Grains, sugar, and tobacco are among the major crops. The state of technology and mechanization ia not high, despite efforts to improve productivity. Hore intensive fertilization has Improved output somewhat. Problems of motivation and of organization are aggravated by attempts to provide Industry with manpower, to provide Investment with resources, and to remake the political complexion of the various countries.

Bauxite, uranlua, lead, zinc, coal, oil, and chemical ores are of special importance to individual economies of the European Satellites. There aro timber resources of some significance. Tho region is relatively poor in ferrous metals and ln some other minerals basic to industrial economies. Furthermore, minerals and fuels are not evenly distributed among the various countries. The possibility of expanding production of low-cost hydroelectric power is relatively limited, with thr notable exceptionanube Basin project which will probably require Yugoslav participation.

Some areaswestern Czechoslovakia, Hungary, parts of Poland, and EastclV-dcvcloped standard-gauge rail net. The gauge, however, ls not. the same as that of the Soviet system, which necessitates tlaw-consuming interchange for through shipments. The rail systems in Rumania, Bulgaria, Albania, and easternaro not fully developed.

The countries of Eastern Europe have long been noted for mutual antagonisms among the various ethnic, religious, and othergroups. In modern times, there has been increasingof the inability of the individual economies to survive asentities, and plans of economic federation, especially for tho Balkan countries, have been widely considered. Under Sovietan increasing degree of trade and specialization in production is now being achieved for Soviet ends.

C. Structure and Growth of the Economies.

'lhe countries which are now identified as theizable total of economic activity, relative to the USSB, measured in terns of GNP. atellite GNP wasthree-fiftha tbat of the USSB. Inafter extensive war damage, followed by the payment of reparations snd by postwarof property by the USSH, Satellite GNP was about two-fifths that of the USSR. atellite GNP was equal toillion5 US prices, and it was still equal to about two-fifths of tbe Soviet GNP. Figurehows the present position of thein terms of GNP by country and over time.

6 the economies of Poland, Rest Germany, andperformed about SO percent of tbe economic activity of tlie European Satellites. Poland Is now the largest economy of the group, although before the war East Germany was the largest. East Germany suffered the greatest relative econoaic loss during the war years; Czechoslovakia, the least. In addition, reparations and Sovietof property further weakened the East German economy. , most of the Satellites, with tin: notable exception of East Germany, had reached the prewar standard of living and the economies had generally recovered. Tableafcowa tbe increases ln output ln the European Satellites, by economic sector,

0 the European Satellites made substantial progress toward industrialization until" all, except Albania andbad attained economic structures predominantly industrial. In East Germany, Hungary, and Czechoslovakia, industrial production la about one-half of the economic output, the remainder comprising oetivi-ties of agriculture, service Industries, and government.

Following

ollows on

Table 2

Increases in Output ln the European Satellites by Economic6

100

national product

and forestry

and communications

and services

East Germany, Poland, and Czechoslovakia rank highest among the Satellites in terms of tbe total value of industrial output, the production of machinery and equipment, and per capita living standards. Nevertheless, Improvement in living conditions In Poland vas so slow in relation to the regime's promises that latentcontributed greatly to the establishment of the nev Hational Communist (Goaulka) regime. Tne revolt ln Hungary wasroduct of econoaic crisis; civil dissatisfaction, both Political and economic] and aggravated balance-of-paymentswhich further unsettled the domestic economy. These and other examples Illustrate that breakneck industrialization is not the sure means ofoniaunist regime in power.

Economic and political conditions are still so unsettled In the Satellites that lt is difficult .to forecast the future with any certainty. All tho Satellites revised7 plane downward and many of0 targets as veil, ln reflection of internal economic difflcultlcs, of the consequences of events ln Poland and Hungary, and of other foreign events which Included tbe Suez crisis and the shifting relationships with the USSR. lowdown In the pace of Industrialization in company with programs tosome econoaic reforms and to increase output of agricultural goods and consumer goods will stabilize the situation remains to be seen. Many of the measures undertaken thus far appear to be halfway measures which are expedient and alleviate conditions for the moment

-t'H'T

EUROPEAN SATELLITES

SECRET

PERCENTAGE DISTRIBUTION OF GROSS NATIONAL PRODUCT, BY86

but do not go far enough to alter the future course of events. For example, the hurah, pro-Soviet political line nov being taken ln East Germany will not endear that regime to the population, vhlch can hardly be misled by so-called economic and social "reforms."

D. Population and Manpower.

he population of the European Satellitesillion, or some Id percent of the population of the USSH. In that year the population of the Satellites vasercent greater than in During thehe greatest increases were shown byercent) and Poland (almostercent). The population of East Germany droppedercent during the same period. olandopulation ofillion. East Germanyillion,2illion, Hungary almostillion, andillion.

During the86 the combined labor force grewercent to W3 million. Thli. growth, faster thangrowth, reflects both the unemployment prevalentnd, in subsequent years, the pressures for women and children to work ln order to achieve the desired family living standards. In future years, the labor force will growate consonant with thein population,ercent per year. Both Poland and Rumania have an unusually high proportion of the total population in the labor force.

As the European Satellites pushed Industrialisation rapidly, the nonagricultural labor force increased correspondingly, and the agricultural labor force decreased somewhat. 6 the nonagrlcultural labor force Increasedercent, and durJng the name period the agricultural labor force decreased byercent. The emphasis on agriculture vhlchajor feature of the "new course"3 halted the decline ln the agricultural labor force.

Subsequently, the nonagrlcultural labor force has continued to rise, butower rate. here were more nonagrlcul-turol worlier3 than agricultural, in contrast> whenercent were engaged ln agricultural employment. The trend towardemployment is evident ln each of the countries.

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E. Agricultural Production.

A serious consequence of the rapid Industrialization of the Satellite economies83 was to weaken theeconomy. The area, which had historically been an area of agricultural surplus,et importer of major agricultural commodities Including grains. In tbe fallnder the "newrogram was Initiated to giveore favorable allocation of manpower, capital goods, and other resources in an effort to stimulate output. The ultimate end was to increase the flow of agricultural goods reaching the consumer and to improve the quality of the consumer diet. This program was at least partially effective, although not successful in preventing the unrest of 6 the priority accorded agriculture was no longer ae high asut lt was still notably better than that accorded

At the present time, the cost coapelling restraints toln agricultural production are (l) landor the lack of them) to the agricultural worker. Were productivity not so low, the present levels of agricultural employment would be more than adequate. More favorable allocations of investment capital, are providing agriculture with improved technology, with machinery, and with fertilizers. Little can be done, however, to increase the sown area in the European Satellites.

The events of6 in Hungary and in Poland illustrated, among other things, that satisfactory solutions had not been found to the agricultural problems of the European Satellites. The new emphasis on improving agricultural output that wus soort of the "new course"ollowedood harvestlus increased importation of grains from the Free World, all resulted in some improvement in diets but did not fundamentally solve the problems of improving incentives to agricultural workers and peasant'-. Agricultural stagnation still threatened. The drought In the eastern Balkans6 further worsened conditions.

Along with the projects to mechanize agriculture, to increase crop yields, to Increase the supply of fertilizers, and to maintain adequate levels of agricultural employment, it was now obvious that the institutional factors had to be reconsidered. Poland and Hungary both decollectivized extensivelyll the Satellites liberalized the programs for compulsory delivery, increasing the prices paid for

H9 BUT

many ccsmoditics and reducing or eliminating quota requirements for many cotaaodities. Kachine tractor station (KTS) operations wereas efforts were made to convert the KTS'a to economicas opposed to their previous primary political responsibilities of control and domination. The USSR,ood harvest, provided substantial assistance, especially by large deliveries of grain to the Satellites. These deliveries, primarily to state reserves made It possible for the Satellites to reform their grain procurement programs while controlling price increases which could be generated by speculation or increased rural murket activities. In addition, however, reforms in the distribution system arc urgently required to more properly channel the flow of foodstuffs to the urban areas.

iet levelB per capita generally had reached prewar levels, except in East Germany and Itumnnia where diet levels were below prewar. In Poland, although the diet level was above prewur and better than in the other Satellites, maldistribution of the food supply led to local shortages, suchhortage of meat andIn Warsaw in Tn East Germany, rationing still applied to meat, fats, sugar, and winter potatoes as well as to other items In the event of local shortages. In Rumania, wheat and bread were rationed, and prices were high on most food items, especiallyand potatoes. In other countries, such as Czechoslovakia and Hungary, local shortages, long queues, and high food prices added to tbe irritation of the population.

F. Industrial Production.

The economic crisis which became evident throughout the Euro-peon Satellites6eduction In the industrial targets70 below targets formulated earlier6 for those years- Rapid expansion of Industry had created problems which were not readily soluble, 'llie supply of domestic iron ore la inadequate and has led to dependenceimported ore, mostly from the USSR. Shortages of coalomparative lack of hydropower resources have retarded theower necessary forof the past rate of growth. Preferential allocation ofto industrial expansion has retarded the growth ofand has restricted Improvement of living standards.

Under such circumstances of strain Id the economy, new policies are called for. More advanced technology cust be employed in an effort to reduce costs, improve quality, and reduce consumption of metals.

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Nev trade patterns oust be developed, both In terms of foreign trade with Free World countries vhlch have resources needed by theand in term* of increasedc specialization ln Efforts must be made to stimulate worker productivity, and in this, anything which increases worker motivation may be Important. Efforts have been made in each regard, although with only limited success to date. Technology continues toajor concern. Labor and management reforms were undertaken6 butwere largely mitigated by Soviet actions to reasoertfollowing the Hungarian uprisings. The now trade patterns,increased trade vith the underdeveloped nations of the Free World, are Increasing in importance to the Satellite economies.

After poetwar reconstruction, the economies of the various Satellites demonntrated most rapid growth in the following branches of the industrial sector: energy, chemicals, machinery andmetals, end building materials. The growth in the output of forest products, food processing, and light and textile products has been smeller.

any of the economic strains had begun to become evident. 0nnual industrial fixed capital investment had grownapid rate, and consumption expenditures had grown atlow rate. The trend toward the Importing ofcommodities was another danger sign. 3ew policies were undertaken (the "newhich modified the structure or capital investment anderies of nev measures designed to Increase agricultural production and the output ofgoods.

The "new course" corrected the strains partially, but not sufficiently. nd subsequently the Satellitesapid increase in exports to Communist Chinu. It has not been determined that tliese exports, vhlch largely consisted or machinery and equipment,train to the Sat-llltes, but il in possible,

The production of military end items ln tbe European Satelllten reaaina small compered vith that of the UM. Czechoslovakia, Poland,st Germany, In that order, are the chief countries producing military end iteas. The aircraft effort is largely concentrated in

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0

Czechoslovakia and In Poland. Small naval vessels arc produced In East Germany. Tanks are produced In Czechoslovakia and Poland. Open budget appropriations for defense, which do not represent the entire defense expenditures, were aboutercent of Satellite budgets ollowing the Soviet lead, the Satellites announced reductions in the armed forces. 7 theurther Independent reduction in the size of its armed forces. Despite6 reductions,5 there ha3uildup of the actual striking power of the Satellite forces and on Increase in their coordination, as evidenced by Joint maneuvers. The Hungarian uprisings have caused some reassessment by Soviet authorities of the use of Satellite forces; one consequence haa been greaterof Soviet forces throughout the Satellites, "under the Warouw Pact."

G. Foreign Trade.

The European Satellites aro highly dependent upon foreign tradeeans of supplementing their meager resource buee andeans of augmenting the markets for their manufacturea. This ls in contrast to the situation of the USSR, for which foreign tradeelatively marginal economic activity. 6 the foreign trade turnover of the European Satellites was valued05 billion, and that of the USSR was0 USbillion. omparison, ihe output of the Satellite cconomler. fin GNP terms) was only two-fifths that of the Soviet economy

Within the comparatively few years since the assumption of Communist control over the economic" of Eastern Europe, there hasirtual revolution in the direction of movement and the composition of the foreign trade of the area. Before the war, more than SOof the trade of these countries was with countries presentlyof the Sino-Soviet Bloc. At that time the USSR accounted for lessercent of their total trade, aud commerce with China was On the other band, there were extensive trade ties with prewar Germany.

Immediately after the war, the USSR exploited the Satellite economies and accumulated an Import balance of considerablewhen reparations arc considered as part of the picture.he USSR began to support the reconstruction of ihe Satellite economies by supplying raw materials and some loveatment goods In return for machinery, equipment, and such resources aa coal and petroleum. This trade expanded under the further stimulus of Western trade controlsuildup of the Satellite armamentswhich occurred. Subsequently, Satellite trade

i'D T

with Cceuwinist China expanded greatly. least two-thirds of the foreign trade of each Satellite was wilh other countrlea of the Slno-Soviet Dloc, and in every case trade with the USSB was greater than trade with the entire Free World.

The coaunodlty composition of European Satellite foreign trade has been transformed as well. Trade in machinery and equipment has increased, with exports of these items from Czechoslovakia, East Germany, and Poland assuming great economic significance. Soviet net imports from the Satellites totaled veilillion trade0 million) Currently, Satelliteof machinery and equipment to Communist China nearly equal the value of corresponding Soviet shipments toillion. Before the war, the Satellitesroup were net exporters ofproducts; now they are net importers of grain and perhaps of foodstuffs in general. Fuel resources have been consumed inquantities, leading to new international flows of coal and Finally, Imports of commodities of vital Importance toparticularly such basic materials as iron oreave increased greatly.

The transformations were equally great for individual Before the war tbe area that is now Bast Germany had nometallurgical base of its own; now it does, which Increases the significance of its imports of iron ore and fuels and of its exports of manufactures. Czechoslovakia vas noted before the war for Its light Industries; the postwar emphasis upon heavy industry has altered its production patterns and its trade patterns aa well. Prewar Bulgaria exported chiefly foodstuffs and raw materials and imported manufactured goods; now grain has almost disappeared from the export list; the share of tobacco, fruit, and vegetables haa increased; and Imports of machinery and equipment have overwhelmingly replaced consumer goods Imports. Likewise, in Rumania, Imports of investment goods nave largely superseded Imports of consumer goods, exports of industrial products have assumed stene importance, and the large prewar export of grains has become only occasional and of little significance. Poland and Hungary, formerly exporters of grain, now import grain, and heavy industrial products enter much more heavily than previously into their Imports and exports.

There recently has been some tendency for the Europeanto increase their foreign trade with countries outside of the Slno-Soviet Bloc, flu share of the total trade of Czechoslovakia and

Rumania going to Free World countries increased. In the same year the other Satellites increased the absolute value of trade with the Free World but did not notably increase the share of trade going to tbe Free World. 5 and more particularlyatellite participation in the Soviet-inspired drive to increase trade relations with underdeveloped countries of the Free World led to an increase in extra-Bloc trade. The Satellite commercial agreements within the Near East, Aniu, and latin America can lead to new trade patterns of great significance. For most of this trade an economic basis as wellolitical motivation exists.

Despite the potential Importance of future shifts in tbeof extra-Bloc trade. Western Europe continues to be the most important extra-Bloc trading area to the European Satellites, as It accounts for about three-fourths of their total extra-Bloc trade.

ITJ. Communist China and the Asiatic Satellites.

A. Introduction.

The economic policy of the Chinese Communists is directed toward the rapid development of industrial and military power. To this end, Soviet experience ia imitated where it is feasible, but nev practices are developed where required by conditions peculiarly Chinese, in theory, the present economic institutionsrogram moving toward socialism. Cooperatives andenterprises continue to function, under the general direction of the state, along with state-owned and Joint state-private 5tate control over agriculturalwas expanded notably. State control over the eccoomy la not yet as all-pervasive aa ln the USSR or the European Satellites.t has increased rapidly in the few years

9 the Chinese Communists seized political control over the Chinese mainland. They acquired on economy which hud been strained by years of warfare and wus actually comprised of three economics, not one. Id Manchuria the Japanese hud undertaken development of ancomplex and had Invested ir. heavy Industry, transportation, and electric power. This complex, now of such great Importance to China, had been oriented toward the Japanese economy and after tbe war had been largely dismantled by the occupying Soviet forces. The second economy was the coastal economy, based on light industry, foreign capital, and cheap labor. Shanghai was the most Important

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center. The third economy was that of the Chinese mainlandaagricultural economy. The fusion of these three economiesa single whole laajor task of economic policy.

In the initial phases of reconstruction, the strained Chinese Communist economy suffered from hyperinflation. By the end0 the economy was subjected to the additional strains of the Korean War and drastic reduction in trade with non-Communist countries. Nevertheless, through strict regimentation of economic life, Soviet assistance, and abundant use of poorly trained labor, the industrial production of China2 had recovered to prewar levels, which indeed vere not Impressively high.

The Chinese Communist economyredominantly agriculturalthat is, most of ita income is derived from agricultural production and from processing end trading in agricultural products. In effect, then, the resources required for the industrial buildup of China must be wrung from the agricultural economy in such forms as manpower and tax revenues. Hot only is great sacrifice required to industrialize the country but also there are other pressing requirements, such as experience In technological development and in management. Ccssninist China, then, looked abroad for assistance. It found the USSR willing to supply capital goods on credit and to supply technologicaland managerial manpower. Statements by the Chinese and by the Soviet officials tend to exaggerate the extent of this aid. industrial creditsillion were extended0 and^ by the USSR, the majority of the capital goods imported from the Soviet Bloc countries are barter shipments repaid mostly by Chinese shipments of agricultural products and raw materials. The recovery of the economy has been rapid, nevertheless, andhina has taken great strides toward accomplishment of the First Five Year Plan. Grave economic problems yet remain to be solved, especially In the field of agriculture. Figurehows thebetween China and the rest of the Sino-Soviet Bloc Ln terms of the production of selected products.

Like Communist China, lnpresent-day North Koreaa nucleus of industryar-shattered economy. North Vietnam is more agricultural in its basic economy, and aside from political coosiderations might be expected to orient increasingly toward the Chinese economy.

* Foi lowing

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B. Geographic and Regional Characteristics.

Historically, factors of geography, ethnic groupings, language, and tradition have prevented fusion of the area that la now Coaaunlat Chinaolitico-economic unity. Great distances, mountainous terrain, arid climate, and ethnic groups paBSlve or opposed to Chinese Ccoaiunlst control create great difficulties in the econoaicof tho western areas of China. In particular, Sinkiang is peculiarly isolated and susceptible to Soviet cultural and economic influences. Traditional differences of dialect and outlook separate North and 3outh China, natural barriers and environmental charac-teriotics tend to divide China proper into distinctive northeasternorthern, central, and southern geographic regions. To the south and vest the great mountain ridgesraditional barrier between China and India.

Problems of transportation have contributed to the historic regionalism of Communist China. Interregional water routes are scarce, and the railroadodern foe of purely localizeddevelopment, is still In the process of formation. The major rivers, whicheneral east-west alignment,ajor means of transportation, but the railroads carried aoreercent of the total ton-kilometers of freight moved The economy is servedelatively small number of coastal ports, vhlch are not fully utilized. The Chinese Communistsmall fleet which engages primarily ln coastal operations, and they are dependent upon foreign-registered vessels for longer international hauls. Seaborne commerce5 carried almostercent of Sino-Bovlet trade and more thanercent of Siao-Satellite trade as well as nearly all of the non-Bloc trade.

Chinese agriculture, like the population, ls clusteredomparatively umoll portion of the great land mans of llie country. Conditions of rainfall, topography, and soil sharply limit theof land for agricultural use. Although China possesses ex-tenslvr mineral resources, deposits are widely scattered and are not easily accessible.

The northeast region (Manchuria) la tbe most advancedarea in Communist China. More than half of China's existing Iron ore reserves are located in the vicinity of An-ahan. ercent of China's coal is extracted in the northeast region. Non-ferrous oree and oil shales add to the resource base. Tbe railroad

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net la relatively highly developed. Finally, rich agricultural lands and moderate population density result in grain surpluses which are exported to other regions of China. The existence of this industrial base on the border of the USSR leads to complex problems in Sino-Soviet relationships. Recently the USSR has proposed Joint development of the Amur Basin, involving ambitious plans for electric powerpossible diversion of the Amur River through Manchuria, and general resource exploitation in the North Manchuria-Amur River areas. Survey work is to be conducted during the Soviet Sixth Five Yearith possible development work to be undertaken subsequently.

North Korea, like Manchuria, was developed extensively by the Japanese. It is, nevertheless, primarily an agricultural economy, as is the economy of North Vietnam.

C. Structure and Growth of the Economy.

Economic data for Communist China are not sufficiently accurate to permit moreough measurement of the extent and trends of economic activity. Such measurement, aa reflected in intelligence estimates, is necessary, however,etter understanding of the transformation of the economy.

The economy, which is underdeveloped, is growing rapidly.6 the GNP stoodevelercent higher thann other words, it has been growingate ofear. The future growth rate is expected to be somewhat less rapidercent per year.

Capital Investments have been expanding more rapidly than consumption. omestic investment was tripleO level, in comparable prices; during the same time, total consumptiononlyercent. elationship is oneountry undergoing rapid industrialization, largely based on domestic resources, and anxious to prevent inflationary pressures from getting out of hand. Inapid increase in real purchasing power for the population would probably lead to excessive demands for agricultural produce, the production of which cannot keep pace with the increasing expansion of the economy.

ough guide for purposes of eomperison it is estimated that5 the GNP of Communist Chinaill loo.

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A comparison of the increases in output, by economic sector, and the growth of CHP in China5 is given in Table 3.

Table 3

Increases in Output in Communist China by Economic5

Economic 0 2 5

Agriculture, forestry and fishing

transportation and com-

(including native trans-

services und rent

national

D. Population and Manpower.

atter of sheer arithmetic, the population of Communist China is impressive. 6 the population probablyillion, and it is growing at the rate of aboutillion per year.actor contributing to economic strength, the populationmust be examined more carefully. In the first place,ortion of the total population is in the labor forceabout jOO million, orercent. Actually, this ratio is relatively high and partially reflects economic compuislcns for women and children toiving by labor. Of the labor force, more thanercent is employed in agriculture, and Ofigh proportionubsistence living, contributing little to the economy. Possibly

-

illion people are employed In nonagrlcultural occupations, but complete statistics are available only for those workers employed in state economic departmentsomeillion

The productivity of labor is generally low, both in industry and ln agriculture. In industry, agriculture, and construction, manual laborajor role.

he population wasercent urban,ercent rural As the pace of industrialization has Increased, wages and prices have both tended to favor the urban worker. In consequence, there has been an extensive movement of peasants into the cities, which has resulted in urban overcrowding und rural labor shortages. Thispattern willerious problem if agricultural production falls to keep pace with population increases. In addition, employment must be found for the transplanted peasants and an effort made to alleviate conditions of overcrowding in urban areas.

DeBpite relatively plentiful unskilled labor, seriousexist for skilled, semiskilled, and technical workers. The college enrollment targets7 were revised upwardtudents, and plans for secondary vocational training were increased. The main emphasis in education is upon vocational training.

North Korea and North Vietnam both have predominantly rural populations and are facedonsiderable shortage of technical managerial, skilled, and semiskilled labor. In both countries the agricultural base appears inadequate to support the expanding pgqu-lations.

Product .

intense efforts of the Chinese Communists to industrialize rapidly led of necessityecline in the relative Importance of agriculture and makeontinuation of an acute food problem for many years to come. The allocation of manpower, machinery, and construction efforts to the expansion of industry and transportationapid expansion of agricultural production. significant efforts are being made to expand productioneorganization of agricultural life, the development of better patterns of land utilizationas amalgamation of small fields Into largerfforts to control floods and tosystems, the greater use of chemical fertilizer, the use of

y- -

better seeds and pesticides, ond tne gradual extension of the use of better tools and machinery. ollectivization ofwas accelerated until by6 aboutercent of the agricultural households vere In agricultural producerand collectives. These cooperatives are of two types, one ineturn on land ownership is included ln income payment to the Individual peasants, although utilization la cooperative, and the second,ype, ln which the land ownership is vested ln the collective and sU payments are based on labor contributed. By the end7 lt Is planned thatercent of the collectives will be of the "higher" type. It remains to be seen what effect these moves will have on peasant incentives. The availability of fertilizers will be email ln relation to the amount of cultivated land for years to come, and mechanization ean proceed only slowly. Current plans indicate thatercent of the tilled land will be cultivated mechanically

Agricultural production has grown only gradually, and the per capita supply of foodnly slightly higher thanas under the average level- Floods^ and typhoons and bad crop conditions6 held back Improvement in agriculturalowever,ood crop year. At present, grain ls rationed in the urban areas. Dietary levels are generally low.

Crowing industrialization leads to increased emphasis on commercial crops, the production of which has been Increased both by an expansion of acreage and by Increased yields per acre. of cosmterclal agricultural coraxLlties (such as cotton, tea, and tobacco) will continue to expand rather rapidly, without necessarily impinging upon food crops. yphoon winds and rains did substantial harm in the cotton belt.

F. Industrial Production.

The efforts of Communist China to Industrialize rapidly have cost heavily but haveegree of success. During the recovery period9 industrial output Increased by more thanercent per year. At the present time, the rate of Increase is somewhat more thanercent per year. Typical of the Cosrmunist development pattern, which Is designed to maximize economic andpower, preference in the allocation of resources hau been given to heavy Industryto the manufacture of producer goods, to the

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extraction of mineral wealth, and to the development of eDergy re-sourcea. Almostercent of capital Inventment goes to industry, and an additionalercent goes to railroads.

The armaments Industry of Ccassunist China hasarallel growth. Nevertheless, lt is not yet capable of meeting all the potential requirements of the armed forces. The regime has concentrated upon the production of relatively small equipment such as small arms, machlnegunA, und mortars aa well as some light 0 it is believed that China will be capable offrom its own resources, tanks und possibly antiaircraftand military aircraft.

Heavy Industry developed rapidly2lectric power production Increased HO percent3 billion kilowatt-hours; coal Increasedercentillion metric tons; finiahed steel increasedpercentillion metric tons; crudeercentillion metric tons; andercentillion metric tons. Production of nonferrous metals increased sharply. arge increases in heavyproduction apparently strained tbe economy; smaller Increases axe planned for The socialization of Industry in Communist China26 ls shown in Table *.

Table

Socialization of Industry in Communist China26

Percent of Total Output

Ownership

state-private

Classification of industrial output (exclud-ing handicrafts) according to ownership Ofenterprises.

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G. Foreign Trade.

The changing political and economic conditions of Communist China have been accompanied by changing patterns of foreign trade. Foreign trade, now at its highest level ln history, is conductedev aet of partners, under different rules of the game. Before World War TJ, lessercent of the trade of mainland China and Manchuria was conducted with the USSR and the countries now its Satellites. boutercent of the trade ofChina was with these countries.

In return for imports, primarily of producer goods {aboutoanunlst China exports agricultural goods and raw materials. Imports include industrial equipment and installations, transport equipment and machinery, agricultural implements andmilitary equipment, metals, Industrial raw materials, fertilizers, and pharmaceuticals. In return, cereals, oilseeds, vegetable.oils, textile fibers, animal products, coal, minerals, and some metals are exported.

Even before tbe maintenance of effective trade controls against Communist China by the Free World countries inradeCommunist China and the Soviet Bloc countriesarked iocreuae, being nearlyercent of Chinese tradelthough the lifting of trade controls would likely lead to anin tbe relative Importance of trade between China and non-.'ceas-unist countries, trade with the other countries of the Sino-Soviet Bloc vould continue to be extensive. It is further likely, however, that the lifting of controls would make the terms of tradefavorable for China. With removal of controls, the volume of trade between China and Japan would Increase, especially as China would seek Japanese markets forods, but it is unlikely that China would ever again be the attractive* market for Japanese goods that it was when Manchuria was under effective Japanese control nnd port of the yen area.

The USSR haa assisted Ccemiunlat China substantially ln its industrialization program. It has provided capital equipment, some on credit; technical assistance; and tbe services of Soviet engineers uid planning personnel. ignificant degree, however, theSatellites have shouldered much of the effort. The USSR Is shipping equipment annually valued al0 million0 million; tba European Satellites are shipping annually0 million worth.

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Shipments of machinery and equipment Into China have increasedduring past years but may tend to level out soon. It is the intention of the government of Communist China to increase the relative Importance of domestic industry in supplying the goods for future industrialization. As the various machine-building plants now under construction begin production, this aim should be realized.

TV. Bast-West Comparison.

Neither the USSR nor the US stands alone ln the world, lt is thus of Importance to examine the relative strengths of the two blocsthe Sino-Soviet Bloc and the NATO powers. Nevertheless, it is true that neither bloc is fully integrated, and that the frictions and disunities which prevail in each bloc will beof basic importance to the power position-

The GNP of the USSR6 was Uo percent that of the US, in terms5 US dollars. owever, the ratio of Soviet to US GNP was aboutercent- In the future, Soviet GNP will continue to increaseroportion of that of the US, and the disparity in absolute terms will begin to narrow sometime ins, if present relative growth rates continue.

The economic disparity between the two major groups of powers aligned with the US and the USSKhe NATO powers and the Slno-Soviet Blocs practically the same as that between the USSR aad the US. The GNP of the Sino-Soviet Bloc is aboutercent that of the NATO countries, which Include the US. Prom another FOint of view the European Satellites, Communist China, and the Far Eastern Satellites bear approximately the same relationship to the USSR as do the other NATO countries to the US in terms of total production. In the event of successful realization of thesuccessful promotion Of disunity in the West andof the Sino-Soviet Bloche picture would be much different.6 the total GNP of the Sine-Soviet Sloe was nearlyercent of that of the US. 0 it could be nearlyercent.

At present the economies of the NATO powers arclear lead over the economies the Sino-Soviet Bloc in terms of over-all economic Strength. At the same- time, it should be

cmphaaiaed that the relationship ln different if only that part of GNP which la devoted to national security is considered. Much of the wealth of the West ia devoted to maintaining and increasing living standards, whereas living standards in the Sino-Soviet Bloc are such lowerreater share of total resources is allocated to national security and military readiness than in the West.

The comparison of GNP for the Sino-Soviet Bloc and the Western alliances also suffers by virtue of the aggregative nature of GNP and may be somewhat misleading if only war-supporting capabilities are considered. The Soviet machine tool industry ia comparable in size, although not always io quality of output, to the US machine tool industry. The additions to Steel capacity in the USSR parallel US additions even though Soviet steel output isercent that of the US. The relatively small quantities of petroleum products used by civilian transport in the USSR compared with the US makes it possible for the USSR toigher share of petroleumto the military and lo industry.

When NATO production of various specific commodities is compared with Sino-Soviet Bloc production, the advantage falls to the West by varying margins. Energy consumption in the NATO countries is more than three times that of the Sino-Soviet Bloc, and steelin NATO is about three times that of the Bloc. NATO wheatis, on the other hand,ercent smaller than that of the Sino-Soviet Bloc countries. The per capita availability of wheat, however, is much greater in the NATO countries.

The rates of economic growth achieved in the Soviet Bloc6nd in the Sino-Soviet Bloc96 have been higher than those ln Western Europe and in the US. It is probable that the Sino-Soviet Bloc countries will continue to achieve rapid rates of economic growth, althoughomewhat slackening rate, in the foreseeable future. Industrial production will grow faster than GNP and will probably more than double6 The economic growth of the Satellites will be significantly less than that of the USSR. The pace and pattern of economic expansion in tbeis bound to be profoundly affected by recent events In the Satellites and by au induced reexamination of Soviet goals and policies concerning the Satellites.

Even if there are no severe business recessions, the NATOre not expected to develop their economies as rapidly us the

Sino-Sovlct Bloc countrlco. The lag will be greatest with respect to Industrial production, if present trends continue. It should be noted that in the Western world growth tends to be not an endean6 to an end, which is that of satisfaction of theconsumer within the context of his society and the common Interests. It is thus not certain that forced economic growth ls generally desired ln the Western world, if It is at the expense of the prevailing consumer orientation. "The Free World hashowever, to stimulate labor productivity and production.

Original document.

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