Created: 3/19/1956

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CENTRAL INTELLIGENCE AGENCY Office of Research and Reports




The major elements of Soviet economic policy5 were aand multiplication of the ambitious agricultural schemes adopted, stress on the predominance of heavy industry and on advanced technology as the basis of further growth of thelowdown in the advance of living standards, and the emergence of an aggressive foreign trade program aimed at underdeveloped nations. Publication of the Sixth Five Yearonfirmed these policies as the means chosen to maximize Soviet economic growth during theears.

The implementation of these policies In agriculture meant the virtual completion of the program to extend wheat cultivation intoillionf newubstantialillion hectares) on the program vhich would eventually introduceillion iiec tares of corn in the traditional agricultural ureas, theof the top agricultural administrators in government, the decentralization of agricultural planning,onsiderable strengthening of Party and machine tractor station control over It alsoontinuation of the4 level of investment allocations to agriculture and continuing attempts to increase agricultural production Incentives.

* The estimutes and conclusions contained in this memorandum represent the best judgment of ORR as* One hectare is equivalent? acres.

In general, it appeared that agriculture was the recipient of measures designed to Improve the basic organization of production (the crop and land-use pattern, production planning, formaladministration, informal Party control, and redefinition Of the role of the machine tractorn preparation for the introduction of further measures during the Sixth Five Year Plan which night lead more directly to the higher production levels anticipated

In5 the Soviet press and the official utterances of Party and governiKnl. indicated clearly tliat the consumer goods programith its emphasis on immediate gains in manufactured consumer goods, was to give waynew course" of action. Output of producer goods was nowew press propaganda campaign, in5 plan fulfillment report, in Khrushchev's preface about producer goods to his January livestock report, and in5 state budget, whicheduction of aboutercent in allocations to light industry.

The "new course" of action which was to be launched in an effort to solve the problems of industry was not set forthetailed statement of economic policy until the5 sessions of the Party Central Committee. umber of developments before July, however, had indicated that the new approach would stress improvements in technology,administration, planning, and control rather than directly attempting to raise labor productivity by way of the material incentives route which typified* consumer goods approach.

The Soviet consumer fared poorly under the operation of the "new course" of action5 compared with tho rate of gain in hispositionnd plans for the consumer over the period of the Sixth live Year Plan indicate that he will continue to feel the effects of this policy.

The post-Stalin leadership, which5 hadewtoward broudening trade contacts with underdeveloped countries, considerably intensified its efforts esult, the USSR may soonet exporter of capital goodsa possibility which indicates that Soviet economic policy hasonsiderable distance since the Stalin era.

1. Introduction.

Soviet economic policy5he terminal year of the Fifth Five Year Plan periodontinued to reflect the primary concern of Party and government with the two major problems which have obsessed the Soviet leadership since the death of Stalin. These problems are lagging agricultural production and underfulfillmeiil of laborgoals- With increasing frequency writers ir. Soviet journals

point out the interdependence of these two problems. ajor aspect of the labor productivity problem is the maintenance of adequate material incentives, which in turn dependsreat extent on tlw availability of agricultural raw materials. But the effort to expand agricultural production tends to reduce the flow of labor from rural to urban areas, thereby further increasing the reliance of industry on increased output per worker rather thanarger number of workerseans of expanding the volume of production.

Soviet statistics on the rate of growth of labor productivity have understandably given rise to Soviet concern over the difficulty ofontinued high rate of economic growth. In contrast to an annual Increase in industrial labor productivity ofercent0 andercenthe annual rate of increase2 has been onlyercent, resultingumulative increaseercent for the Five Year Plan period instead of the planned goal ofercent.

Continuing Soviet concern about agriculture is similarly justified by the poor performance of this sector. In spite of the effort expendedn opening up virgin lands to cultivation, the addition to agricultural production In that year was barely more than enough todrought losses in other areas. owing goals generally were overfulfilled,ore rational agricultural land-use pattern was reported to be emergingesult of changes in planning techniques. But in spite of these signs of progress, production gains wereufficient to dispel completely the anxieties of the leadership. The increase in corn production, reported toimes4 levelillion metricid not keep pace with the Increase in land area devoted to corn cultivation, which wasimes4he problem of obtaining higher yields would soon have to be faced. Furthermore, the success in increasing corn production was offset to some extentecline In the production of coarse grains other than corn from an estimatedillion toillion tons. Againroduction of bread grains was affected by drought in the "newut with an unusually high yield In the Ukraine, production of bread grains is estimated to have increased fromillion tons4 toillion tons The increases in livestock reported i

* Tonnages throughout this memorandum are given in metric tons. ** 5 corn production includes immature corn harvested as silage but convertedry grain equivalent.

in5 plan fulfillment reportercent,ercent; andercent) were impressive only when related to the failures of the past.

Against this background the aim of Soviet economic policy, as expressed in words and deedsppeared to be the creationore favorable environment for the operation of the 3ixth Five Year Plan. The consumer goods programhich succeeded in raising the output of manufactured consumer goods but failed to meet the goals for those consumer goods which depended on agricultural raw materials, gave way5onger range program designed to overcome thebarrier to increased industrial production and to work out the technological and organizational deficiencies in industry.

2. Agriculture.

The guidelines of Soviet agricultural policy5 were set forth in detail in Khrushchev's reportn increasing output of livestock products. Khrushchev's report reaffirmed the second-priority position of agriculture in the Soviet scheme of economic development and then proceeded to0 production goals which would be difficult of achievement even if agriculture were to be elevatedirst-priority position. Realization of the ambitious livestock goals was predicated on the expectationonsiderable increase in grain and fodder productionhich in turn was to be realized through tho expansion of the cultivated landreat increase in the role of corn relative to other crops, the raising of crop yields per hectare, and the reduction of harvesting losses.

Attempts to implement this policy began inhen Cosplan and the Ministries of Agriculture and Agricultural Procurement were criticized for unrealistic planning which took inadequate account of local and regional variations in production possibilities. To improve the planning process, collective forms were to be allowed henceforth to construct their own sowing and livestock plans with the aid of the machine tractor stations, and direction from the center was to be limited to the assignment of quotas for the delivery of products to the state. Although this ntlll meant state determination of basicpatterns, greater leeway supposedly was to result from the new planning technique. But even this aspect of planning freedom was circumscribed by the provision for mandatory review of collective form production plansong line of successively higher authorities from the rayon officials of Party and government up to the Ministry of

Agriculture and Qouplan. The increased transmission or local experience from the collective farm to the center, however, may avoid some of the fiascos which have typified Soviet agricultural planning In the past.*

In the hope of giving the collectivized agricultural sector still another boost, the action to decentralize planning was followed by efforts to strengthen collective farm leadership and to bolster Party control over agricultural activity. Khrushchev announced on5 that0 collective farm chairmen were to be replaced by workers from the Party, the local governments, and from administrative, engineering, and technical fields. This action was expected to reduce the friction between the collective farm chairman and the Partyattached to each collective farm, thereby increasing theof Party control and Party participation in agricultural planning. It apparently wan considered essential to increase the number of reliable personnel among those who would exercise these broadened powers at the lower operational level.

To facilitate Implementation of the production goals demanded by agricultural policy, the top governmental posts in agriculture were reassigned during the year. Kozlov, criticized for his handling of the state farm system, was ousted in March from the post of Minister of State Paras and replaced by Benediktov, who had been Minister of Agriculture. Lobanov, who had been Deputy Minister of Agriculture and experienced In handling collective farm affairs, was elevated to the newly created post of Deputy Chairman of the Council of Ministers in chargen action consistent with the trend3 of expanding the number of deputy chairmen who, without specific ministerial portfolios, are free to concentrate their attention on problems embracing entire sectors of the economy. Matokevich,eputy Minister of Agriculture, was appointed Minister of Agriculture in October, completing5 shnkeup In agricultural leadership.

* An article in Pravda5 indicated that the new system of agricultural planning had already resulted in major changes in the use of land onationwideepublic scale. For example, planting of winter wheat on collective farms in the Ukraineercent of4 area, whereas the area planted to spring wheat was onlyercent of4 area. Similar changes, although not so dramatic, were reported to have occurred in other republics.

The "new lands" policy and the corn expansion progrura were pursued unabatcdlyith success inut. unfavorable weather caused low yields - 6 budget message indicates that the plan to bring under cultivationillion hectares of new land"5 was fulfilled, increasing the cultivated areaillion hectares3illion hectares The plan for sowingillion hectares of corn5 was overfulfilled byillion hectares, raising the total area sown to corn toimes4 level and bringing the corn program well on its way toward the final goal ofillion hectares.

Measures taken by the state to implement these programs included (a) the allocation ofillion rubles for the development of new landsotal1 billion rubles allocated to agriculture by the state in5 budget; (b) the separation of tractor and agricultural machine building from automotive machine building in Julyove to overcome what Bulganin expressed as "exceptional sluggishness" in advancing the mechanization of.agriculture; and (c) the issuanceecree in May which provided substantial material incentives for engaging in corn production. The May decree promised paymentf the harvested corn crop to collective farmers and machinestation workers in addition to their regular work day compensation, regardless of the extent of fulfillment of the state. This departure from past practices governing the distribution of incentive payments was indicative of the determination of the state to carry out its agricultural policy.

Continuation of the agricultural program launched'i was evident in the state allocation1 billion rubles to agriculture in5 budget. This amount, which was exclusive of allocations for state procurement of agricultural products,light increase over4 state allocation5 billion rubles to agriculture, because the latter included on5 billion rubles for procurement activities. In contrast to5 increasehe6 budget allocation to agriculture6 billion rubleseductionillion rubles from the.5 level. It is not clearly evident, however, that thisignificant change in agricultural policy, as the bulk of the cut is in the relatively minor category Other. The two major categoriesAllocation to Machine Tractor Stations and Allocation to State Farms together accounting7 billion rubles ofbillion-ruble total allocation, remained at virtually the same level as Furthermore, total investment planned for agriculture

yate from the budget and by collective and state farms from their own lunds was announcederev inudget message to3 billion rublesa continuation of the high level ofent prevailing since the start of the new agricultural programhen planned investment in agriculture was increased toillion rubles from3 level ofillion.

The determination of the state to eliminate budget subsidies to state farms (whose costs were still exceeding revenues in spite of4 increase in prices of agricultural products) was again evidenced in5 when action was taken to raise labor productivity. The Ministry of State Farms announced plans to increase the average wage of state farm workers byercent while revising upward byoercent the existing outmoded work norms. Matskevich, the new Minister of Agriculture, has indicated that work norms of collective farm members, which had been increased4esult of the new system of determining obligatory work days, also will be revised during the winter, although no details were orrered as to the extent of the planned revision.

3- Industry.

The traditional Soviet economic policy of preferential treatment to heavy industry actually lessened onlymall degree during the brief interlude of the consumer goods program of tyi'S-yk but obscuredreater degree by official propagandawas strongly reaffirmed in the first months First came the press campaign inhich culminated in the5 editorial by Shepilov, editor of Pravda, censuring the "heretical" group of Soviet economists who had mistaken the heightened emphasis on consumer-oriented industry3s an officially approved trend toward the reversal of the "basic economic law of socialism." Then4 plar. fulfillment report, published Onaid little stress on the consumer goods aspect of Soviet industry, and Khrushchev prefaced his5 livestock reportengthy comment, on the necessity for anemphasis on output of producer goods.

5 budget, presented by Zverevut meaning into these words. Budget and nonbudget allocations to heavy industry, although rendered unclear by what appeared toransfer Of some expenditures from the budget Subcategory Other Lo Iho subcategory Heavy Irxlustry (both within the category Financing the Nationalere estimated to be at loast as large os in On the other hand, budget

and nonbudget allocations to light industry were planned to be aboutercent below the level planned. Zverev's observation that State Bank credit was available Tor the further expansion of light industry proved to be an inadequate substitute for budget allocations. Production achievements5 bear testimony to the emptiness of Everev's gesture. Production in light Industry increasedercent over the previous year, according to Soviet statistics, in contrast to an average annual increase of aboutercent during theears of the Fifth Five Year Plan. Heavy Industrial production, on the other hand, increased by more than l'l percent over4 levela rate slightly higher than the average annual increase7 percent over theear period.

Following the presentation of theequence or events gave further indication of the orientation of Soviet economic policy toward industrythe resignation of Malenkovebruary and the installation of Bulganln as Chairman of the Council of Ministers; the elevation of Hikoyan, Pervukhln, and Saburuv In late February to the rank of First Deputy Chairmen of the Council of Ministers and the expansion of the supraminlsterial group by the addition of four new deputy chairmen; the separation of long-term economic planning from short-term annual planning by the creation In May of the State Economic Coaimisslon for Short-Term Planning; and the creation of two new special problem committees, one for the introduction of new technology and one for the study of labor and wage problems. All of these fictions appeared to be, at least In part, attempts toore effective transmission of economic policy from the Party to the producing ministries, thereby clearing the way for the implementation of the corrective measures which were to be outlined at the July Plenum of the Party Central Committee.

This sequence of events and further actions which followed the July meetings of the Party Central Committee lent credence to the program of corrective measures outlined by Bulganinuly, which, taken by itself, sounded conspicuously like the familiar Party exhortations long extant in Soviet political and economic literature. Bulganln'a collharp rise in the pace of technical improvement in all branches of industry was given substance in the form of the newly created Gostekhnika, (State Committee on Technology). The resolution to increase production and to lower costs by increasing the degree of specialization ofin industry was assignedajor responsibility to the newly created OOMkonomkomissiya (State Economichich was to devote more time to attaining the additional short-term planningneeded to coordinate the greater interchange of products arising from greater specialization.

- fl -

The exhori nt.on to raise lubor productivityew high level, repeated countless tines since the days of Lenin and again by Bulganin in July, was now backed up by Kaganovich's Comalttee on Labor and Wages, which showed promise of bringinguch needed general revision of work norma and wage rates. The first work of the committee appeared in the new work norma and wage system announced in October, 'to go inton the construction industry. This industry, afflicted with one of the poorest labor productivity records in the economy, was put on notice of the impending reform as early" by Khrushchev at the All-Union Building Conference.

Bulganin also indicated at the July Plenum the firm intention of the state to continue to decentralize the economic administrative apparatus and to delegate greater economic responsibility to regional and local authorities. Action in support of this policy5 wus unimpressive compared with that, when important ministries in metallurgy and fuels were changed from All-Union to union-republic status, many small enterprises in other fields were placed under republiceconomic reporting requirements were relaxed, the list of centrally allocated items was reduced, and the enterprise plan was shortened. The creation5ew construction ministry for the coal industry, the splitting of the consumer goods ministryinistry for textilesinistry for light industry, the separation of automotive eachlnc building from tractor and agricultural machine building, and the conversion of the Ministry of Paper and Wood Processing Industry from All-Union to union-republic status indicated that the statewas, in fact, still endeavoring to increase production by improving the-economic administrative structure.

The various Institutional changes3*ore favorable climate for the eventual attainment of tho Party's economic goals, but they obviously did notramatic solution of the Party's economic problems. 5 plan fulfillment report, published onnnounced the overfulfillment of the plan for gross industrial outputercent, but the plan goals were modest compared with those of previous years. The degree of fulfillment, as in past years, was considerably uneven,umber of Importantand major commodities falling short of planned production goals, and slow progress was reported in the introduction of new technology and automation. ew move to hasten the automation program was taken on6 when the Ministry of Machine and Instrument Building was split into the Ministry of Machine Building and the Ministry of Apparatus Building and Means of Automation.

The state, budget both56 gave further evidence of the relative positions occupied by heavy and light industry in Sovietpolicy. In both years'it wus planned that heavy industry would receiveercent, and light industry lb percent, of total allocations to industry. In contrastb, when heavy industry's share wo* reduced toercent in deference to the consumer goods program. Similarly, heavy industry's share of the total capital investment in Industry, which had been reduced toercent during4 consumer goods program, was raised5 percent in6 plan for capital investment.

The favorable environment provided to heavy industry by Soviet economic policy was especially noticeable in5 plan fulflllmcot

failed to meet planned goals, the rates of increase in the production of many major producer goods (including pig iron, steel, coal,electric power, and mineral fertilizers) exceeded4 rates of growth. By contrast, the rates of increase In the production of nearly all of the important foodstuffs and manufactured consumer goods were cither less than, or at best only equal to,4 rates of increase.

4. The Soviet Consumer.

Soviet economic policy5 and thus far6 has held little appeal for the consumer. Although the consumer might not have believed that the consumer goods program of34 could continue forever unabated, the abruptness of the change which became apparent earlys probably dismaying. The expected annual reduction in consumer goods prices did not occur. The -boon to disposable income34 resulting from the relatively small size of the annual compulsory state loan woo no longer to be enjoyed. chod to subscribetate loan ofillion rublesdouble that" and the largest since World War II. furthermore, the sum total of prizes to be awarded over the life of5 loan waa to be roughly equivalent toercent of the face value of_the total loan, in contrast toercent on34 loans andercent on loans

Events of theonths6 have offered little hope of betterment of the Soviet consumer's lot fromeduction in prices of consumer goodseduction in the compulsory state loan. 6 state loan Is to be at about the same high levelnd again there


is no indicationeneral reduction in prices of consumer goods. Inumber of instances of unpublicized upgrading and raising of prices of food products In state stores have teen observed.

The reported overfulflllmcnt of5 plan for retail tradein state and cooperative stores was of limited benefit to thein the light of the modest goals planned for this sector$ as compared with those of the previous year. The actual increase in the volume of state and cooperative tradehe smallest increase in the postwar periodwasercent overU level into an increase ofercent4 over3 level. The high rate of increase in retail trade turnoverchieved in part through the short-lived expedient of reducing inventories and stockpiles, could not be maintained by current production alonespecially since Soviet economic policy permitted onlyercent production increase in light industry as comparedpercent increase

In spite of the unfavorable developments5 and6 from the point of view of the consumer, some solace was offered to consumers by the Sixth Five Year Plan promiseradual improvement in real incomes. But even here the continuing orientation of Soviet economic policy toward heavy industry was apparent. Real income of "workers and employees" was to increaseercent and collectivencome in cash and kind was to increaseercent during the course of the Sixth Five Year Plan. These planned rates of increase were lower than the rates achieved during the Fifth Five Year Flan, which, according to Soviet statistics, amounted toercent for workers and employees andercent for collective farmers.

The rural population of tbe-.USSR, .whichore rapid rise in income than the urban population during the Fifth Five Year Plan period, was promised the same treatment during the Sixth Five Year Plan period, even though at lower rates. This development has resulted largely from the policy of increasing agriculturaland voluntary delivery prices on several occasions3 in an effort to increase both total agricultural production and the portion of production channeled into urban markets. ubstantial increase in grain procurement prices forarvest and an increase in potato and vegetable procurement and voluntary delivery prices on6ontinuation of this policy.

The Sixth Five Year Plan revealed that the lower rate of increase in consumer goods productionoo low to fulfill the original consumer goods goals Of the "new course"might be expected to continue:

The majority of0 production goals for nonfood consumer goods announced in tho Sixth Five Year -Plan indicate planned growth rates lower than those achieved during the Fifth Five Year Plan- Furthermore, the realization of these less ambitious goals is to dependessor extent on new capital investment andreater extent on less,factors such as improved utilization of existing plant facilities and more efficient management of production operations.

5- Foreign Trade.

Foreign trade between the USSR and the Free World,ictim of Marxist-Leninist-Stalinist economic doctrine, has been3 by the economic policies of the new leadership. Apparently dooited before the death of Stalinermanent pattern of raw material exporting und capital goods importing, Soviet non-Bloc foreign trade is now moving toward the reverse pattern of capital goods exporting and raw material importing.

esult of this new trend, the USSR*etof food products from the Free "World for the Tirst time in the postwar period. The trend was accelerated5eries of attempts to promote economic and political relationships with thecountries of Asia, Africa, and latin America. These attempts, which took several forms, included (a) increased participation intrade fairs;umber of agreements with underdeveloped countries calling for Soviet acceptance of surpluses of food and raw material in exchange for- capital goods, technical assistance, andindustrial installations; and (c) the offering of long-term, low-interest-bearing credits amounting to aboutillion, of which0 million has been accepted. In order to coordinate these various measures and to develop further foreign trade contacts, it is probable that the USSR, in the latter parteparated the Main Administration of Economic Relations from the Ministry of Foreign Trade and attached it directly to the Council of Ministers.

If the USSR continues its present aggressive foreign trade policy, it mayet exporter of capital goods osition which could materially enhance its prestige in the struggle to influence thealignment1 of economically underdeveloped non-Bloc countries.

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