ECONOMIC INTELLIGENCE

Created: 4/1/1956

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MfllSEKSMIllKEO

STUDIES

INTELLIGENCE

A collection ol articles on tho historical, operational, doctrinal, and theoretical aspects ol intollifjonco.

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AH suiemenis of (act. opinion or analysis expressed in Studies in Intelligence are those of

the authors They do not necessarily reflect official positions or views of the Central Intelligence Agency or any other US Government entity, past or present. Nothing in the contents should be construed as asserting or implying US Government endorsement of an article's factual statements and interpretations.

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ECONOMIC INTELLIGENCE

by Paul W. Howerton

Editors Note: This article is tuued on.

given by Mr. Rowerlm at the Industrial College of the Armed ForcesSe are grateful to the Commandant of the College for making the transcripts available to us.

npHE first order of business Is to Identify the problem of economic Intelligence. Itroblem very like that of the college economics professor in the classic story about the examination papers that, year after year, ask the same questions. The punch-line hardly needs repeating: -Inwe never change the questions, only the answers."

This is the problem of economic intelligence. We in the intelligence profession have the questions, which remainconstanthe answers we have to change.rocess of refinement, through successivewe hope to approach the true picture of the outlook in the economic sector of the various nations we are called on to study.

Perhaps the best way to treat the subject of economicIs to borrow the Journalistic breakdown Into the five W's and the H:what"ndhe first question Is whatwhat is economicIt Is the appraisal of the capabilityation toar. This is, to beimplified definition but It covers almost every Important aspect of the activity.

| The "Why" of Economic Intelligence

The second question is vhyvhy do we prepare economic Intelligence? We prepare It because we now recognise that

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many of the operations undertaken during World Warere not successful, or were unnecessarily delayed, owing'to the lack of sound economic intelligence. Consider, forpeech made by General George C. Marshalleek after the war started. He said:

The true philosophy of the maximum war effort of any nation is for it to devote as much manpower and as much supply power as the nation canuspect that Germany is now pursuing the veryave just outlined. For some years now she has been devoting overer cent of the productive effort of her country,men, plants, and materials, for the preparation of war and now actual war. So it follows that she is now geared up to her maximum effort.

It is important to note, however, that she was not able to reach this status overnight It has taken her some four or five years of intensive effort to develop the rawrmaterial capacity to support her maximum effort It Is nowacceptedact that it requires far more time to mobilize the industrial effortation to the war load than It does to convert civilian manpower into soldiers.

This man was Chief of Staff of the US Army. He was alleged to be the best Informed man in the country on the capability of the potential enemy, and he said that Germany was then ineared to its maximum effort. The Strategic Bombing survey conducted after the war indicated that9n the fields of explosives, tanks, and aircraft, German capabilities increased six times. The over-all increase of the German economy was two to three times. The Britishear tradition of intelligence research behind them, said at the end of each war-year,has now reached hernd during every successive year, that peak was surpassed.

This, then, illustrates the why of organized economicresearch. Since the war such great soldiers as Field Marshal Montgomery have listed the essentials for national

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security, based on their experience, Montgomery, inaid he believed these essentials were:

Strong national character.

Great development of scientific and industrial research. S. Powerful and well<usclp!lned industrial power.

A regular army.

Preparedness.

Three of these five essentials are economic intelligence targets-great development of scientific and Industrial research" (we have to know what intentions and capabilities may be for thepowerful and well-disciplined industrialnd preparedness" (both of these fall Into the category ofIntelligence).

Economic Intelligence Is, in sum, the appraisal ofation toar, also an estimate of its vulnerabilities and of Its Intentions. Economic Intelligence is indeed, probably the best long-range Indicator we have of intentions. On the vulnerability side, the Intelligencemust have,onsideration of exploitable vulnerabilitiesa vulnerability Is unimportant unless It can be exploited.

nd "Who"

When is economic intelligence produced? It Is produced for both current and future use The field of economics, broad as It Is, requires an Intensive study, sector by sector, in any given country to determine the aggregate of its economic potential. Furthermore, economic intelligence depreciatesonstant rate of, roughly,erear. At the end of six^ yearsiece of economic intelligence developed from data published this year will be worth onlyer cent of its present value.

The intelligence community Is charged, then, with keeping current on economic developments within the countries under study. These efforts are by no means confined to the study

world Itis eona^

* equ*ped10the capacities of ourand alleged friends. There is, for example, prob:

SLunSTl? the US ni toe

n^w ^ere is probably world Cl9llLnShlp^ two nations? We pr0duce to*>ngence on Canada and on

^CITZ^^'^ ur

Where is trus economic intelligence prepared? Part of itin CIA. Part,ty Council DireS rSnr? -S? ^ rPrCled byCIADCID

catcd ^ earch is ali>

wltn^hrnlrlOf State deals

CIA confines il

.heareas which may contribute to Soviet capabilities. The military comrxmenK

tte proper ^oerstanding of the capabilities and

Sited on I' ST enMnyriend-InterpreStS^PPenings of the day are contributed across-the-board, by all people who are competent to make such caT

rganJzaUonr0dUW economic lnteUige.2'

Techniques and Methods of Economic Intelligence Production

ncxt ^ftion is theill treat at greatestis economic intelligence

The chart (Economy of the USSR)purports to analyze onlv

Se aTSnS

6 USSR-pplication oftechniques and methods discussed, however,as broad as the subject matter of economic intelligence if

ORH^

.1

SEOarT

the methods that have been developed for answering theput to the intelligence community by policy-makerslso the sources ol information drawn upon.

The chart, furthermore, breaks down economic analysis Into five major subquestlons. The first is that of quantitative analysis, the second and third deal with qualitative analysis; the fourth deals with the organization of the economy, and the fifth subquestlon. with the growth of the economy.

A number of techniques are available to quantitative anal-ysia First of all. there are the statistics published by the country in question. In the case of the USSR, the statistics are, by and Urge and with the qualifications discussed below, good Intelligence agencies have carefully analyzed theseboth for their internal consistency and for their external influence on the operations of the countries within the Soviet Bloc. The consistency of components within an aggregate can easily be checked against announcements of future changes in the aggregate itself as well as changes of individual compo-nenta The consistency of data on all levels, includingof changes in the physical productive capacity and the commodity outputs within the Soviet Bloc, has been verified forsufficient number of cases to convince us that theare not attempting, in general, to distort their published statistics.

Having said this, let meew examples of precisely the oppositecases where the Russians have Indeed distorted, or where interpretation is necessary to understand properly the statistical analyses made by the Soviet Central StatisticalA Soviet rubber-producing plant turns out both rubber Urea and rubber heels. An announcement came out of this plant saying that the goal for lores had been missed byer cent but that the goal for heels had been exceeded byer centwhich, according to the Russians, meant that theproduction goal was meter centl

Another example comes from the humor magazine,artoon appeared In this Journal, some time back, which showed the managerachine tractor station standing on

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tbe porcb sendingeputy to the local commissar'with the admonition: "Dont forget to tell him that half the planer cent fulfilled."

All of which demonstrates that Soviet statistics needanalysis. They cannot be accepted completely on face value. But by such analysis, and by careful review of the aggregates that we are able from time to time to accumulate, we have come to the conclusion that the statistics are. by and large, valkL

Input Analysis

A second tool of quantitative analysis is the method ofThere are certain basic relations, that is to say, that are constantiven Industry. For example, the floor space In an aircraft plant Is proportional to the number of airplanes it can produce. This relationship has been checked outumber of aircraft companies in the US and in friendly countries and found to be valid. Other methods have been developed to relate seemingly unrelated commoditieswhich seem toutual control over one another. An example Is steel and rubber. The Joint Intelligence Bureau In London developed this factor: the amount of steel producediven country is directly proportional to the amount of rubber consumed This factor has been tested In the US, France, and Italy and found to be valid These are twoof how factors can be developed so that,it of Information collected by an observer In the USSR on some plant or Industry, one can by deduction determine theproduction capacity of that plant or industry.

Markings Analysis

In intelligence, as In laboratory research generally, we try to verify our results byumber of different analytic methods. One of the most useful of these methodsIs that of factory markings analysisnext Item on the list of tools of quantitative analysis. Factory markings are those trade marks, inspectors' marks, or other stampings, that appear

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on most any finished product. These markings arc uniqueiven plant or eveniven department or inspectorlant Factory markings analysis might be called the Bertillon system for the identification of products and producers.

Even though the field is in its infancy and was onlyduring Worldome examples drawn from wartime experience demonstrate its enormous possibilities. Themonthly production of tanks In Germany in theas estimated, using conventionalhe markings people, who had analyzed the markings on captured tanks, set the figure. When the Speer Ministry files were captured, the true figure was found to7 (markings analysis)true figure)0 (conventional2 theestimate of German truck production; the markingshe Speer Ministry3 average German monthly production of tires was estimated by conventional methods; by markings; the actual. It is, of course, just as bad to overestimate production as it is to underestimate It It has been said that the Invasion of Europe was actually unnecessarilyear because of bad intelligence and, especially, bad economic intelligence.

Modern machine methods handle the raw data of markings analysis in the Joint Markings Center maintained by CIA in collaboration with the Army, Navy, and Air Force Markings analysts Is going to be one of the potent techniques of economic intelligence In the future. Its method is that of statistical analysis; and, consequently, the larger the sample, the more accurate will be the conclusion. With five MIG's available to US intelligence, markings analysis has produced an estimated monthly production to within one plane of the figure arrived at through other intelligenceust to Illustrate the dimensions of the markings effort, by the way, there0 distinctive markingsIG, ofre significant for markings analysis.

Input-Output

A system of inputoutput analysisinter-sectoraluseful for quantitative estimation, because it shows the changes that can occur within an economy for any given stimulus- Take, for example, an inputoutput matrix for the Soviet petroleum industry (plotting products on the vertical

t tlfSlhethe agricultural sectorthe USSR useser cent of total petroleum output-energy production useser cent; manufacturing,er

Sf'Cr Cent;uses, nine per cent, and the military, eight per cent. This adds up to 87

P" cent Is that bit of petroleum the Russians have been using for barter with the West for scarce and necessary machine tools.

Input-output on electric power is another useful illustration of this technique of analysis. In their current plan, thehope toillion kilowatt hours of electricityear, which would requireillion tons of coaleach f coal are required

ne to have'mor*will therefore have to increase its power requirementbilhon kwh. OS million tons of coal will also benew coal requirement ofillion tons mustfrom new mining activity or must be reallocatedpresent consumptionone further example of input-output analysis,iven Soviet oblast from horse-drawnequipment to tractors. This sounds, at first, like abut, to Increase requirements formuch more than Just an increase in tractormeans, as well, an Increase In steel production, inproduction, and in electronic control; and It meansdemand for management and skilled labor requirement for horses, on the other hand, willotherarger food supply for the people. Itthis sort of complex economic tatcrrelationshlp thatanalysis can help to

In sum, the developmentatrix of Input-output will show the Implication of any change within any sector of the economy for any given product field that appears within the matrix. This type of analysis can be extended and refined as far as the matrix can be manipulated; at present weatrix which will taketems in the vertical columns andtems in the horizontal rows; this may be built up, at some time in the future, to asatrixhis would require electronic calculators. To handle even the1 matrixood deal of calculationood many man-hours.

GNP and Industrial Production

The gross national producthich Is an aggregate in money units of the total value of the goods andiven economyiven time period, is anindicator of the magnitudeountry's economy. There are. however, many problems associated with GNP estimation. Inor example, when the American Economic Association met in Washington, the Washington Postroup of economists whose job It is to study GNP: "What do you estimate the US gross national product to be" The Post had toormal distribution curve to get the best guess! Thus, GNP by itself is, at best, an over-all indicator; some of Its Implications will be discussed below under the heading of the growth of the economy and In comparisons between tbe West and the East

The index of industrial production Is an Importantindicator, for two reasons. The standard method of handling this index is, of course, toase year and call that. Then all other years are related to it to determine whether there has been growth, stability, orin the capabilityiven sector of the economy. There isecond way to use an index ofiven Industryapacityor any given time, this index will show at what capacity It is actuallyat one particular moment This Index, furthermore, can

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indicate seasonal operation within industries and thereby make intelligence operations and target analysis that much easier.

Qualitative Analysis: Sovmat Program

To turn now to the tools of qualitative analysis, there are two major points involved. First of all, there areroduct the country decides It needs. Thesewill be the specifications assigned the productanalysis will aim at finding out how closely thesehave been met. This is done, here in the intelligence community,rogram of analysis of foreign materials and equipment produced throughout the world.

In the case of the USSR, we have the SovmatSoviet MaterialsProgTam. We buy all manner of things and have them analyzed for quality by US industry. For example, the first item procured by the Sovmat Programan of tuna fish. An unglamorous Item, to be sure; but the analysis of the tin, madeeading US steel company, revealed that the Russians had perfected tm-claddlngegree as yet unknown in this country. On the basis of that analysis, theew research program of its own.

There are also, frequently, interesting peripheral benefits from the Sovmat Program. Oneale of yak wool which originated in Slnkiang, crossed the Himalayas, came down through Pakistan, was purchased in Karachi, and was shipped to the US. An analysis was to be madeajor US wool processor. When they opened the bale, they found complete documentationerson to travel through Sin-klang.

It is possible to generalize on the quality of Russian products In this way: they are utilitarian. There is no excess ofThe Russians obviously believerain car will get you fromoust as quickly without the chrome trim and the fancy seats that Americans seem to like. Russian tanks are extremely formidable, even though they have not buffed off the burrs from the welding seams. Russian guns

Ore just as well even though the projectiles are not machined to the tolerances common In US industry. Quality, that is to say, is strictly an applied matter as far as the Russians are concerned; they maintain quality only to the minimum possible extent consistent with use.

Organisation and Growth

The organization of the economy Is studiedumber of ways. Inputoutput tables have already been discussed above. Tbe population curve is one important measure of economic organization because, In developing It, one must also determine what skills are being maintained or Improved and what skills are in short supply.

Gross national product is worth mentioning again in this connection. The GNP4 for the Sino-Soviet Bloc1 dollars)illion. The GNP for the NATO community Is estimatedillion. The GNP for the USSR is estimatedillion and that for theillion. Note the Interesting relationship that exists here: within the Soviet Bloc, the USSR accounts for almost the same proportion of the total GNP as does the US In the NATO community. The USSR, that Is to say, is the direct US counterpart within Its own economic community. The growth rate of the Soviet GNP is now estimated to be of the ordererear and that of toeer cent The US GNP Is at2 times that of the USSR With present estimated growth rates, therefore, and with the USase almost three times that of the USSR, the GNP curves will not intersect in the foreseeable future.

The growth of the economy In any country Is analyzed by using much these same techniquesInput-output tables, gross national product, index of industrial production, population curves, and, more recently, toe index of the standard of living. This last was addedime when,made his famous speech on consumerwhich was, of course, lust so many words. There is no evidence that

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consumer goods program was ever Intended to be implemented much less that it was ever actually implemented, from analysis' of all available materials.

Sources of Information

This completes the survey of the Ave questions thecommunity is called on to answer and of the primary methods for dctenrdnlng these answers. Where, then, docs the community get the necessary information?

First of all. there are overt sources. One never knows when an industrial publication of. say. the Soviet Ministry ofmayreat deal of information of interest to people studying ferroalloys. Design information is commonly given in suchpecifications are also frequently pven as well as material which contributes to ourof markings. Open Journals often publish information on future planned productioniven economic sector. Information from overtike radio broadcasts,journals, ands. furthermore, often morethan information collected by clandestine means. m able to make only one point in thisant It lo bebsoluUJy no relationship between the lnfprmat,on and the classification of the document in which the information appears.

Defectors are another source of Information. The intelll-

ee" miS,ed' however- needs always to be chary of this source, it is difficult indeed to establish

And the method of screening must be greatly **

Returned POWs are of littleut mostly because the nterrogalion system is imperfect. There have beenreports in which an individual, whose POW background tadicates he hasemberoad gangungarian railroad, was askedead-off question: "What direction do you think the economy of Hungary will take In

Stem*

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the next fivehis sort of absurdity has to beFortunately, procedures with both defectors and POWs are being constantly refined.

Commercial contacts within the US are used to analyzecollected from the Soviet Bloc and other countries.contacts are used, also, to provide positive Intelligence which has been collected by members of commercialas they travel about the world. Italuable source of Informationnot, however, without difficulties because some people who go outside the US and have been contacted by CIA fancy themselves cloak-and-dagger operators and act

Attache reports are another Important source of information. All military, naval, and air attaches who go out to Soviet Bloc

chemicalI took thatound that my knowledge was strictly limited to tbe configuration of US plants and,reat deal about theand equipment of European chemical plants.

US government fliesoutside the Intelligence communityare another fertile source of information,ource that has not yet been exploited as thoroughly and as completely as It should be. Why Is this? Because of sheer, simplethe objection of bureaucrats to making their filesA major effort Just now is directed to the study of gold manipulation by the USSR There Isreat deal of Information on this subject located In various flies around Washington. The Economic Intelligence Committee, which has on its membership list practically every major agencyepartment in the government, sentall for Information but, despite hints that it exists somewhere, very little has been forthcoming. Tbis problem, clearly, has to be solved. As a

s2

last resort, it may be necessary toational SecurityIntelligence Directive. It seems strange to me that it should be necessary to have to go to this extreme for authority to get nothing more than Intragovernmental collaboration andon matters ol national security.

Covert sources of informationdown near the bottom of the list in the chartare the last resort when all other sources have been exploited. They are the last resort because they are are so very expensive In time and money.

The Consumer of Economic Intelligence

The final question Is: who uses economic Intelligence? The Office of National Estimates in CIA has charge of theof National Intelligence Estimates and. In so doing, tries to get the best thinking of the communityiven subject and to produce an agreed estimateituation. Theseare distilled downsometimes the expression is "watered" downso that the President and the NSC can have anof the estimated results of certain courses of action bearingolicy question. It Is the purpose of intelligence tofacts to whoever needs them. The need to know Is, of course, the overriding factor In the dissemination of Intelligence to consumers.

Tbis has been,ummary of economic intelligence In terms of its definitionappraisal of the capability of atoar. Why Is It prepared? In order tothe capabilities, the vulnerabilities, particularly those that are exploitable, and the intentions of tbe potential friend or

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enemy. When is it prepared? Onong-run and short-run basis. Where Is it prepared? By the entire community, by all the assets that can be brought to bear on the problem. Bow Is It prepared? By all manner of different techniques, all part of tbe mechanism of successive approximation. Who uses It? The national policy-maker.

Original document.

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