SOVIET ECONOMIC POLICY IN 1954 (RR IM-410)

Created: 6/1/1955

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INTELLIGENCE MEMORANDUM

SOVIET ECONOMIC POLICY4

CIA/RR5

CENTRAL INTELLIGENCE AGENCY Office of Research and Reports

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FOREWORD

Although this memorandum oq Soviet economic policy is focusedV the continuous nature of economic policy formulation and the time -consuming process Involved In the implementationomplete reoncole program render highly artificial any uniform time period suchalendar year. The present review attempts to reflect the real continuity of the process by relating the events of the year to policies introducednd by including, insofar as possible, thc major economic policy developments In the early months So attempt has been made, however, to treat systematically the policy changes in the current year.

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SOVIET ECONOMIC POLICY" Sunaaxy

The achievements of the Soviet economy by the endithears remaining ln tbe Fifth Five Year, vere not sufficiently Impressive to guarantee the successful fulfillment of5 Plan goals'. The Plan, belatedly adopted byh Party Congress Inpparently had suffered from the lack of an effective, detailed program at the outset ofear period. the various economic adjustments attendant on the revised economic policy introduced by* the new leadership3 hadepressing effect on the performance of the economy- onsequence, there was no margin to allow for any further interruptions in the functioning of the economy. Thus at tbe beginning^ thefor achievement of the Fifth Five Year Plan goals hinged largely on the success of the neu economicolicy vhlch, as yet, had not been in operation long enough to prove its effectiveness in meeting the two basic problems which had become increasingly acute during tbe course of the Fifth Five Year Plan; diminishing gains ln labor productivity and slow growth in agricultural production.

he Soviet leadership tried to strengthen those aspects of3 policy which bore most directly on these two basic Their solution was complicated by the fact that both problems were products of the most fundamental of all Soviet economicthe forced development of thc industrial sector of the The principal aim of Soviet policyU was to boost labor productivity and agricultural productioninimum ofto long-term Industrial development. The task of increasing the productivity of labor was essentially one of increasing theof consumer goods, thereby mntHng more meaningful the system of incentive wages. The problem of lagging agricultural production wus more complex, involving deficiencies in the institutionalof production and also unique problems of investment as well as thc problem of agricultural income incentives.

* The estimates and conclusions contained in this memorandumthe best judgment of ORR as

Implementationf lite consumer goods aspect of the revised policy vas designed to provide an Immediate increase ln manufactured consumer goods by depriving the defense establishment of Its customary share of the Increase In the growing product of Industry. Thus much of the consumer goods programhift ln final demand Items from military to civilian use ratherhift from investment goods to consumption goods, thereby lessening considerably the effect of the program on the traditionally high ratio of investment to consumption. In addition to the revision of production priorities in favor ofconsumer goods, the pattern of state Investment vas shifted slightly ln favor of light Industry and housing at the expense of heavy Industry. Tbe Investment plan for the trade sector of thevas increased from theercent of total Investmentercent, reflecting the planned increase in consumer goods as wellontinuation of the policy of drawing trade into state and

Implementationf the agricultural aspect of the revised policy took several forms. Tbe most dramatic was the diversionarge portion of nev agricultural machinery and tractor production to previously uncultivated lands. Although of marginal character because of uncertain climatic conditions, these lands vere calculated to give an immediate return of grain with little sacrifice to production on the old lands, which in recent years had shown little response to nev applications of machinery and tractors. This action was planned toignificant part ln the formulation5 of aneartlivestock program.

Less dramatic were tbe steps takeno continue and tothe agricultural policies'Introduced The Incentive features of3 version of tho agricultural tax were retained, and the Incentive of higher state procurement prices for agricultural products was extended to Include grain as well as livestock and vegetables. These measuresigher level of Investment by kolkhozes. In addition, atatc Investment in agriculture wasexpanded. State and kolkhoz investment together was nearly hQ percent greater than

In Implementing tbe raw agricultural policy, greater freedom was given the kolkhoz in planning the utilization of manpower and lnthe crop pattern. In an effort to improve the organization of

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machine work, large numbers of workers were transferred from seasonal to permanent work In the Machine Tractor Stations. The method of determining obligatory workday minlmums for labor on kolkhozes was revised. It was hoped that these measures would correct some of the more serious defects In the collective organization of agricultural production.

The effects ofolicy on the economy were varied. goods production, excluding food-processing industries, is estimated to have increased over3 level byercent, anearly equal to that of the producer goods industries. Food products remained scarce, however, and agricultural prcduction, set back by adverse weather conditions, was not so great as planned, in spite of the success of the new-lands program. The industrial wage fund was again overexpended. These and other cost pressures stemming from the new policyarge gap between actual and planned profits, as esult, fewer wholesale price reductions were made in either year. n order to combat further the growing Inflationarymaller and more selective retail price reduction was granted. No retail price reduction has been granted thus farnd the state loan from the population has been doubled to absorb some of the excess purchasing power. Tn spite of the mixed effects of the new policy, however, it appeared atnd that the consumer was slightly better off, that the Five Year Plan goals were more certain to be fulfilled, and that the defense effort could be restored to its original level.

I. Introduction.

The economic course of action, or program, set forth3 after the death of Stalin was pursuedeasonably faithful and generally successful fashion, the first full year of the new economic policy. Throughout the year It became necessary from time to time to make certain revisions in the policy to keep the economy bearing true to course. These policy revisions, touching upon nearly every facet of economic activity ln the USSR andumber of types of economic control mechanisms (includlne prices, taxation, wages.

profits, and. direct allocation ofid not add upignificant alteration of the Basic economic policy formulatedhey did indicate, however, the nature and extent of the stresseson the economic system by the tasks of the new program and the degree to vhlch the administration vas willing to make the adjustments necessary to carry out successfully its program ccannitments.

Certain of the actions taken- apparently were designed to realize even greater agricultural and consumer goods goals thanset forthut it vas also evident, especially during the laat few monthsk and lnhat neither the basic Industrial development of the economy nor the defensewas to be allowed to suffer noticeablyesult. These actions, although halting the rapid rate of Increase In consumer goods activity attained* were designed to maintain thla sector at its newly created level and at the same time to provide the defense establishmentubstantial increase in expenditure which would more than restore the reduction permittedI1 in order to support the initial costs of the new program.

Such revisions as vere made in Soviet economic policyU in favor of the consumer or of agriculture vere aimed at fulfilling the limited objectives of3 policy. They were not intended to challenge the classic Soviet emphasis on heavy Industry. In fact, the expansion in consumer goods and agriculture was calculated,onsiderable extent, to remove certain barriers to further expansion of the industrial base of the economy. Diminishing gains in labor productivity and chronic shortages in the agricultural sector had become increasingly serious during the first years of the Fifth Five Tear. It vas to these problems in particular that many of the policy revisionsere directed.

II. Agriculture.

The original Fifth Five Year Plan, adopted byh Party Congress lnnvisioned substantial increases in the level of agricultural production The goal foror example, was set at one and one-half times0 level. The goals formulated2 were to be achieved by means of an agricultural policy designed to increase the yields of grain. Malenkov stated at the Party Congress that since the prewar level of sown acreage had been reached, the correct method of achieving anio output was to Increase yields comprehensively. Before the

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death or Stalin, however, there was no discernible effort tothese ambitious goals Into an effective program of agricultural development. Withoutrogram the great agriculturalof the Fifth Plve Tear Plan vere unrealistic.

It vas not until3ealistic effort vaa made to formulate and carry out an agricultural policy designed to produce significant Increases ln the level of agricultural production. Malenkov then stated, at the meeting of the Supreme Soviet, that the serious failures ln agriculture must he overcomerogram ofthe economic Incentive of kolkhozes and kolkhoz members. The programonth laterlenum of the Central Committee of the Communist Party provided measures for the improvement ofpotato, and vegetable production. Procurement prices paid by the state for the delivery of compulsory quotas of these products were increased. For some of the products, the Increases were the first granted lnears. In addition, certain compulsory delivery quotas were reduced. The agricultural tax levied on the rural population also was revised in Ine former tax schedule, which varied according to the value of the crop, was replacedniform tax rate levied on land area regardless of the type of crop raised. The separate tax on individual livestock holdings was abolished in order to encourage private livestock breeding by members of the kolkhoz. It was hoped that these procurement price changes and tax changes wouldedirection of effort toward those foodmost urgently needed and would provide, at the same time,ltlonal income to thc kolkhozes and kolkhoz members as further production Incentives. That the production of processed foodsby little more than half the amount scheduledas the result of adverse weather conditions rather than of Inappropriate changes ln agricultural policy.

The agricultural policy developed ln August and3 offered few details as to how the Fifth Five Year Plan goal for grain production, as set forthas to be realized. It wasonly that grain production should be developed through further increasing yields. Between3 snd, however, Soviet leaders apparently reassessed the efficacyolicy devoted solely to the intensification of the prcduction effort on existing cultivated lands. It was announced by Khrushchev at the* plenum of the Central Committee that the major efrort to

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Increase grain production*5 was to be focused on the extension of grain cultivation to nev lands, primarily in Kazakhstan but also In Altay Kray and West Siberia.

Ihe significance of the nev policy vas not ln the decision to increase grain prcduction, for this had been made ln tbe formulation of tbe original Plan. Tbe significance vas In the decision to augment the program of intensive development of agricultureoncerted effort to extend the margin of cultivation to the new lands. Tholow return on additional investment in equipment on the old lands, especially in heavy tractors, was endangering the achievement of planned production goals. The new-lands program had tbe short-run attraction of an Immediate production return and tbe longer runof permitting some lands traditionally devoted to food grainto be converted to the production of feed grains in support of an expanded livestock program. This, ln turn, eventually would reduce the need for livestock raising by individuals, which of necessity had been encouraged byhanges in agricultural tax and procurement price policy. Furthermore, the extension of cultivation into the new lands,reater ratio of state farms to kolkhozes than in the old lands, constituted another small step toward the eventualof private plots and kolkhozes and assured the statearger marketed share of nev production than would have been obtainedomparable increase ln production on the old lands.

The new-lands policy set forth in* "as rapidlyaad with such initial success that the Plan goal5 ofillion hectares of new lands waa enlarged, calling foroillion hectares ddition, the ratio of state farms to kolkhozes was to be still greater on the additional new lands. the new-lands program was proceeding apace, certainwere discussed at the* plenum of the Central Committee. Conatruction of the necessary buildings, especially housing, was stressed as the greatest need. Throughout tbe remaindereffort was made to insure an increased supply of building materials to the new areas.

The* plenum was concerned not only with the new-lands program. Inadequacies of the entire agricultural program also were discussed at length. Several policy decisions were continued3 or newly Initiated* to deal with these problems. The short supply of foodstuffs was recognized not only by theof the higher procurement prices and lower tax provisions

established3 but also by the introduction inI1 of seasonal variations in prices of foodstuffs. Furthermore, the annual retail price reduction in- was considerably smaller than In keeping with the relatively greater scarcity of foodstuffs the bulk of the reduction was In manufactured goods.

Several steps were takenk to increase the share ofprocured by the state from kolkhozes. In June, grainprices were increased, and arrangementspractice established3 of releasing manufacturedand certain building materials to kolkhozes on tbe basis ofwith regard to above-quota deliveries of bread grains toagencies.

The agricultural labor force waa affected on several counts, partlyyproduct of the new-lands program and partlyesult of measures concerned specifically with agricultural labor. That portion of the agricultural labor force working for wages, and hence subject to greater state control, was increased by tbe transfer of large numbers of workers from seasonal to permanent employment In thc Machine Tractor Stations and by sending cadres to the new landsage basis. Kolkhoz members, who are notage basis, were subjectedltew system of determining obligatory workdays. The significance of the new system was twofold. The new obligatory minimum of workdays for able-bodied kolkhoz members was higher than the minimum for the preceding year, thus furthering the effort to * increase agricultural production on the old lands. But perhaps of greater significance was tbe fact that the new system gave the kolkhoz greater freedom in planning the utilization of manpower. It provided for the establishment of the workday schedule, both for the yearhole and for the various seasons of farm work,eneral meeting of the kolkhoz members, who were to take Into consideration the specific conditions on the Individual kolkhoz.

Khrushchev had stressed at tbelenum that agricultural planning was too centralized, thereby impeding the use of available production alternatives, inhibiting local Initiative, and weakening any general interest in increasinge reminded the plenum that as far back9 the Party and the government bad abolished the order under which kolkhozes were given obligatory plans for each separate grain crop but that Gosplan and the agricultural ministries had ignored the action. The decentralization of workday

planning Introduced* presaged the Introductionecree in5 vhlch formalized Khrushchev's sentiments toward greater decentralization in the planning of agricultural crops. Both actions Indicated an Increasing recognition of the fact that central planning had not taken account adequately of local variations ln theof agricultural production.

Agricultural investment policy* was consistent with the requirements imposed by the new program. State Investment Inrose fromillion rubles3 toillion rubles Although this increase did not represent fulfillment of thc planned goal ofillion rubles, the shortfall appeared to be the result of inability to translate rubles into goods, especiallymaterials and equipment, at soate, ratherailure of the state to pursue its stated agricultural Investment policy. In addition to the state agricultural investment of IS billion rublesgricultural Investment by the kolkhozes from their own funds and loans amounted toillion rubles, an increaseillion rubles over3 level5 billion rubles. This sizable Increase in Investment by kolkhozes vas made possible byevlnlons in state procurement prices and tax policy, which had increased kolkhoz Income, reportedly byillion rubles3 andillion rubles In addition, tb* state Intensified its policy of encouraging kolkhozes to obtain long-term loans for investment purposes froo the Agricultural Bank. Agriculturalpolicy* thus produced an Increase ln total agricultural investment (state and kolkhoz) ofercent5 plan for total agricultural Investment Indicates thatinvestment policy will be geared to approximately the same level of activity ashe planned figure of hi billion rubles5 lying between the U2 billion rubles planned* and theillion rubles actually achieved.

III. Industry.

An Indication of Soviet economic policy with regard to industry is to be found In the record of the relative share of total stateallocated to tbe industrial sector of the economy and In the pattern of distribution of that share between heavy Industry and the consumer-oriented light and fooduring the Fourth Five learn average ofercent of total state Investment van allocated to the industrial sector, as compared with an average

ofercent in the late prewar years. All of the increase during this period was allocated in favor of heavy industry, while the light food, and textile Industriesmaller share of total state investment than in thc prewar period.

he pattern of distribution of state investment between heavy and light Industry changed only slightly from the pattern set in the Fourth Five Year Plan. eavy Industryf total state investment, and light industryercent, together accounting forpercent of total state investment. lanhift in this pattern in favor of light It van planned that heavy Industry's share io total statevould be reduced2 percent and light industry's share would be increasedercent. The full extent of the planned shift in the relative shares to heavy and light industry was not realized. The share to heavy industry was reduced only7 percent, and the share to light industry vas increased onlyercent, of total state investment. Yet tbis degree of changeignificant departure from the pattern of the past and was an Indication that one of the various policy revisions made in conjunction with the new program was an actual shift In the pattern of state-allocated resources for Investment.

Industrial production, as well as the investment pattern, showed some of the effects ofevisions in economic policy. The order of priorities for the allocation of materials, applicablearge number of material inputs to industrial production,as revised to some extent in favor of the consumer goods industries at the expense of the defense industry. It is estimated that consumer goods production (excluding food processing) increasedercent over3 level. This performance nearly equalled the increases in the producer goods industries (energy,ercent; metals,ercent; chemicals, lU percent; constructionercent; and forest products,ercent). By contrast, productionof military end items by the defense industry showed noroduction being onlyercent of3 level.

In addition to Improving the relative position of consumer goods industries ln the allocation ofhanges In allocational policy served to increase the freedom of all producing ministries to plan the utilization of centrally allocated materials. Athe list of funded commodities (those subject to direct state allocation) was redrawn so as to reduce greatly the number of specific commodity entries, leaving in their stead more generalized categories

which afforded the ministries greater leeway for substitution andallocation. Thia action marked the reversalrend which,ad increasedhe number of commodities subject to detailed allocation by Cos8nab, the organization established8 to administer the funded commodity system.

Soviet profits tax policy* continued the trend, prevailingf reducing the portion of total profits retained by the producing ministries and enterprises for their own use. During World War XX, nearly all of the profits of enterprises were taxed into the state budget. This policy was relaxed after the war to permit the necessary reinvestment of profits Into reconstruction, which was re-

structure Introduced The portion of total profits retained by industry was permitted to rise from aboutercent6 tb nearlyercenteflecting the high level of Investment In all areas of industrial activity. After thc reconstruction and price reform period, Soviet profits tax policy, which permitsery small portion of profits to be retained by consumer goodsworked to bring an Increasingly larger portion of total profits of industry back into the state budget, as the high-profit consumer goods industries began to regain their prewar levels of production. The folloving table shows that planned deductions from profits to the state budget nearly doubled1, whereas the portion planned for retention remained at virtually the same ruble level throughout tbe period, thus reducing toercent,hatof planned total profits vhich the state was willing to commit to reinvestment within the particular ministries originating the profit.

Planned Total Profits, Planned Deductions from Profits, and Planned Retained Profits in Soviet

Billion Current Rubles

Planned total profits Planned deductions from

62

Planned retained profits 6 26

8

6

For remission to the state budget.

The number of workers entering industrys in the previous years of the Fifth Five Year Plan, exceeded thc planned increase in the industrial labor force, and labor productivity did not Increase so rapidly as planned- onsequence, the planned wage fund was again overexpendeda chronic symptom of the Soviet system of forcedwhich exerts constant pressure on the labor supply. With the operation ofolicy, the system of incentive bonuses and other wage premiums is misused frequently to attract workers on abasis and thus is not always geared exclusively to production performances. Thc Council of Ministers continuedo point out the weakening of control over the expenditure of the wage fund in several areas and ordered the ministries to take serious measures to strengthen this control.

Overexpenditure of the planned wage fund and other cost pressures led to anlment of the planned profit goal2till greater underfulfillment Evidence to date indicates that the government's reaction to this situation both3 andlackening off of the wholesale price reductions which had been carried out sporadically sincepursuant to the policy announced at that time of passing along all cost savings throughprice reductions. The degree of fulfillment ofoal for planned profits has not yet been reported, but it is possible that fewer and smaller wholesale price reductions were madeo that such cost savings as were realized could be used toepetition of the large gap of the previous year between actual and planned profits.

The increasing overexpenditure of the industrial wage bill3, as well as the smaller state loan and thc higher stateprices of those years, contributed to the building up ofconsumer purchasing power, in an effort toalance in the income flows between the state and tbe population, the annual state retail price reductions were grantedcale considerably smaller than in previous years. By the end of the year It was apparent that price policy alone was insufficient to counter the increased purchasing power In the hands of the population. the plan for subscription by the population to the annual state loan, which had been halved3 tourchasing power adequate to absorb the planned increase. returned5 to the higher level which prevailed prior

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IV. Transport, Trade, and Housing.

Most of tho economic policy adjustments" were in agriculture and industry, an indication of the size and the complexity of these sectors as veil as of their importance to the functioning of the Transport, trade, and housinguch smaller activity sectors hy any standard of measurementwere, however, the subject of some

From the point of view of state Investment policy, the slighting of these three sectors hasraditional feature of Sovietdevelopment. The allocation of state investment to theand communications system has continually declinedortion of total state investment since the period of reconstruction in the Fourth Five Tear Plan. The continuation of this trendeduced toercent the share of total state investment allocated to this sector In contrast toercent during the Fourth Five Year Plan. Thushe predominant emphasis In transportation policy continued to be placedore intensive utilization ofontinuation of the drive to reduce thc average length of haul and to eliminate crossfreight. There were some indications during the year that this policy would be augmented in the near future by the introduction of new equipment and facilitiesreater rate. In part, this was in connection with the new lines needed to support the new-lands program, but, ln addition, an impressive dieselization program was announced, production of electric locomotives Increased significantly, and production of steam locomotives increased nearly to tbe level achieved during reconstruction in loJ*9>

Investment policy, because of the consumer goods aspect of the new program,ronounced effect on the trade sector of the economy. Traditionally the smallest recipient of investmentthis sector was to receiveercent ofnstead of theercent. Although evidence indicates that this higher level probably was not quite attained, the actual increaseas well as the intention of theignificant departure from the past.

The share of the gross national product of the USSR originating in the trade sector continued to grow relative to other sectorss the consumer goods supply increased; Soviet economic policy

continued to draw an increasing portion of total retail trade into state and cooperative markets nnd away from the kolkhoz markets. Basically this trendroduct of urbanization, but,U as in past years, Soviet policy has been designed to encourage the shift. 3 order of the Ministry of Trade making consumerorganizations responsible for acceptance of agricultural productsommission basis from kolkhozes and kolkhoz members vas continued Another example ofolicy was the provision to extend credit* to consumer cooperatives for the purchase of agricultural products at purchase and eelling-purchase prices,advance payment to suppliers on contracts, regardless of the status of their settlements for Gosbank loans.

State Investment allocations to housing, which hadndercent of total state Investment throughout theperiod, were increased toercent in* investment plan. Although an Increase of such small magnitude was insufficient toa spectacular rise 'in housing accommodations, It appeared to be an upward revision of the housing policy originally guiding the new economic program. No mention was made of an increased allocation to housing in3 pronouncements of the new program.

In addition to the increase in the proportion of total stateallocated toignificant aspect of Soviet housing policy* was the greater opportunity for construction of private housing.. Throughout theontinual effort vas made to keepmaterials flowing to tbe open market. In the past the major deterrent to construction of private housing was the inability to obtain supplies, so that loans for construction, which could have been obtainedominal Interest charge, went begging. Another boon to private housing, though limited ln scope, vas tbe granting of nonreturnable building loans to settlers in the new lands, the first time that outright grants have been made to private housing.

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