Beyond Perestroyka:
The Soviet Economy in Crisis
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Beyond Perestroyka:
The Soviet Economy in Crisis
Information Cutoff Date:1
A paper presented by the Central InteUigence Agency and the Defense Intelligence Agency to the Technology and National Security Subcommittee of lite Joint Economic Committee, Congress of the United Slates.
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Beyond Perestroyka: The Soviel Economy in Crisis Summary
Six years after Mikhail Gorbachev launched Ihe policies and reforms ihal have come lo be known as perestroyka, the Soviel economy is in crisis. Ouipui is declining at an acceleraling rale, inflation threatens io rage out of control, interregional uade has broken down, and ihe center and ihe republics arc engagedierce political struggle over Ihc future of the multinational state. Since last fall, rather lhan responding to these problems with reforms, union authorities haveto reassert central control over the economy and politics with counterproductive results.ecent accord between the center and Ihc republics may impart new momenlum toprevious agreements of this sort have proved fragile. Even if reform proceeds anew, tough economic times are in store for lhe Soviets. If meaningful reform is not carried out, the economic future will be totally bleak.
Economy in Turmoil
The accelerating deterioralion of the Soviel economy goes beyond declining output and rising inflation. Worsening imbalances between supply and demand have contributedreakdown of the distribution system, which has been aggravated by the efforts of regional authorities tofactoties and consumers on their territories from the effects of shortages. The USSR'srelations with Ihe rest of the world also areard currency imports exceeded exports0 for lhe second straight year, while the combinationising hard currency debtacklog of late payments to Western suppliersredit crunch.
Theeterioration results largely from the central planning system's chronic weaknesses, which have been compounded by partial and ad hoc economic reforms, excessive growth in Ihe money supply, and regional protectionism. The Soviel economy's tradiiional- of central planners selling output targets fot most products and allocating lhe supplies needed lo produce at these levelshas eroded drastically under perestroyka but has not beenby the discipline of the marketplace. Moreover, rapid growth in the money supplyfueled by large budget deficitshas ledcramble for goods, rising inflation, and acute shortages As shortages have worsened, republic and local authorities have banned shipments of goods ouiside Iheir borders, disrupting longstanding trade patterns and denying badly needed supplies to producers.
Ihe Soviel economic decline also reflects the impact of policy mistakes and mismanagement. The budget deficits that brought monetary expansion and rising inflationerious blunder. In addition, ihc leadership's policy of shifting resources from investment and defense toallhough long overdue, has been mismanaged. Inadequate investment in basicand transportation has contributed to declining output and shortages of these vital goods and
services, and increases in the defense industry's output of civilian goods have fallen short of overly ambitious largcts. Abo. efforts to step up imports to improve supplies of consumer goods quickly have led the USSRising hard currency debt-Mounting political and social tensions have exacerbated Soviel economic difficulties C'on'.inu-mglashes have coniribuiedorsening confusion of economic authoriiy, and ethnic disputes haveariety ofany of themeiwccn and within republics. Sirikcsrowing problem, and popular concern over Ihc environment has forced plant closures lhat haveubstantial deni in output.
Advance* and Halls on Reform
Gorbachev's economic program, which (he Soviel legislature approved in October, calls forMarxist with market economics andf if strictly implemented, would deregulate most prices, sellubstantial portion of stale assets, and introduce an element of genuine competi-non to an economy long dominated by monopolies. Like the failed reform programs of the past, howevca. it places much of the responsibility for implementation on lhe central government- the very instiruUon thai stands lo lose the most from lhe dismantling of the old sys-tern Moreover, the program's vague provisions and timetables have made it subject to selective implementation and delay by the political leadership. Indeed, in the several months that followed the legislature's approval of the program, Gorbachev's implementing decreeslearlo stabilization, to be accomplished largely by administrative measuresew reliance on the police and Committee for State Security (KGB) to enforce lhe center's economic decrees.
However, economic reform legislation passed0 remains on lhe books and couldthe developmenl of private economic activity and markets if lhe political climate improves. Moreover, the republics' growing sclf-asscrtivcncss has given reformers reason lo believe lhal their cause is no longer completely hostage lo changes in Ihe commitment of the union auihori-tics. Private economic initiatives also continue to expand and find new outlets. Cooperativeproduction has grown rapidly in spite of cumbersome and frequently changing regulations, and the sprouting of commodity exchanges in cities from the Baltic republics to Siberia holds promise for the developmentarket-oriented trade system.
Grim Economic Ouitook
There is no doubt1 willorse year for the Soviet economynd il is hkcly to be radically worse. The center's recent policy of seeking to stabilize the economy thiough primarily administrative means and the republics' accompanying refusal to comply wilh lhe comer's orders already have ledharp drop in production. If this standoff continues real gross nanonal produci (GNP) most likely would decline byoercent and the annualrate could easilycrcenl.
An allemaiivesliaicgy of stepping up repression to control the republics and enforce Iheconomic decrees could temporarily stem ihe decline in outpui and lhe rise in prices. More likely, however, ii would provoke popular resistance, which could lead to comliiions in which the fall in real GNP would exceedercent and inflation would spiral out of control Moreover, increased repression would not address lhe underlying systemic problems of (he Soviel economy nor would it help tooundation for future progress.
IV
Another possibility is lhat the center-republic accord ofpril could serveasisustained improvement in center-republic relations and the renewal of reform. Even under these circumstances, the decline in Soviet GNP this year probably would still be close toercent in real terms, and inflation wouldigh double-digit rate. Prospects for the next few years would improve, however, and the longer term forecast clearly would be brighter.
The message that all of these scenarios have in common is that the Soviets, including thesector, will face hard limes in the next few years regardless of which path they choose. The crucial question is not whether continued austerity will be required bul when the end will be in sight. If reformew momentum, the Soviels at least will have embarkedath with the potential lo lead to economic recovery. If economic reform continues to be postponed, the Sovietsuture of seemingly endless and worsening crises.
Contents
Economy in
Advances and Halts on Reform
Grim Economic
The System in Crisis -1
Sharp Deterioration in Economic
Regional Fragmentation
Problems in Foreign Economic
Erosion of living
Cutbacks in
Defense Spending
Sources of
Breakdown of the Traditional
Loss of Financial
Mismanaged Shift of
Political and Social
Little Progressarket
The Reform
Gorbachev'sledge to Implement Real. 12
But With Potentially Fatal
Some Remaining Bright Spots on the Reform
Grim Prospects in the Near
The Leadership's Anlicrisis
Falling Output and Rising
Hard Currency
Tighter Belts All
Appendix A
Problems of Measuring Soviet Economic
Appendix B
USSR: Selected Economic Indicators
vil
Beyond Perestroyka: The Soviet Economy in Crisis
Syslem in Crisis
After six years under Mikhail Gorbachev, the Soviet economy is in crisis. This crisis haselements: an accelerating decline inworseningreakdown in interregional trade,ierce political struggle between the center and the republics over theof the multinational stale. Rather thanto these problems with reforms, union authorities have been attempting to reassert cen-Iral control over the economy and politics since last fall. This approach hasew approach to the country's economic and political ills may be in the offing if the center-republic accord signed in late April bears fruit, previous agreements of this sort have proved fragile and fleeting.
Sharp Deterioration in Economic Performance
The Soviet economyad yearut the period since0 has been much worse. For ihe first time since World War II, the Soviets have acknowledged that overall output isercent0 and by a8 percent during ihc first quarter1 compared to the same period last year. CIA and DIA estimates, while subject to greaterthan in previous years, continue to indicate that the decline has been greater than officially claimed. Also, inflation is acceleraiing sharply. Retail prices rose by an cslimatcdercenteportedercent in the first quarternd by an average of morepril of Ihis yearesult of adecree.
Measures of ouipul and inflation alone do not
fully reflect the extent to which imbalancessupply and demand have worsened orhow explosive the economy's problems have become. Shoppers with huge accumulations of excess rubles have swept slorc shelves clean. In addition, rising prices and proliferatinghave made consumerrowing liability for leaders at all levels of government, especially as the population becomesaware of how poorly Soviel livingcompare with those in other countries.
Shortages of energy and basic industrialsuch as steel and chemicals, also haveand iheir impact has spread rapidly across the economy. Shortfalls in production ofcoal, for example, have contributed lo ain steel output, which in turn has left machine builders short of materials. Factorywho can no longer rely on ministry and parly officialselp them find supplies, have spent more and more time searching for crucial inputs and arranging barter deals. Even theindustries appear to be less insulated than in ihc past from difficulties experienced in lhe resl of the economy. In an open letter in Pravda lasl September, for example,igh-levelindustry managers complained that the USSR's economic problems have causeddisruptions in their enterprises and "massive losses" of skilled workers.
Regional Fragmentation
The regional fragmentation of the Soviet slate and economy also is proceeding al anrapid rate. Some republicsEstonia,and Lithuania in the Ballic region and
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Armenia and Georgia in ihe Caucasusarc bent on independence regardless of what happens in lhe rcsl of lhe Soviel Union. Moldova, on the border wilh Romania, also favors eventualbut political and economic obstacles could force it ioeformed unionater date. The leaders of the central government and other republics have been locked in disagreementide range of issues: the shape andof lhe union irealy, ihc strategy and pace of market-oriented economic reforms, and theover natural resources, budget revenues, banks, the money supply, and earnings from hard currency exports. This political gridlock hasthe efforts of leaders at all levels of gov-ernmcni to address the economy's problems.
The efforts of republic and local authorities lo insulate their own territories from the effects of ubiquitous shortages have aggravated thebreakdown of distribution. Republicslarge amounts of food and other
consumer goods have been withholdingto central slocks and customaryry lo keep their own populations supplied. The Ukraine and Kazakhstan failed lo meet targets for grain deliveries to the sialend Georgia resiricted shipments of cilrus frail and tea, its primary exports to the rest of Ihc USSR. Many republics held back on deliveries of livestock products, which have been especially valuable in barter transactions. The main losersesult of these disruptions in food deliveries have been industrial cities, other nonagriculrural regions, and the food processing industry.
Regions producing key raw materials, such as oil, coal, and eolton, also have begun to ignore centrally mandated delivery targets in an effort to deal for supplies that the center cannot guarantee. The Bashkir autonomous republic in Russia bartered oil for Rsfonian consumer goods lasl year, while Azerbaijanimilar deal wilh Turkey. Uzbekistan withheld cotton from
Output
USSR: Official Soviet Statistics on Notional Income Produced and Industrial Output by
Ptrc&nr change National Income Produced
ithuaniarmeniaAiarbaijan -Georgia -
Kirghiirya -
Tajikistan -Turkmenlya -Uzbekistan
change USSRussiH -Ukraine-Belorussia Kaiakhatan -Moldova -Ellon laaw i* -lithuaniarmsnie Aierbaijan Georgia -I
Kirrjhiiiys -
-10 -fl -6
-12
So>*te Soviet stcu raw
Tajikistan -Turkmoniya -Uzbekistan -
10
the stale in hopes of increasing hard currency exports.
As these problems spread across the USSR, few regions escaped ihc decline in outputfficial Soviet statistics indicate that0 only three republicsEstonia, Turkmeniya, and Uzbekistanregisteredin national incomeoviet measure of total output excludingome of the steepest declines occurred in republicsinterethnic violence or striving forArmenia, Azerbaijan, and Lithuania.
USSR: Hard Currency Trade
Billion US Dollars
lit 2d 2d Ui 2d lei Half Hall Hall Half Hall Hall
USSR: Hard Currency Debt and Assets
Billion US
' Piptiiiiis-y
*
' CamnleocriM by r* Bank lot
Giosj
In an ominous sign for future inflation, theover the transfer of budget revenues from the republics to the central government hassharply. Shortfalls in republic contributions reportedly have left the union budgetbillion-ruble deficit in the first quarterore than double the expected amount ofillion rubles.
Problems in Foreign Economic Relations
esult of the ills afflicting the domestic economy, Soviet foreign economic relations are suffering, and the problems in foreign economic relations in turn arc magnifying the domestic economy's problems. Hard currency imports, which jumped by more lhanercent7ontinued to climb in the first halfhe Soviet leadership's efforts to case shortages of consumer goods were largelyfor this import surge, and enterprises exercising newly acquired rights to buy directly from Western businesses alsoole. Hard currency exports also rose but could not keep pace with imports, and the trade deficit for the first half of last yearecordillion
The USSR got some breathing space in thehalfeightened tensions in the Middle East ledough doubling of the hard currency prices of oil exports,eassert.or, of central control reduced hard currency imports. However, many of the import cuts came from supplies, particularly of steel products and chemicals, that were badly needed for domestic production.
To finance their burgeoning import bill, thenearly doubled their total borrowing from the West7nhey also began to run up an unprecedented backlog of late payments lo Western suppliers. Wilh Ihese arrears coming on top of mounting domesticand economic turmoil, the Sovieis found Western banks unwilling to provide new loans last year. To alleviate the resulting credit crunch.
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Ihc USSR has drawn down cash reserves inbanks, stepped up gold sales, and obtained financial assistance from Western governments. Nonetheless, its hard currency position remains weak.
The Soviets'economic problems and thetransformation under way in lhe region have taken an especially heavy toll on Soviet-Easl European trade. The USSReficit in trade wilh Eastern Europehen oilfell and imports remained about the same asn Ihe firsi quarterhen most of these longstanding trade arrangements changedard currency basis, ihe Soviets slashed imports. Because they cut exports by much less than imports, the Sovietsrade surplus with Eastern Europe and earned badly needed hard currency. However, ihe costs have been high. The Soviets have lost badly needed imports of industrial supplies and consume; goods, and East European exports haveevere blow.
In another dramatic change this year, the USSR will receive significant aid from the rest of the world. The Soviets have lined upillion in grants, loans, and credits backed by noncommunist governments that Ihey must rely on1 to maintain imports of needed goods. Iialy and Germany are the largest donors of overall financial assistance, bul about one-third of the aid to be disbursed will come from Arab slates and Soulh Korea. Moreover, Soviet economic aid to the less developed world issharply. Longtime clients such as Mongolia and Vietnam arc slated to be virtually stricken from ihc aid roster this year.
Erosion of Living Standards
Sinceoviet leaders have attempted lo shift resources from investment and defense to consumption to improve living standards. This policy has produced few benefits for Soviet consumers, who have complained increasingly that inflation and shortages have reduced their
welfare sharply. Although the estimatedof goods and services adjusiedmall per capita increaseuch of this increase reflected higherof alcohol and expensive householdand consumer electronics. Moreover, ihc imports and drawdowns of inventories that helped boost consumption0 cannot be sustained.
Problems on the supply side, in any event, have been only partly to blame for lhe erosion of living standards. According to official Sovietpersonal money incomeser capitaverwhelming the small improvement in supplies of consumer goods and services. One resulturge of inflation.indicate that retail prices of consumer goods sold in state stores and at farmers' markets climbed aboulercentoughly twice as fast aslack market prices almostwent up even faster. In addition, because controls slill kept most prices from rising enough to balance supply and demand, some inflation was repressed, resulting in shortages and afor goods. According to one Soviet report, the "availability" (not further defined) of basic food items declined fromercent3 toeicent9 andercent in
With shortages leaving stale store shelves bare, some lucky consumers have had access to special distribution channels, such as workplace sales of food and appliances. Arrangements of this kind have spread rapidly in recent years, helping some segments of the populationworkers at largeut reducing supplies of consumer goods available io thepublic.
In an effort to protect residents of iheir areas from shortages, first local and now republic-level auihoritics throughout the Soviet Union haveapidly growing number and variety of rationing schemes. More and more cities have issued coupons for consumer goods in short supply, such as meat and sugar, ln the
USSR: Growth in Personal Money Income
Percent Cftdflye
Food Alcohol Soli
ausing High inflation in Retail Prices Percent change
15
0 -
d
' M
0
republics and in many cities, including Moscow and Leningrad, consumer goods aie sold only on proof of residence. The mostrationing scheme to dateintroduced by Ihc Ukraine in0 and adopted by Moldova inequiresio provide coupons distributed along with Iheir pay or pensions, in addition to money, for Ihc vast majority of Iheir purchases from state stores. Also, as mentioned earlier, severalhave banned the shipment of consumer goods ouiside iheir borders, in what one Soviet economist hasbacchanalia uf local pro led ion ism."
Consumers whose needs arc not covered by special distribution channels or rationing have been left to rely lo an ever greater extern on black markcl purchases, if they can afford the higher prices, or on potluck in state stores. Press reports indicate that many shoppers buy goods Ihey do not want themselves and barter withmembers and friends for what they do need, and almost everyone stocks goods for fuiurc use. One Soviet survey foundutaintained such stocksputneputy trade minister placed Ihe value of household hoardsillion rublesroughly one-fourth of ihe value of retail sales last year.
As miserable as the consumers lot wast has worsened since lhe beginning of ihis year. Official Soviet statistics indicate that output of manufactured consumer goods in the first quarter1ercent lower than in the same period lasi year, while money incomesbyercent. Two presidenlial decrees implemented in January also added loercent sales tax wason all goods, even the most basic consumer necessities,urrency changeover resulted in the confiscationuble notes that could not be proved lo have been earned.
Probably the greatest blow to consumers
occurredhen much of theinflation that has built up in recent years was transformed into open price increases. Retail prices of consumer goods were raisedoercent on average, with larger increases in food prices that were particularly alarming for the low-incomcamputation. Despite the compensation payment accompanying these price hikes, the purchasing power of people's incomes isto have fallenoercent on average.
Cutbacks in Investment
Although the regime's shift of resourcesconsumption has done little lo improvestandards, it hasubstantial bite out of investmentime when tbe Soviet economy is io dire need of modenuzation. According toSoviet satisfies, state investment0ercent less thanharp drop in centrally financed investment that an increase in cnlerprise-funded investment partly offset. Completions of investment projects also declined, and only two-fifths of theprojects included in stale orders were- down from one-halfhis decrease in project completions included much infrastructure intended to benefit consumers, such as housing, schools, preschools, hospitals, and clinics. Meanwhile, the backlog ofconstruction reportedly swelled byercent.
The investment downturn0ecuase in domestic output of machinery and an especially sharp drop in construction activity.supplies of construction materials and equipment, such as bulldozers, cranes, andwere part of Ihc problem. In addition, state construction organizations lost workers to cooperatives, where wages reportedly were nearly one-third higher.
Defense Spending Down
Defense program reductions0 followed the same general trends thai developedA and DIA estimates indicate that the overall
4 i
annual decline in defense spending wasercent in both years. The driving forcesthese cuts have been the poor slate of the economy and the leadership's desire to reduce the budget deficit and shift resources to civilian production. On the arms control front, thehave tried to ease requirements for newons by constraining Western force modernization while posturing their forces for Stralegic Arms Reduction Talks and Conventional Forces inagreements.
CIA and DIA eslimale that procurement oul-lays, which account for almost half of totalspending, fell by aboulercent in each of theears. Percentage reductions were distributed almost equally between strategic andposc forces. The heaviest cuts in90 came in the procuremcnl of ground force weapons: artillery, lighi armoredand particularly tanks. Aircraftdeclined as well.
Expenditures on other major defensealso have fallen over theears,not quite as steeply is procurement. Personnel outlaysecrease ofn Ihe number of troopshe decline tn spending on operations andresults primarilyownturn in space launch activity, as well as fromlower pace of training and exercises. Available evidence suggests thai outlays onand development leveled off9 and declinedlthough estimates for thisare much more uncertain than for the other components of defense spending.
Sources of Difficulties
Ihc current Soviel economic problems sicmariety of sources: an acceleratingof the tradilional system of managing the economy from therogressive loss of control over financialismanaged shift of resources from investment and defense toand rising political and social tensions.
Breakdown of lhe Traditional Syslem
The traditional Soviet economic systemwith central planners setting output targets for most products and allocating the supplies needed to produce at theseas alwaysThe accompanying allocation procedures andsecrecy also have condemned the USSR to technological backwardness. In short, the system was relegating the USSR to the statuseveloping country. Nonetheless, itunctioning system with fairly stable rules.8owever, partial economicseriously weakened the system, and, since early last year, its erosion has accelerated rapidly andegional dimension. The_Sovict Union has gone fiom stagnation into decline.
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Early in the peresiroyka years, enterprises were instructed to earn profits; however, most prices, which did not reflect supply and demand accurately, were not changedven
the realigned prices now in effect take littleof demand, although they do reflectproduciion costs better. Under these conditions, prices have not stimulated increases in production of the goods that are needed most urgently. Moreover, controlled prices havewith inflationary pressuresfueled bybudget deficitsto create steadily worsening shortages.
Another problem is that the "direct links"buyers and sellers that were supposed to reduce the need for central planning havewith difficulty. The lack of progress stems partly from the continuing efforts of bureaucrats in ministries and supply organizations lo cling lo Iheir old functions. The longstandingof industry and Ihe recent plague ofprotectionism have exacerbated (his problem.
Monopoly producers, whose development
Shares of Exports end Import* In Republic Production and Supply. 1!
Eipora A* Pateani ot TotalAi Poreom of Total Suppl,
-
i
Armanis -Aiarfaaijan -Georgia -Xlrghliiya -Ta jikiatan -fi Turfcrnaniia -Uibak.ita
Utvl. Lithuania
Aiarbaljan Oao.fli. Klrghtriyaurkmen
5 10 IS IO ' Sara Maw^irWyar^SSSWvlSStaaoUP'
H
7
central planners actively encouraged, dominate many Soviet industries. For example, singleeach in different republics, produce the USSR's entire output of potato, corn, and cotton harvesting machinery. Single factories alsofor more than half of all production offreezers, and oil and gas drilling rigs. Under these conditions, shortfalls of output at one plant cannot be made up elsewhere and arc spread rapidly across the economy.
Republic and local authorities' efforts tothe factories and consumers on theirfrom the economy's general deteriorationajor factor in the erosion of thesystemn the past, Sovieldevelopment policy encouraged most republics to specialize in certain kinds ofand to trade with each other rather thanself-sufficient. For instance, the Ukraineajor center of heavy industry, while Uzbekistan specializes in cotton. Given theserepublic bans on shipping goodstheir.borders have been particularly disruptive.ore positive note, the republics have moved quickly to sign economicwith one another to assure deliveries of needed supplies. However, the terms of most of the basic agreements arc vague and often cannot be enforced.
Loss of Financial Control
For all but the first year of Gorbachev'sthe Soviet government has run large budget deficits, and0 deficit further fueledpressure. Official claims that0 deficit was slightly below the limit the Supreme Soviet approved are suspect, partly because the claimed figure for total budget revenues appears inflated compared with the information available on individual revenue categories. Inhorough examination of the Soviet budget by
USSR: Budget Deficit and Increase in Money'
Billion rub/as
I..
' "lad toi 1
Vf tuppv iteer,nea anW(tuminfl itwfrus. tee
the International Monetary Fund indicates lhat off-budget expenditures to support agricultural prices should be added to the officialhatever the actual deficit was, lhe government's efforts to sell interest-bearinglo finance the deficit fell far short of plan. As in the past, therefore, the deficit was funded almost entirely by adding to the money supply, which increased by an estimatedercenthe excessive budget deficit and rapid growth of the money supply, in turn,ajor contribution to the leap in personal money incomes.
Fiscal and monetary problems multiplied rapidly in the first quarterudgeton Subsidies rose sharply when wholesale prices were raisedanuary, while retail price hikes were delayed, pending negotiation of a
International Monetary Fund, The World Bank, Organization foi FconOiniC Cooperation and Development, and ihc European Dank (or Keconsltuclion and Developmentludy of the Soviet Economy (Paris:, Volume I,
8
center-republic agreement,pril. The subsidy burden shifted to the republics starting this year, and. perhaps partly to cover that bill,governments withheld budget revenues from the central government. The center then was forced to create money to finance itsNow that retail prices are up, subsidies will be reduced sharply, but compensationto theinanced by aof budget and enterprise fundsare so generous that they will add new fuel tofires.
Mismanaged Shift of Resources
The leadership's policy of shifting resources toward consumptionove that was badly needed and long overdue, but the mismanaged implementation of this policy has led to disarray and confusion in investment and the defenseSkimping on investment in basicmaterials has contributed to declining output and shortages of these vital supplies. Centralized investment in these industries was cutnd producing enterpriseswhich had rapidly
efense Conversion: Meager Progress to Date.
Gorbachev began expanding the defense industry's role in the civilian economy, in8 byplunts producing civil machinery to defense industrial ministries. Ine announced more extensive plans to convert defense plants to civilian production. Soviet officials have slated that moreefense industrial plantsivil industrial plants will be involved in conversion to some degree. Of these,efense plants, along with someivilian plants, are planned to cease military produclion entirely!
Soviet claims about conversion mast be interpreted carefully because theii use of the term varies. In the strict sense of the word, conversion means the retooling of military production lines for civilian output; however, the Soviets also use the term lo refer lo the expansion of civilian output using excess flout space, the sale of military property to the civilian economy, ibe retooling of civil factories by the defense industry, the diversion of resources, the sharing of expertise, and the release of previously classified technical date.
Problems of Implementation
Soviet defense industrial managers have faced numerous problems in implementing conversion. In many cases, they have hod to produce civilian goods with which they have had no experience. At the same time, like theii civilian counterparts, defense managers have had to adapt lu partial reforms of the economic system. Reduced military orders and increased retooling and retraining costs have complicated the increasing pressure to earn profits. Because of lhe priority treatment they enjoyed in the past, defense managers also have less experience in dealing wilh transportation and supply problems than managers in civilian industry. Moreover, workers faced with retraining, job transfers, and the end of higher wages and bonuses for mililary output have left the defense industry in suhsioniial numbers.
Lack of CkHr Strategy
Another major problem foi the defense industry has been the Soviet leaders' lack of careful planningime when markets weie nol developed enough to allow producers toknow what consumer* really wanted. Enterprises were ordered to begin the conversion process before the regime recognized the financial burden ibis would impose. While the Soviets plan loeftyillion rubles in conversionabout the same amount invested in metallurgyillion rubles actually will be spent on retooling from military to civilian production. The bulk of tbe invesimeni in conversion is earmarked for adding new civilian produclion capacities in ihe defense sector and not for further retooling military production lines. Last December, after many revisions and considerable debate, ibe government reportedlyonversion program drafted wjihin the defense sector, bul il> fumlin^ .indjw&it Supreme Soviet legislation
dwindling profit margins before wholesale prices were raised thisad few funds of their own to invest. Moreover, investment in transportation has been neglected for years.Pavlov recently recommended adjustingto maintain adequate investment in output not directly used by consumers.
Soviet officials have said that increases in lhe defense industry's output of civilian goods arc Offsetting only part of the drop in militaryMoreover, many defense industryarc worried lhat the speed with which they have had to increase civilian production isthem to lose valuable technical expertiseduring Iheir years of working for the
umber of these managers haveinterest in developing export markets and spin-offs of their traditional output; this would allow them to maintain military productionand remain solvent financially.
Moreover, efforts to increase imports tosupplies of consumer goods quickly have left the USSRising hard cunency debt, which must be serviced in spile of falling oiland the reluctance of commercialto extend new loans. Hard currency problems led to some reductions0 inof materials and equipment needed todomestic produclion and much sharper cutbacks in the first quarter
Declining Soviet Oil Production: How Western Technology Could Hrlp
. Although the USSR lias some of the world's largest oil reserves and-is still the world's leading oil producer, Soviet oil production has been declining markedly since it peakedutput droppedercent inand appears headed this year for its lowest levelombinatio'h'of short-sighted Investment policies, technological shortcomings, and substituting gas for oil is responsible for the decline in oil output. The standard' Soviet practice of injecting water into reservoirs to fotct oil out as quickly as possible has left flooded fields, which tequire sophisticated equipmentto recover the remaining oil, Moreover, conosion is wearing out lhe production infrasimcture faster than il can be replaced. Years of neglect pf the'oil equipment industry, however, have left it incapable of supplying either the quantity or (lie quality of the equipment needed.
The challenges of maintaining output from mature fields, coping with equipment shortages, and developing new fields are outpacing the USSR's technical capabilities and increasing its need for Western technology and assistance In the near term, the most pressing Soviet needs for Western equipment and services include;
Enough equipment, not ncecssarily statc-of-tbe-art lechnology, to overcome chronic shortages of artificial-lift equipment, blowout preventers, drill bits and pipe, and oil loots.
Modem rotary drill rigs or drilling services, specialized arctic drill rigs, and measure-while-drilling equipment, '
Social Infrastructure, such as housing and schools, to improve the difficult living conditions of oil-field
Advanced exploration capabilities, cither equipment or services, lo locate small, deep, complex <
Moreover, lo turn longer term performances around, the Soviets need'to:
heir oil equipment industry with new plants.
Modernize iheir oil-handling infrastructure, including pipelines storage facilities, and ports
Learn Western methods of integrated project management that are based on profit rather than gross
10
Political and Social Tensions
Another reason for the economy's decline is that mounting political and social tensions have interacted withand worsenedSovietdifficulties Center-republic clashes over republic efforts to achieve independence have spatked labor protests and blockades, as well as entailed violence and loss of life, as in Lithuania inthnic disputes also haveariety of conflicts, many of them violent,and wilhin republics, and these conflicts al times have played havoc with Ihc economy. The clashes between Armenia and Azerbaijan in, for example, dealt severe setbacks toperformance in both republics.
Strikes, sparked partly by worsening consumer shortages and inflation, also have become anserious problem. According to Soviet statistics, the loss of work time because of strikes amounted loillion worker dayssurpassing the previous recordillionhis year, the coal miner strikes that began in March aggravated energy shortages andheavily to the sharp drop in production.
Finally, popular concern over lhe environment has forced planl closures thai have made adcni in industrial output. The impaci on the chemical and wood products industries0 was particularly severe. For example, aof closings and partial reopenings of ihc Nairil chemical factory in Armenia cut supplies ol plastics, synthetic rubber, and chemicals used lo produce medicine. The shuldown of Ihe Sloka pulp plant in Latvia removed ihc USSR's sole source of paper for computer punch cards, book and magazine covers, and cigarette packaging. In addition, public protests about the safety ofpuwcrplanis in the last several years have contributed lo delays in lhe construction ofpowersta lions. Nuclear plants accounted for more than half of lhe shortfall in completing new electric power generating capacities
Utile Progressarket Economy
Although advocatesaiket economy can take some consolalion from important legislation passedhe Soviet central leadership has concentrated on stabilization since lastwhile putting markei-orienicd economicon the back burner. In response, some republics, especially Russia, have attempted tohe initiative from the center by proposing alternative reform programs. At Ihc grassroots level, moreover, private economic initiativesalive despile cumbersome and frequently changing regulations.
The Reform Debate
As ihe Soviel economic crisis deepenedost economists and politicians came lothat the reform and stabilization planin9 had been overtaken by events and was simply inadequate for the lasfc at band. The consensus ended there, however, and bickering over which of several pioposed new game plans to adopt consumed most of the year.
The debateew economic. whenus' presented lhe government's version to lheSoviet- Ryzhkov's plan calledear transitionregulated marker economy and emphasised the need for price revisionsirst step toward deregulation. Legislators rejected lhe increase in bread prices he proposed foi July, questioned the wisdom of other price hikes scheduled fornd remanded the program for further work.
Meanwhile, Boris Yeltsin, who was elected he.id of the Russian republic's legislature in May. began promoting an alternative program thai would give first priority to supplanting stateof assets wilh private ownership and shorten the lime allotted for the transitionarket economyears0o keep Yellsin from moving ahead on his own, Gorbachev reached an agreement with him loorking group, chaired by Presidential
1
Council member Sianislav Shatalin, lo develop anoihcr game plan combining elements of the Yeltsin and Ryzhkov programs. However, Ryzh-kov and other members of his government were totally unwilling to cooperate with Shatalin. Gorbachev himself may have developed doubts as he realized the loss of central power the Shatalin plan would entail.
Gorbachev'sledge to Implement Real Reforms
Gorbachev directed tlie preparation of another
program that replaced Shatalin's link between stabilization and reform with an emphasis onnow, reform later. The program, which the legislature approved in October, still calledarket economy to replace the Marxisteventually. If strictly implemented, thevvould deregulate most prices; sellubstantial porlion of state assets to joint-stock companies, labor collectives, cooperatives, and individuals; and introduce an element of genuine competition to an economy long dominated by monopolies.
,Economic Reform Program
Stabilization of Production and Finances
mandalnry state orders for output and existing contracts between enterprises during lhe transition periodarket economy.
Increase the supply of consumer goods and services by providing lax breaks for producers and privatizing retail trade and consumer services.
Reduce the budgcl deficit lo atercent of GNP by decreasing spending on investment, defense, and government adminislration and increasing revenues from tumnver laxes.
Raise interest ralesvC
Relain central controls on foreign exchange during lhe transitionarket economy.
Sell state enterprises to generate revenue..
Privatization and Development of Markets
Privatize stale property by selling or transferring slate enterprises to shareholders, labor collectives, cooperatives, individuals, and foreign firms; distributing land to farmers; and transferring housing lo residents.
Decontrol wholesale and retail prices in stages: set key wholesale prices centrallyhile Ictling buyers and sellers negotiate priceside range of industrial pioducts, and remove conlnjls on retail prices for allairow lange of consumer necessities
Replace lhe detailed regulation of wagesew system of minimum wage ratCs lhat depend on worker skills.
Reform lhe hanking system byew syslem of central and commercial banks and putting the insurance systemommercial basis.
Move toward foreign trade with the ruble convertible lo hard currency by passing new customs and currency laws and establishing internal markets for hard currency.
Expansion of Social Safety Net
Set up slate employment services to provide job search, retraining, and career guidance services andcompensation.
ew pension/ s Index personal incomes to the cost of living.
But Willi Potentially Fatal Flaws
The Gorbachev economic program, however,umbcT of fatal flaws:
Like past reform programs, all of which have failed, it placed considerable responsibility for implementation on the central government bureaucracy, the very
institution lhat stands to lose the most from the dismantling of the command economy. The increased economic autonomy it gave the republics fell far short of their demands, reducing the prospects for unionwide adherence.
Its vague provisions and timetables made it subject to selective implementation and delay by lhe political leadership.
Stabilization at the Expense of Reform
ted Gorbachev emergency powers to issue decreesting the legislature. Most of those decrees attempt to stabilize sat the expense of economic reform..*
Decree* Freezing economic tics between enterprises
Allowing enterprises to negotiate wholesale price increases.
met
Creating worker committees to control the distribution of food and other consumer
goods.
Confiscating high-denomination ruble notes.
.-Impact Intended to relieve supply bottlenecks but will slow development of wholesale trade, hamstring formation of new enterprises, and hinder republic efforts to privatize Intendedositive step toward rational pricing but diminished by imposition of state-set price guidelinesercent lax on excess profits. Intended to sop up excess rubles but relies on administrative fiat rather lhan allowing interest tales to respond to changing economic conditions. Attempt lo reduce (heft and speculationeturn to administrative control reflecting the inability of lhe legal system and ruble to perform their functions. Attempt to confiscate black markci profits also hurts legitimate small enlreprenCutS who were unable to document past earnings.
Effort to cushion the transition to new system by having successful enterprises finance enterprises operatingoss; undermines efforts to force enterprises to operate more efficiently and become financially independent.-Effort to prevent "economic sabotage" adds to problems of small businesses and cooperatives lhat have stockpiled scarce materials to protect against shortages: also dampens entrepreneurial initiative and foreign interest ih joint ventures and investment.
The plan's malleability predictably hasurse for reform. The regime's initial im-plemcniing decrees havelear priority to stabilization, which is to be accomplished largely by administrative measuresew reliance on the police and KGB to enforce the center's economic decrees. This emphasis has come largely at the expense of fundamental reforms Ihc economy so urgently needs. Moreover,by administrative decree has proved elusiveime when the center's commands carrylevs weight with republic leaders and enterprise managers.
lhe regime's retreat from reform has not been confined to the economic arena. Powerful groups, notably the Communist Party, theand defense industrialists, felt seriously threatened last fall by the devolution of power to
the republics proposed in the Shatalin program. To placate these groups, Gorbachev has used the expanded presidential powers he requested and received in November to fight reformist efforts that the republics are pursuing.
.Some Remaining Bright Spots on ihe Reform Front
Economic reform legislation passedn the books and could provide afor developing privale economic activity and marketsuture dateif the politicalimproves. The USSR Supreme Sovieta wide array of laws on such fundamental issues as property rights, land use. enterprise rights, taxes, and banking. Most were drawn up9 but became the subject of prolonged and divisive debates that stretched well
ey:'Features ofKerorm Legislation Passed0
Broadens thedefinjtion of "socialist" property to include.both public and individual ownership. Slops short of using Ihe term "private property" bul sanctions wider range, pf privale enterprise activities than previously ^rrhiltcd.
ge. or give it tenia
Gives peasant farrrtersthejright lo own land and pass it oh to. their heirs but not tn sell.
Gives repuhlics considerable flexibility in
ilerprises by removing some restrictions on how ihey allowing them lo establish independent associations not it Purports lo give enlerprises run by organizations of ind shareholders equal status with state-run enterprises, rcdulet: low for most of the work force and high foraise tax freeikes, lower tax rales on high incomes, and end
If-employed. Some republics have alicred specific lax m
eonfiscalion.by ministries replacedpcrccnt lax on profits of most.state enterprises. Fxlraoidinarilyhigh profits to be confiscated. Maximum union rale reduced locrcenlome republicshave net lower rates."
Establishes modern two-tier banking syslem, with central bank operating
independently of the government and reporting directly, lo.ihe Supreme Soviet Independent republic central banks are lo delegate control over money supply to central bank All ul her hanks .re to become profit's'eeiihg commercial ventures pro* iding banking'services tn enicroi ises jnd CorrWmeis.-
enterprisevand consumers.:
While Ihe final packageroduct of political compromise, it siill breaks new ground inthe legal basisore market-oriented system.
The republics' growing sclf-asscrlivcncss and willingness to pursue policies different from ihe center's also have given reformers reason tothat their cause is no longer completelyto changes in the commitment of Ihe union authorities. Market-oriented reform efforts in the republics during the past year have beenclosely with efforts to promote economic independence from lhe central government. All of ihe republics have issued declarations ofthat proclaim authority over naturalon their territory and control over Iheir lax collection and banking systems, but republic reform efforts have varied greatly in pace and scope.
The reform climate has been most favorable in the Russian and Baltic republics. Russia has passed key legislation on property and landas partrofessed commitment to the Shalalin program, which the center rejected. In addiiion, Ihc republic government's most rcccnl reform initiative calls for steppedhased decontrol of pricesonths. The Baltic republics also have begun implementing ambitious plans to privalizereduce budget subsidies, and create their own banks and convertible currencies. Into these reform efforts, lhe Russian and all three Baltic republics are actively promoting trade with the oulside world and foreignon their territories.
Meanwhile, private economic initiatives al the grassroots level continue to expand and find new outlets. According to Soviet statistics, production by cooperative businesses increasedven though the number ofregulations also grew. In agriculture, the formation of independent farms has continued,slowly,inimum of officialThe commodity exchanges sprouting in
cities from the Baltic republics to Siberia arc one of lhe most promising recent developments, So far, these exchanges bear little resemblance to the sophisticated Western organizations of the same name, but they doource of badly-needed supplies for factory managers who no longer can rely on the crumbling centralsystem. In addition, ihey arc much morethan barter deals arranged oneime.
Given several years to developolitical environment conducive to their growth, theseand other fledgling market institutions could coniributc greatly lo economic recovery. The Soviet economy's problems, however, are so severe that an assessment of its prospects musthorter term focus.
Grim Prospects in the Near Term
The Soviel economy is in such turmoil that its performance is impossible lo estimate by relying totally on the methods used when the economic system was relatively stable. All thingsIhc Intelligence Community believes real Soviet gross national product (GNP) declinedercent0iven the great disruption in the economy,GNP numbers alone tell much lesstory ihan usual.
There is no doubt1 willorse year for lhe Soviel economynd, in all likelihood, it will be sharply worse. Despite the union leadership's renewed expressions of supporl for markcl-oricntcd reforms and anby the center and nine republics toanlicrisis measures, the politics of both reform and stabilization most likely will conlinue in turmoil. In addition, the economy most likely will coniinuc to suffer from sharp shifts inpolicy. Most unofficial Soviel forecasts place the likely decline in ouipul alnd, according io some estimateswhich CIA and DIA consideruipul could fall as much asercent. Moreover, declining ouipul will noi be lhe only problem. The Soviels
also will haveace lhe consequences ofbudget deficits, rapid expansion of the money supply, rising inflation, and deteriorating external economic relations.
The Leadership 'j Anlicrisis Program
The central leadership recently responded to the economy's accelerating deterioration with yet another effort at stabilization. This time, thehave called it an "action program for leading the economy out ofhe draft anlicrisis program, issued in early April,ost of measures aimed at stabilizing the production and distribution of goods, especially food and other consumer necessities, and bringing the budget deficit and money supply under control. Some of these measures have been tried before with little success, but others, such as removing restrictions on overtime work and reopening factories closed for environmental reasons, have not been tested yet. To enhance its appeal to reformers, thealso calls for speeding up the privatization of housing, retail trade, consumer services, and small industrial enterprises and for completing lhe transition to "primarily free price formation"
Prospects for the anlicrisis program depend less on these provisions, however, than on whether lhe center and the republics can resolve the impasse in their political and economicand on whether concrete actions will follow the promises in the program. The agreement that Gorbachev and Ihc leaders of nine republics reached on1 mayromising sign for future cooperation and could give new momentum io economic reform. Although not all the details of this accord are known, Gorbachev apparently consentedevolution of political and economic power to tbe republics in return for their support of the center's stabilizationand agreement toew union treaty soon. Reportedly, Ihc republics will be free to pursue economic reform at their own pace. If so, they will behance to demonstrate that their claims of being more committed than the
center to free market principles arc more than emptyowcvcr, if the accord is to befor moreew months, the center will have to permit theuch larger role in central decisionmaking.
Falling Output and Rising Inflation
The course Gorbachev was pursuing prior tof trying lo stabilize Ihc economy and maintain the unionixture ofmeasures and intimidationhas ledharp drop in output. If this course is maintained, real Soviet GNP is likely io declineoercentnd the annual rate of inflation easily couldercent.
If the regime resorts to more repressivesuch as introducing presidential rule in the republics and imposing severe punishment for failure to comply with central orders, the results would depend on ihe population's response. Public acceptance oftep back toward the old system piobably would help stem ihein ouipul and the rise in prices in Ihe shon run. However, the regime woulderious risk of popular resistance in the form ofstrikes, and, possibly, outrightUnder these conditions, real GNP would fall at leastercent, and inflation could spiral out of control.
Another possibility is lhat theprilcould serve as the basis for sustainedin center-republic relationsenewal of reform. This would help to reduce confusion ovei lines of authority, promote intcr-rcpuhlic trade and thus ease supply bottlenecks, and facilitate center-republic cooperationeduce the budget deficit. Ihc decline in real GNP this year probably still would be close toercent, but inflationary pressures could case In the next few years, prospects foroutput would improve, but the freeing of prices Ihal seiious reform efforts requirewould lead lo extremely high inflation.
miMie Relation?
republic and' ouqPCI and otttcr issue
bliea
r Id pf JCCS '
Wot
il (new itiiiiftgc
SI.il ili/.il
'Rati,
on of t'rridiictioilnilii".
In Ihe Anlicrisis Program
caLbodies' decisions thai contradict agreed center-republic policiesguilty.of'iciab of positions andprosecule
ng lower level executive'bodies lo carry out decisions of higher bodies, tlh tepublio ihal have refused to sign the union treaty.
risis program; increase penalties for illegal strikes.
kisuspend legislalion adoptedhat causes reductions
.vstL-nis
Restart most important.product ion facilities stiippcd for ecological reasons.
Shut down me fficient-production capacities.'
Scllunused inventories of material and equipment
Special Help for
Strengthen wage and price inccntrves'lo deliver more supplies to agriculture thantiffen ptnalties for reduced deliveries,
Allow farmers tocrcertlof their output at free market prices- .
. Allow retailfrom farms and people with private plots at free
market prices.'-
.Grant credit on advantageous terms to farms in financial difficulty. Stabilization of Financial Situation
out plan for reducing:budget expenditures in second half1 at union, republic, and- levels.
Suspend programs for which financing Ls scheduled to beginmpose moratorium on new programs:-'
Replace sales lax and turnover tax with value added tax and excise duties as
Authorize die state bank to establish ceilings on credits for budget spending1 by center and
imports by at leastoerceni by endevelopment of Markets and Private Economic Activity
enterprises irfretail trade, restaurants, personal services, and automobile repair, plus small industrial enterprisesriority basts.
Abolish rcslrictions on cooperatives engaged in retail trade in the second quarter
Privatize housingoluntary and predominantly free basis.
Complete the transition to.p'rimarily free price formationntroduce "special mechanism" for legulating' the prices that monopoly producers charge-
legislation on repatriating profits und hard currency investment. Expansion of Social Safety Net
legislation on indexing incomes to the cost of living.
the formatiortofastatc employment service network and employment funds in the first halfomplete the.formatioiiob retraining and vocational guidance system by the end
paid public wQnSi',*"
17
Hard Currency Crunch
Whatever course the center pursues, lhe Soviet Union will face tough choices this year in trying to halt the deterioration of its external financial position. Oil exports will continue to declineesult of problems in domestic production and the soft world market. Depending on world prices, hard currency revenues from oil exports could falloercent. Markets will remain weak for Soviet exports of manufactured goods, including arms. Meanwhile, the demand forespecially of agricultural products, is likely lo remain high.
The Soviets also willising debt service burden in the form of interest charges andpayments of principal on medium- and long-term debts. Some short-term credits that Western lenders have been refusing to roll over also will have to be repaid, and the pressure to eliminate arrears in payments to Western firms will be great. Some of the credits that Wcslemalready have pledged have been disbursed slowly, probably because of Western displeasure over center republic confrontations and the lack of progress on economic reforms. Moreover, the Soviets have not drawn heavily on credits tied to nonfood goods Instead, the drastic importin ihc first quarter1 indicate that lhe USSR has chosen to limit cxpcndilures rather than face comprehensive debt rescheduling. These import cuts have hurt domestichowever, and lhe Soviets will havecontinuing along ihis course.
Tighter Bells All Around
Given ihc sharp drop in economic output that appears all bul inevitable Ihis year, nearly all claimants will be lefl wilh fewer resources. The increasing pressure to reduce ihe budget deficit but siill improve lhe social safety net most likely means continued reductions in both investment and defense. Indeed, real reductions from the
level of defense spending apparently have been planned already and arc likely to occur in
regardless of the direction center-republic
Defense Budget Up, Bul Not as Much as-.
p'iromthe "
ovieibfficials'
say the ncvy. figure" includes compensation for large increases' iri"lhc. prices uf defense goodsctually IcflcctsJannul HI percent inih -WiJiv-'l'ndii ate'jfiall "bout .'tl percent, whileiiii! operation*ll 'rise!ercent,'piubablyliihiiHyjcosisastern Europe.ea'Pdevelopmenl,'iciiing'^and engineering originally^ was slaicdharp /decline, bul the miliiar.truggling tirminirpi/rjciits in ihis area..
The published Soviet defense budget captures only about half of the outlays actually devoted to defense and.esult! is seriously flawed as an indicator of changes in the allocation of resources lo defense. Nonetheless, analysis of Soviet miliury programs indicates lhat total defease spending, as officii! Soviet sources daim, will continue lo fall
relations lake. If ihe center resorts lo moreladies, ihc miliury might succeed ina larger share of Ihe economy's outpui, but ihc level of economic output mosi likely would drop so sharply that real outlays on defense would fall asenter-republic accord, in contrast, would improve general economicslightly. Al Ihc same lime, the accord mosl likely would give lhereater share of lax revenues and reduce lhe funds available for defense and other programs financed by thegovernment.
Because of the erosion in the quality of life thai has occurred during theears, Soviet consumers are reluctant to endure furtherUnfortunately, no relief is in sight. The drop in outpui in lhe first quarter extended lo manufactured consumer goods, and the defense conversion program has noi provided lhe benefits
18
lhal Ihc leadership had hoped for. Moreover, lighi limils on (he availability of hard currency will make il increasingly difficult lo boostPerhaps worst of all arc the twin ihreals of rising unemployment and accelerating consumer inflation.
Under these circumstances, it is no surprise that consumer hardships haveeverefor political leaders al all levels ofThe recent prolonged strikes by coal miners and sporadic protests by other workers
were directed at the policies of lhe centralandole in moving the center backialogue with reform-mindedleaders. But these demonstrations were also an indication of popular impatience with all levels of government for not improvingof living. Greal political skill will be needed tond, in the case of the central governmcnl. regainpopular irusl and to pul through effective bul often initially painfulmeasures. However, the alternativeompletely bleak Soviet fulure.
Appendix A
Problems of Measuring Soviet Economic Performance
The CIA has been involved in measuring Soviet economic performance since thend has been the principal source of Western estimates since the. Over the years, the primary focus of the estimates has been touantitative basis for analysis, like that in this paper, of changes in the Soviet economy. In addition, comparisons of the sizes of the Soviet and US economies have been produced. These two estimating efforts are largely distinct and arc discussed in separate sections of this appendix.
In Ihc last few years, CIA estimates of Soviet economic performance haveubject of increasing criticism. Although some critics have claimed lhat these estimates understate the growth that has occurred over the years, most of the recent critics maintain [hat CIA has overestimated both the growth and the size of the Soviet economy. These critics' arguments draw in parturge of attacks on official Soviet statistics, including some of the data used in the estimating process, by Soviet economists encouraged by gtasnost. Other arguments refer to the present turmoil in the USSR and Eastern Europe and question whether CIA cstimales have provided an adequate picture of Soviet economic difficulties as they have developed.
Estimates of Economic Growth
Measuring real economic growthifficult task, even in Western countries, where data arc far better than in the Soviet Union; however, changes in the level of production that have occurred in the USSR over the past year have been unusually difficult to quantify. For one thing, changes in Soviet reporting have left gaps in some of the data. In addition, rapid changes in the economy have increased the degree of uncertainty normally involved in the estimates.
Over many years, withew exceptions, CIA estimates have shown notably slower overall growth than official Soviel summary statistics. This can be seen in Ihe following:
Percent Change in Soviet GNP
for lasl year, the routine application of standard CIA estimating methods indicates that the drop in Soviet GNP was only slightly worse thanercent decline thai ihc Soviets officially reported. Pan of the reason is that one of the key assumptions used in estimating changes in Soviet GNP may no longer be valid under current economic conditions. Estimates of growth arc based primarily on detailed data on the ouipul of individual products included in ihe various GNP components, in most instances, ihc data reflect quantities of ouipul in physical units, such as tons of oil or liters of vodka.
.'1
valued at base-year prices per unit. Over the years, CIA and many students of ihc Soviet economy have looked long and hard at the reliability of these data and have found them generally acceptable.
However, ihese dala reflect changes in total output, including materials used in production, while the standard definition of GNP includes only final output, such as goods and services for consumption and investment, or, equivalently, the value added by the primary inputs, such as labor and capital, used in production. The impact of using data on total output rather than value added has been examined and, most of the time, ihis simplification has not led to substantial errors in the estimates. Given the breakdown that occurred in the Soviet transportation and distribution systems last year, however, when materials were tied up in freight cars and warehouses, value added almost certainly fell more than total output. Data reported by an official of the Soviet State Planning Committee suggestorrection for this problem might lower the estimate of the change0 GNPercentage points.
Another measurement problem that may have worsenedesults from using Soviet data on ruble values of ouiput in supposedly constant prices to calculate the change in some GNP components. Almost all Western experts, and now most Soviet economists, believe that these data overstate output growthand understate inflationbecause new products arc introduced at prices that include overly generous allowances for improvements in quality that arc often illusory. These data have notevere impact on CIA estimates in the past because they are usedstimate only aboutercent of total GNP and because Soviet inflation has been slow by Western standards. Last year, however, price controls weakened seriously, and inflation accelerated sharply. The estimate of the change in GNP might be reduced by roughly one-halfercentage point on this count.
Tlie estimate of the decline in GNP last year, corrected for both of the problems reviewed above, is aboutoercent. However, an adjustment for underreporting of physical data might offset part of this reduction. In the past, produclion managers had incentives to overstate the output they reported to the statistical authoritiesonsiderable share of their incomesand that of their workers -depended on reported output. Incentives for underreporting may have increased0 as acute shortages made barter deals between factories more attractive than deliveries to the central supply system. Enterprises also may be underreporting production lo reduce their tax obligations. Unfortunately, the impact ofhange in reporting is nearly impossible to quantify.
Even the corrected GNP estimate does not reflect the full impacts economic decline on consumers and other final users of ouipul. One reason is thai GNP includes depreciation, whichost of produclion but docs not yield direct benefits to users.ime when repairs of aging plant and equipment are takingrowing share of output. Soviet GNP excluding depreciation (or net national product, as il is called in the United States) almost certainly has declined by more than total GNP.
More important, ubiquitous shortageserious blow to consumer welfarehe loss of leisure timeesult of searching for goods and standing in line, allhough difficult to quantify, must have been substantial, ln addition, the combined effects of shortages and inflation resultedising "misery index" and growing popular anxicly about future living standards.
Comparisons of Economic Size
Comparing thef lhe Soviet economy wilh lhat of Ihe Uniled States is an even more complicated task lhan estimating economic ircnds. During the pastising tide of critical attention has been
22
focused on ihc comparisons conducted by both lhe CIA and the Soviet State Committee for Statistics.1
CIA currently estimates that total Soviet GNP9 wasercent of US GNP when valued in ruble prices andercent of US GNP in dollar prices. The geometric mean of these ratiosenerally accepted single estimate of relative size) Isercent. Soviet GNP appears smaller in rubles than in dollars because goods and services that arc relatively abundant in the USSR are relatively cheap there and relatively expensive in ihe United States. This sort of inveise relationship between relative prices and relative quantities is found in almost all international economic comparisons.
Although the geometric mean often is used to summarize US-Soviet GNP comparisons, the gap between the ruble and dollar measures provides an important indication of the difficulty of comparing two economies as disparate as those of the United Stales and ihc Soviet Union. In part,'this gap also reflects the much greater sophistication of US technology. In general, Soviet production processes require large inputs of labor, which is much more expensive in Ihc United States.
As CIA has acknowledged, its comparisons almost certainly overstate the size of Soviet GNP because complete adjustments for the inferior quality and limited variety of Soviet goods and services are noi possible. To calculate the ratios of ruble and dollar prices on which these comparisons arc based, Soviet and US products are matched as closely as possible in size, design, durability, and other qualitative features. However, the remaining quality gap is substantial. For example, Soviet consumer goods lack style and variety, retail shopping conditions are primitive, those who provide education arc often poorly trained, and health care is miserable. Nonetheless, until better data are obtained, the only further adjustments that could be made for quality differences would be arbitrary.
romising sign for the future, the Soviet Siaie Committee for Statistics has begun participating in the ongoing United Nations project comparing economies worldwide. As one result of this work, Soviet statisticians recently have published "experimental" comparisons of Soviet and US GNP that reflect substantial downward revisions of their earlier claims and that also arc lower than CIA estimates, as shown in the tabulation below:
USSR as Percent of United Stales'
OfficialExperimental
GNP
per capita
per capita
mean.
For further discussionis issue, see lhe statement, "feiimaies of ihc Sovietresented by George Kolt. Director of Soviet Analysis, Central Intelligence Agency, lo the Senate Foreign Relations Committee,
OA is studying these new estimates and looking forward to the results of further Soviet work in this area- However, the new estimates need to be interpreted carefully because theyhange from the previous UN practice, which CIA continues to follow. In the past, the United Nations assumed that the productivity of an hour of labor used to provide such services as health, education, and government administration was the same in all countries. In the latest UN comparisonsowever, the productivity of labor services in several East European countriesincluding Hungary, which is usedink country in the new Soviet comparisons with the United Statesis assumed to be only half that in the rest of the world. This new assumption, which has aroused controversy, is responsibleubstantial portion of the downward revision in UN estimates of the relative size of the East European economics.
24
Appendix B
USSR: Selected Economic Indicators
USSR: Total
USSR: Estimated Hard Currency Balance ofSSR: Estimated Hard Currency Debt to theSSR: Selected Indicators of AgriculturalSSR: Gross Fixed Capital
USSR: Totalbillion current US dollars)
Average Annual
Soviet exports
countries
countries
Soviet imports
countries
countries
Figures0 are preliminary.
Include* boih hard currency trade and trade conducied with soft currency countries Components may not add exactly to total because of rounding.
2S
USSR: Estimated Hard Currency Balance ofmillion current US dollars)
-22
90 arc preliminary. NA= Not available.
Net errors and omissions include hard currency issuance to and trade with communis! countries, credits to developed Western countries to finance sales of oil, and other nonspecified hard currency expenditures, as well as errors and omissions in other line items of tbe accounts.
USSR: Estimated Hard Currency Debt to thebillion current CS dollars)
dent
debt
o
and government
debt
in Western banks
debt
Figures90 are preliminary.
Estimates nf government-backed and commercial debt arc measured in current dollars and rcnect fluctuations in exchan
rates. Commercial debt also includes estimales for promissory notes held outside banks. Components may not add exactly to total because of rounding.
USSR: Selected Indicators of Agricultural
of ouiput
(billion rubles)
Commodity pr<
Grain
Potalocs
Sugar beets
Sunflower seed
Cotton
Vegetables
Meat
Milk
Wool
Eggs (billion)
(million metric tons)
0 are preliminary.
Value of outpui is net of feed, seed, and waste, in2 prices.
Gram figureunker weight. To be comparable to Wesiern measures, an average reduction ofercent is required.
USSR: Gross Fixed Capital4 rubles)
5 1
Total Investment By Source: State
Collective farms
Consumer and housing cooperatives
Privale housing By Sector:
Industry
Agriculture
Transportation and
Construction
Housing
Trade and services
Source: Narodnoye khozyaysnv9 and earlier years; and official Soviet economic statistics0 NA= Not available.
Original document.
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