The Soviet Economyorbachev Changes Course
Information Cutoff Date:9
A paper presented by the Central Intelligence Agency and the Defense Intelligence Agency to the National Security Economics Subcommittee of the Joint Economic Committee, Congress of the Uniled States.
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9
RELEASED
TABLE OF CONTENTS
Page
conomic Performance: Few Bright
Slow Progress on Peresuoyla
"Human Factor"
Modernization
Economic
Growing Popular
Rethinking
Trading Guns For
Selectively Seeking Outside
ew Investment
Backing Off From
APPENDIXES
Economic Performance by
on Soviet Economic
v
The Soviel Economyorbachev Changes Course
SUMMARY
rompted by another year of slow economic growth, continuing disappointment tn his efforts to mode mire and reform the economy, and rising consumer dissatisfaction. General Secretary Mikhail Gorbachev reassessed and revised bis economic poucses Gorbachev remains commmed to bu original visionevitalized economy. He has, however, apparently concluded that be cannot realize this vision as rapidrr as be once thought possible, or proceed dtrecay along the path he initially planned to fouow According to our estimates, tbe Soviet ccooomy grew by only aboutercenthe second straight poor yearly showing. Meanwhile, Soviet media indicated thai the campaigns io modernize industrial plant and equipment and reform the economic system, and even the once much-vaunted antiakohol campaign, were not only failing to meet die leaderships expectations but were occasioning major disruptions
Oruyercent of the state's priority protects scheduled for commissioning last year were actually completed and lhe growing backlog of urifinished construction testified to widespread waste of investment resources.
Although economic perrstnyyka has yet to include such radical moves as theof price subsidies, the economic reforms that have been Introduced reportedly have been confusing to planners and managers accustomed to Brezhnev-era ways of conducting their business
Reduced sutr revenues combined with increased state spending for Investment, defense, and subsidizing unprofitable factories and farms substantially boosted die budgei deficit and In cum. inflationpressures.
Consumers grew more dissatisfied and more willing to voice their complaintsa devtlopmtnt driven home to Gorbachevuch-publicized trip to Siberia where he faced crowds of angry consumers
Recognizingontinuation of these problems would threaten both the USSR's economic well being and his own political standing. Gorbachevumber of major policy changes designed to Increase substantially the production of consumer goods and services, reduce the budgei deficit, and postpone reforms that would require sacrifices on consumers' pan. These shifts were reflected ta
approval9 plan ihai greatly Increased the priority of consumption
iu
A subsequent decision to cm state centralized investmentillion rubles9 from what was originally plumed
The promiseercent cut in overall defense expenditures over theears.
The leadership's move to put retail price reform on hold indefinitely
The adoption of this package of measures does not signal die abandonment of modernization or economic reform Tbe cutbacks in investment are to come primarily from Urge, expensive projects such is land reclamauon At the same time, the leadership has reaffirmed lu commitmeni io retooling Soviet plants with modem equipment. Similarly. Gorbachev is proceeding with reforms such as Und leasing and it* encouragement of private sectoriill. he has clearly modified his program in an effort io increase popular support for perestroyita and reduce its disruptive impact.
In our view, the shifts that Gorbachev has implementedif sustainedhave the potential to boost consumer welfare andense of order to tbeuccessful diversion of resources from defense io consumption. In particular, could do much to increase worker incentives and case inflationary pressures, thereby paving the way for the eventual implementation of key economic reforms. Effectingiversion, however, wfll bc no easy task given the inefficiencies thai plague ihe Soviet economy
Gorbachev, moreover, is likely to face pout!cal as well as econoniic obstacles to proceeding with his program. He increasingly will be held personally responsible for any of Its futureThis situation obvmuslv increases the pressure on Gorbachev to produce results. Moreover, his decision to alter the pace of economic restructuring has made him vulnerable to second guessingopponents and bureaucrats could see Gorbachev's temporizingign ofand become even more recalcitrant. Although Ute regime has portrayed the defeatizable number of party officialsseveral at high levelsIn the9 electionsarning io those who are resisting Gorbachev's reforms, the unexpected repudiation of so many party oft dab almost certainly has strengthened pressure on Gorbachev from more conservative leaders who view his political reformshreat io parry authority. On the other hand, the electionloc of radical reformers beyond Gorbachev's controlsuch as former Moscow leader Bons Yeltsingives those who have criticized the slow pace of economicew forum in which to press their demands
iv
rhe Soviet Economyorbachev Changes Course
joini ClA-DIA report is ihc fourtheries examining General Secretary Mikhailefforts io revliaUxe ihe Soviet economy and lhe implications for defense In particular, ii assesses the major policy shuts8 io get his prog-am on track. The first pan of the paper details ihc8 and ihe sums of theand reform programs The paper thenGorbachev's backtracking on economic reform and his move to shift resources io con-sumer goods production. Finally, it considers whether these changes are likely to be successful
conomic Performance: Few Bright Spots
According io our estimates, afterspun6 ihe Soviet economy grew byercent in78 (sec
rate reminiscent of the pre-Gorbachevyears" (see' Although ihe regime could take some comfort from the acceleration in the growth of labor productivity last yearas enterprises disgorged surplus labor and used the savings to raise wages and salariestheof most sectors of the economy was extremely discouraging to Soviet leaders (seeAetailed discussion andor selectedisaprxiinting harvest did much to slow tbe economy's growthfarmtell by anercent. Record highs In lhe production of meat, milk, and eggs were more lhan offsetrain harvest thaiaccordingoviet statisticswas about 8less thanotato crop thai was the worstnd stagnating vegetable and fruit production.
Not all of the blame for slow growth, however, can be attributed to agriculture. Our estimates
Intelligence Community Estimates vs. Official Soviet Oalm*
Although Soviet media commentary and leadership statements on last year's economic results have been highly negative, the officially reported growth of Soviet GNP5 percentis subsun-tially above tbe InteUigence Community'* estimate, as well as high by historical Soviet standards. As In tbe past, Moscow's official statistics exaggerate actual growth both because of their failure to correct completely for inflation and their understatement of agriculture's influence on overall economicoviet leaders have become increasingly critical of the official growth statistics, and our estimate of the growth of Soviet GNP lastercentIsmore In Hue with leadership siatemems of the economy's performance than tbe growth figures reported by the state statistical authorities.
1 Set CcpojJ Intelligence Agencr. Krvttihng Soiirt Itxmomii Frrformtuvx Under GLunoa tmpttauiont for CIA tofmam.l.9
1 Out rauniioB ire preUmlrurv. *nd ta wilh prcfou* oumici will probibty be revUeflote complete iniomuwa an ihe pan year* ecooomieecomes rvBlUrte
I
Avaraas Annual Growth Rate* (Pa'cant)
I. USSR: Growth ol
that industrial production increased byercent last yearnot muchthan the sluggish rates registered throughout most of this decade. This continued low growth might have been acceptable to the leadership if it had been caused mainly by enterprisesproduction in order to retoolathat might promise more and betterin tbe future. Unfortunately for the Soviets, such was not the case. Instead, supply disruptions, failure to bring new capacity on line, andgenerated by reform measures such as wage reform and self-financing constrained output in most branches of industry The crucialsector continued to lag as even high-prioriry state orders for many types of machinery were not fulfilled Although energy production grew byercent according to our estimatesa respectable rate In light of the continuingof oil and coal extractionthe much baUyhooed Soviet campaign to conserve energy showed few posiuVe results.
The Soviet leadership has expressed increasing alarm over the lack of economic progress.NikoEay Ryzhkovear-end review of tbe economy painted an especially gloomy picture. Although some of the economy's problems were due to circumstances beyond Moscow's controlthe Armenian earthquake (seeorGorbachev placed much of the blame on the failure of has own policies to take root.peech to scientists and cultural figurese said that progress in the rood-exniiaiioo program was being made only "very slowly" and thai economic reform iset the leadership currently seems most worried about the growingpressures caused by large state budget deficits and the consequent consumer discontent Inanuary speech, Gorbachev labeled thai "the keyhile onremier Ryzhkov said that the USSR's "most importantto satisfy die Soviet people's steadirrneeds."
Economic Impact of the; Armenian Earthquake
Armenian earthquake8evere economic blowepublic already hobbled by months of ethnic unrest and economic dislocation. Before the earthquake. Armenia's economy waa suffering from work stoppages and disruptions resulting from ethnic clashes between Armenians and Azerls
Tbe earthquake killed an0 people andomeless, with damage to the region's industry, rail lines, road system, and power Hoes Economic recovery wfll cost bfllioos of rubles aod take (everal rear*
Moscow plans to constructxuuoo square meters of bouabif over then estimated cost ofillion rubierercent of annua] mvestmeni In national bousing construction
-Tbo length of time needed to rebuild damaged factories suttgma that Armenian
4*
r Industrial capacity will not be fuBy restored for ateara nnenian agriculture wtD falter until destroyed hrigatioo systems are rebuUt^
The costs associated with reconstruction win increase the Soviet budgci deficit and probably exceeduble cosi of the Chernobyl" cleanup.
The diversion of food and consumer goods to the stricken region will threaten already limited supplies of some of these commodities In other republics,
Moscow's intervention in the economy to relieve the effects of the earthquake will further retard an already delayed program io Increase enterprise Independence and move toward economic
Progress oo Pcrxsiroyka
To lodge (rom media commentary and leader-ship speeches, the Soviets were counting onpositive results from their "human factor" campaign to achieve higher overall growth and effect some tanspKc improvements in8 They abo expected theirto retool cfviuan industry io begin to bear fruit. Finally, they hoped that new economicwould get the economy on ihe path tovitality In each of ihese areas, however, they were disappointed.
"Human Factor" Campaign. To giveto the economy, Gorbachev first relied on his "human factor" campaign, whicheries of measures to increase personalimprove worker artinidcs, and weed out incompetents. The most visible of ihese measures were his campaigns for discipline and against cor-
rupUon and alcoholism During his first year infor example,conomic ministers and state comminee chairmen were replaced as Gorbachev made clear has intention io hold government and party officials more responsible for iheirThe Soviet press56 abo indicated thatesult ol* the anttakobol campaign, there hadarkedbsenteeism, fewer industrialenes, andproductivity overall.
Gorbachev continued to press parts of hisfactor" campaignft. With the trial of former General Secretary Breihoev's son-in-law Yurfy Churbanov last summer, Gorbachev again pui officials on notice lhat corruption would no longer be loleraied Similarly, ihe leadership con-Unued io pay lip service to the issues of discipline and lhe need for greater efforts by workerstn it least one critical areathe antuueohoi campaignGorbachev appears io have re treated
i
8 The ipparcni reason for ihis rcireai was his recognition that ihe campaign had been less effective than originally claimed and had led io unforeseen problem* In contrast to earlier official claims lhat per capita alcohol consumptionbyercent during theears of ihe campaign to reduce drunkenness, recent state menu by Soviet officials indicate that ihc drop was less than half that amountesuliurge in illegal production. Home distilling ofalso contributed to widely publicized sugar shortages, and ihc loss of revenue from taxes on official alcohol sales added to tbe budgei deficit, perhaps by as much asdlion rubles per yen For these reasons, Gorbachev has allowed state production of alcohol to Increase over the past year
'i Program. Soviet media reports abo Indicate thatull yean.program to reequip Soviet industry with more
modern machinery has failed io live up to eapec cations On tbe positive side, the proportion ofused io retool and reconstruct existing cmrrpriscs continued to increase8 Also, newty introduced machinery models were said to4 percent of machine buildingcomparedlanned level ofer ceni. These successes, however, have not been accompanied by comparable increases tn coramts-skHungs. producdon capacity, or across-the-board improvements in product qualiry or in theembodied In new products. In fact, onlyercent of the state's prioriry pro)ecu scheduled for commissioning last year were actuallywith shortfalls in all sectors of the(see figureonsequently, the total value of uncompleted construction projects increasedercentn addition, according io Inetttya corjjrnentator Yurty Rytov.and supply miscalculations resulted in over it billion rubles worth of equipment iimply waiting to bc installed at the end of the year.
SSR: Rtporfd Growth inolCsptil.
' onfmion accompanying implerriemaiion of decisionseorganize the construction indus-uyooi regional basis, io shift construction ac-tMry toward bousing and other social-cultural purposes, and to ranch constructionto self-financing undoutxedh contributedhe growth in unfinished construction Inlocal officials and enterprises look advantage of increased autonomy to rest an pet construe ilon protects Moscow had halted6n effect dissipating scarce construe-uon resources. The pace of factory modcrniza lion sufferedcorxuixissionings of computerized processing centers and robotized lines actually fellshortfalls appeared in the plannedof heavy electrical machines, turbinechemical machinery, metal working machine tools, and ball bearings.
To make maners worse, much of theproduced8 failed to meet Moscow's expectations for higher quality Prime Minis-
ter Ryzhkov again complained that machine tool builders made too marry manually operatedtools and too few numerically controlled ones According io the Soviet press,uarter of newly produced machines purporting to meet world technological standards failed io doThas trend must be particularlyto Soviet leaders, as they struggle to overcome Urgeand In many areas growingicchnoiog ical lags behind the Vest (see figure 3)
Economic Reform. Meanwhile. Gorbachev's economic reform packagewhich faced lu first real testid little to help matters.without exception, implementation of the reforms (see tableroved to be disruptive
Among the reforms intpoduced or extended last year were measures designed to
Slash the number of centrally mandated output targetsnow known as "state orders"and give the enterprises
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(in yuil)
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Computers
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Equipment
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8 10 12 14 li
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stimated Sowar Lag Bahmd the Unitad Siatai In Kay Technologim
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, Table 1
Soviet Economictatus Report
Purpose Enterprisesbeareconomic
CSuitSftt"
activity Invesimeni Be hnanced iruoue" anesource*
Results
Enterprises producingercent of output in It* economy reportedly operated on selt-hnanc-ng-
Reform it to be extendedercent ot industryegneuflute; planrvar* "hope'* to complete changeover ol nonproduciion sphet* lo seme principles.
and local governments willreater role in forming ihai' own Pudgers and will ba eioected iott*ie iher* Ol iheir
EnurpnaM will prodwcaortiona"ombfcance with mancat crye orQers and will be given greater latitude in determining the ran
Only "scarce" produce* gooot anao> itata orders will be rationed by lie state Olher supplies will ba distributedrad* system lo allow he* purchase and uie betweenuy***
yet 4Woduced
State orders mad* upercent of
industrial production
ercentndustrial output wa distributed through wholesale trade.
to be introducedEstonia Latvia Lithuania. BeMrussia Moscow City, rater ASSR.iovs. OWear.
State orders are to make upartem of inouitnal production
About to percent of total mdntnal produclionholesaleercent of sales through state supply network* operated on wholesale I
wage and Waryhe
productiono be overhauledepend on anbility to finance ihem and be lied toin prpductrvirv
Fonnqn tito* Allows selectedand
enter prises toelly in foreign trad* and enter impventures.
flera- once* Will be madeetter reflect aupplv and demand, prabeblyigherfor foods, housing, and consumer services
to the reform, wages rasaerceni while otfioelly reported labor producitvtty rot* byercent.
ercent ol export* andercent Of impels were conducted directly by ente>pt4es-
Noi scftecUiled to be implemented.
announced8ercent of wort force
pril, all enterprises have ngni to engage in deect foreign trade subject to some constraint* not yet disclosed
None To begin only after full public discussion
authority to make their own production decisions
Reduce the central rationing of supplies and gradually replace ilystem of "wholesale trade" that allows enterprises to freely purchase their supplies from other enterprises, manufacturers' outlets, or territorial supply organs
ystem of economichai allows tbe enterprises toarger percentage of their profits in reium for fooling more of iheir own expenses.
Encourage the formation of independent businesses (cooperatives) io improve
the quality and availability of consumer goods and servicesExpand long-terra leasing arrangements in agriculture io encourage greater individual initiative and rcsponsibiliiy.
Given the erroneous bureaucratic inertia that plagues the Soviet economy, even well-conceived and weU-lmplementcd reforms would inevitably have been disruptive. The disruptions occasioned by these reforms, however, also reflected aof problems in both their design and theirThe roost serious of these were caused by the decision ioackage ofinterdependent measures gradually and
6
secfuentiauy. leaving full implementation of two ol* the mosi essential reform*(hose inand wholesale tradeuntil lasteries of "dbconnccts ihai reduced (he effectneness of the packagehole Fur example, the attempt to implement sell hnanang before reforming the price strutture mcani ihai ptofiiabiline used a* in accurate measure of enterprisency li was partly to compensate for these pricing uvcquities thai the irarustries continued to prop up unprofitable enlerprises and rely extensively on state orders, undermining the intent of the reform.
Implementation of ihe reforms was also made more difficult by their introduction in the midstive-year plan thai had been adopted before the reforms were worked outesult,managers were asked to undertakereforms while at ihe same lime meeting high outpui targets Holding ihe ministries rcsponsi ble for meeting ihose targets virtually guaranteed their continued interferenceicrpnsc
These design problems were compounded by execution of theays that distorted iheir original intent. For example:
Bureaucratic foot dragging on tbe corrversion to wholesale trade forced an even greater dependence on the central supply system than was envisaged by8 plan
Some private businesses set their prices at exorbitantly high levelsa move that discredited the cooperative movement in the eyes of many consumers
when centrally set state orders were reduced, rrunistnrs stepped in to establish their own state orders ihai often accounted for muchif not mtof an enterpriseierths circumventing attempts to decentralize production planning
Leasing arrangement* were interpreted by many farm managers in ways that gave the individual farmer no more incentive to Increase his production than be had under -he old system.
Growing Popular IXvsatls faction
WliUc thefforts to restructure ihc economy were floundering, the regimegrowing popular discontent over its failure to improve Irving standards In laying outhFrve-Year. Gorbachev had originally told ecmsumers they would have toin the short run until economic reform and the industrial modernization program began io yield results. The regime stuck io this policy through most6. but speeches by Gorbachev and other senior officials7 signaled the realization that Soviet workersmore goods and services up front To counter growing skepticism among theas to the benefits of perettroyna andbuHd support for ihe regime, the Soviethad promised to un prove the availability of goods and servicesespecially foodand tbe quality of life8 Indeed in laying out ihc planhen Gosplan Chairman Nnco-lay Tafyzin said thai consumer goods producuon was to be "considerably in excess" ofh Five-Year Plan targets for that year.
Consumers, however, had Utile causeer capita consumption grew, according to our estimates, by onlyercent and would have been stagnant hadof state produced alcohol continued to fail Reduced farm output, processing, marketing, and distribution problems, and ihe inadequacy of storage facilities resulted tn food shortages and widespread consumer complaints. According to the Soviet press, "inierruptions In the supply of beef' affectedercent of the major cities. The availability of nonfood consumer goods improved onfy slightly as well, and Industry continued to be criticized by Soriet leaders for the poor quality of hs goods According to Premier Ryzhkov. tbe Soviets estimate thai ihe unsatisfied demand for consumer goods last year amountedtflion rublesby our estimates aboutercent of total consumer purchases of goods and services.
The goods thai were available, moreover, were often priced higher than In previous years.since Gorbachev became General Secre-
iiryrices tn coUecitvc farma/sif share of meat, fruit, and uuiiahles in purchasedhave risen almost JO percent due to poor supply of these goods in Mate Mure* and ming consumer demand.vcraur pnvr* furodsnpri-miruS because mam emcrprrso cither anirHuuly labeled some of iheir products i> new allowing them to increase prices, or stopped manutaciur-mg cheaper tannicsiven item
The difficulties wilh mounting inllattonary pressures last year were due primarily, however io lhe emergence of large-scale budfcet deficits, resultingise in state spending for food sutrtidiev defense, imestmeni and the support of unprofitable enterprises, and near stagnation in the growth of government revenues We esUrrute that8 the deficit rose ioercent of Soviet GNP (see figureoreover, as pan of toe wage reform package introducednierpnses were given much more control over wages This allowed enterprise* in raw wages
far in excess of productiviry Increases, thereby contributing io increased demand for consumer goods that were already in short supply (sec
All of ihese factors led8row-ing disparity between consumer expectations and actual results (seehe most strikingof popular dissatisfaction came duringmuch-publicized irip to Krasnoyarsk inhere he was besieged byresidents complaining of poor housing, food, schools, and hospitals Indeed commentary in the Soviet press and widespread worker expressions of unhappiness suggest that Soviet ciilzcns saw themselves worse off8 than previously
Bethinking Strategy
The lack of progress on economic perestroyka and the surge in consumer discontent Last year highlighted for ihe Soviet leadership the serious-
Psrconi ol GNP 10
FigureSSR: Estimated Slate Budget Deficit,.
8
Percent
ag*.
1m lawmi c
f/oureompanion ol Raportad Growth in Average Monthlyith tatlmatad Growth in Foal Par-Capita Consumption.3
of lhe problems the USSRt weal as lhe extent of lhe economic and toctal disrup-Qons to bc expected during the transitionreformed"Indeed, we believe that tbe growing recognition that his campaign tothe economy was simply not working has led Gorbachev io alter bis basic approach to lorving the country's ecoooecoc problems In the clearestof this shin in course, Gorbachev has acknrawtedged that cwasumer welfare must be substantially improved soon if the regime is io develop broad-based popular support for per-estroyka He put9 plan that gives consumerigher priority than codplans: production of cocisumer goods Is slued to growercent, rather than ihe original targetercent- Minister of LightVladimir Kryuycv has abo stated that during
utpui of consumer goods willuboo rubles higher than ihe plan target To raise the output of consumer goods, Gorbachev hasto the traditional strategy erf bringingroduction resources to bear, as opposed to rerying oo increased efficiency What setsapart from his predecessors Is that these rescnarces are to come primarily from defense
The Soviet kadenblp has also realizedust restore financial order to tbe economy, prl-inaruy by tackling the budget deficit, before it can bring InflaOortary pressures under control To thisigh-level government commission chaired by Ryzhkovrogram In9 for reducing the deficit Expenditures arc to be slashed by ciming defense spending and byre-
9
ummary of Selocted IndJcators of Consumer Welfare
Meaiurn' Prceptant
MdlcatW
j&a
Con-
looOi
goods
care
rupair
art
*
0 cnenaa
-> m* m m ptmmm
in-
mitaie*
ducing naif centralized investmentillion rubles from what was originalh planned
Gorbechcv has alsoecided lo slow substanuaUy the peer of those economic reforms, such as Ihc rbrauuiion of pocc subsidies, thairequire sacrifices on ihe pan of iheLeonid An alkin the director of the Insti-rute of Economics of the Academy of Scienceseading advocate of reform, recently admit -led that the failure to meet consumer demand combined with the higher budgei deficit, hadethinking of priorities that would slow ihe reform effort, with the first real results of reform not io be fell5
Trading Guns For Butler. Over the past yearalf Gorbachev has increasingly called on the defense industries io step up their support to the crvillan sector. Ine gave
them responsibility for rcequipping most oflantsisbanded civilian ministry thai manufactured equipment for food and consumer goods producdon.
In September, in an effort to increase ihelrto do more for the consumer, the Council of Ministersecree that allows theindustries to retain profits from above-plan production of consumer goods9reviously they had to remit most profits io the state At the same time, defensewere publicly criticized for not doing more. Ryzhkov warned thai anyone who failed tothe consumer goods program wasig mistake."
In the past, attempts to prompt the defense industry to support the consumer goods and the modernization programs have been relativelybecause lhe leadership did not apply substantial pressure and was unwilling to pare back military demands. Last year was noWc estimate that Soviet defense spending, as measured in2 rubles, grew byercentIn line with the growth rates of ihe past several years. Procurement of weapon systems wasa|or contributor to growth. Expenditures on ship procurement rose sharply, caused primarily by an Increase in spending on both strategic and general purpose submarines Missile procuremeniparticularly' for intercontinental ballistic missiles (ICBMs) and strategic surface-to air missilesabo displayed strong growth
Last year, however, Gorbachev took several actions that evidently were Intended to lay the groundwork for future military cuts Ath Parry Conference Inhe leadership characterized the threat from the West aswhile charging thai the expeoditures of "huge sums" on weapons and the neglect ofmeans had weakened both the economy and national security. Numerous commentaiors. for example, criticized the deployment of theissileaste of badly needed resourcesove thai Intensified political strains between the Soviet Union and the West Theresponse to such complaints was tothat future Improvements in military capabil-
10
try be based on quaulatrve rather thin quanuiadye factors, ud thai pob ileal considerations be given greater weight before new weapon systems arc developed and deployed Sovset spokesmen began un prying that this would result In lower defense expenditures, while other officials stated that lhe increased civilian demands on defense industries could reduce military production
ecember at the United Nations,moved from hints and suggestions about his plans for defense to more specific promises by announcing ma tor unilateral cuts in Sovset military manpower and equipment to be carried0 (see table i)eeting with the Trilateral Commission Inorbachev expanded upon this pledge, promising lhat the defense budget will be cutnd the production of weapons and military equipmentercent during the sameSoviel commentators subsequently said thai the promised cuts tn defense spending will be sp-
Table 3
Promised Soviet Force Reductions in Eastern Europe. USSR, and Mongolia
rFrom Eastern Europe
4 (roan COR
I Iron* CascnoiiovMta
1 tree- Hunoary
Ten**
toXX)CO horn Eastern Europe
b.OOO to be "iiflun;*ied. others convened to tree ton end paining vehicle*
Arttaeer
toial
Aireot*
Pam of ptenea to be used as
Ground support eawvment to be redearOueatf
Personnel
rom European pan ol USSRon southern pan ofwi" pan c' ussa
Mongolia
3round force oVvierons to beA*liminated
plied io "total defense eipendlturcs" rather than to the small portion of this tout published In the annual state budget (see inset on
For all ihe Soviets' show of openness on their defense spending plans, some crucial points about Gorbachev's pledge remain unclear. Moscow has not. for example, indicated whether lhe promisedercent cut applies8 spendingor to ihe expenditures planned90 Similarly, it has not indicated whether the defense budget is io be reduced in real or only nominalhether ihe cuts will be made after or before the budget is corrected for inflation Moreover, the Soviets have yet toany 6gurcs on the level of their localspending This continuing sdence makes ii difficult io assess the sue of the promisedspending cuts. Given the distortions that historically have ctiaractenaed Soviet economic and financial statistics, this difficulty almostwill persist even if the Soviets make good on iheir pledge io release their "toial defense expenditures.*
In view of the problems inherent In measuring Soviet defense expenditures, moreover,ihc implerricnuuon of the promised spending cuts will require substantial evidence ofin Soviet forces and ihe flow of weapons and equipment io them. In many cases. Moscow will provide substantial publicityboth forand foreign audienceson specific cuts In some areas, national technical means will provide the West with independent confurnaiion In other areas, such as research and development, cuts in spending will be far more difficult to mocuior
If the promised cut is io be appliedefense budgci as large as we estimate Moscow's to beabouloercent of Soviet GNPthen the resource savings Involved will be subsiantiaL Indeed our eslimates indicate that to reduce Iheir total defense budget2 perceni. the Soviets would have to go beyond the cutbacks la military programs thai they have specifically promised to make
By our estimates, onlyhirdalf of theercent reduction can be accounted for by savings associated with sviihdrswing from
il
CJMfunt on the Soviet MlUiary Budget I
In the past the Soviets have releasedingle figure far the "defense budget Ineputy Foreign MinisterFeircrvskiy publicly announced that this figure represented only Ministry of Defense expenditures for rraamuining raunary personnel, military pensions, logs*-Ucs. niilitary construction, andumber of othere also pledged that comprehensive defense spending data would be releasedrice reform which would "allowwith the West" Other spokesmen quickly claimed that thb would happen inears "
There haveumber of statements recently In the Soviet pressincluding those from Ktrvcmroeni officials such as Foreign Minister Shev-ardnadaecalling for carry release of the Soviet defense budget- Pro-reform eie menu, who want to use the data to strengthen their case forresources from production of defense to civilian goods, an apparently growing impatient with wturr they perceive as stalung by opponents ofbcy have said that they would Like to sec the new Supreme Sovietreater role tn determining allocations to defense
The Soviets may release defense spending data this year because of mounting pressure. Even then, however, ft will take time and strong political support from Gorbachev for the Supreme Soviet to shape Soviel defense spending policies lo the face of entrenched rrUTitary tatxresta.
Meaxrwhile. claims by the Soviets lhat they are unable to release their defense budget because they themselves do not know what they are spending are increasingly less credible, now that Moscow haseryercentrsracntteeduction In local miUiary expenditures. Indeed, continued Soviet delays intrue" defense budget will leave the USSR open to the charge thai it is using the time tolausible but stall deceptive or uninformative set of figures
complying with the Intermediate-Range Nuclear Forces (INF) Treaty, and carrying out the reductions promised atN Although some additional savings will come from reduced demand for weaponsthai ts.esult of ibe force restructuringprocessed during his UN speech, wethe Soviets wiH have to do much more than what ihey have publics disclosed to achieveamounting2 percent.
may be concentratedmaller number of protects, but that those projects funded may be more technologically ambitious than was typical in the past. Projects thai would result in only minor improvement* might be refected is sim pry not being worth tbe cflon At tbe same time, lechrtologsealrr ambitious projects designed to counter very distant or only hypothetical threats might also be rejected. As rioted above, however, cutbacks in militaryould be especially difficult to confirm.
the Sovieis might take io meet their promiseefense spending cut includeIn military research, development, testing, and evaluation (RDT&E)efense Minister Dsmitriyeputy Defensefor Armaments Vnaliy Slusbanov and Deputy fnresgs Minister Aiekaandr Bcsarraertnykh all crtti died tbe USSR* mUnaryaken together, these criticisms suggest that future Soviet RDT&E
The Soviets probably also hope thai some of the promised spending cuts can be Implemented under or In anticipation of future East West arms reduction agreements, although they rcccajrnize thai agreements will be difficult to concludetheir1 deadline for tmrslement-mg ihe reductions Conclusiontrategic Arms Reduction Talks (START) treaty, for exam
12
pic, could save the Soviets several billionear Moreover, ihc Soviets probably also hope thaiSTART agreementparticularly when cornbtned with their unilateral reductions inforceswill lead io negotiatedin the conventional area or.inimum, weaken NATO's resolve for conventional andnuclear weapons modernization Anywith NATO that would allow them io forgo or reduce expenditures on modernii ing convcnuonal forces could result in substantia]
According to Bcssmennykh. the Soviets also expect their foreign policy to contribute to theconomic goab not only direcdy by achieving arms control agreements, but indirectly byore benign intcmaiionalthai wdl allow ihem to redirectfrom defense to the civilian economy without damaging the USSR's security Easingwith the People's Republic of China, for example, might allow ihe Soviets to reduce the size of their armed forces in the eastern Soviet Unionreater extent than thev already have promised
Tbe Soviets have indicated thai the' percent reduction in the defense budgei wiD be carried out1 but transferring UV freed up resources to crvilian usesand fullyeconomic benefits from themIs likely to take more time (seehe Sovietshave admitted thai in many cases they arc just beginning tcasihUity' studies oofinal assembly plants from militaryivilian uses. They have indicated that they intend toexisting plants from defense io cMilanrather than transferring manpower and equipmeni from defense plants to ChilianUnless, however, the convened defense plants are given the same priority in resourcethat they have enjoyed historic ally, their ability to satisfy the requirements of their new civilian customers may hot' be as grot as It was for the tnihtary.
In our view. Gorbachev will have strong in-ccntn-cs to keep defense spending down, at least through the period ofh Ffve-Yearhis would be consistent with theannounced plans for the defenseio aid the consumer sector during the same period. Council of Ministers Deputy Chairman
Traxuferabillty of Resources
Ultimately, the degree lo which resources are transferable from one use to another bquoaoBf: jl of time.e lathery easy to plan for shifts tn resources that win occur several years Into toe futurenown now. for example,ivenot going to behen the plant and machinery Deeded to produce that weapon do not have to bc bulh and the material* andgoods Intended for that purpose can be readily divertedifferent plant or purpose. Shining the existing stock ofr those rjaanoed for Defenseext few years, tn contrast, can be more difficult, depending upon tbe resource trrvofved
materials used In weapons reductionspecialty steels, cocawructkon -and engineering fibers, for rxanrpkare both readilyidik
and ba great demand lo the cfrQtan sector.
rm ediaie goodssuch as bearings, composiirs. and, roost tmportam. mtexo-eaecrronlcsare also relatively easy to transfer and important for civilianvj*r
Tbe Soviets would benefit from the transfer of huge numbers of defense-industrial workers and,esser degree, from reduced conscription demands resulting from personnel reductions.
Transfers of defense relaxed industrial punt and equipment would prove more dim cult, but the USSR would derive dear benefits from ihc reaJkxattan of. high-quality production machinery to civilian productton.
13
Igor" Beknisov has said for example, thaihc defense industrial ministries are tb5 billion rubles of machinery (outotal ofrillion rubles) for ihc food processing sectoralmost as much as ihelue of ma-chincry installed in food processing07 (seehey arc also ioillion rubles worth of goods for light industry, as well as increase outpui of construction materials, medical equipment, and plumbing supplies.this greater crophase. Ryzhkov has stated thai the share of crvilian goods produced by the defense industries would increaseurrently toercent1 and to someercentnurfacc. this suggests further efforts to reduce the defense1 Frve-Ycar Plan-
Seleettvety Seeking Outside Support. Although the Soviet leadership appears firmly committed to seeking Indigenous solutions in economicit is not ignoring potential gains from trade and other foreign relations. Indeed debate within the leadership over rhe rote foreign resources can play in economic restructuring has intensified over the pastumber of Soviet economists
Table 4
Miniilry Amaiion
Contributions of Soviet Defense-Industrial Ministries to Food rVrjccssing Modernization
Food Proceeeing Equipment
Fruit and vegeubia processing Sued and syrup production Pacta production Canning industry Packaging ol dor good*
Defonta Inaunry
G**w* MacfMM
Building
Livestock and poultrytee ceem production Canning mduitry
Medium Machine BuikWso
Radio Indunry Shipbuilding
Bakene* and sugar refineries Con (action industry Processing of fan and oils
Oacy mOuitry
Refrigeration equipment Bakery oven*
have, in particular, called for stepped-up imports of consumer goods toestiveand hopefully, provide sufficient incentives io giveoost
The leadership has not. to bc sure, abandoned lhe conservative approach toward increasingthat it has pursued in recent years For the most part, the current leaderslike those before themremain sensitive to the nationalimplications of becoming financially overex-tended. They are particularly reluctant to boost imports substantially without greater confidence in their ability io pay for the goods as well as io effectively absorband ultimately diffuseimported technology. Moscow's debt runup in ihc mid, thesubsequent appucaiioo of Western economic sanctions against the USSR, and Eastern Europe's own financial plight earlier in this decade arc still cited frequently in Soviet discussions of foreign economic policy
The recent pattern of Soviet trade and financial activities nevertheless is sending mixed signals on Moscow's Immediate plans. Soviet orders ofand equipment from the West climbed in the third and fourth quarters of lastoost in these Imports over theearsonversely, the Council of Ministers has recently proposed that imports of consumer goods bc increasedith the increase apparently to be financed by reducedof capital goods. And while net newrose several billion in the first halfhe trend appeared to have tailed off during the latter half of the year. Moreover, the program tosizable Western credit lines for the import of machinery for consumer goods production has quieted considerably. Sizable lines were finalized only with consortiums of West German andbanks, and these are being drawn down very slowly. Most important, despite growingunrest, the Soviets have yci to arrangeubstantial infusion of Western consumer goods
To the extern Moscow is seeking Westernit isoncerted effort to ensure that it will neither waste what it obtains nor pay more than is necessary. For example. Moscow Is continuing its aggressive pursuit of joint ven-
14
i/SMhi Sauna-*In SO* af >au> von
ff. USSff Order* ol Western Mechinerv end touiprnent Irom Top Seven Countrtem. I
svith Wen cm firms to improve its chances of more effectively absorbing Western equipment and know-how (see inset on. Moscow Is abo seeking ties to uttcrnational orgaiuiaiions such as the General Agreement on Tariffs and Tradefsparently hoping that member ship will increase its knowledge of world markets and lead to increased exports
ew Irwestmertt Course During the past year, Soviet commentators havecmsgivmsrs about the long term efficiency of their investment strategy that emphasued rapid growth of Investment and targeted heavyibr top pooriry The Soviet press wascritical of the waste and inefficiencyarge-scale investment protects such as dam* canals for water diversion, and hugeInwaltoions. Even tbe completion and main-
tenance of tbe Baykal-Amur railway (thehcrwpiece investment protectwasThe move toward more efficient use of investment resources resulted in proposals last year toumber of major protectstbe Dnepr-Bug hydraulic complex, the planned world's largest hydroelectric power complex on the Yeniscy River in Northern Siberia, and the Volga-Chogray canal protectand culminated in March with an announcement thai investment spending financed by the state budget would be cutiDSoo rubles9 from what was ongiruilly planned. These cuts are to come (rom hafts in resBcnal development programs and land reclamation protects.0 on. moreover, state caqiendirurcs for investment are to be fur ther restricted by giving enterprises moreto finance Investment through their own funds and interestbank loans.
15
Recent Trends In Soviet Joint Ventures
The USSR's continued hand sell" of rOint ventures, as well as its willingnessrant concessions during protect negotiations, resultedubstantia!ontract signings last year. As ofoscow reportedoint ventures had been registered with foreignf them InvoMng Western participants Onlyoin' ventures had been registered by the endest Germany, the US. Italy, France. Great Britain, and Finland were the leading partners in terms of the number of agreements actually signed
Despite the Impressrve growth in the number of deals concluded the Sovset leadership Is far from satisfied with the progress of its joint-venture program. Foreign Arms have committed to make relatively small Investmentsin the aggregate onfy aboul one-third of the estimated3 hi! boo investment. Well over one-half of the pfofects with Western firms Involve capital contributions of lessillion. Service and coosumcrrelaicd protectsrather than deals thai will enable Moscow to acquire advanced technologiescoarinuc to dominiie the list of complete contracts. Tbe Soviets have, however, completed several small deals to assemble personal computers andsoftware, and some ventures in tbe machine tool area are also under way. The transfer of human capitaltbe technical skills, expertise, and know bow of Western labor and nsanagementhas abo been far leas than the Soviet leadership anticipated
The Soviets have expressed interest during the past year in establishing "free economic zones" tn tbe Soviet Far East and the Baltic states, largelyeans to attract additional joint venture Investment. Jotm enterprises operating in these zones would be granted concessions on taxes and customs payments Research oo thbn an carry stage.ew zone* may be established as carry ast wOl rake several yearsand probably' better terms and condirions than are likery to be offered initiallybefore they attract substantial"foreign investment
New regulations attempt to address some Western concerns by allowing foreign partners to exercise greater management control over joint venture protects and reduce their hard currency outlays. Western businessmen are reportedly disappointed, however, that Moscow failed tosolutions to the problem of profit repatriationthe main barrier to foreignroup of six US companies known as the American Trade Consortium has recently signed aagreement that will allow the members to overcome thb problem by pooling their hard currency revenues,S oil company shoukiering most of the burden by exportingjotendal petroleum joint venture. Even if the profit repatriation ingle can bcdditional problems confront joint ventures once they are established including high tax rates, unreliable materia] supplies, unexpected hard currency costs,hortage of working and IMng
Investment for the development of the consumer goodseing increased signJ-iearitiy while heavy industry wOl rccerre lessInvestment io the foodo rise byercent and In the meat and dairybyercent When imported machin-
ncluded equipment for Ughi indostryb to increase so pcrccnL Inove to prevent limited RADfrom being squandered the Sonetsthai henceforth only those machinery designs that supported one of theriorityof technological developmenl would bc
16
centrally funded (set: tablei least half ofirections are clearly intended to henetit the consumer
Meanwhile. Moscow has taken major steps io focus its modernization eBon. The primaryremains on the machine building sector and the need to modernize the technology olInhe Politburothe machine-building sectors priority role as the technological basis of economicand gave the Machine Bo tiding Bureau, the ministries, andonths to plan "radical measures" to improve machine budding's(see Inset below).
If this trend holds, the planned averagerate of invesimeni growth inh Five-Year Plan will probably be lower thanercent rate ofh. Investment growth is more likely to be in the I-erccw range, as resource constraints put pressure on state spending across the board. Investmentwill probably favor consumer-oriented
sectors and rural infrastructureespecially roads. Nonetheless, competition for investment resources will remain heated For example,the Soviets are successful in shiftingproduction away from oil and towardgas. investment in this area will have to increase rapidly to avoid energy shonfalb that would cause economic stagnation (see inset,. Transportation is another sector that will probably need more resources, especially if the Soviets intend to improve the rural tnfra-structure and help the critical railroads.heavy industry and Soviet farms maysmaller increases than In the past
Backing Off Fnm Reform. To avoidconsumer problems, the regime has also decided to back off from some of Its plannedSpecifically, retail price reform, which was to be implemented1 along with wholesale price reform, appears to have been pushed Into the indefinite future. While recognizing Its critl-cality to other reforms, even reform economists are expressing skepticism about its wisdom be
Tbe Emphasis on
The "radical measures" the Politburo has called for to improve machine building's perfbrrnarice arc likely to reflect the leadership's preference for "highnd require the itmuductlon of advanced production technologiesassive scale. Currently,9 plan calls for the Ministry of Insirument Making. Automation Equipment, and Control Systems to Increase fts outputwhich Is vital to the re equipping ofest basebyercent. The overall production of the crucial components of factory automationmachinery, equipment, and Iristniments uxorporating microprocessorsis to increase byercent, and almost every product newly entering into production will contain microprocessors. To meet this surge in demand for mlcropnxxsicea. last year (our cWl rriachme-rsuilcling ministries Joined the Ministry of theIndustry as producers of electronic equlpmcm.
Moscow also hasew strategy to raore theseonto the factory floor. Previous efforts often led to theraduction of flexible rnanufacturing ceils or other automated production technologies into existing factories aod resulted in Inefficient "Islands ofbe Soviets hope that by concentrating dcifveries of advanced equipment to their most obsolete factories, they can skip over the islands of automation stage and convert their worst factories Into showcases of computer-Integrated manufacturing. Western experience suggests that this isisguided approachjumping directly to full automation often results Inexisting Inefficiencies. The preferred course In the West Is to first simplify the production process, then begin to automate where economically justified and only then to Integrate the islands of automation.
17
.Table 5
Focusing Industrial Modernisation:rioritv Areas
EmohatK Social development
program
Transportation
Construction mecnmery
fuel and energy equipment
Metallurgical equipment
Machrna-building equipment
ol Areas 4
12
Emphaal*
Consumer goods
Medical equipment
Publishing and printing equipment (one not reponed)
Automated processing
Scaled-downo tnand privet* larme
Advanced technologies (live not reponed)
Subway trams
Local Trams
Improved buses
Compact can (eight not -sported)
equipment
Hoed leymo equipment
Road repair equipment (three not reported)
(none reponed)
(none reported)
(nonn reported)
Assessed Needs
Color TVs VCRs.nd hewers
Diagnostic equipment
F.nsning. tanning and loorwear equipment lor light
V
Knitting equipment
Ptoceeaing equor dairy mdusiry.nd wgatable*
Staess steel equipment
Pacsagmg equipment
Meaaurmg equipment
Beverage equipment
Reiterated storage
Locomotives withDrMmg and electronic system*
FreigMspecially retrigDrated ana ipee-ai-purpoM rollmg stocs.
Train com mo and conuol equipment
ntruding icebreakers
Mecrieruied Voadmg/ unloading equipment
Mot oi.nd valves
Geoohysieat equipment
H igti-quality nanconoarva Pipe*
Soap steel prcceesors
Electric arc lu maces
Rolling miU* Machine toot*
Computers
quipment
and Icestry equipment
Processing equipment with automated controls
Norvec-rroarv* tanks
Engineering plastic*
Stainless ataeiea.
18
o Da vestment Wild Card
In response io growing domestic demand, (he USSR has become th*argest energybut the associated costs are skyrocketing New deposits of oil. coals, and gas arc increasingly distant from populated areas and more difficult and costly to exploit. Soviet energy users, however, have not yet been forced to adjust to this new reality. Vast, heretofore easily exploitable reserves have firmly embedded in the minds of the Soviet population the Impression of cheap, plentiful energy. Waste remains pervasive in factories and households.
Soviet plans call for energy production to increase byercent by the0 and oil output to remain stable. Goals this ambitious could push energy's share of investment from aboutercent to nearlyercent of the total usurping resources essential to modernize industry and improve consumer welfare. Curbing growth in energy Investment, however, would risk almost certain energy shortfall and economic stagnation. Unless there are majornergy efficiency, the USSR will be hard pressed to sustain moreercent average rate of economic growih over the next decade. Addressing tbe shortfall by reducing oil exports wouldoviet trade with Eastern Europe and severely crimp Moscow's ability to import from the
of anticipated pubbc outcry against price increases (see inset,.
Other reforms have been put on hold as weil
Despite theromises to reduce state orders rajbuantiaUvtare orders wdl continue IO dominate tbe consumer sector because of the need to ensure Use produclion of inexpensive goods.
To correct what Council of Ministers Chairman Ryvhkovreatecisions on wage increases, which were to be the preserve of the enterprise, are now to be monitored by the banks to keep wages from exceeding productMty gains and adding to inflationary pressures
In another step to restrain inflation, prices of consumer goods will also be stabilized through stricter governmental conuofat
Oibcr reforms, however, parttcularfy those that svfj benefit the consumer, continue io be pushed by the leadership Land leasing was endorsed by ihe recent plenum on agriculture and Gorbachev bud out bold plans to reduce central controls over the farms. Tbe reform of agriculturalprices, orlglnalry scheduledas osoved uplso, die regime continued Co support die expansion of the private sector, al-
lhough measures have been introduced to restrict cooperatives in selling prices because of popular resentment over price gouging.
Outlook
We believe thai the policy shifts Gorbachev has made have the potential io advance histo revitalize the Soviet economy Asseems to recognize, he must put hishouse in order and regain the support ofif he is to proceed with the other parts of his economic agenda Cuts in investment andspending should help case the deficitand provide resources Ibr increasingof consumer goods Ai the same time, the reduced targets for production of capital goods should allow the Soviets to tackle the problem of unfinished construction, allowing them to bring additional capacity on line and thus Increase
Successful diversion of resources from defense and investment to consumption, however, willifficult task, especially given the inefficiencies lhat plague the Soviet economy. Changing athai for the pastears has emphasized heavy industry Into one oriented toward thewill be time-consuming and disruptive
19
rMtft^ng Off From Retail Price Rrform
Wc simply cannot possibly win the price [refonn| campaign under the present coodlbons. No rrann- how carefully the retail price Increase might be prepared and captained to the people, no matter bow much compensation will be paid to the consumer, the ensuing situation would not satisfy the ma)oriry.
Slkolay Sbmdev, Institute of ISA aad Canada
A reform (of retail prices) would behink, under certain conditions, Fust, there must be adequate stability of the consumer market when the supply of goods and money are In balance, Second, there mustflScientty large stocks of goods to prevent potential negative events. Third,
there must be ecrarxMnic competition among state enterprises, between them and cooperatives,
and so forth. Do all of these conditions cc|ectfrely exist today? Not yet
UoaM AJmlkto, Director, Institute tf Economics, USSR Academy of Sett
'.
A yearearalfas willing and Instiling oo [pricevenelieve" tructural reform of prices Is necessary Only before it was both necessary and possible, nowb necessary andope we wul soil getoint where ft wul once again become possfcle. but for now the moment has passed.
Otto fjuatfsv Deputy Oslef Editor,
The threat of growing inflation, as the experience of Hungary, Poland, and China warns, requirescautious and gradual approach to the implemenutlon of reformso usemany Illusions about the possibility of putting the consumer market In order by
Oieg BoffomaloY, Director, Institute of Economics of Ihe World Socialist System
even once the transfer ofchieved thereubstantial risk thathift in resource audcauon will come toay of avoiding radical reform rather thaneans of preparing tbe populace for it In sum. we believe thai while tbe policy shifts Gorbachev has made may buy him tune towith tbe hard pans of his economica key question to be answered in the next fewhether he wiD be able io make effective use of thai time To do so. Gorbachev must achieve at least modest near-term un proveonsumer Irving standards, reduce the budgei deficit and the wasteful use ofresources,omprehensive plan for
the implementation of cUmcult measures such as price reform, and prepare the populationfor the sacrifices these reforms willenuul
Gorbachcv, moreover, is likely to face pobocal as well as economic obstacles io proceeding with his program. He will increasingly be heldrevp.iru.ible lor any of Us iurure failures This situation increases the pressure on Gorbachev to produce results Moreover, fus decbaon to alter the pace of economic restructuring has made him vulnerable to second guessingopponents and bureaucrats may sec Gorbachev's temporizingign of weakness and become even more recalci-
20
tram. Although the regime has port ravedizable number of party officialsseveral at high levelsin the9 electionsarning to those who are resisting Gorbachevs reforms, the unexpected repudiation of so manyfficials almost certainly has Mrengthcned pressure on Gorbachev irom more conservative
leaders who view his political reformshreat to party authority On the other hand,loc of radical reformers beyondcontrolsuch as (ormet Moscow leader Yd'tsingives those who have criticized the slow pace ofew forum in which to press their demands.
21
8 kunumit IVrformance by Sector
Our preliminary estimates indicate that perestrxyytra did aidemprove Soviet economic per* form in ceoor harvest, supply shortages, widespread failure to meet delivery deadlines, and confusion sparked by reform policies all crjntrlbuicdelaUvety low IS-percent growth In GNPa rate similar io the previous years
Industry
Indusirul produciion grew bv anercent Last year. Production was disruptedof trim pons tion bottlenecks, supply interruptions, and difficulties In Implementing economic reform
Machinery. According to our estimates, output of civilian machinery showed iu slowest growth smce ihe, finishingercent higher than the level' We estimate that outpui of consumer durables increased byercent last year Consumer complaints remained widespread however, as much of the output apparently continued to be of poor quality and consisted of items not rughfy sought after Wc estimate that the growth of producer durables was eonssderabfy lower last year thanustercentreflecting continuing probtcms imptcnxniine. the industrial rrxxierr-iiation program
Irutusxnal Materiais The rate of growth of production of industrial materials (chemicals metals, construction materials, and wood products)8 was anercenta repeatTs disappointing performance Continued problems with raodemazaooo were compounded by the uiiroduciion of economic reforms. Mediocre results were registered across the board growth in two of five subsectors dropped compared
Seriousutpui of plastics and resins, iniermednie chemicals, and pesticides brought down estimated annual growth in the chemical industry fromercent7 toerceni
Outpui of cementillion tons, helping the construction materials industry ioerceni gain. However, the production of window glass and precast ferroconcreteboth critical to Gorbachev's plans to modernize constructiondeclined
Ferrous me tab production rose anercent8 Output of crude steel fled pipe, and rolled tied rose modesdy. while boo ore output fell
Growth of raoruerrous metalsercent last yearrebounded6 leveb. due in large pan to to creased utilization of proccssirui capacity and new Western smelting rfflilpmcot
Continued)
Strong performance tn rumiiurc productioniddling improvement in paper outpui helpedercent Increase in ihe ouipul of iheproducts tndusin Ihe industry was criticized, however, for shortfalls in production of chipboard and cardboard packaging
Energy. Despite unresolved problems in tbe fuels and energy industries, the Soviet Unionthe only major induHrulized nation lhat is energy independent, with ihe largest proven od reserves outside the Persian Gulf andercent of the world's natural gas reserves. Energy production8 grew bvercent, although this level of outpui required IS percent of total Sovietercent if pipeline systems areo prevent declines in national production. Moscow will need to make another large boost in oil-industry investment. Oil productionillion barrels per day (bbl'd)lthough daily output fcDighillion bold in lhe second quarterillionn the fourth quarter. Producuon In the key West Siberian regionwhich accounts for two-thirds of nationalhas leveled off while production from other regions continues io fall,ubstantial Increase in drilling and new wdl completions. West Siberian production will soon begin to decline.
Salural gas output again led growth in energy production,illion cubic meters, with increased production from naslields in northern West Siberia continuing io account for nearly all the growth. Maintaining this robust growth over ihe next several years, however, will become difficult and expensive Further expansion in gas consumption will require accelerated construction of local distribution pipelines as well as successful addition of new customers through conversion of existing equipmeni in gas and wider use of new gas-bred equipment.
Raw coal production increased byercentnd once again the net gain to Soviet energy output is probably less than this due to the declining average energy content of Soviet coal. The trend toward small gains in energy from coal is likely to continue since almost all of the growth in raw coal production continues to come from open-pit mines In the Eastern USSR that produce some of ihe lowest-quality coal In the Soviet Union. Coal production will probably continue io grow slowly because Moscow Is facing technical challenges in exploiting Eastern coal and developing new industrial consumers very slowly.
Electric pouer output grewercent last yearthe smallest gainearly all of this increase was produced ai nuclear and hydro plants Instead of ai fossil fueled plants as in previous years. The suspension or cancellation ofuclear plantsinvolvingeactorsmeans that maintaining the neededercent annual rate of growth In electricity will become increasingly difficult unless efforts io increase powerplant capacity receive priority attention.
Consumer Goods Industries Overall output in light industry grew by anercentith most productsexcept textiles and hosieryshowing higher growth rates thanight Industry was sharply criticized, however, for the high price of its goods and was accused of using price supplements and contract pricing to boost the price of its goods without making real style improvements The food processing industry ilsoespectable performance, with increased output of meat, dairy, and fish products offsetharp drop in sugar production. The official announcement of the easing of the aniialcohol campaign is also reflected in production statisiics. with output of most alcoholic beverages showing suong growth. This industry also came in for heavy criticism last year, with complaints of shortages and declining quality.
24
Continued)
Agriculture
We estimate thai Soviet (arrn production dropped byercenin tile heebSpercent dropecord highs in production of meat. milk, and eggs ledcrccnt increase in the livestock sector Still, this was not enough to onset the negative effects of the smallest potato crop inhirdentury,ercent drop in grainillion tonsTillion tonsnd unchanging vegetable and fruit production The only bright spotcrceni Incrcsse in con on production Moscow's efforts to eliminatehe cotton.growing Central Asian republics and to reestablish proper crop rotationcrucial for obtaining higher yieldsare evidently taking hold
Future food consumption may also be undercut bynventories of livestock The number of bogs held steady bat year, but die stocks of cattle, sheep, and goats continued their sude and are now downctav According to some Soviet researchers, the declines in herd sue may krcjpardiie ambitious long term plans for meat production In pan because of rbtt Inventory reduction, per capita meat availability was up by moreercent Supplies were spotty, however, as marketing and distribution problems resulted in numerous shortages
Transport
Freight shipments by all carriers Increasedercenthe second yearow of slow growth. Transport plans overall were fulfilled mainly because the slow growth of industrial output dampened demand for transport services. Shipments were up on the river fleet and pipelines, and virtually unchanged on common earner trucking The volume of freight shipments carried by railroadsthe main barometer of freight tramportatioogrew by1 rue moreercent8
rying to support future growth In shipments by improving efficiency Raff-road Labor productivity continues to soar because of the implementation of the Bclorus-sian railroad experiment thai pared down the siae of the workrogram to shift highway freight from departmental earners to the centralized fieei ts making slow progress but promises to improve the notorious Inefficiency of overall trucking withto labor, capital, and fuel usage Soviet transportespecially die railroadsnevertheless will require substantial investment to modernize antiquated equipment and expand capacity For example, severe railcar shortages and slowutomating traffic control are constraining growth of rail shipmcnts-
Trs.de
The USSR's hard currency trade balanceurn for the worse8trong showing ihe previous year. On the basis of preliminary data, we estimate that the trade surplus fell over IJ5 buuoo to aboutdbon because export growth could not keep pace with surging imports. The dollar value of Sovset hard currency exports increasederceni last rear due to increased arms salesagain on creditto the leas developed countries (LOCa) and growth an nonraiuiary. nooenergy exports, wnh the coropcxUOoa of these sales spreadumber of cc-ximodary caregceie*.
25
Continued)
Imports were up nearlyercentoor harvestubstantial burst in grain purchases. The higher quantity of grain importscoupled with rising world pricesadded at leastillion to Moscow's import bill. Sizable growih in imports from countries such as West Germany. Austria, and japan suggests that machinery and equipment Imports also increased last yearsome increase was anticipatedickup in orders from those countriesurchases of consumer goods reportedly rose, albeit not enough toisible impact on store shelves. Moscow also boosted imports of oil from the Middle Eastlargely in payment for arms salesfor resale elsewhere.
The shrinking Soviet trade surplus prompted both higher borrowing and increased gold sales. Net new borrowing increased by several billion dollars, much of it taking place carry in the year when the leadership probably decided to finance some imports and build up reserves in the face of uncertain export earnings because of weakening oil prices In looking to foreign credits, the USSR sought to diversify its sources of money by issuing Us first state bonds in the Swiss and West German capital markets. The Sovieis also began to negotiate large credit linesumber of Western banks during the latter half of the year. Theyeal with West German banks, but so far they have made little use of this credit line, Estimated Soviet gold sales amounted io approximatelyillions for the third straight year Moscow turned heavily to ihc gold market in order to cam hard currency.
The Soviet Union's trade with its Communist partners also sufferedoscow registered large trade deficits with most of the countries of Eastern Europe as falling Council for Mutual Economic Assistance (CMEA) energy prices continued to erode Soviet terms of trade with the region. The value of Soviet exports io Eastern Europe declined byercent, prompting Moscow io limit the growth of imports from the region to avoid even larger 'deficits. Trade with Yugoslaviaanother Large customer for Soviet oildeclined slightly because the Soviets have been unable io boost non-energy exports to offset the falling value of oil exports. Moscow's trade with China rebounded sharply8ownturn the previous year, but it is stall below planned targets
26
- ables on Soviet Economic Performance
Page
USSR: Estimated GNP by Sector of Origin at factor
USSR Es lima ted Value Added in Industry at Factor
ussit: Estimated Average Annual Growth of Per Capita
USSR: Estimated Giowih of GNP, Industry, and Labor
USSR: Gross Fixed Capital
USSR; Total Trade.
USSR: Estimated Hard Currency Balance of
USSR: Esuxuated Hard Currency Debt to the
USSR: Selected Indicators of Agricultural
2
Continued)
USSR: Estimated GNP by Sector ol Origin at Factor Cost2 rubles)
-
3
1
7
9
9
6
8
9
7
5
9
0
6
8
5
7
(mclud-
mililary
ta un-*
USSR: Estimated Value Added in Industry at Factor Cost2 rubles)
Industry2
Metals
fanou*
erous Fuel
Electee power MBMWV Ch*micals Wood, pulp,
onstructionindustry Food industry Other industry
7
89
3
4
7
3
9
Crown
28
Continued)
USSR Estimated Average Annual Growth ot Per Capita Consumption (percent change)
-65
0
on
i
4
goods
2
7
2
a
6
-
9
Bines
4
7
- and
1
:f't
on
6
4
'
3
I
USSR: Estimated Growth of GNP. Industry, and Labor Productivity1 (average annual percent change)
0 0
product3
producing*
Continued)
SSR: Gross Fixed Capital Investment4 rublaa1)
2
9
4
7
* tmt
and
g i
*
Sscioi
B
0
and eawmj-
caWi
B
0
1
0
aaaaaaiaaaai
IMI mm wt
B-S
Total'
current US dollars)
-
EapOR*egion
7
0
2
0
1
eouriBiea
0
4
2
7
6
davnicooo cowniriea
Import* by reg<on
6
3
6
6
0
0
4
6
courttnet
6
4
3
developed
I
f
ll
Continued)
USSR: Estimated Hard Currency Balance of Payments (million current US dollars)
account
balance
lo b
iniecMt
iiantfax
account
ll>
debt "
debt
Oange m
163
527
lf" in
bant! 1
late
credits
LDCs
Salt*
and
'
aw
*MIWI10 iml al
Continued)
Hard Currency Debt to the West (billion current US dollars)
d*bf
otftC*
gtjvffcfTvritjrtT. -
abt*
In WnW" btnkj
d*U
USSR: Selected Indicators of Agricultural Output
6 0 1 3 3 4 8 8 7 B1
V*lu*output* 8 4 6 4 8 8 5 1 8 (baton eubH*>
32
Comrtoovn production (million BBBaa ion*)
Gmln*
2
6
3
0
2
2
Mm
0
3
8
3
2
8
Original document.
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