GORBACHEV'S ECONOMIC PROGRAM: PROBLEMS EMERGE (DDB-1900-187)

Created: 6/1/1988

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Gorbachev's Economic Program Problems Emerge

CIA HISTORICAL REVIEW PROGRAM RELEASE IN FULL

Gorbachev's Economic Program: Problems Emerge

Information Cutoff Dale:8

A paper prepared by the Central Intelligence Agency and the Defense InteUigence Agency for the Subcommittee on Economic Resources, Competitiveness and Security Economics of the Joint Economic Committee, Congress of the United States.

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8

Gorbachev's Economic Program: Problems Emerge

SUMMARY

tiortyachev's ajnbitious program ioodern, more dynamic Soviet economy rantroublearoiliar problem* wilh poor weaihcr and transportationereby the disruptions caused try thr introduction of economic rrlorrm. with the result that Soviet GNP grew by lessercent last yeara rate reminiscent of the late Brezhnev period

The new quality-control program (gftsprlyemka) introducedndustrial enierntlscn proved to be particularly disruptive, especially carry in the year The introduction of wage re form, ministerial and enterprise staff reductions, and.esser extent, new financialurther complicated the enterprise managers' already difficult andtask. Buffeted b> these disniptkans industry grew by onlyercent, and the critical crvuian maehine-buikling see to* did not expand at all Harsh weather also hampered agriculture, where outputercent below the previous year's record level.

'Ihc effects of the sharp slowtlown In growth were felt unevenly across the economy. In line with Gorbachev's emphasis on the modernization program. Investment appears to have been given top priority. Major defense programs also appear to have continued on track, allhough Gorbachev demanded that the armed forces use resources more efficiently and some cost cutting measures were apparently instituted- The real loser7 appeared to be the consumer,ear* into Gesrbachcvs economic programhas seen almost no increase in tlie standard of living.

While slow growth in Soviet GNPand the attendant rxoWerm In resource allocationswere Ihc most obvious signs of theifficulties, the real problems for Gorbachev lay elvcwhere The leadership had hopedtrong economic performance last year wouldrm foundation for the future development of Gorbachev's economic program, but this did not occur. Enterprises still appear to be confused by contradictory guidelines for implementing the aa>scl! financing reforms being introduced this year, shortfalls7 nuchinery output will slow the pace of modernization, and transportation bottlenecks persist. In addition, shortages of consumer goods, reduced job security, and widespread concern over pnicnilal increases in consumer prices are undercutting the prospects lor Improved worker productivity.

In light of these problems, thr short-term outlook for Gorbachev's economic program is not good. Although considerable year-to-year duct nations are rxtSsiMc due to weather and other external factors, we project average annual GNP growthercent or less during the rest of this Hvc-Year Plannder these circumstances, we beUcve that If. as seems likely. the leadership continues to pursue its high-investment strategy and provides some Increase In consumer good* to motivate workers, it will have to tap resources from one or all three of the following areas:

Defense currentlyercent of GNPIncluding an especially large share of the output of (he critical machine-building sector and large shares of the

higltest quality materialsand, thus,rune candidate to support Gorbachev's modernization program. The defense industries arc already being drawn into helping the consumer-oriented industries, and the military is placing Increasing emphasis on more efficient use of resources and on personnel accountability.

Other SectorsGorbachev could also try to slow the growth of investment to other sectors of the economy to find additional resources for modernization and the consumer. Energy and agriculture, which take about half of Soviet investment annually, are prime candidates, although any major reductions in these sectors would disrupt output, which couldipple effect across the economy.

AbroadContinued economic difficulties would make mcreascd imports an attractive option, especially In selected areas such as energy and machine tools. Although Gorbachev has repeatedly indicated that the machinery for modernization must come primarily from domestic production, the Soviet credit rating in the West remains good and the USSR has considerable room to expand imports beyond the current levels. Prospects for increasing imports from East European allieswhich need machinery for their own domestic modernization programsarc less bright.

While it is still too early to tell how fax Gorbachev will go In rapping each of these sources, we should begin to get some good indications as to the choices the Soviets arc making over the next year. Decisions on economic reform will probably be made and the fundamental goals of the next Flftccn-Ycarould be unveiled at the All-Union Party Conference in Junethe first such conclave in nearlyears. The emphasis placed on traditional growth targets (a* opposed to modernization and reform) In leadership speeches and the Soviet press will provide additional insights into the policies Gorbachev Intends to pursue.

Whatever direction Gorbachev follows, wc beb'eve that if the economy continues to perform poorly in the next few years, tension within society and the leadership will increase. Bureaucrats will become increasingly frustrated by loss of privileges and status and by demands that they show greater initiative. Military leaders arc likely to become more and more uneasy If benefits of the industrial modernization fail to materialize. Soviet citizens will need to see some improvement in living standards if rhc regime Is to achieve necessary gains in worker productivity and avoid widespread discontent. Although Gorbachev appears to be working against no set timetable, failure to head off these tensions would,inimum, make it more difficult for him to pursue his economic program vigorously and could, ultimately, call into question his strong political position at home.

11

1 ABLE OF CONTENTS

Page

Summary

FScopc

iQiroductlon

Gorbachev's Game

ifficult

What Went

Trends In Resource

Defense

Where tkirbachev'a Program Stands

Industrial Modernizations The Record After 3

Economicong Way To

Near-Term Outlook for Gorbachev's

Possible

Finding More

Tapping

Squeezing Other Sectors

Looking

Slowing Economic

Measuring Progresst Signs to Look

The Upcoming CPSU Party

Shifts in Economic Reform Policy

TABLE OF CONTENTS (Continued)

Page

Shifts in Resource 21

APPENDIXES

Economic Performance: Conflicts 23

on Soviet Economic 29

Scope Note

ThisIA report is the thirderies evaluating ihc performance of the Sovietunder Gorbachev and analyzing trends In resource allocation. Data on Soviet7 arc preliminary and. as in past years, will probably be revised slightly as more complete information7 results becomes available.

Gorbachev's Economic Program: Problems Emerge

Last yearMikhail Gorbachevs third in powerwas expected by horn Western observers and the Soviets themselves to mark an Important stage in the Soviet leader's efforts to revitalize the USSR'S economy. After enjoying respectable growthhe Sovietsew pro-gram of quality control designed to make suchure meaningful and legitimateof progress than in the past. They alsowith their efforts io strengthen discipline in the workplace, inodernizc the industrial base, and reform their system of economic incentives. In so doing, however, they came face to face with problems that highlighted the extraordinaryof their task.

This joint CIA-IMA report assesses Gorbachev's program as the Soviets approach the midway point ofh Rve-Ycar. Itby describing his policies, showing how they have fared So far. and discussing the impact they have had on Soviet military programs.

The jiapcr then analyzes Soviet economic prospects through ihe, noting pos sifilc adjustments Gorbachev might make to his if his program should continue to falter, the paper discusses possible leading Indi-eators of changes in Soviet economic policy.

Gorbachev's Game Plan

Gorbachev has grouped his efforts to revive the economy under the broad rubric oferm thai includes three ma|or elementstighter economic discipline, industrialand economic reform, lie hashis program as one of "indepth, trulytransformations" and justified the need for such professedly radical measures by claiming

that by the time he came to power the Soviet economy hadprc-crisis" stage.

Clearly, Gorbachev has some basis for his harsh description of the late Brezhnev period and the Andropov and Chernenko years. During the decade priorhe Soviet economy not onlyharp slowdown in growth but also failed to match the West's rapid rate of technological advance. Although the USSRto Strengthen its strategic and conventional military forces during this periodprimarUy byarge share of resources tothe Soviet leadership had reason to be concerned that prolonged economic and technologicalwould weaken the USSR's military position and undermine Soviet global gains (sec

When Gorbachev became General Secretary inowever, the planning process forh Five Yearas nearly complete Although he made some adjustments to the plan, he was limited in his alMliiy io Institute maior new programs. Thus, he initially sought and achieved some short-term gains by extending and intensifying Andropov's discipline campaign, making wholesale personnel changes, and reorga nwing the bureaucracy. At the same time, he laid ihc groundworkonger term strategy by Callingeversal Of the slowdown mgrowth (hat began inorbachev expanded his efforts byuality control program (gospiiyemka) and by embracing an economic reform program that goes much further ihan that of his predecessors.Gorbachev's program is comprehensive, it is in some respects inconsistent, particularly with regard to timing For example, his goals for an immediate acceleration in the growth of national incomeronounced improvement in the quality of output arc. in our view,incompatible, while his efforts to change

FtOfioniic Slowdown

r>- 4mw SM o> us

.

RtUtivaly low Gtindsn) ot thing Uttnmod mh iMI

aa 40

orbachevs Domestic Imperative

economic planning and adnunistrativc procedures dramatically has been thrustargely unprepared bureaucracy. Nonetheless, at least Initially, the economy showed sometyival under Gorbachev's prodding. Good wcaTher and the discipline campaign combined to boost economic growth during the last half5 andowever, asbroader program was put in place, its inherent conflicts surfaced and caused majorthroughout the economy.

ifficult Year

The growih targets in7 Sovietplan woukl have been extremely ambitious even if the Soviets had not planned toost of new economic and administrative re-

forms. Yet. even while calling for high rates of growth across all sectors of the economy, the Soviets introduced gospriyemkahich were tyrcducing aboutercent of industrial output) and implemented newand managerial arrangements in selected factories. Although the leadership realized that changes of this nugnitude would be disruptive, the Soviets almost certainly did not anticipate the extent of the difficulties that ensued. Formonthly government reports on planrepeatedly criticized economic managers fur not anticipating and dealing with thethat occurred. These disruptions, combined with weather-related problems and supplyresulted In Soviet GNP growih of lessercentate rernimscent Of the late Brezhnev years (secnd

2

Table 1

USSR: GNP by Sector of Origin1 (annual percentage growth)

^ it WfUCfl-

^

s

' Hi

fndmfort WtStmhixVui MM

*M

Alrnost all sectors of lhe economy (ailed lo match the gains achieved6 Aftera modest increasendustrial growth

dipped to IS percent, with rjcrfcernanceut of thendustrial branches down comparedhe machine building sectorkey torruxlcrnization plansregistered no increase in output, and ihe resulting shortfalls In equipmeni for Investment reverberatedindustry and the rest of the economy (see inroducers of basic materialsmetals,and so forthalso failed to meet plans, posting lower growth thanxacerbating industry's problems, the volume of freight trans ported was newly flatore positive note, the energy sector did weU, as higher invest meni67 yielded dividends.esult, the economy was relatisrty free of energy bot-tie necks, and Moscow was able to boost its hard currency earnings by stepping up fuel exports to ihe West (Seeore detailed description of Soviet economic performanceresents selected statistics on the Soslet economy.)

annual O'Onln <alai .. am!

win o'atui ol ouipul

Praliatinaty

Noiand

FigureSSR', economic1 90

Agriculiur.il output, meanwhile, wasciccniecord levelSoviel success in maintaining relatively high agricultural output7 in the face of less than favorable weather reflected atartial vie lory lor (nxbachev's farm policy, tjopdeclinedercent,ute springvajrTrosis In May0 percent drop in fruit output and problems for otherrain harvestillion tons, although the largestasillion tons more than6 harvest and thus contributed little to growth Moreover, the poor quality of thedue lo wet weather during live harvestled to increased Imporu of milling quality wheat during the second half of the year, 'flic grainhowever, did combine with an excellentcrop and si/ablc gram imports to boost meat, milk, and egg production to new records.

while ind.'ten-iii performance in Industry and agriculture was the most obvious sign of the ccon

omy's problems, the real "bad news" layUse leadership had hopedtrong economic performance last year wouldoundation for the future development of Go* bacbevs economic program. It was counting on more machinery of higher quality to accelerate production8 andhift inio newer products to help the modernization drive's push for product renewal; and advances in gospnyemka. self financing and wage reform toase forxpanding reformfoundation hid hern IjkI. then low overall growth would noterious concern. It could even be takenign that tktrbachevs Initiatives were being implemented.

This, however, was not the ease. Shortfalls in machine budding win limit investment growth, especiallyH Moreover, lo judge fromin the Soviet press and leadership speeches, there was no maior improvement in overall prod uct quality. Finally, problems encountered with

BuildingTlie Focus of Gorhjclx Modernization Plans

(kirlsachev has argued that the key to long-lasting improvement of the USSR's economic sitube continuous introduction of Mcreasingfy productive machinery and equipment lhe mode rni/af von program, therefore, depends heavily on improvements in machine building and metal workingthe sector that produces these producer durables, is well as consumer durables and mililary hardware The ambitious targets oflan reflect the sector's imponance.

Output is to increase byercent

Targets fix high technology equipment arc even higher Planned growth ratesespecially high for numerically controlled machine5omputer0lexible manufacturing05nd processing centersercent).

- Quality and technological level arc to improve dramatically.ercent of ihc most importani types of machinery output will br up to "world technical levels."with5 percent for civilian machinery6 Newo be at leastm more productive and reliable than previously produced equipment

machinery is to be introduced more quickly than In the3 percent of machine-building output Is to be in its fust year of prodmimn upercent

'i percent of the sectors own machincr) ts to be new. ie. brought on line during theears To reach this goal, investment in civil machine-building ministries i< to rise hyercent Meanwhile, the withdrawal rate lor old capital is id doublehile the withdrawal rate for machinery is to quadruple.

(he Introduction of self-financing and wage re-fornt, combined wilh die alarms sounded hyeconomists rcguding (he lack of prcparaiion for changes this year, suggest7 aho failed to lay the proper groundwork lor expanding reforms.

w In short, the USSR8 wtih many ofproblems that It started withow worker productivity, poor qualitythroughout much ol the economy, and aUI prepared for rtimomic reform Unless Corbaehcv can achieve belter results this year in implementing his program lhan last year, histo revitalize the economy are likely to falter and tensions wiihln the leadership are certain to mount as the Soviets are forced lo maketough resource allocation decisions

BTiar Went Wrongf

Harsh winter weather carry in the year,supply problems, the Introduction of aquality control campaign, difhculilrs with sell-financing and other new economic reforms, retooling,lackening of labor discipline all contributed to the Soviet economy's lackluster performance

A record cold snap in January andheavy snowfallsbruary bit hard al basic materials, accounting in large part for (he falktff in their growth Production stalled because of interruptions of raw material supplies, transport bottlenecks, and increased requirements for fuel and lubricants. Allhough output of these products bounc ed back by midyear, the recovery was mil ayjpid or as complete as2lso years of bad weather Agriculture's performance was also hurt by poor weather For example, cold spring temperatures delayed planting* and held down fruit and vegetable output, ami heavy fall rains reduced (he quality of the grain crop.

The introduction of new quality control sine-lures further dirrkiiBhed Soviet industrial growth, at lime* bringing produdtonirtual stand still and diverting resources to the repair ofgoods. Although information in thepress Indicates that quality control standards were relaxed somewhat after the first quarter

So&priyvmka dampened production during the cniire year, especially In the machine building sector, which at counted for about two-thirds of lhearticipants

Self financing and other economic reforms granting increased operating autoisomy to enter prise managers were also introduced In selected facilities and left their mark as well. Confuseddirectives from above, many plant official* floundered, struggling to nod reliable sup pliers and meet contract obligations Gorbachev also truest ioncd the hitherto sacrosanct principle* of egalitarian wages and jobew pay system introduced7 increased wage differentiation and encouraged enterprises to cut excess workers and managers 'thousands of layoffs have already occurred, and more arc scheduled Although the numbers involved arc small relative to the sire of the work force, this unemploymentadical departure from previous policy. There have already been press reports of labor disturbances over lost bonuses and other changes caused by the reforms

Meanwhile, despite rising investment over dieears, ihe Soviels fell far short of their plan to bring new capacity on stream and replace obsnlflc equipment, mainly because ofin the construction industry and the inability of machine buildersulfill their com mitmcnis to customers The tautness insaapptsrs, coenbined with other factors,igh percentage of projects uncompleted throughout the economy (see

According to ihe Sovietlosses in work timecaused by traditional problems of Hip ply interruptions and idle equipmentincreased7 compared6 Corn pounding these rwobicms, Moscow km ground in its human factors campaignthe spur to Im proved economic performancey wage cuts and Increased unpaid overtime hecause of gospriyemlra. Soviet workers balked, at rimes resortingork stoppages and revert ing increasingly to loafing and drinking In (be workplace (see tnset).

Finaity. although the overall Soviet foreign trade balance improved, importsmaller role

s

Machine Building

Light Industry

kv3iar.<-

Energy

Metallurgy

Chemical Industry and Timber

90

SSR: Percent of Planned Capital Construction Projects CompletedyComplox.

boosting Gorbachevs program7 than6 and failed to make up for the shortfalls inproduction. Despite higher grainreliminary data indicate that hard currencyfrom the West dropped byercent in real terms as imports of machinery ani1declined. East European exports to the USSR also grew only marginally, at least temporarilyrlng Soviet plansncrease tlictrto Soviet economic development Although Gorbachev has stated that he wants to base his economic program on domestically producedwc do not believeubstantial short-run drop in machinery imports was part ol his plan.

Trends in Resource Allocation

Thel the sharp slowdown in growth were felt unevenly across the economy In line with Gorbachev's emphasis on the modernization

program, investment appears to have been given top priority. Major defense programs alsoto have continued on track, althoughhas demanded that the armed forces use resources more efficiently aivd Some cost-cutting measures were apparcmiy Instituted The real loser7 appeared to be ihc consumerears inio Gorbachev's economichas seen almost no increase in theof living

Investment Despite the economy's problems new fixed Investment growth appears to have come close to the plan target (sec tableNonetheless, problems surfaced with respect to the use and composition of investment. The goal for completing new projects was not achieved New capacity brought on stream grew byercent comparedoal ofercentthe second year of substantial shortfalls inof the planned capacities needed to support

6

Diminishing Returns on lhe Human factor

human factor" initiativesdiscipline, temperance, and improved work incentiveswere Intendedaise labor peoducihlty for theears ofire-Year Plan while Industry retooled Improved discipunc helped boost productivityut by June7 Giorbachev was complaining that momentum had been lost According to theecretary, "the Incidence of drunkenness has increased again and idlers, parasites, and pilfererspeople who llvr at the expense of othersagain feel at liberty '

Backsliding on discipline was one reason for the increase in work-time losses cited in7 plan fullillment report Other factors probablyole as well. The problems that traditionally lead to the greatest lasses of work rimesupply interruptoor organization within enterprises, equipment sltonages, and breakdownswere exacerbated last year by the weather, by resulting failures in the transport system, and by Gorbachev's economic reforms. Hxpanded use of second and third shifts also added to work time losses in manywntimcs arc frequent on late shifts becauseack of support personnel and because workers often leave early. According io press reports, for example, many worker* in Asiatic republics quit after being assigned lo the evening shift.

Finally, the personnel and organizational problems associated with self lituneing and wage< ontrfltuicd to labor unrest in some enterprisesravda reported that worker*ocal furniture factoryaycWuary of (his year toub stantial drop in wages between December and January, when new reforms were put in place lhe paper blamed the plant management's poor transition to self-financing for the disturbance. Along the same liner, the Soviet press last Novemberay strikeajor bus factory, abo over kiss ol income

Satincapi-ijItr.viiHIT*ni' retool' inrjuction ol eanting inn-roma*

no* canaciiv

SO IMI 85 6 7

3.3 38 83 4J

4.4

7.1

59 50

According lo Soviet data, the share of ma chinery and equipment in total new investment in industry did not ntend green the strams in the civilian machinery sector, the share probably grew little. If at all, last year.

Delense spending also appearsincreasedlthough the precisesultjca to great uncertainty because ofin assessing recent expenditures ondevelopment and operations andAlthough changes In procurementarc also difficult to detrct Immediatelyevidence suggests (hat majorproceeded on track. Ourisrcmrnt grew bypercent7 (measured in consiamconsistent with the growth notedpreceding lew years. Growth was drivenIn proewrment of offrrwr andsystems Among

largest jump kn outlay* was for ship and submarine

[inn iiicnum. principally because of continuing expenditures on ihe Typhoon and Delta IV SSBNS and the Sierra-Class and Akula-aass SSNsforANDID and the strategicissile system also helped to push up spending. These systems had already begun to be deployed or were in the final stages of development when Gorbachev became General Secretary.

While apparently leaving major procurement programs akme, Gorbachev was increasingly vocal on the need for military support of the modernization campaign. Early7 he calledgreat burden" on the economy andthat, in the future, military requirements would have to be based on the principlerinciple which, while not yet authoritatively defined, has been construed by some Soviet commentators asleast cost" response (sechile accepting the

principle of "reasonablehe military services" only response observed so far has been to irim some operations and maintenance costs through an emphasis on discipline and greater efficiency. The Navy, for example, probably in response to both economic and operationalhas reduced its out-of-arcawhile recent articles In the military press indicate that some ground force units have been given specific goals for reducing the use of fuel and other resources. In addition, longstandingefforts to extend the service life of various weapons apparently have been given additional emphasis.

Consumption. Although Gorbachev iscounting on increased worker contribution and dedication to help achieve his ambitious mod cmizaiion targets, the consumer wascr-caplta consumption rose

Sufficiency

In seeking to balance the needs of the civilian and military sectors of the economy, Gorbachev has claimed that the Soviet Union will not deploy military forces beyond what is requiredreasonable, sufficient defense' 'lhe Warsaw Paci Political Consultative Committee endorsed this concept in the declaration on military doctrine issued in

The Soviets, however, have notetailed explanation of how they define reasonable sufficiency, and its implications for Soviet force posture arc probably still under discussion. Senior party secretary Alcksandr Yakovlev, writing in Kommunist inalled on social scientists to work with military specialists to give substance to the concept.

Soviet commentators have clearly differed among themselves as to the rncanlrtg of sufficiency. Most civilian and even some military specialists have argued that the USSR need not, and should not. matcheapon program undertakenotential adversary, emphasizing the detrimental cffeci of lhe arms race on theew have even advocated unilateral force reductions, father commentators, many of ihem military officers, have Interpreted "defense sufficiency" in more traditional terms. They contend that weapon reductions sltould be mutual and that an increase in Western military power must be offsetroportional increase in Soviet military capability. Defense Minister Yazov, for example, wrote7 Pravda article that "the lirniis of sufficiency arc set not by us. but by the actions of the United Stales and NATO."

Yazov and other military writers have also taken the view that defense sufficiency Includes an offensive capability. For example, in his book Guarding socialism and Peace, Yazov noted:

"Soviet doctrine considers defense to be the principal form of action for tbe repulsion ofBut. it Is Impossible to destroy' the aggressor withefense. Therefore, after the iuvasion is repulsed, troops and forces of the fleet ntusi be capable of conducting decisive offensive operations."

s

only slightly last year,ercent salesunilm of key consumer goodsincluding vegetables, clothing and textiles, footwear, and alcoholdeclined. Meanwhile, because of the unavailability of the desired goods, unsatisfied consumer demand continued to accumulate as wagn Increasedercent. Other evidencedemand included press references to higher collective farm market pricespercent Increase in savings bank deposits

The Soviet population apparently supports per-estmyka in principle, but most workers,to one Soviet survey, do not believe they have benefited from it The impact of many of theinitiated7 has just begun to be felt by the consumer and could dampen morale even further

Hospriyemha has resulted in lost bonuses and unpaid overtime for corrective work and prompted work stoppages in protest.

Wage reform in many cases will lead to lower wages, demotions, and some lost jobs-

Ministry staff reductions arc eliminating thousands of fobs and disrupting work, as those still employed worry alvout their future.

Self-financing, which links wages and output could reduce wages if

output falls, even if the reasonsfor example, interruptions in supply- arc beyond the workers' control

Gorbachev's Program Stands

last scar was toear of transition foreconomic program, one in which his policies were to begin to provide the basis for the Soviet economy's transitionelf sustaining path ot higher growth. Gorbachev haslueprint for the mndernizauon of the Sovietbase and reform of the economic system,e implementation of his program has begun. Three years into Gorbachev's rule, both majorof his economic program haw displayed significant strength and weaknesses The questionwhich remains to be answeredb whether

the slow growth and disruptions that occurred7 were transitory phenomena or harbtngers of even more widespread problems.

ladustrial Modernitstiom The Recordears

Ihc progress of the industrial modernization program is best re flee ted in civilian machine building, the sector that Gorbachev has described as crucial to the success of his plan Overall, the scope ol Gorbachevs program for restructuring the machine-building complex is impressive. All operations within the sectorfrom research and production work at Institutes and plants to high level planning and administration In Moscowhive been engaged, and the policies implemented over theears have addressed the most sig nine ant issue* at each level. But the pace andof Gorbachev's policies have thrown machine building and all of industrytate of turmoil

high largets that machine builders have been tasked to achieve Ineriod are overwhelming in and of themselves As7 results showed, moreover, major elements of Got bachev's program for the machine-building sector are intrinsically contradictory because the sector is being forced to do everything al once retool increase quality, conserve resources, change the product mix, and accelerate production. Thus, Ii is not surprising that machine builders could noi meet their goals for tbeears of tbe five year plan and that the modernization program is behind schedule:

Large pan because of disruption* resulting from retooling and quality control, civilian macliinc builders only managed

6 output levels Defense machine building ministries, less affected by these dlsruptktns, probably grew faster than their civilian ministry counterparts

civilian machine builders meiand at times exceededtheir targets for introducing new products, press report* indicate that the new equipment is not as advanced or productive as originally envisioned, in part because

entcrjitlse* do not have ihc time loe ifi technologysk,i: in production.

Civilian machine builders were able to increase investment vuhttanitafty. but pressures to keep production levels up ant) shortages of equipment hare prevented ihem from meeting plan targeis for reiooling the industry.

When production dropped sharph/ at the be-ginning7 ami then reeuvered only slowly, quality standard* wrre apparently relaxedonths at many of the plants under gospriyemka, and the constraints of self-financing were deferred, according to the Soviet press. As months passedebound, however,leadersarrage of criticism at the machine-building sector

iehc leadership shows no sign of backing; down on ihe modelnOatkon program Gorbachev has stressed that "No retreat is per missiblc from ihe program There wiU be no turningis strategy appears io be one of maintaining forward momentum, while relieving pressure so as not to posh machine builders too hard In line wnh these ctmsiderations, Moscow' appears to hi .In Ki!ii;,ur dealing with the secioi Realisingontinued, unrelenting criticism would only make mailers worse, Soviet leaders have Income more upbeat For example, in his speechioup of media chiefs this January, Gorbachev praised machine builders for the rate at which tliey were renewing products and rvitied thai "qualitative changes" arc also be iofctitasle in science and technology.

bconomii Hi lurin iwg Way To Go

Gorbachev has abo pledged notetreat from ihchjet inr* ol his economic reform programthe other key element In his drive to bring about ibt long term, selfainng kn-provenii-nis lhat heultimately seeking for ihc Soviet econonivCa (or expansiongtitda

He lore ihe7 Central Commiuecas not even clear (hai Gorbachev had

2 unified blueprint for economic reform. He had started out by exiending Andropov's and Cher-nenko's reforms In the industrial sector toand finance, and introducing self-financing, wage reform, and planning reformmall scale. In addition, he had established ain6 torogram of reform legislation, and had sanctioned an un-prcccdcntedly wide-ranging debate on economic reform. This discussionrescendo jusi before (he Central Committee plenum in June

was called to ratify the new program.

'Ihc June plenum, however,new economichich is to be "almost fully" implemented by the start ofh Five Year Plansanuary

were introduced or expandeda large portion of the economy (seeinclude self-financing, new planningwholesale trade, changes in the bankingsystem, wage reforms, new foreignand reorganization of theforeign trade ministries With theirhas replaced his predecessors'approach to reformuch moreprogram If fully implemented, thispackage would greatly change thestructure The role of Gosplannational planning organizations wouldtu long-range, national planning, whileoperation of the economy wouldhandled at the enterprise and local levels

Nonetheless, while comprehensive,reform program isell-integrated package, and returns from its implementation arc likely io be: deferredboth because of loopholes in ihc reform legislation itself and because Crucial elements of the reform package have not been worked out Indeed, Minister of Finance Gostcv said thatnsiiion to the new conditions of economic management is being made on ihr matchesnlt. many of the reforms are not scheduled fur full implementation until (heof ihr next five-year period, ln particular, price reformessential for better decisionmak ing aihe national and enterprise levelswill not he completedfter the live-year planning process is finished Almost asis the fact that Uic wholesale trade reform

Timetable (or Soviet Economic Reforms

SrUftnancing

WW*

Purpose

fot crprisc? "ill bear full economic responsibility for thr rrsuks of iheir acuVUv. In vestment will be financed

leuudget lUiXUHifU.through bank credits

Entire wage and salary structure la the production, sector will be over-hauled u> tie monetary rewards more closely to performance Salary in* creaaes, however, will depend upon

oab

ercent of all Industrialandercent of aland estimatedercent gl agr-cultural production.ercent ol sttenulKof transportation

rrccn* of work force.

ttnal Obleciin-

X-hole economy by end9

All Industrial sectors by end0

holesale trade)

Banking

Wholesale prices

Hetafl prvecs

willoo loo

ofUtJHitwilh

mandatory state orders and win be jjjjvcnlatitude Id <Ictf Ttriiiitij^ the remainder. The role of Cosplan jitid otherpftj^flj^ itf^xjiiijT lions would be emailed sharply.

Only "Kane* producer goods will continuee rationed by the siatc. Olher supplies wO be dKirtbutedholesale iradc sysicm iltai will alow free purchase and sale under direct contracts between providers and users,

Dccenlrablcs banksomcsvhu and elevates ihe role Of economic criteria in extending credit.

Will be revised io betier reflect re-source scarcity and customer dc mind*

Allows selected etuerposes todirectly in foreign trade and keep portion of foreign currency

- wfll be reduced toercent of total outputercentercenteventually" dropping1 percent

AU enierprties and aur-ciauoni. However,tate orders make up Htl perceni of tnduaral produc. tion. includingercent in the fuel mlntaws and GO percenithe eight civilian machine building minl-anc*.

leuerceni of toial indus trial'i. IS ioercent of sales ihrough siaie supply networks.

No dale given

Alleorganization is being undenaken. bin deccniraloatlon of ban! lending poKcir* willimited and gradual

None;epn0

y, transportation, com-municauotisomirucUon and agriculture, by

No dale eft-en

ercent nl all impuru; It perceni No date gnen of all exports

independent quality-control Inspector* in civilian

Seek* to streamline and economic bureaucracy.

ore enterprise* lorUrn* includes food processing andructionoughly Huof civil machine hud-ting ouipui and mote ilun -i0 percent of all in-dim ml production wiB be covered.

All centia) nWiisirics. icpublieCommittees, and repubticof Minbtrre

: l

will noi be fully in placelihoiu treeupplies, enterprise managers will find it hardpend the profits that ihey are allowed to keep under sclf-fmancing.esult, more reform related disruptions can be expected.

Near-Term Outlook for Gorbachev's Program

How the Soviets perceive ihe success of Cor-hachev's economic program will depend greatly upon which of its compedng objectives they con-sidcr to be more importantlong-termand reform or short-term economic growth. Many of the modernization and reform initiatives impinge directly on short-run growth Gorbachev has indicatedears will be required before the positive effects of thesearc felt. If growih slows in the near term, however, fewer resources will be available ioihe modernizaiiun ciTon or io satisfy key constituencies such as consumers and ihcwho arc undoubtedly troubled by thethai ihe reforms may entail.

The shonicnn ouilook for growthnot good. Mccung ihe targetslan, for example, would requireGNP growth ofercent Thisbeyond reach (see inset) Given thethat Gorbachevs program arearc likely to continue causing for ihe nextwc proicci average annual growth of 2or less for ihc rcM of ihis five-year plan,considerable year lo.ycar fluctuationsIndeed, comingrowth .ould tcl>oundespecially if the weather cooperates.growth

years if disrupiions worsen or are accompanied by harvest fadurcs or other niajoi problems

Possible Adjustment

Heeause Gorbachev's economic program Isschedule and short-term growth prospects arc not bright, wc believe that as ihc Soviets begin to focus on lhe next five-year plan, ihey wdl be looking foi possibleuring8eriod lhat will gelgram hick on track

Specifically, the leadership may:

Look for additional resources from defense, other sectors of the economy, or abroad.

Decide to adjust its approach io economic reform and modernization.

Finding More Resources

The leadership's ability to deal with these ex-pected shortfalls in production will be csscnilal to ihc success of Gorbachev's modernization effortsinimum, wc bcUevc that if the leadershtp is to continue ioigh investment- critical if ihc USSR intends to renew Us capitalhen it will have to tap resources from one or all of three areas outside the civilian machinery sccior.

Delense.

Other scciors of the economy.

external sources in Easternor the West.

Tapping De/enc Defense currentlyercent of GNPincluding an especially large share of ihe output of the critical machine building sector and large shares of the highest quality materials Thus, itrime candidate io support Gorbachev's modernization program Indeed, defense industry already produces invest-memanging from computers toand tramcarsboth for its own use and for shipment to civilian customers In addition the sectorarge portion of such dnmcsticilhonsumer durables asrigcraiors. radios, and TVs.

Until recently, leadership statements forsup in civil sector echoed

similar calls in the, and. as in the past, ihc kadtvship has complained that the defense industries have largely ignored these appeals During Ins opening address ai the Ccn iral Committee plenum in June, for example, Gorbachev attacked three defense ministries forformal auiu.de to consumer goods

12

8 Han: The Pressure Builds

The Soviet economic plan8 Is, for tbe roost pan. in line withh Fwe-Year Plan goals. Output growth targets match those in the five-year plan; the machine buikling sector is assigned continued priority, and calls for increased labor productivity, resource conservation, and improved management are repeated.8 plan appears to take little, if any, account of either ihe economy's shortfall*7 or the scheduled implementation nf comprehensive economic reforms this year.

8 production targets are totally unrealistic mainly because they are expressed with respect7 plans, which were substantially underfulfillcd. For example, industrial output would have to growercent this year to meet the plan Because it is unrealistic,8 plan will probably create imbalances and create still more pressure on Soviet industry and other sectors of the economy to tum out production at aD costs, even as enterprises try to cope with the new reforms and an expansion of the quality control system.

In terms of resource allocation,8 planigher priority for the consumer Investment resources allocated to housing and consumer services reportedly have been raised substantially over the distribution originally called for in0 plan.8 plan calls for overall investment growthercent, comparedercent7ercent8 target looks low. however, given the many demands In the economy for investment In modernization, in energy, and now In consumer-related sectors, although it may be in line wilh the original five year plan

USSRi8 Economic Plan Goals Annual Growth (percent)

GNP

Agriculture

Industry'

Machinery"

lan Compared7 Plan1

X1

lan Compared7 Performance'

8

0

n CIA oaeuta ol frotimJvUufi md ddcrDC mxtuaei,

as somethingdditional reporting indicates that defensehas fallen far short of the Sovietexpectations'

Since the beginningefense industries have been criticized un at leasteparate occasions in industrial

performance reports for shortfalls in production ol consumer goods and failures to improve quality

'lhe f'cntral Committee dismissed the directorefense industrial enterprise manufacturing television set* and issued "strict warnings" to several defense industry

minister* lor their failure iu Improve die quality of TVs and radios, according to Soviel news reports in

Faccd sviili this poor performance, ihcrecently has stepped up its pressure on the defense industry to help retool light industry and ^Dod_proec**ing IXirtng last October's Central fluimniurc plenum on the food processingPremier Rvrhkov blasted the state of foodreaffirmed the leaderships commitment to retooling the sector, and then presented the defense industrial ministriespecific plan for their irmsrvemeni in tbe program He stated that the defense industries, along wilh the other machine-building ministries, would be required to increase dramaticallyby "fourfold to nine foldtheir equipment deliveries to the food processing sector. He added that the Bureau for Machine Building, (he State Agro-Industrial Committeeand an unidentified state commissionwhich we believe to be the Military Industrial Owiirnisslon (VPK)had been tasked to submit withinpent,outlining how their ministries would meet these production targets.istrict (obkom) plenum onovember, Party AgricultureNikonov repeated Ryahkov's statements on retooling food processing, and he too cited tbe "fourfold to ninefold'" increase in the corartbutitxi from the defense industries.

Even stronger evidencearger role for the defense industries came8 press announcement that the civilian ministrylor retooling tbe light and foodthe Ministry of Machine Building for Light and Eood Industry and Household Appliances^"Jtu be dissolved and subsequent press reports indicating that responsibility for vmn ofnterprises was being transferred to defense in dust rial ministries

Despite ihcsc changes, defense industrialin (he cml modernization program is unlikely to affect weapons production capabOi tics greatly, at least for the neat few years.esult ul the large scale modcrnl/atlon in the defense indusiries in, the sector has in place most of the equipment It needs ioweapon systems scheduled for deployment

through the. Therefore, any invest ment foregone in weapons plants to supplyfor Chilian production could delay the introof future weapons programs, but would not be likely to slow current output.

Nonetheless, the Soviel defense industry teithout its own pressing needs. In the near future. If not this year, It must begin serious commitments to support the next generations of Soviet weapons (sec Inset) Any move toresources from defenseowevereven If It affects only future weapons production

be controversial and could sparkfrom more conservative elements of the leadership Thus, although Gorbachev probably will look to defense for resources to bolster his industrial modernization efforts, wc believe that he will move cautiously. National securityarticularly sensitive area for the leadership, and Gorbachev probably would be reluctant to leave himself open to charges of weakening Soviet de lenses by pushing reforms or resource shifts lhat many in the military leadership oppose

one way to shift resources from the defense sector and head off criticism would he to reach arms control accords that would slow the paceeapons programs, especially SDL Indeed,robably one of the main reasons theis inirrrstcdTART agreement. Fvcn more imponani than the direct savings from anwhich could be significantGorliachcv proliahly sees the larger process of arms control as his principal means of achieving more stable fast-west relations and dampening both external and internal pressure to spend more on defense

least until he can reap the productivity gains he hopes to obtain from hi* industriallnn program (sec inset).

Squeezing other SetUm. Gorbachev will also kx* to other sector* of the economy to and (he investment resources needed for his modern iza (ion program Bui the chances for any real savings appear slim Investment demands are rising across (he economy, while the leadership has apparently ruled out holding down consumption any longer for fear of its impact on productblty

As pan of restructuring. Gorbachev has said thai he would like to reduce investment in

USSR- Selected Future Major Weapons Programs

Strategic offensive systems! New solid and liquid propellani SLBMsew SSBN likely by the,eplacement for the SS-IH follow-on ICBMew long' range cruise missile In ihe new century.

Strategic defease: systems* New air defense ground laser, lorig-rangc interceptor, and Iting-range aJr-io-air niisstlc probably entering series production by the;aser ASATariety of surface-to-air missiles,ew AWACS aircraft in the next century.

General purpose ground systems, Series productionew antitank missileewattack helicopter by the; and new ground forces vehicles in the next century.

General purpose air systems, New lighters and other aircraft and tactical missiles in series production by the;ew transportew airborne laser In the next century.

General purpose nival systems; An improved cruiser and subrrtahne. new helicopter, and new missiles in series production by the,ew fighter and new ASW equipment in the next century.

Space Systems: Space-based weapons by theariety of command, control,and intelligence satellites by the,pace plane in the next century.

Ihr agriculture and energy sectors, which together absorb about half of total Soviet invest meat But both sectors will need morecr ihe next few years. Although agnrul lure hasigh priority since lhethe agro-industrial complex takes about one-third of total investmentihishas not boosted output appreciably0 (seerops arc still losi due to Inadequate transport and storage, grain and other food import* remain high, and rural housing and associated infrastructure arc poor Allhough this sector might welleclining share of total yuesirneni. absolute reductions will be difficultchieve

Similarly, in the energy complexwhich lake* alxtutercent of investmeni - returns to investment In fuels have been falling over the pasi dec arte, and this trend shows no signs of re versing itself.

a It is besoming more and mote costly io maintain oil production, as new wells arc deeper, are less productive, and are located in more remote and smaller he las than in the past

The new oil and gas fields that are being developed offshore in lhe arctic and onshore near the Caspian Sea will require huge Investment outlays

Shifting domestic energy consumption away from oil and toward gas and coal will require the construction of new and costly pipelines and other refining transprinariori, and storage facilities

In the past. Soviet leaders, including Cor

hachev. traditiooally have-been willing inee consumption growth for tm-estmcni harlv in

Nachev made this policy explicit.

indicating that ihc consumer musi tighten hi* bchew years Unlike in the nasi, how ever, the work force is being asked to improve its productivity, agree to major changes in the

"socialnd work on second and third shifts. Tlie leadership, moreover, has cxprcv-ed Increasing concern rhat the failure to increase the output and quality of consumer goods ha* bun morale and dampened ihc enthusiasm lor Oorbaehcv's program. Second Secretary Ligachev said last May. for example, thai consumer dmn age* hadbrake on the cconomv" Cor

IS

bvi Sec Ta. Qtovvlh

h> PfOOvctio* and Capital Stock

i iaro-too

Soviet Agnculiwa Growth In Production and Capital Slot*

Output

i 1 .

4

baches. speaking at an October conference on ihc food processing industry, slid that improving "thepeople'* everyday life" Is more important even than modernization.

H plancv. emphasis on the consumer

resources aUocaicd to the so-called nonproducine sphere (principaih

trade, services, health cut, and education) have been increased by IH perceni over ihe level originally called for inlan.

Target* h* output of consumeroriented building materials have been increasol

Goal* for the production of food, clothing, textiles, and consumer services have also been raised The share of consumer related gixxl*hare ol indusirial

production is to rise, reversing the downward irend of reeeni years.

looking Abroad. Besides seeking help from defense Industry and other sec lots of the ccon omy for the modernization drive, the leadership will abo look io Eastern Europe and the West for additional support AU hough some rise in importspoaaahte. neither source is lakefy to be able to compensate foe domestic produclion shortfalls

Eastern Europe isajor supplier of machinery. Currently, Eastern Europe provides over two-thirds of Soviet equipment imports and is the largest foreign supplier of machine tools, computers, and eJcctronics Although additions to capacity over the next few year* shook) allow Eastern Europe to increase its exports of sorne rypes ot machinery to the USSRe^ciaBy ma chine tooh from East Germanytherearge requirement for advanced machinery lor domes tic Investment in most East European coumries. and iheir leaders would rcslsi sacrificing their

16

Economic Gains from Arm? Conirol

Our analysis indicates thaialthougli arms control need not result in the transfer of resources from military to civilian programsthe Sovieu could reap some economic benefits from arms control, given theof tbe recently signed INF treaty and the type oi' reductions envisionedTART accord The greatest potential economic benefit to the Soviets from an arms control agreement would be the avoidance of substantial new military expenditures. By avoiding the deployment of follow cms to, and mcKJcrnitatiiin of. existing MRBMs and IRKMs, the INF agreement could perhaps nre the Soviets oo tbe orderxlhon rubles annually durings well as release tens of thousands of troops and the workers in the plan is producing INF weapons for other duties. Near term savings, however, will be reduced by the costs associated with dismantling and destroying INF systems, which the Soviets have claimed could be substantial

The direct savingseep-reductions START agreement are much less certain The actual amount would depend heavily upon the rate at which the Soviets would modernize their forces, both in the al>sence of an agreement and under such an accord. Under the Soviet START proposal for example, total savings might be less than under the INF treaty if the USSR decided to reach the warhead limit by scrapping most existing systems and replacing them wilh new. more costly ones. Conversely, should the Soviets opt to reach the warhead limit by curtailing future programs, stowing the rate of modernization, and keeping existing systems longer, wc cstimaic Out by the0 cumulative savingsombined STARTgreement could exceedillion rubles, and make substantial numbers of soldiers and industrial workers available for other employment

We do not know how the Soviets would eltnosc to reallocate any resources saved from arms control. Hart of the savings might be used to strengthen strategic defense, conventional forces, or research and development efforts. Given the priority Gorbachev has placed on his industrial modernization program, however, he probably would choose to allocate at least some of the resources to the civilian economy. If ihe Soviets were to transfer all the resources saved, wc estimate the non defense component of GNP could Isccrcenl higher than it otherwise would be by the turn of the century. Moreover, because strategic offensive forcesarge share of ihc hew electronics, high-quality machine loots, and scientific resourcesall of which are vitally important to Gorbachev's nsodenuzatkin programeven small reductions in ihcse forces could help alleviate bottlenecks in these areas

Beyond some long term economic benefits from arms control, Gorbachev and the leadership probably see arms control as partarger process to case East-West tensions and they probably calculate that arms control would lead to constraints on Western force mixlernttaflon If Gorbachev can reach strategic arms control agreementswhile at the same time reaching some son of accommodation with the US on other contentious political issuesthen he will beuch beticr position tu push his modernization program at home and to make wliatcvcr adjustments he feds are needed Ui the delense budget Imprmcd t'S-Snvici political military relations would also make il easier for the USSR to expand commercial tics with the West.

development programs In addition to luv ing their own economic problems, many Eastcountries arceriod of political transitiona |toor time lor the Soviets to push for greater austerity. Moreover, because ofterms of trade. Pastern Europe finds itself

etter position than in the past to oppose any demands from Moscow lor additional support ihc value of Soviet energy deliveries to Eastern Europewhich make up the hulk of exports to the regionfellercent7esult of lower oil prices

In addition, the Soviets arc aware of the limits on what they can expect from KastcrnGorbachev has made economic modcrniza-tion the goal not only for the USSR but for the Warsaw Pacthole. In so doing, heEastern Europe's tradeoff betweenmore low-quabty machinery and progressing tenvard higher quality products: higher output in th^sllbrt run comes at the expense of higher quality in the long run To this end. the Soviets have emphasized betier quality exports in recent years and coniinuc to do so.

In contrast to the limited prospects forimports from Eastern Europe, Moscow would probably find willing suppliers tn the West.suppliers have been geared up since the start of the current five-year plan to increase sales to the USSR, only to find their expectations dashed, in part by Soviet cutbacks in purchases from abroad. Oil earnings4 have been lower

than tn thend Soviet buying in gen-era! has been restrained as leadershiphave centered on domestic production. The possibility that the Soviets would look to boost importsesult of the slow paceowever, coupled with Soviet efforts to revamp the foreign trade apparatus andjoint ventures over the past year, hasWestern interests (secoscow may even be able to extract some trade and financial concessions from Western governments eager to give their firms the upper hand in tapping Soviet domestic nuirkcts. Despite the sizable climb in the dollar value of ihc hard currency debt inyearsdue as much to the continuing rise of West European currencies and the yen relative to the dollar as to new borrowingthe USSR is still regarded as an excellent credit risk by most western bankers.

At present,ow debt-service ratio of

Update on Soviet Joint Ventures With the West

The Soviet leadership has pushed aggressively during theonthsstablish joint ventures with Western firms. We believe that Moscow sees such arrangements as better vehicles titan cuneni trade and economic relationships for acquiring and assimilating Western technology, managerial expertise, and marketing skius. As part of Gorbachevs modernization drive, jointare intended to upgrade Soviet production processes and thus spur exports of manufactured goods, reducing Moscow's reliance on energy and other raw materials as its principal foreignearners. Soviet plans callercent of the *'most Important" machinery to be up to "world technical levels"0

Despite Ihc initial interest shown by Western firms, progress has been slow. Only aboutgreements out of moreroposals have been concluded since the legislation took cflcci at the beginninghe largest stumbling block remains the inherent conflict between Soviel and Western commercial objectives. Western businessmen arc eager tootentially rocraiivc Soviet domestic market, but have little interest in helpingSSRorld-class exporter of manufactured goods to compete with their own foreign sales. Soviet inexperience with many Western business concepts, such as management conirol and profit repatriation, are further impeding progress Moscow has shown some flexibility in negotiations and has modified the regulations to try to address some Western concerns.

mall number ol joint vcniures arc likely to be in operation within the next year or two. and they will probably have liitle impact on Soviet hard currency earnings or the quality of domestic produclion untilost of tlie deals concluded, or those close to signing, appear to be relatively smalt endeavors that involve Simple production processes. low-level lechnology. and little foreignew large projects arc under negotiation, but even if agreements are reached sometimel will be years before these projects begin full operation

aboulercent, Moscow isurly stoodto expand economic ties with the West But sizable import growth over several years would increase Soviet dependency, both on particular products and on Western financing needed to make the purchases Nonetheless, even though Gorbachev has stressed the need to modernize ajrom within and is likelyave set hli own limits on Soviet Western economic relations, the attractiveness of Western assistance to ease the transition pains of some key sectors may increase markedly II ibis year's economic performancelast year's.

Over the longer terra. Moscow would bkc to finance any increase in imports through increased export earnings and. to this end. is exploring the possibility of expanding tiesumber ofeconomic institutionsajor impetus fix ruining theseout ical. membership abo would confer someeconomic benefits lor example, theapparently believe that membership lu GAIT will expxnd their general knowledge of world trade and also make Soviet exports eligible fortarutsaccompany GATT membership In contrast, the Soviets have shown far lessin joining (he IMl: Membership would require greater economic Information than the Soviets have previously been willinghare, the Soviets woukl be required touable subscription fee upon joining, and they would probably realize few economic benefits from part ici pat Ion

Slonina Itonoatlc Reform

How(rtKbachev will push the pace of eco nomic rclonii is uncertain. In the face ofluw economic growth, shortages ol critical goods, and discontent on the part of workers and nat tonal it lev the lenuous balance in tbe leader ship could easily shut in favor of morepoht ics Indeed,peech to ihr media on reform this January. Gorbachev signaled ato retreat "if it turns out we nude an error "

If retrenchmentelieve thai the more orthodox elements of Gorbachev's pro giant to improve the system would probablybul that the drive to make lhe economy

more market-oriented and decentralized would be (leemphasizcd. The emphasis would be ondiscipline and organizational reform

discipline campaign woukl include renewed emphasis on the anti-alcohol program. We might also see continued efforts to increase differentiation In wages lictwecn workers who perform well

and those who do not Organizational reform would continue to focus on some cutback in the bloated central bureaucracyattonalizatKm of (he structure in an attempt to join related economic ministries and central organs.

reforms most likelye weakened arc those that would decentralize rxrjnomic decision making. Among the first in be affected would be the proposed reduction in obligatory plan targets, increased authority of ihe enterprises In allocating of lesources. and plans to decentralize wholesale price formation Reforms intended io increase authority at the farm level would probably suffer the same fate although the cmphasb on the collective contracta way to improve disciplinewould probably continue. Ideological opposition and bureaucratic redtape would [itnlvabty proem any significant expansion of ihe private and cooperative sector

Me.isurini; 1'rogrciv *dgni to Look lor

In charting ihc progress of Gorbachevs; i : the problem for Western oh servers and for live Soviets themselves will be to understand whether the pobcy shifts and re fornr* being carried out will be cflectbe and io identify indicators of progress in areas suth as quality and technology, which are only indirectly measured in ouipui statistics Another key qnes HOD for Western observers will be how to gauge tlie commitment of (lorhachcv and oilier* on iiu-Kikthuro to his pontics Whileoubtful thai Gorbachev (nr any successor) eoubl ever fuUy turn back the clock and publicly renounce per esltuyka, how last and how hard Gorbachev'swill Ik pushed Is siery open question.

Tin- Upcoming CPSU Party Conference

year's most important tesi of Gorbachevs poliilcaJ strength and of the momentum of his reform agenda will probably come ath All Union Party Conference, to be convened onune. Gorbachev hasreat deal of political capital In the conference, which will he tlntjtiiM meeting of its kindehopes to circumvent the current Central Committee and use the conference to ratify some of the more controversial elements of his reform program and strengthen his grip on partyReflecting ihc controversial nature of the cooaercncc. Gorbachev first proposed it at the7 Central Committee plenum, but he did not receive formal Central Committeefor the idea until last June's plenum.

In addition to focusing on personnel issues. Gorbachev will almost certainly use thelo conduct an across-the-board assessment of domestic policy and toision for the future Moscow has already indicated that the agenda willeview of progress inthe current five-yearopic thai will inevitablyiscussion of the Impact of current reforms on the ability to meet plan target* Gorbachev might abo choose to unveil the general outline ofifteen-Year Plan. If so, it could provide clues concerning the adjustments intended in economic policy In

The conference will also aflotd Gorbachev an important opportunity to consolidate Ids power. It apparently will Ik empowered to make changes in the Central Committee (perhaps replacingtaaaaa^taaf itshere tiorbacbcv* sup port has been weaker than in the Politburo and Secretariat. The composition of the Central tIs particularly important (or the future of economic reform, because officials who haveinput in the design of economic policy and are largely responsible for implementing llregional party leaders, government ministers, and economic managersarc heavily represented there If Goibachcv (lib to increase the ranks of hi- supporters significantly, his abdiry to pushthe limbs of current reforms will prolwbly be severely hampered

II the leadership that emerges from the con ference decides to takelong view|.c, is willing to wait for economic gains innd realizes Uiat short run disruptionsec cssary pan of the economic reform processwe would expect to sec some Indicators that theof reform is being maintained. Some that would probably be esldcnt in leadershipand press articles Include.

Less emphasis on growth in general and on the fulfillmentlan targets in particular. Recent Soviet statements have begun to make this point (see inset).

Strong united commitment by the leadership not only' to tbe general concept of economic restructuring but also to individual elements of the reform program,> price reform, thai arc controversial but essentialomprehensive approach

Willingness lo carryticularty palnful adfustiuents. such as bankruptcies and wage reforms, that lead to wide differentials in pay.

Greater consolidation of economic ministries and cuts in staff

Continued publication of controversial articles by reform economists arguing (or expansion of reform

Probably the key indicator of.how serious the Soviet! are about economic reform, however, is how thoroughly they institute price reform, anwhich soil apparently has not been resobed Some Soviet economists have argued thatprice reform, where prices reflect the irue scarcity of resources, is essential for the enter prise financial reforms to work Such reform wouldove away from an economy based on centralizedn economy that docs not rely on the stale planning ot state-supply committees fur its day-to-day functioning Retail price reform, which would include rernov-ing subsides from basic necessities such as lood and housing, would be extremely controversial

Downplaying The Importance ofossible Shift in Soviet Strategy?

Gorbachev. Plenum Speech,

Fears are being expressedemporary decline in production growth rates in individual sectors, regions, and even lhe countryhole may take place, given the abandonment of direct prescription of volume Indicators for associations and enterprises in conditions of complete economic accountability. What can be said of this issue, comrades' If Ituestion of higher growth figures achieved by cranking up gross volumes, via double counting, andeal increase in end results, the society not only gains nothing from this, it actually sustains losses.

Hie radical restructuring of Statisticsery large and acuterastic turnqualitative indicators, the expansion of information on questions of regional and social development, and the execution of various selective studies are needed here. (Emphasis added)

Gorbachev In Leningrad,

Many years of practice have taught us allto handle figures for growth in production volume and capital investments and other economic Indicators withut. comrades, we do not need these figures for their own sakes. Wc must in any event be able to answer with coiifidence the question: What relation does this kind of figure have to the process of genuine growth of the well-being ot the working people...

Nikolay Sbmelcv, (Economist with the Institute of the USA andapanese Press Interview,

It is better not to judge current Soviet economic progress by figures At present the only field tltatigh degree of growth is advancedn this age ofercent growth is Sufficient.

painful to consumers, but would be an even clearer sign of the leadership's willingness to un-dcrrakc painful economic change

If. on the other hand, the leadership decided to retrench, wc would expect to sec an erosion ajprhe reform process, it is unlikely, however, that ihc bhicptrni for reform would he formally erased from the books. Retrenchment would be indi caied by.

The dominance in leadership speeches ol themes of discipline and accountability over the importance of economic guides for decisionmaking

Increasing concern by the leadership over the effect of short-term disrupiions On economic growtheduced sense of urgency for reform.

that central controls over production and resource allocation arc not being liftedfor example, only

ull decline in the portion of stale

otal industrial output.

.-note relaxed mood on the pari of ihc ministerial bureaucracy.

esource Allocation

Ikillingness to push reform, the other key in*lienor of ihc leadership's commitment uiconomic agenda will be its willing nc" t" hold down defense outlays over ihc next lew years in order to channel moremi consumption U:olicy decision lo involve defensemuch more heavily in ihr modernization program, wc arc tuncntly projecting that Soviet

defense spending will continue to increase over theears, at roughly the rate of recentercent perharp decline of observed defense act retry in the years ahead bora what we are now protecting would suggestecision to reduce defensehad been made Nevertheless, we could not be certain whether observed deviations from our proteins meant lhat the Soviets had changed their plans or simply that our projections had been wrong

ore generaleadershipto focus additional resources on theprogram could affect how the USSRits international commitments Moves

to tut hack on Third World aid, actually pulling Soviet troops out of Afghanistan, or greatlytrade with the West could all signal an intention to deal with international situationsay that complements domestic economic policy.

The clearest indication, however, of how the leadership will adjust its modernization objectives in the light of developments on the domestic and foreign scene will probably be provided in theDirectives for the next fifteen-year. which will probably be approvedow this plan compares with the targets inlan should signal whether diefor high growth is to be relaxed and what the priorities for resource allocation will be

>

Appendix A

conomic Performance! Conflicts Emerge

Bad weather early in the year combined with conflicting goals In Gorbachev's eexmomic program to disrupt productionlowdown in industrial growihecline in agricultural oulput yielded GNP growth of lessercentthe lowest rate since the.

Induitry

Industrial produclion grew by onlyercentboutar with the poor rate* achieved duringeriod (seeluggish performance was almost inevitable given the disruptions caused by the Implementation of gospriyetnka and new managerial and financial arrangements These changes, coupled with bad weather, caused the greatest problems in iheonths, when industrial outputercent below ihe same periodven when weather improved and quality control standards wereaut transportation sysiem limited industry's ability to make up for the poor start

USSR: Growth of Industrial Production and Transportation' (average annual rat* of growth, percent)

80

Industry

4

|

-

poas*

5

:

rsvtaftlS

]

*

7

'

0

'

materials

1.

1

goods

1

8

foods3

<1

transportation*

7

mm** euitui oi s >m

ii tonifyMsaf

MM -'am

MM

'

Machinery. Last yearifficult one for civilian machine builders. Faced with high growih targets and demands to improve product quality, they struggled just to6 production levels, and month to-month growth rates fluctuated widely Shortfafls were recorded in the production of both consumer and producer durables Ouipui of consumer durables was moreercent6 levels, and ouipui of producer durables" was virtually unchanged from ihe

- *

Continued)

previous year. Particularly troubling for the modernization program was ihc fact that over two thirds of the targets set for producing advanced and highly cflu lent types of ouipul were not mei

A principal reason for production shortfalls was the introduction of nQsptiyemka, which ac-amnted forercent of the failures to achieve plan targets for machinery output, accordingring ihe first several months. Uasprcton rejected an average oferceni

some cases farf all the products checked Because many cnicrpnses were unable to deal with ihe tough quality standards. Moscow reportedly relaxed ihem by rnidsrar. granting someoonth exemptions Consecfucnify. although machine btiildcrs made some selecwe gains, the, did not achieve the overall quality improvements thai the leadership initials expected

lite Soviets experienced mixed results with regard to two other key modernization objectives

and producing new machinery and equipment, leadership statements and press reporting suggest that, while subsiantial resources were devoted to the retooling effort, the effort fell far shori of plan. On the other hand, machine builders reportedly made substantial progress in producing new equipment. For ihe year, new machinery accountedercent of machine-buildingell aheadp|an. although the Suvici press has raised questions as to how

new some of ihe machines were.

/nduunal Materials The Industrial materials sectors (ferrous and nonferrous metals chcrnacaJs. construction materials, and wood products) all grew more slowly7 than6 and con

tribuied to the erratic performance of machine bmliry^<rv ol the economy. For the

most part, producers of industrial nuieriab were unable to accelerate growth7 as they dsd6 hec-use most of (bedding shins and tapping (beactessabfc reserve-labor, matnd equipmentwere one lime improvements In addition, gotprtyemka Drought disappointing resultsfrequent disruptions with apparently Utile improvement in quality:

Ferrous mciais prodnciimi grewerceni down frompace Shortfalls Inide assortment of specially sicels and an across ihe hoard failure to meet delivery schedules were noted throughout (he year

Noi.lt nous nicials ouiput rose by anercent Moreover, press reports indicated thai, despite quantitative gains, some specialized metals were in short supply.

Chcmkab output grew byercent as continuedocminer tn fertilizer productioneakening in most rather area.

Ouiput of construction rtuirrub grewercent as growth in cemem and ferroconcrete more than offset small declines in the production of glass and racing materials Csmamn about waste and poor quality appeared iii ih. press thioughout the tear.

Ouipui in ihe timber industry declined Shortfall- In ibis industry hampered production in theupplieswood products, pulp and paper, furniture, and bousing materials

P.rierjv Tin major energy branches posted goodi lot? as the oil. gas, coal, and rlecirk power industries all grewealthy clip. Continuing the upswing begunil pmdudion grew by lKD.OOO barrels per dayuccess was expensive

Continued)

However. Moscow- achieved ihis growth primarily through another large infusion of resources and equipmeni. Although investment information is sketchy, the activities that drive investment rose sharply last year. Drilling in ihis sector, for example, grew hy aboutercent7pcrccnt increase

Natural gas producers maintained their role as the primary sources of growth in Sovieth production risingercentillion cubic meters. Development of the substaniial reserves of high-sulfur gas In ihc Pre-Caspian Basin, which proceeded despite difficulties and progress in augmenting the Soviets' enormous gas pipeline network should provide the basis for future growth.

Alter achieving record growthaw coal produciion increased againalbeit moreillion tons and exceeding planned outpui by almost ISs. Recent growth In coal producdon has been almost wholly offset by the declining average energy content of Ihe coal. Recent Soviet statistics indicate that the average energy content per ton of coal has declined by roughlyercent

Mectrtc poieer production increasedercent5 billion kilowatt hours 'HieM. hydro "id nucleai power segmems6 performance Nuclear plants overcame the Chernobyl setback, as nuclear generating capacity grew byercent Thehe power industry were somewhat clouded, however, by trouble in bringing new coal- and natural-gas-fueled capacity on line.

Consumer goods industries. Ugbt industry output increased bvercent, sughtly faster thans textile and knitwarc production did well, parily making up for the slow growth in the footwear and sewn goods suhscctors. Lights hurt by disruptions due to problems with transportation and electric power, gospr^-emka. ihc.6 coiton harvest, and uneven deliveries of manmadc fibers from the chemical indusiry The processedfood industryelatively good year7 If alcohoUc beverage production is excluded, although its performance failed to match the unusually strong showing6 lotal productionexcluding alcoholicrewercent Growth was bolstered by an increase In some supplies from agriculture, particularly meat and sugar. Offsetting this .nciea.se. however, was an apparent dcicri or.it.on ol food quality. Numerous press articles criticized the decline in state standards for manv products, including such staples as bread and tea.

Agriculture

'on. although downper,n, iI peak was sell ;hc scorn, highest onaintaining agricultural production at this level in the face of lessihanlavorablc weathcr reflected ai Icasi partial success for Gorbachevs farm policy.

On the positive side, the Soviets achieved substantialhe output of sugar bceis and .sunflower seed, andrain crop of 2II million tonsillion ions above last year's) Mi excelkni forage crop, ihc large grain crop, and sizable gram imports helped to push meat milk and egg production to new highs. Gorbachev's program to increase animal productivitymeat per animal and milk pery cullmg marginal animals from ihe herds also played aincreasing meat production On Ihe negative side, however, these gains were not sufficient to counter declines the Soviets experienced in potato, vegetable, and cotton ouiput.pcrcem drop in fiuit outpui.

Continued)

Agriculture's mixed performance7 has hampered, at least temporarily, Gorbachev's promises to improve consumer welfare quickly. The availabOiry of farm productser capita basis fell by anercent. Pet-capita meat asauability increased by Justercent, far short of the growth required toonsumer demand that Is driven by steadily increasing mcomesolicy of holding retail prices constant.

ansport

Transport carriers musteredercent increase In freight trafficompared with an unusually strongercent gainhe poor perfonnance stemmed mainlyecline in rail shipments (the first. which reflected the Soviets' lack of sufficient surge capacity to handle the backlog of shipments that built up during tbe crippling early winter months. Rail problems delayed shipments of timber, perishable foods, metal structures, peat, refractory materials, and slag

While all freight carriers suffered from winter bottlenecks, there were some positivein the Soviet transport sector

Shipments by tlie centrally directed highway carriers grew for the second straight year after declining.

Railroads and highway carriers managed io transport another successful grain crop with yruy isolated problems.

Increases in oil and gas production spurred stepped-up pipeline deliveries, although the increases were lower than

Trade

The USSR's hard currency trade balance showed marked improvement7 because of higher export earnings and Utile change in the value of Imports. To judge from prelhrunarydata, the Sovietsecord hard currency trade surplusillion for the yearnearly triple6 surplus. The dollar value of hard currency exports jumped aboutercent, due in large partartial recovery of oil prices and an increase in the volume of oil exported to the developed West In addition, the dollar value of hard currency arms sales to the Third World remained high for the second consecutive year. Most of the arms sales were on credit, however, and the prospectsspaymcnt are poor.

Moscow apparendy decided to take advantage of higher export earnings to cut both net foreign borrowing and the volume of gold sales. According to prchminary data, the Soviets also held the line on the dollar value of hard currency imports, with real purchases dropping an estimatedfusion resulting from the ongoing reorganization of the foreign trade sector may also have reduced imports. Imports of machinery and equipment arc estimated to have declined, as preliminary data show steep drops in the value of imports from traditional suppliers of machinery and equipment, including japan. West Germany, and Austria. Imports of grain increased, on the other hand, even though the Soviets recorded another large grain crop. The poor quality of this cropa result of wet weather during harvestingspurred purchases of muling-qualiry wheat during the second half of the year.

26

Continued)

In contrast, to Its hard currency trade success, the USSR was less fortunate in trading with its Communist partners last year. In particular, Moscow's total trade surplus with Communist countries was almost cut in half last year as falling energy pricesthe result ofomplicated pricing mechanismcut sharply Into Sonet terms of trade Trade with East Europe was roughly tn balance, with only marginal growth registered for Fast European exports to the USSR.lvj forced ton import- frool.mother mWffi imp.Ute* Of Soviet oilto hold down its growing trade deficit with that country. While oil does not figure in Sino Soviet trade, Moscow saw trade with China drop last year following rapid growth. Trade declined nearlyercent, as both sides tailed to preside the goods called for In the annual trade

ables on Soviet Economic Performance

TableGNP by Sector of Origin at Factor Cost

2 rubles)

TableValue Added In Industry at Factor Cost

2 rubles)

TableAverage Annual Growth of Pcr-Caplta Consumption

(based2 established prices)

TableGrowth of GNP and Factor Productivity

(average annual percentage change)

TableGrowth of Industrial Output and Factor Productivity

(average annual percentage change)

TableGross Fixed Capital Investment

1 billion4 prices)

TableEstimated Hard Currency Balance of Payments

(million current US dollars)

TableTotal

(billion current US dollars)

TableEstimated Flard Currency Debt to the West

(Wlllon current US Dollars)

TableSelected Indicators of Agricultural Outpui

Continued)

USSR: GNP by Sector of Origin nt Factor Cost2 rubles)

7

4

7

7

$

6

4

9

2

7

2

6

7

2

2

6

8

7

7

6

4

l

2

Klll al

USSR; Value Added in Industry at Factor Cost2 rubles)

7

3

2

4

7

8

6

ll .

1

1

5

1

4

6

8

6

1

pown

oitm

mcla ivci-king

2

9

ale

.

7

OO)

1

J

0

7

.

tMki

7

9

TOUT,

1

69

,>

to

Continued)

USSR: Average Annual Growth of Per-Capita Consumption (based2 established prices)

consumption

3

floods

1.5

1

0

G

I

1

^cations

3

and Porsonal Care

1

i

*

USSR: Growth of GNP and Factor Productivity (average annual percentage change)

national product3

1

2

inputs*

<

0.1

(actor productivity

1.2

1 i

1.4

productivity

7

productivity

4

4.6

productivity

>

4

eo iW vl W ivWm)van *

*M^xiviilWMSaitf 10

jkob- w"l lita wonminiM" cull Wornwii *rd a

I (Continued)

USSB: Growth of Industrial Output and Factor Productivity (average annual percentage change)

83

pr09ud>0r)

Kipi.ii*

-

i

-t

3

8

factor productivity

9

piodUclivly

3

* Mpap* rt*, *,

Inpml*Col*

m

i. Mhl dwnwwtfHn

SSR: Gross Fixed Capital Investment

(billion4 prices1)

InvBnment

2

lourc*

3

4

6

7

rarrnt

rror^nn

cxoa^uaiom

-

is hotaaag

I

7

.r

6

6

5

5

and

'

1

!

6

3

ana

4

0

8 man

Continued)

USSR: Estimated Hard Currency Balance of Payments (million currant US dollars)

account balance

trade balance

to o

moods, fob.

Interest

Invisibles and uansftjit

account Balance

124

gross debt1

dew

debt

>.'j;

change in ussell held m

Mi'u'

fRate

45

ceiiitshe LDCs

200

sales

prior* ni*t! omissions'

[rteljdntf #ridi[tu*Tt jsrT -ifu Kdt^LftfJ J1 ffj* iWutJ-Ert

* trxi*dH -jrti {yfvnEf ntifjrtt. tnf-*rj

Continued)

USSR: Total! (billion current US dollars)

Annual

txports by region Total

7

5

0

3

countries

4

oevrfoped countries

imports bv region Toi.il

5

5

0

countries

Oeve4oped ecu nine;

6

USSR: Estimated Hard Currency Debt to the West!

(billion current US dollars)

debi

5

9

2

2 8

] 1

verecXed 0i

Western oanks

9

5

-

Cite

,

2

2

Continued)0

USSR: Selected Indicators of Agricultural Output

ol ouipul1

turtles)

7

meuic *

2

2

2

2

beets

saec

0

24

(billion)

<y 2 era

flMonvnbif lo Woinna* trWiQi ittKcbtn ol it patrc*tjurwt

Original document.

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