ANNUAL BULLETIN ON SOVIET ECONOMIC GROWTH (SOV SEG 88-001)

Created: 4/1/1988

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Annual Bulletin on Soviet Economic Growth

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Annual Bulletin on Soviet Economic Growth

Thb bulletin was preparedof Soviet Analysis, with contributionsin

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Comments snd queries arc welcome and nvsyto tbeDivisiori.

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Annual Bulletin on Soviet Economic: Growth

bulletin uses both independently derived CIA measures and official

Soviet stalls tics lo analyze the performance of the Soviet economy and assess the progress of the Soviet leaderships ccoootnic plans and policies. Inderiendenily derived CIAexample, of the growth of GNP, industrial production, and agriculturalused when we believe that the corresponding Soviet indicators distort actual cconoraic rjcrformancc. generally because their growth reflects varying degrees of double counting or iriiuttion, and when we have sufficient data to coostruct alternative rrteasurcs. When wc lack such data or judge the Soviet indicators to be reliable, official statistics arc used and are identified as such in the text and its accompanying tables and charts.

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April im

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Contents

Preface

(Jicthcxlemmiion Ugi.etiurnei sullen

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Slow Orowth la

Indastry

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Cceuuroer

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Hard Cancacy Position I

Defease

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Growth Stows,

aRS,

(he Consumer Suffers '

A. Eeoatomy Stumbles

7 the Soviet eeoiaoray grew try less to^ Ilowest rate in almostears. Coming In tbe wake of tbecrceat growth achievedbis dropoffobering development for the leadership, mpecially because it was not offset by major improvements in overall product Quality. The economy's poor peifonnance points up the enormous obstacsea In the path ofestructuring program. Gorbachev's efforts to denigrate therecord of his ptedecessors and statements playing down the importance of growth rates by regime supporter* were ahr-w' rsertainly inspired1 poor perforniance, >

Economic growtb may pick ep thiswinteras not been as severe as tbe last and enterprises will have had time to better assimilate tbc recent surge in investment- Nonetheless, rriany of the factors that contributed to the poor performance7 are likely to carry overf the economy continues to perform poorly In the neat few years, tension within society and among tbewin Increase,tiff test of Gorbachev's political skill, i

D.Mixed Showing

Although production la some agricultural sectors was high by historical Soviet standards, erveratl production fellsereeni last year as output of several rrsajor crops declined. An excellent forage cropnillion-tori grain crop helped push meat, milk, and egg production to new records. Improved feeding practice* and the use of "intensive technology" haveositive impact on aotne types of farm output. Overall crop production, however, fellercent as the potato, vegetable, cotton, and fruit crops declined sharply. The fruit harvest also dropped by almost one-third because rlate springeverely damaged orchards and vineyards, i

arked expansionnventories of cattle, bogs, sheep, and goats dropped sharply toevels. Although per eapKa meat availability was up by moreeeceat, in part because of the inventory reduction, marketing and distributionapparently caused nurherou* local shortages. Moreover, difficulties in processing milk reduced the assortment of producu available.

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in industrial prod inll |oIercenthoof increase dropped In practically ill iti.of uiilu.iiy. boi ihe downturn was meal pronounced In lhc civilian machine-building lector. Machinery production stagnated and machine builders had little success In raising ibe technological quality of (heir output.ore positive note, energy performed well. The economy bad fewwith energy bottlenecksnd Moscow was able to boost its bard currency earnings by steering op fuel exports lo the Wear,t)

The downtime rcQalred for the retooling ofcoofusioo over new self-brunciag measures, lags in bringing new production capacity on line, and slackening labor discipline all contributed to tbe slowdown in most parts of Industry. Record cold in January and heavy snow In February led io rtaajor backlogs on tbe railroads lhat Interrupted supplies ofo enterprise* and Ibe delivery of goods to markets. In addition, the new qualily control system played havoc In tome sectors alumbers of goods were rejected as deficient, t

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Per capita consumption grew by leasercentperccnt drop In alcohol taleaajor factor behind this poor showing, but there were widespread shortages of many foodfruits, potatoes, and erg cubic* Hig>-qttality nonfood consumer goods also remained in short supply, aad the growth of consumer durables production fell markedly from tbe previous year. On the other hand, new boasting corr.ru rxJorishe Largest gross iacrrneast to tbe slock of bousing ia the pott-Sulis era

Concern over worker altitudes has prompied the leadership to adjusth Five-Year Plan and increase Ihe aha re of resources going to the consumer Mousing construction, in particular, is being stepped up Targets for the production of food, soli goods, and consumer services abo have been raised Investment resources are extremely light,xrceptibteia rivinghe key to eliciting the belter worker performanceecessary If Gorbachev's urogram lo revitalize the economy is to succeed

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C Machineajor Worry

Machinery production stagnate!uipul of consumer durable was down moreerceni and Ital or lrrsrortaot types of industrial cquirenent fell tu touch as is toercent thon cf plan. |

rsPWrdinjtudy cited in ibc Sttie Planning Aseocy's joewrxaLercenthe machinery sbon-(tH list year was due directly lo the new qualitysuftroionly to shortages in material xtrppbes. Id addition, the retooling effort is being riiiiiered by inadequate supplies of newoie machines Ihat are available bave ssot been Sought on lineapid enough pace, i

ia^'ieadership seems to have backed off fromWrth criticism directed at these Industries roostearocusing on bow to relieve their Vtyshlems. AD debts and fines accumoisTcd in the early mooths7 have been fmgrren. quality suadards were relaxed in some plants, and tbeind ns tries have been told to help pick an the slack in tbc crrilian sector's product io r.

F. Hard Currency PcnJtiou Improres

Pretounary data indicate that Moscow's bard cur-reacy trade surplus more than doubled7 to an6 billion. Hard currency exports jumped JT abboteicent becauseoreee-barrel rise in the price of oil on world marketsOllDOO-ba rrel-per-Jiy Increase in the volume of oil '. exported to the developed West Moscow tooklgCof higher export earnings to cut newfoteign borvnwing and to hold down iu volume of gold sales, t

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Tbe dollar value of hard currency Imports, adjusted for miration aod tbe depreciation of the dollar on world financial rstarkcts. dropped an estimatedoercent. Confusion resulting from theof the foreign-trade sector appears to haveole In the decline in imports. Even imports of machinery and equipment, important to the regime's efforts to modernize industry, were cut sharply. Grain purchases increased, however, as the poor quality of the Soviet harvest and favorable world market prices led Moscow to step up imports of selected grains.

Growth Slows, Modernization Lags, the Coiiaumor Suffers

The Soviet economy performed well inBrat fall rear ofhe rates of growth of GNP and industrial production were the highest inecade, and agricultural rarodoc-Uoqew record Buoyed by (hit itrceg performance, the leaistiblp cvideastly7ear ofwhich economic growih would be maintained and supplemented by gains on the quality front and In which mod cm iiation and reform would proceedapid pace

Slow Growth7

Tbe Soviet economy, however, grew by lesseicent inlowest rate of increase in almostears and far belowercent average annual rate targeted foth Five-Year Plan period (see table I, figurendifiicultiea were encountered in practically all sectors of ibe economy. Industrial growth dropped markedly, with tbe downturn most pronounced in civilian machineprimary source of the equipmentto modernize the economy and the consumer durable goods needed to raise worker incentives. In agriculture, overall production declinedear record grain crop, and major transportationreappeared as clogged railroad line* helped to cripple tbc economy

Irdjstry

Industrial prodtscsicn rose byercent, down fromercent rate of growth recorded6 aad roughlyar with the lackluster performance in tbe. Growth rates recorded in seven of tberanches of industry were lower than6 (tee table 2)

Several factorsote in slowing the growth of industrial output:

* Record cold Ut January and heavy snowfalls in February led to major backlogs on tbe railroads that interrupted tbe supply of materials to enterprise* and the delivery of goods to markets.

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Mi-turn of Economic Growth

The Soviets measure their economic performancearxian concept called National Income Produced INIPL This measure differs from Western GNP In that It excludes depreciation and services that do not contribute directly to material output. Published NIP growth rates are biased upwardInadequate adjustment is made for Inflation. The NIP and GNP measures also vary consldtrablr In some years bexxtuse the weight used for agriculture In Soviet accounting differs from that used Inestimates. In years tut*rhtmperformance was unusually good, tkt two measures art closer together.

The GNP ond NIP measurts both show lhatgrowth has slowed In tht USSR since She. The IJ pern at grown* of SIP reportedn fatt. ts the lamest rate of Increase Im thiseven than In theps. Ihe period called the "prtcrisis yean" by Gorbachev:

has recently published for the first time data on Soviet economic growth using the Western concept of GNP. According to these data, Soviet GNP In-createdercent6erceniell above the CIA estimates fot thott yearsercent, respectively The large disparities between the Soviet and ClA estimates matt likely Stem In large pari from the failure ofailal authorities to use price deflators to correctInflation In prices for new products.

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New managerial and financial arrangements,ibe transitionystem that requires the arm to finance much of its current and capital expenditures from sales and other internal funds, left enterprisera uncertain and confused. Without price reform, whkh fa yet to bethe new measures are not working very well. At times during the year enterprises found themselves short of money to pay their workers and purchase supplies.

In keeping wilh General Secretory Gorbachev's call to raise the auallty of Soviet products to world-class levels by the end of tht century,7 the leadershipew system of quality control Inndustrial enterprisesfor abouterceni of Industrial output. IJj

Tht system Is modeled after that used by the military to maintain the quality of defense goods. Astaff of Inspectors Is assigned to manufacturing plants lo ensure that products meel stringent quality standards. Inspectors have tht light to reject Items at any Stage af tht production process and are the final arbiters on matters of quality. The system Is designed not only to spot artd reject defective goods but alto to determine the reasons for theexample. Inadequacies In technological documentation, poor production equipment, or defective Inputs.

Although the program succeeded tn focusingon the sources of ihe shortcomings Ingoods, the quality of produclion In the USSR has not Improved significantly, according lo B. N.irst deputy chairman of the Stale Com-mittte on Standards. Sokoltv reports that by the end of first7 the lough standards had to be relaxed for some plants because the requirements were strangling production. Strict control of quality proved Incompailbie *ith the still existing quantity-oriented Soviet reward system and the current fiscal year plan's high ouipul targets Productionis often too otd to manufacture machinery thai can meet tht standards, and many plains lack Ike necessary itst Instruments to check for the quality of components, nonetheless, the newsyilem should. If properly Implemented, lead to some overallIn product quality In the longer term

a high rate of investment, the volume of new production capacity brought on line lagged (seeommissioning! increased by about S

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eu than half ibe rale planned. Tbe shortfall wu ratrisnrkabty large in aonu aecion astcb aa tha chemical Industry, where ihere wai aliDcal no growth la new capacitj brought oa line. Furthermore, according to Soviet data, oolyereen! of the facilities bcwigfat oa line were acttsal-Ij pvl to uae.

retoeJlng of induatrial enterprise* also dlsru pted productionhe regimeefforts to mod-

tbe ecooomv. institute reforms, and sllll meet ambitious prodiictioo targets seem to be undenoin-iag each other. On* peoeiioent Soviet economist has calledpause la ecooocnicat. aslaa ma tea clear, no letup in output targets appears In the

slackening of worker discipline ma* also hive been behind tbe dropoff In performance Unhappy over wage cuts and unpaid overtime io repair goods

rejected by Qualily control inspectors and forced to go to mulliahiii operations, Soviet workers balked and in tome eases ttaged protean Work stoppages occurredew plantslo the) Soviethabits of loafing aad drinking at week reappeared

Some Soviet ladostnal sectors did, however, enjoy toccras. Tbe energy tector. for urtaertptc, dad weftesult, tbe economy was fairly free of eaergyand Moscow was able to boost its hard cuirco-cyy stepping ap fuel exports to tbe West. The tuccest of tbe apace program7 also demonttrated the abiliiy of Soviet Industry to accora-plisb bigb-priority tasks. Soviet ootmonaut Rooun-enko relumed to Earth ivsccessfullyays inowerful new rocket, tbe Energiya.

wii launched in what wai viewed at ihe lint successful public leal of tha Soviet apace shuttle

Industrial Materials. Continued eipansto* oa* prodoe-tlon in the industrial materials branches of industry is necessary if Gorbachev's plans lo modernize the USSR's industrial plant and Improve the quality of ouipul arc lo May on track The plans require ln> creased production of material Input* such as lechno-barcally advanced metals, chemicals, aodtioe materials. Mom rn* tomb producing: branches, however, were hard bit by ihe cold weather and tiimportation bottlenecks of the first quarter and spent tbe rest of the year trying to catch up. The stronger discipline and Increased use of labor and cqaipmoal that had boosted growthould not be repeated.verall output of the branches prodocirg industrial materials was op by oatlyercent

Output of ferrous metals increased byercent. SIfOrtfafIs in the productionfdeof specialty Heels delayed or disruptedI) in tbc rnachine- build ing sector, the customer for about SO percent of all esternal deliveries from ferrous metal]orgy In addi-ti on, prograrro to modernise most major Soviet steel plants wore weD behind schedule last year, weakening the prospect* for the prodoctioo of machinery for the mode mi rmion program In tbe years ahead

Growth in aomfrrrous metals output also was slow, earning shortages of rolled predects ind some special-ired metals. The industry drew criticism from ibc Soviet poliiical leadership for failing to provide coough advanced metals, such as nickel alloysill ii".i, plating for steels. Prodaction targets for alumina, sine, lead, copper, and nickel, however, apparently were met

The ranrfotoiacce of tbe chemical industry also droppedtrong ahowingtcept forhe growth of production of most prodnct* tumbled Problems with weather, transportationthe diversion of energy for residential needs

during cold weaiher. and equipment shortage*the industry. Dorncntk produciion of chemical equipment and spare parts declinedercent, prompting Moscow to import mora tecautosogy from tbc West,ith Western firm*7 amounted loillion, cootparrd8 billion during the.

Tbe sharp drop la growih of wood products7 represented another instance of Industry's failure to sustaia tbe Improved performance of the previous year. More lhan half of the enterprises in this setter failed to meet their delivery contracts Raw material shortage* delayed paper and cellulose peed action, and raikar shortage* delayed limber shipment* In the first half of ikeassive Siberian forest Arc later in the year and eacetudvc downtime of logging and transport machinery combined to bold down limber production

Even though growth in ctvurrwrtow moiertaii output slipped only slightly, several high-level latdustry etf5-ciili were retnoved from their jobs and several more were criticired by tbc leadership for failure to proridc proper support to Gorbachev's investment program, fa late June, rrvoroover. the Central Committeeesolution censoring the construct Ion materialsfor their "unpardonable compiicency andIn meeting targets for delivery ofto const ructionn aa effort to aoouhc more advanced teehrsoaogy for theseoviet ofi-euU stepped up their efforts to obtain neededfrom the Untied Slates.

Machinery. Moscow has invested heavily in IbeIndustrie* over Ihe past tworoduction failed io rise even thoughent increase. Prodaction ofgenerally stagnated, andoutput dropped by morerarcasoLof growth la the production of Lowest nsemlthe leadership to convene two Centralconlcrmces on the problem* in tbcthe

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loAc-lerin program to modern ire ihe economy hinges oo the ability of ihe dvilian machine-building ouiinely lo introduce' new prod-udsipens* lo ouiiomer demands ind conlinually lo upgrade Iheir piodueiionchieving evenone-lime upgn.de of ibc industrial base, however, requires large amounu of high-quality equipment, and the Soviets currently appear incapable of meeting this resuirrmem Ouipul of many type, of itsdustrtal equlpmcat *uch asorging aad pressingnd eouipeoeni for tbe chemical, light, aad food industries fell IS toercent short of target lasi yew Most tmportant, the Soviets continued to have bilk rwecrx. In raising the tecnranogscal level of msceuoery reeo-sctx Over twe-cbirds cf the goal, for ihe prcduetaoo of aervaoced eepsaprnent were notkd. Toe only mayor exceprico* were programdorieea for advanced industrial processes and computer equipmeni. wbieb grewndercent, leapectivdj

As noted earlier, the new quality control system was especially tough on Soviet machine builders. Slaty porcenl of dvihan machinery was subject to stale acceptance end, during the first isvo months of the year, inspectors rejected, on average, aboutercent Of the producu they checked. The situation became so serious that Moacow-.ithout formally announcingepialify standards somewhat for someby the cad of the first quarter (see inset)

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Tht txptrlenee of Ltningrad't Sverdlov machine-building plant reeve,ivid example o/ ihe kind, of problems Soviet tnlerprises art haying wilh tht state quality control system. According to Lenia-gradskaya pravda, production was so shoddy at tht plant that, to matt quality controlerttnl Increase In iht lime to produce each unit of output was required. This resultedarge ihort-fall In Ihr plants production ofmachine tools

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extra work created by Gosertyemka eforrlime to Introduce labcrsaving and ttmesarlng i_ cnrlr, ll also blamed the quality controller, for not catching problems on the assembly line before the product was eompltttd and for the defectivesupplied lo Iht plant.

Not was much progress made during the year to correct iht iliuatlonubles' worth af production wot rejected In October. By November, the value of rejected output hadillion rubles, and Inad climbedillion rubles. After ant year of Gospriyemka or tht plant, every third machine tool produced was still defective.

ywaruod. the Sonets were reportingerceni of machinery being produced was new. This dsimbe exaggerated, however. Acasretiag to reports In the Soviet press, many enterprises appear to betargets by making only minor adjustments to old machines aid classifying them ts newmg-standing Soviei practice In addition, some ma eh in ery producers art trying to meet renewal plans without regard for the machines- prodocsirily or reliability

To lay the groundwork for rnooermong Ihe economy, enterprise managers In the rruchinery sector have been told to triple and even quadruple tbe rate at which old equipmeni Is retired. Plant managers are sometimes reluctant, however, to pari wilb oldout of fear that it will not be renUced. Supply and produciion problems a* well as the leadership's

A recent study, reportedoviet economist In ihe January Issueovoyc khoryaystvo. found ihat rate acceptance was responsible forercent of the underfubillment af theonly tala the supply of resources and material!

erforta to force plants lo increase the use of erisiiag equipment have combined Io reduce the flow of incoming equipment. When nuehincry has been avallabk, ll has often been Installed too slowly by construction uniu that lack the technical know-how and equipment needed to do the renovation work

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eflWrally. Aboulercent of ihe new machine-building opacitye ccrnrrussioocd7 wu not completed, ind, when new eouipment wu irtsuHed, tbete were often delays in bringing it on

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Tae-lc 3

USSR; Growth tn Fawrgy

One of the bright spots in the Soviet economy7 wu the energy sector. Tbe production of primary energy increased by noteercent capered6 (see tableatural gas and electric power posted heft, gains, and oil and coal

continued to make tip for ground lost in tbe. Tbe coat of ma In laming growth in energy

output, however, was high. The energy sector gobbled

up more lhanercent of toul industrial investment

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Continuing the turnaround that beganil production7 rose to justillion barrelsbove planbove the previous year's output. All of the ii>creue resulted from growth In West SiberianWc estimate that the number of well completions and the amount of drilling in this region increased byercenthile commissioningi of new field, accelerated According to tbe Soviet press, productionarge number of older wells at Samot-lor-the USSR's largest oilfield-was transferred to shallower oil horizons, allowing Moscow io achieve quickhe productivity of these wells, however, will probably fall rapidly in tbe future

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Natural gai output expandedercent pace: The constructioo of several large-diameterand additional compressor stations wuAlthough lags In drilling and well completions ai Ibe Yamburg and Urcngoy gasfields north of the Arctic Circle were reported, they seem to have hadrnall effect on overall Output- Urcngoysupplies most of the increment to guin the USSR. Yamburg. Moscow's second-largest field and expected source of most future increases In annual wiput, did not begin producing unlil

Raw coal production increased7illion metric Ions, exceeding planned output. IJeeause meal

o4 Th, So-io. chanced Iheir eeeoutataMS andotxa nvibau torHlocud rem

of the coal from tbe easternreatest share of totalmuch lower in heat value than that produced elsewhere in the USSR, tbe act addition io energy output wu less lhan implied by the reported growth in production. The Soviet statistical handbookecrease ofercent in ihe energy content oT coal

EltcirlcUy output increasedercent, with fossil fuel, hydroelectric, and nuclear power all up substantially comparedhe loss of niaclear capacity at ChemobyT wu largely cn-eecome. Al yeaiend, nuclear generating capacity stood0 megawatts,ercent more than at Ihe beginning of the year. ^

Ctmtmmtr Nanduratlti. Prcdwtiou of nondurable consumer goods increased byercent Al-Ibough flgftr induiiry output grewlightly more rapid pace lhanmaller cotton harvests the last two years, sporadic deliveries of manmade fibers

by lhc chemical Industry, transportation bottlenecks, and cnierprae problemi adjust log to newprocedures disrupted or delayed production in ihit lector. Lighl indulry Mill is unable IO taovide Soviet cocoumcn with high-qualityproducts, particularlyood* aad fcjeBwear. (

Meanwhile,he fooJpwcetititt induitry. excluding alcoholic beverages, waaercent. Granulated sugar output shot up by 7reflecting relatively abundant supplies of sugar beets and continued large imports. Demand for sugar, however, also surged during the year; much of It apparently went into the ritodueiion of illegalThe canned-food sector, on the other hand, eineountered dlfBculty obtaining supplies of vegetn-bles. fruits, and berries. Labor shortages and depleted Hocks brought on by overworking fishing tonesproduction in frth industries.

Mixed Saarntag Although production in several agricultural sectors was good by historical standards, overall produtioe dedmed byercent last year because output of several major crops fell (see tablea excellent forage cropn grain harvest helped boost meni, milk, and egg production to new highs. Inventories of cattle, bogs, sheep, and goats dropped, however, ill partesult of Gorbachev's program to increase animal productivity by culling marginal animals. Despite the Increased slaughtering occasioned by this program, the per capita availability of meat increased byercent, not enough to satisfy the growing consumer demand fueled by rising incomes and the low level of meat prices

Crop production, mean-bile, declinedercent. Frail crops were down by almost one-thirdate spring last year and heavy frosts la May damaged orchards and visveyards. Potato, vegetable, and cotton crops also were tower than6 The potato harvest was so small, in fact, that in November collective farm market prices for potatoes were near record highs. Sugar beet and tuaOower teed harvests, however, showed substantial increases

On balance, ihe per capita availability of farmdropped last year by anercent, providing further evidence of Ihe volatility ofproduction in the Soviei Union. Agriculture's relatively poor showing, moreover, camead time, hampering the regimes efforts to improve living

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I and raise (he productivity of Soviet workers Si olher pom of Gorbachev, program wan Ragging.

Problem.ndia trial Growih Afterstrong performanceoviet freight carriers 'altered badly7 (teeail freight traffic, for instance, measured Iniacrestcd byercent. weG below the rate of growth plannedarled drop ia performance over tbe pre*toot year. Tbe poor performance of tbe transportation networkajor role In the slump In overall economic growth.

The main culprits wera tbehich carry nearly three-fourths of nonpipebne freighl traffic aad form tbe backbone cf tbe Soviei transportationHuge, weather-related backlogs developed early in iheIn the shipment of coal, limber, and metal ores. According lo the rail minister, ooly two of the country's J] railway systems acre meeting adiedukao-milboa-ton deliverydeveloped during first

As tbe year progressed, railroad administrators were hard pressed to alleviate the troublesome backlog and get tbe system back to normal Because the rail network has been operating at near maxim amia recent yean, planners had little operating room lo adjust schedule* and equipment to cope with the bacUogs and to increase the average distance freight was hauled. The possibilityuickexam-pie, adding more freight to etistiagnot exist. The oaly action was to add Operatingrolling stock, more automation equipment, and new "tuperlaige"handle the increased Iralhc and to unsnarl the system. These kinds of changes, however, tak" aad resources, which the Sovieu do not hive

esult, the tonnage carried by the railroads declinedercent7 and productivity fell markedly. Average freight car turnaround timeover the year, for instance, and average train speed declined Mere important, the impact of tbe rail bottlenecks was felt throughout the economyof critical supplies were often delayed, and the flow of goods to markets was disrupted

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ore positive note, therearkedin ihe USSR's hard currency trade balance7 (seereliminary dan indicate lhai the hard currency trade surplus more than doubted to an6 billion. Hard currency eaportt Jumped by aboulercent becauseote thanper barrel rise in the price of oil oa world marketsncrease in the volume of oil Moscow exported to the developed West Tbe dollar value of bard currency arms tales to Ibe Third World also itmained high for Ibe secondear. Moat arms were told on credit, however, and tbe prospecti for repayment are uncertain at best.

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look ad van tago of blfbci export earning* both io cut new foreign borrow!ne and lo hold down III volume of gob* tales

Meanwhile, Ibe dollar value ot* bard carreacy im-pons adjusted for isslUtaoa and Ihe depreciation of the dollar on world nttancial markets drooped an estimatedoercent. Confusion retultint from the reorginl ration of the foreign Irade lector appears to haveote In the drop In imports. Even imports of machinery and equipment, import*ni to thee'i effortsodernize industry, were cut sharply. Grain purchases increased, however, as Ibe poor quality of tbe Soviet hirveal apparently led the Kremlin to step up grainof mlng-qualitythe last half of the year

At the tame time, Moscow's trade surplus with ill Corarrasrust trading partners fell7 (searade with Raster* Europe was roughly ioasa LoTOpeir exports to the USSR irrcrcascd only' marginally. Trade with China fell an estimatedercent following rapid growth during the previous five years.

General Secretary Gorbachevumber of initiatives during Ibe year to make Ihe Sovietore active player la tbe to terns tioaal tradingunity aad ia world taa racial markeu Moscowabout possible membership in the General Agreement on Tariffs and Trade Tbe Kremlin also

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placed added emphaii* onn lues (see iiuel)ay to giin access lo more Western tceansokatvlower hard currency outlays and lo improve the marketability of Sc^et-rrunufaetured food* la the West

Tbe leadership continued Its campoica to eapand lhc Council for Mutual Economic Assistance's rote in Sovietdaveloptnent. The economicexperienced by most Easl European countries, bowcv-cr. limllcd the types aad Quality of goods they were able to export to tbe USSR

Macrocconomlc Policy

Gorbachev took officeust ash Five-Year Plan waa being completed In an effort to put hb stamp on economic policy, he sent the draft document back to ihe planners on al least Iwo occasions, apparently because he thoughl the goals for industrial oulpul and investment were too low. Tbe plan that

/afar Venture Update

During ike pasto IS momhs tlie Soviei leadership hasushed total remures Wesiern firms. Despise she Udtlal barer si shown by many Wesiern firms, however, pros-ess has been slew. Only aboutgreements have been concluded liner ike legislation look effect al Ihe beginninghe largest tiumbllngblock remains the Inhertnt conflict between Soviet and Western commercial object Ires. Wesiern ttuitnesimen are eager tootentially lucrative Sovtet market. They have less interest In helping the USSRorld-class exporter of manufactured goodsompetitor for their own foreign sales. Soviet Inexperience wUk Westernconcepts, the vagueness of Soviet legislation, strict rules on profit repatriation, and Inadequate suppltet of necessary Inputs also have been major rtumbilngblocks

ew additional Joint ventures art likely so be concluded in the next year or two. Host of ike deals dose lo signing appear to be small endeavorsdhat litvotve timpte production processes, low-leveland Utile foreignew large protects art under negotiation, but. even If agreements are reached sometime this year. It will be several yeaet before theseegin full operation.

In the near term, tkrreforr. Joint ventures will have Utile Impact on Soviet hard currency earnings or the quality of domestic production. Over iht longer lerm. however. Moscow could benefit frommall number of such agreements Joins projects withfirms could help Improve the performance of certain Industries by transferring valuable manage mem and technical skills to Soviet workers, providing acceig to belter and more modern manufacturing techniques, and giving Moscow access to new foreign markeu

rmdeofLaJ

wu eventually adopted raised tbc growth of both real per capita cooiumptwo aod lavtaiaicei to rate*above those realized daring (be. At toe tame lime, tbc Input*o grow mote slowly tbaa ia the pact, and the ambitious oatpat goal* were to be met by large increase* in productivity. So far, however, these gains bave not nulerialired.to CIAhe snnnal rate of growth of overall Labor productiviiyhowed onlychange comparedsec figure )1

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According to Soviet data, new fixed capital invest-mem increasedercent Last year, roughly equal to tbo rate targeted7 and in line with thecrccal average annual rate offannedsee table SI rurtberrnerr, Ibe distribution of investment among sectors of the economy appears to be roughly as planned. The huge commitment of resources lo machineIndustrie* thai produce the equipment neededears lo hare swallc-ared the lion's share of industrial investment last year.

iht

itss-to

Plin

According to Soviet data, the amount of Investment channeled into tbe retooling and reconstruction of enterprises grewercent lastnd the avenge annual ra tc of growth of rcoovatioo activityr ta th* current five-year period I* wefl about that planned for the period aswhole.

AVEijc innoil

I.SI-SJ 4

J5

Nevertheless, the evidence indicates that the retooling of the machine-building sector did not go as wdl as expected Cce&ptaints about delays ia bringing eapao-ly on line In machine building and elsewhere mounted during tbe year. It could be that enterprises an etna tiding production fadHtie* or building new plants oa adjacent land and reporting It aa renovation. This practice was widespread in the past and could be even more prevalent now, given the pressure managers are under to both retool and expand production

Msr arwaUna* rac

sr. ,Ua4,ravumw la retrain*ta a* ru^aewt un> atthe-anV primariewi

>*k< caprul attest nUral da-tag iaecrr.nl yea. dlridod

by Ik*ol the lotal.raianln, oT Ilia voir.

unm th*.

Accordinghe prominent Soviei rcooomiai Abel Agaobegyan, ibearrying out restructuring -mainlyolve socUlnd the criterion for whether restructuring is proceeding well is, "Dolive belter, orevertheless, GeneralGorbacbev ha* cautioned the populace not to expect too much too toon.7 *peeeh in Riga, for instance, be said that full implementation of ptrtitreyko would lake time.oviet citizen* should be preoaredighten their belt* for iwo or three yean.

Tbe goab for sales of consumer goods duringh Five-Year-Plan period calledodest rbe over the rate of growthharper acceleration In consumer sen-ices provided to ihe populace (see tableo far. however, the volume of comumer good* and services going to the population hat noi come close to reaching those goab. CIA

estimate* that last year per capita consumpiionalcohol grew by lessercent (see figured);

Pa- capita supplies of food and beverages, one of the main indicator* by which Soviet consumers judge their well-being, barely improvedale* of moat and dairy products were up. Poor vegetable and pot* to crops, however, resulted In widespread produce shortages, longer lines In stores, and higher prices in collective farm markets. Sales of alcoholic beverages continued to decline.

Nonfood consumer goods, especially high-Quality items, remained in abort supply. Sales of clothing and textiles, for example, wereercent, while purchases of footwearercent- The

Average Annual Sale* of Cosrsvmer Goods and Serrlees laibh

Fip.ro 4

USSR: Growth In Per Capita

Aon.1

Pita

win. ,wa

irtl*

k ivi ia

f'mraJmiy kkoirwifoclflfta IMS aadHai Ural- IMS.

twvlog ai* ownMid tiwoamuriand aaraiet,"

npalr1 h'> include. Im mmiv.ad

rank, tvoalf af'nHa Iima. ud tataUrtia'iTh* SoviatSave mrvuy tuawa

h ihwTm <Uu wnknada filniii afaaM Hrvioos.imtlaa bdndabMpenoaal naui. oilkat ud in iwparlat(urrtocs aadGrowth af ItM

acniota Ii plaannd idnr raar for ltlo-*0

of oooaanvrr durable* rsrodiscboo fed, (tomb take ptevious rear,Va. and tapereported tn especially ibon sapply. One reccat Soviet survey. In fact, found tlore abelvei generally abort of tiock. Those items available were reported aa being "either exorbitantly eaperarve; tbe wrong stac. color, or abapr. or of peer oaaaitty."

umc of repairJiaiice. ear. tailoring, and housenot satisfy the rising consumer demand for such tarvicasL

Overall, according to Soviet dala, state retail trade tales adjusted for inflation increased only bycent drop la (Icobol tales was mainly responsible

M ran while, average wages of workers and employee* increasedercent, exacerbating lhc growing Imbalance between Ihe demand for and supply of consumer good* In ihe USSR. Moscow! failure to supply enough consumer goods and services to soak up tbe additional purohaaing rower--created by Ihe drop

in alcohol sales during the past threeaggravated tbe iltuatloa. According lo the yea read report on plan fajSHnvent. lotal depoaiti in savings banks increased byillion rubles7 (equal to nsorealf times lhc increase In retail sale*)

Still, there have been some promising development! for UM consumer. Gorbachev may bave earned acme poiats with the populace, for tisataisce, by overseeing anpercear increase la new boosinglargest arras* increment to the stock of bousing In tbe USSR in Ibe post-Sulin era. Then too.

in addition lo Ike major program announced' Ibe regime bai introduced several new programs bi Uie fail two yearsenefit tbe consumer:

Fxpaailng the Primeigh Potential for Cain

laws were passed extending Ibe boundaries of private activity aad perm it ling the formation of producer cooper* Uvea. The leaders hip hopes tbe me*lures will increase tbc supply of service* by drawing additional labor to tho service sector (lee insetV

Enterprise* have been assigned mandatory quotas for rrroviding service* lo the population. Machine-building enterprises, for instance, have been ordered to set ap service centers to repair tbe appliance* thatmanufacture.

special Bureau for Social Development was orunder toe Cetuneil of Minister* lo cserleeof tbc Consumer Goods aad Service* Program.

oviet ?os*swrrtpiion level* are still low by international standi Ms (tec figurend improving the lot of the consumerajor concern of the Kremlin. The leadership especially wants lo illcvi-ate the chronic problemthe USSR's food supply Gorbachev recognizes thai success in this areamoderniiiag the entire feed-to-market chain rattier than concentrating primarily on Increasingcultural producticsu. Inadequate transport*lion and storage contribute topercent Idssc* of farm produce oo the way to and through the food-processing sector

To address these cehcicrrria. the regime last year renewed its commitment to an ambitious long-lerm program io improve food storage, handling, and pro-cessing -part of2 foodbad never been implemented. The food-processing tector had been sbortcbanged in lhc aDoeation of resource* compared with both agriculture and the rest of lhc industry

To*1uracincr Goods an* Kantm Protum ihat ku out quanUMilvr u'|<l> (or boon's* thr quality aad quantity of aon'oof nmmi aoodi and "oxHTturtidon. itawaiMkauua. laml cart

ir>u.pcru. ao* kiiM raHwal

ittrteae. Tiet Iml rwitwcs lo tcMm that roth, aaaay a* whkh have ten* pal iata rrTm tfwe

earn* in mown

Among the reform measure! proposed by ikeregime, the mm- lews aulhortrtng Individuelt to engage In private business may hold ihe most promise over ihe short and medium term. According to the prominent Hungarian economist. Janot Xarmal. the

farmlssicm"for sack acttvUy ledoom In similar activity In llungaey.

To date, however, the new measures to tncourage more private activity have affectedmall segment af the eeonomy. In large part because of the resistance af local authorities lo ihe new measures and the reluctance af citlsens to register. In7 an article In Pi> estimated that cooperatives accounted forerceni cf the total value cf goods and services sold to ihe population. According to the State Committee for Slailitla. by the end7 there were1 perceni of the labor fore* working In cooperatives.peech in 7ami8 Gorbachev said that there0 cooperatives In tht country. Press reports Indicate, however, that in revise arias, more than half the cooperatives have not yet begunIn that same speech, Gorbachev seed that morepeople were self-employed butthat Inountry sue* as ours ihat Is not veryncluded In that total an perhaps as manyeople who were already operating legally before the new law on peif-employment becameIn

To overcome this slow it in. the Itaaerihip has taken several ittps. Most Important was the approval In8raft law on cooperatives that bolsters thtlr Ideological and legal legitimacy and broadens the rules for tllgtolltly In learningami iht scope af their activity. It seems more likely, however,ajor expansion of the private sector will require further measures. Giving itait-sector workers tht opportunity to earn Incomeslo ihose earned by private businesses, foe-example, wcmld reduce hosttllsy toward prtveie

"ConhThmttnt

Mm**

Defenae spending sppeara lo have increasedllhough the preciseubject logreat deal of uncertainty bccauie ofn ataeaaiAg recent expenditures on research and development andnnd maintenance. Although change* inipending art also difficult io detectth* available evidence suggests thai major weapon programs proceeded on track andctircmcnt grew byercent7 (measured In2 prtceal Orowth wai driven primarily by procurement of ofTtiviive and deferuive strategic sys-terns Amorig weapons categories, the largest yamp in real outlays was for ship and subrnarine procurement, principally because cf continuing expenditure* on the

Typhoon and Dctla-lV naciear ballistic missileand the Sierra-class and Akula-dasi nuclear torpedo attack submarines. Outlays for theandid and the strategicralaaile system also helped to push ap

At first glance, thb relatively high rate of Increase in procurement may seem at odds with reccrrt evidence that taggesied lhat the Soviets were oraxssdering reducing military steading:

Since the7 Central Committee plenum, sovarii high-ranking political and military

XoajMeailal

(.'onfidiiirral

bave said thai (be USSR intends to reduce military trxediog ia aa effort to acccictaic economic growth.

The military b) currently cngigcd laprogram to conserve resources throuch better training, greater midpunc and at countabiljiy, and by stretching out maintenance progrumi

We believe, bo-ever. that ike reauf jence of sraertdiag for defenae procurement the last two years Is related mostly to the cyclical nature of Motcow'sof military hardware For eurnptc, many of the programs fueling the recent growth of procurement were already Is production or were in the final testing stages when Gorbachev took office. Submarines and surface ships, in particular, take yean to build. The vessels now coming into the otder of battle had thrtr hulls laid yean ago.

8 Haa

The published output targets1 suggest no letup from the demanding goab Gorbachev has laid down for the planning. Tbe pbta1 implies that GNP aad industrial output art to riseercentercent, reapoctivdy.7 phutline withoaht. When compared with what actuallyowever, the targets8 require increases cfpercent In GNPerceat ia Industry la the machine-building sector,8 plan caus for an overall loci ease ofercent over what was achievedercent ewer what had been plannedhe emphasis oa production of snore lecsntvotfly sophisticated output is continuing as

ft ti H

of important types or equipment inchmachinebe by betweennd

To judge from Utea OosplsA Chji:min Talj nn'tOfl8 piin ind from Olher information, however, Ibe regime'* earlier belief lhat consumer needs could be deferred has channel:

bulk of the irtcrease in labor resources thiso be used to improve tbe quality aad availability of coemrocr service*.

"asajdr redistribution" of capita]o occur that, accordingoviet ecoraormst and Gosplan official, will benefit tbe "nonproductive" sphere "at Iha expense" of Ihe const ruction of industrial and other facilities in the "productive ipbore" Enterprise* irtparently are belog allow od to use some of their own fund* originally ialended for retooling for boosing and otberurpeaes. Indeed, the share of nonproductive Invest-mean in certttruetion activity thb year is to be the highest in Soviet history. Housing construction it to continueast clip, and investment going to health care facilities, schools, rx etc boob, retitrrneat hocn-ot, dubs, ando be raised sharply.

Targets for the production of food, toft goods, assd consumer services {including personal care, repair, personal transportation, and recreational services) bare been irtcrrased.

* Tho Politburo hasajor new program to revamp tbe health careO-percentin invMimenl inlilies bby the0 with anillionf iflveatmeat to be spent over the next three year*.

The defeaseo be more beavily Involved ia the production of consumer goods and machinery for consumer Industries Some enterprises of ihe recently ibolbhed Ministry of Machine Building for Pood and Light Industry have been shifted to the defensc-induttrial sector

The Kremlin appears lo be trying lo increase the share of aofi goods and food imports from Eastern Europe, according8 irade plans.'

Meanwhile, the regime's ambit wus Investment policy seems lo be continuing largely on track.8 plan calb for new fixed investment lo Increaseercent over6ercent ova the achieved level of investmentonetheless, ihe invesiment plan ttill looksismatch when compared withrodacsioa targets, which we believe to be unattainable without mil larger inputs of capital Indeed,ive-Year Planharp reduction in Iheincrnrertal capital-output ralioincrease ia capital required per ruble of growth In output (ONPk The improvements in tbe quality of Axed capital and thewith which It is used have not been Urge enough, however, lo achieve productivity gain* of the required scale (tee.

The publbbcd versions of8 plan and budget say almost nothing aboul defease. As usual, tbe only informationhe single tine entry forhe lUle budget* This figurehe tasne aat believe Ibe budgetanipulated for propaganda reirposes

Asseurncel

Mikhail Gorbachev was chosen General Secretary of Ibe Commtmitt Party of the Soviet Union in5 by ibe Politburo in large part because of bb

eAclib hart admitted rrcoul. Urn UM detent, taw aa tin iut<ubtlihed anomaly doa reioi oCiptMin, bfxWcocuitaseni o( waparu and otiD.yt (or retaart* tad dori-pmwLto

tetrntn. eomprehc.iiive lUikllct oa

rrJorts. arc In atari

-tPOntidmiiAl

The regime hai nol succeeded in boosting living standard* enough lo raise morale aod increase work productivity. No* as there nay guarantee lhal it -ill tiiicccd in providing better incentives for consumers in tbe yean ahead. If not, Gorbachev will not realize the gains in labor prssdactivity he needs lo make bis programs work.

Tbc quality of good* predated also is ma improving

to tbe eilent it must. This it apparent not only at

the low quality of consumer and producer

durable* and in the judgment of well-placed

also ia world ma rkcts where Soviet

mantifadurc* are no more competitive today than tboy bare ever been.

evidence available suggest! that Oorbacbev baa been unable, or unwilling, to cut into resources Bowing to the defense teeter to help his modern iza-lioo program substantially.

regime's program lo "reform" the economy Is off to an unimpressive start.re not coping wdl with the newnd loopholes exist in much of Ihe reform legislation. Major elements ol ihc reform, of course, are yet to be implemented- Tbe degree of Moscow'sto reforming such key elements of theu the price system, however, la open to question Without more flexible aad rneaningfol prices that can only be determined by market forces, the rest of the changes being implemented lose much of iheie pot en uil efTtctiTenes*

Why Gorbachev continues to endorse the high outputh Five Year Plan is also unckar. Politically, Ibc General Secretary may judge ihat. given his close association wiih the orginlal plan, he canrsot impose reduction* In contrast, mereSoviet leaders, such as "Second Secretary- Liga-chev, have warned of the perils of undue baste in implementing Gorbachev's programs, and Gorbachev may be concerned that any retreat from nit rapid growih policy might seem io concede the sursttriority of their more cautious approaeh. Gorbachev may

Nrw Planning Ftmetier

The General Secretary hai promised ihai once five-

ei

during ihe planning period. Although Moscow adjust ed Its five-rear-flan Invesiment allocation over the last year. Ill deciiton mot to back off from ihe leui produclion largeti contained Inh Five-Year Flan It consistent with Gorbachev's commitment to stability la the planning protest. By doing thisIs hoping logeta more smoothly functioning economy Enterprises and ministries, for eiample. would be more certain of their tasks and could plan accordingly. The traditional practice of planning from the achieved level"isincentive to Improving performance because exceptionalbrought higher targets for tht next year

The new planning philosophy has been tntx/rporoted intoS plan, where output targets art given as ratios of7 production goali. Under this system, produclion shortfalls art notis. they carry over from year to year and have to be made up by ihe end of the planning period.onseqmtnce. actual largetg are likely lo be unrtalis-tlall, high during she remaining years of the five-year planning period. For example, because7 goals were not met. ihe largeti for next year are higher lhan Ihe original targets8 Incorporated In the five-year plan Thtt could mean that:

Managerial and worker bonuses will be smalltr. possibly sapping worker productivity.

At enterprises scramble to meet the targets, the economy Is likely lo be stretched more loutly than would otherwise have betn true. As some sectors do belter than others, dislocations arevery thing ihe new planning technique Is Intended to preclude

'nihewayoflhefforts to raise ihe quality of production. Managers will be even more reluctant than before to modernise and retool manufacturing facilities.

believeetreat from hii original growth ttrgels issWr oa ocoeotDx gttninth is well In partica-Lar, he mir believe thai bii program for decenti decisionmaking requires slicking in hit pledge to make five rear plant stable (see 'rtsctt.

There arc seirrsc reasons lo beriev* that she ecoooeny will perform better thisyear's winter has been miHer than last; the regime, forewarned by last year'* troubles, may be able to snake adjustments to programt le alleviate problems; and, given lime, enterprises ihoald be ablessimilate escre of the recent surge hatill, many of the same factors that sic-wed economic growth7 will persist Ibis year aa the leadership continues tohigb-output growth targets while trying to retool indust y. restructuie the economy, and Improve prod-uct quality1 plea Iniplita no letnp ia the pressure lor more production: tbe targets for growth of GNP and Industrial production are more than four limes the average annual rates posted in tbe periodManagement ia to be further decentralised, tbe state Inspection program expanded, and other new measures introduced as well

Those cha nge* could prove aa or rater* daarttrXfva lhan last year and depress economic growth si plant managers and workers struggle to adjust. If so,wouldet casing djbculty etyanleriag pouiblr claims lhat hit prc-gramt are not working:Government bureaucrats will bticome increasingly concerned tboal changes that arc undermining their traditional privileges aad status but demand greater personal competence aad initiative

Military leaden are likely lo become more and more uneasy to the extent that promised benefit-from tbe industrial rnodcrstiratioa fail to materia II re.

Improvement* la living standards are essential if theo achieve tteceaiary gains in worker prodocUvity and head oft worker discontent

On balance, the potential for increased tensions In Soviet society and fot greater infighting within tbe leadership it likely to rise in the aeat few rears- These events wouldI lest for Gorbachev and hit ability to lead

-fMGd&ti.i

Original document.

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