THE SOVIET MACHINE-BUILDING COMPLEX: PERESTROYKA'S SPUTTERING ENGINE (SOV 88-10

Created: 4/1/1988

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The Soviet Machine-Building Complex: Perestroyka's Sputtering Engine

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The Soviet Machine-Building Complex: Perestroyka's Sputtering Engine

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The Soviet Machine-Building Complex: Perestroyka'sRine'

At the center of General Secretary Gorbachev's economic revitalization strategy is his sweeping program to modernize the critical, and heretofore ignored, civil machine-building sector. After nearly twoalf years, lhc modernization elTori has made little progress and is far behind schedule:

Machinery production is below plan,7 outpu: no belter6 oulpul.

Product quality has improved bul is well below leadership expectations.

New equipment improves only slightly on the lechnical level of existing models, and new designs have been slow to appear.

Retooling has been plagued by inadequate equipment supplies and problems in installing and operating new machines. '

The challenges ofargely anliquated and stagnant sector have been formidable, and contradictions in the program itself have further stymied progress. Gorbachev insists that enterprises meettargets all at once. Moreover, measures to reform the sector have oflen been introduced piecemeal, leaving machine builders responsible for operating under new regimes without the benefitsupporting infrastructure.esult, the sector has been thrownotentially volatile slate of dux'. Machine builders, tasked with what they believe to be unattainable goals and besieged by high-level criticism, have begun toense of desperation. Indeed, one machine-building official reported in the Soviei press lhat "wc arc, to pui il bluntly, being skinned alive."

Gorbachev's immediate challenge is to case pressure an (he sector while slill moving forward with his program. He appears tohat machine builders cannot be pushed to ihe extremes witnessed over the pasi two years and has begun layingonciliatory course of action. At ihe same time, the party chief does not wanl machine builders lo interpret his actions as signs of weakness and to begin rcsisling the modernization strategy across the board. Therefore, he has not publicly backed off from his reform schedule and exacting performance largcis, even though mosi plansrc beyond reach. To partially offset these shortfalls, he is leaning heavily on defense industry and.esser extent, onrope for increased equipment deliveries. Soviet orders for Western machinery and equipment, however, have remained relatively low.Gorbachev still adheres lo his staled policy of limited reliance on the West.

hc ecu term, Gorbachev musteadership consensus on lhc viabilily of pursuing civil modernization intoih Fivo-Yfurigh-growth strategy must,inimum, conlinue through at least lhc first few years of the periodenew thecapital slock. Wc believe Gorbachev will argue strongly forif il means postponing some investment in defense produclion capacity. He has taken steps toerious challenge from lhc military in large part by replacing top military and defense industry officials with personnel supportive of his policies

Over the long run. Gorbachev's program will result in some improvement in the quality and technological level of Soviet manufactured goods andne-time modernization of the nation's production capital. However, it will not achieve the more important goal of transforming civil machine buildingector characterized by the use of successive generations of increasingly productive equipment and the continuous, rapid introduction inio production of advanced, high-quality goods. For this to occur, Moscow would have io relinquish major elements of central planning and price selling. Allhough existing decrees would allow for ihese reforms, their implementation would overturn the basic working arrangements of lhc Soviet economy, and ihe chances of such fundamcnial changes occurring are small, panicularly over lhc next few years

The Soviei Machine-Duilding Complex: Pcrcstroyka's Sputtering Engine

Objective: Routine Product and Process Renewal

F.vcn before Mikhail Gorbachev came lo power.leaders blamed the slippaec in economic growth and the USSR's technological lag on lhc fact that Soviet industry was hobbled by an obsolete industrial base, gross systemic inefficiencies,erverse System of incentives. They believed that theproblems placed the USSR's hard-won military gains at riik. seriously threatened the legitimacy of the country's claim to be the socialist economic model, and weighed heavilyopulation faced with poor qualily and chronic shortages of basic consumer items (sec

Gorbachev has made economictop policy priority, emphasizing that il is essential for Ihe regime's long-term viability. He has areucd, we believe correctly, that lhc key to long-lasting impiovcment of the country's economicis continuing, self-sustaining product ond process renewal. In particular, he believes that:

The routine infusion of reliable, technologically sophisticated equipment into the nation's industrial capital stock is Crucial to securing long-lasting productivity gains throughout the economy.

The rapid development and produclion of high-qualily. advanced consumer goods will ditccilyconsumer welfare and the USSR's cxpOrl position

Developments in critical technologies, such asandill foster advance across industry,if noi morelhc USSRA military capabilities.

Machine building is the SCCtOr Of industry on which Gorbachev is relying toilic success of hi* strategy The bub of Soviet industry, this complex

employs overillion workers al moreesearch institutes, design bureaus, and production enterprises, and is responsible for designing,and producing over one-fourth of the country's industrial output. Of thendustrial ministries lhat mskc up the machine-building complex (detailed in foldout ai back of paper),ratferrcd lo as the defensein military hardware. The Olher eight produce primarilygoods and equipment for investmem in the civil sector

The Soviels historically have striven to steer the defense industry to the forefront of worldand industrial prowess through high-leveltop priority in personnel and resourceand lavish investments of the bcsl Wesiern and Soviet produclionevertheless, thehave confronted ever increasing problems in the produclion of sophisticated weapons. Despiteefforts ino upgrade theseapidly advancing produclion technologies in the West and Japan seriously threaten to outpace those of Soviet weapons producers. By thehe Soviet military leadership was well awareomprehensive and responsive industrywide infraslruclurc to supporl. if roi lead, routinedefense plants would fall ever further behind the West

Al ihe same lime, civil machine-building capabilities have fallen well behind the Soviei defense industrial Slate of the art and woefully behind Western achieve-mcnls The sector has historically, tn the words of Gorbachev himself, "nut been allocated sufficient

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for itsis: personnelhave been recruited from whalnot hire away, and in rv/iority formaterial alkxatiora was typicallyonly by that of the defense industry but alsoof olher civilian sectors, such as energyMost important, civil machinelittle incentive to satisfy its customers andthe best or most advanced equipmentbefore it could be called upon to nurseback lo health, civil machine building bad

The "Kick-Start" Program: Administrative Measures

Gorbachev wasted no time in addressing the sector's ills. He initially attempted to revitalize, or kick-start, civil machine building using administrative levers. In particular, he:

Applied sanctions and introduced incentives to boost produclion. To motivate machine builders to increase production byercent duringh Five-Year Plan (FYPJ. Gorbachev tasked them to work harder,etter wage and bonus system, and pushed them to use equipmeni during more hours of ihe day and tn employ malcrials and equipment more efficiently. He lined the enterprises and reduced worker bonuses when Ihey failed to meet production targets.

tringenl auatity control program.he Soviets selectivelyualily control system known as Slate Acceptance. Ostensibly, the system acts on behalf of the buyer as it reviews products for compliance with technical standards and for visual appearance. Staleis in effect at moreivil machine-building enterprises thatide rancc of the moil important invesiment and -tnsumer goods. Roughlyercent of civil machinery produclion is subject to il.

Prettured machine builders io raise iheir rale of innovation. By lhc, Gorbachev expectsoercent of Soviei machinery lo correspond to "world technicallofty (arret piven the

USSR's positionis Western machinery(see figureo force machine builders to transfer existing technologies into production more rapidly, lhc Soviet leader has required them to produce only that equipment that iheir customers Ordered. He has also provided equipmeni designers with monetary incentives and upgraded (heir(est basesncourage them lo create new designs capable of reducing the Soviet lechrso-logical lag In particular, he has devoted considcia-bly moic icsourccs lo the development of those leciinoiogics tbal have been the key io effective

Keyear in Sheep'% Clothing?

improvemenix in key technologies "ill benefit more lhanjuil ihe civilianmilhelp the mililary eonfronl ihechallenge looming on ihe Wesiern horizon. The highly capable weapons the USSR plans lo deploy in ihend beyond will depend on dramatic improvements in manufacturing technologies. These weapons will use more complex guidance, sensor, compuier. and communications subsystems, which In lurn require sophisticated microelectronics,and automated manufacturing.

Automated machine tools, robots, and flexiblesystems IFMSsI are particularly attractive in weapons manufacturing because ihey are ideally suited to batch produclion of highly complex and precise pans Moreover, the mililary places aon minimizing teadlime between design andand on highFMSs deliver these features The mililary applications best suited for automated manufaciuring include airframe and engine part fabrication; milling and finishing of tank hulls, turrets, and guns: and fabrication ofcomponents and subassemblies of olher ground, air. and naval weapon sysiems.

The USSR's effortevelop microelectronics has been driven by mililary concerns, and. consequently, the mililary has been Ihe main recipient of advances in this area. The Sovietsigh priority on including sophlsiica-ed microelectronics in avionics, missile guidance, fire control, antisubmarine warfare, and intelligence systems. Moreover, because advances in attiomaanufacturing depend heavily onthis technology is becoming morein military production.

Finally, computers are essential lo lhc performance of many strategic and lacllcal mililary systems: airborne, spaceborne. missitebome.ond shipboard, as well as fixed and mobile ground-bosed sysiems. In fact, computers are involved in ihe entire life cycle of military systems, from design, developmenl.and testing through operalions. maintenance, diagnostics, upgrades, and logistics The Sovietrecognizes these roles and is actively pursuing indigenous compuier technologies as well asadvances in ihe West.

modernization and economic growih in the West, as well asdvances in militaryin the USSR (see inset).

> Dramatically shifted renovation policiesurn over ihe sector 'j capital equipment. The sector must more than quadruple its rate of withdrawal of capital equipmeniimultaneously, through tbe infusion of massive capital investments in the form of advanced and highly productive equipmeni. machine buiWers are to retool their industrial base0 Gorbachev wants more thanercent of the sector's productionio have come on line during [he preccdine five years (see figureo achieve this goal, civil machine building has first claim lo its ownand is receiving support from the defense industry and equipment producers in the socialist community and in the West

Th* "Overhaul" Program: Systemic Change

The leadership realized that ndministrativc measures would be insufficient to bring lasting change to civil machine building and lhat the sector would have to be reformed. Thus, Soviei leaders lookeday to make product and process renewal routine rather lhan forced. Their solution was to augment much of the top-down, centralized pushecentralized pull, so that workers and managers would be continually motivated to innovate (seehe leadership ic:

Decentralizing decistonniaking authority to theTo motivate worked and managers IO work on iheir own imiaiive, Gorbachev is giving them more responsibility for their plant's operations

and. hence. ils success or failure. Me is introducing reforms thai give enterprises greater authority in deciding what and how much they produce, who ihey purchase supplies and equipment from, and how much they sell their products for.

Removing dtodv/ood at middle layers of iheIn an effort to ensure that ministries do not interfere wilh enterprises' new responsibilities. Gorbachev has reduced the number of civilminbtries fromo eight and has eliminated unnecessary bureaucratic layers. Inbe is taking steps to consolidate machine-building facilities into large organizations ih.it arc designed lo improve the innovation process and the dovclopmcnl-io-dciivcry cycle.

Adding coordinating bodies ai ike uppermost levels. To break down departmental barriers and provide national-level oversight. Gorbachev has created new high-level coordinating bodies and expanded ihe authority of existing ones. Heureau for Machine Building subordinate to the Council of Ministers, introduced organizations to provideto and direct technology development; reinvigo-ralcd joanlnd programs with Eastern Europe; and authorized joint ventures betweenand Western firms.

The Pressure Builds: Limited Success With Mounting Frustration

The program for restructuring civil machine building has been impressive in its range and intensity, if not in results. The initiatives and reforms implemented over the past three years have addressed the mos! pressing, significant issues at each level of thethe research and produclion work at institutes and plants to high-level planning and administration in Moscow. The effect of many of these initiatives, however, has been to threaten (he sector's stability. By altering traditional objectives and priorities and severing long-established lines of authority and communication, the leadership has thrown machine building into chaos.

In large part, machine builders have been iroubled by contradictions in the modernization strategy.insists that enterprises meet an cntiie range of tough, often countervailing, performance targets all at once. For eiample. the sector must increasesharply while improving product quality and pulling down antiquated production lines to retool. Moreover, measures to reform the sector have often been introduced piecemeal, leaving machine builders responsible for operating under new regimes without the benefitsupporting infrastructure. Forenterprises mustrofit, bul they have not received authority to set prices thai would cover costs andeturn

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wc cannot precisely gauge ihc impact of any one reform on any olhcr reform ot on performance indicators, lhc Soviets have on occasion admitted that the conflicting targets and new reforms haveto limit irioetcrniiaiion progress Indeed, the sector's performance lo dale has not met expectations:

Produclion levels are below plan. Wc estimate lhal civil machine-building ouipul grew by abouterceni inlhar in recent years, bul slill short ofcrceni urget.we eslimale Ihat civil machine-buildingwas at Ihc same level asespite planned growthercent (see figure Si. In addition, equipment supplies from tbe defensehasten) Europe, and. to some degree. Ihc West have fallen short of Soviet targets (see inset).

The quality control program has so/or proved louch for civil machine builders. During the firsi several moclhshe program was highly disruptive and resulted in production slop-pages at several plants. Soviet press reportingthat inspectors rejected an average ofercent of all ibe products they checked. Equipment deliveries fell sharply, and Moscow was forced to relax some of lhc standards.

1 /Vfiv products represent only slightand new equipment designs are slow to appear.ivil machine builders reportedly made headway in introducing new productpercent of their output was new, more than theercent. Open-source reportinghowever, ihat many enterprises arc making minor adjustments to machines and classifying Ihcm as new, while others have little regard for ibc machines" ptoduciiviiy or reliability. Moreover, lhc sector has fallen behind on targets for equipmeni designs. Inorbachev criticized i( for insufficient progress and slated its work "remains unfavorable as yei."

The retooling effort has rvn into difficulties ol eachThe supply of new equipment is not large enough to support planned investment, (hosereaching the plant are not being quickly installed; and equipmeni thai is installed is noi

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USSR: Eslimalcd Cronth in Civil Machinery

being broughl onsLast year alone, ihc sector fellerceni short of targets for commissioning new equipment (secnenior machine-building official acknowledged lhal theof obsolete equipment in thecompter was being conductedsnail's pace."

Although the leadership realized thai lis sweeping reforms and exacting demands for produciion,innovation, and retooling would disrupt lhc sector, il was almost cctlainly surprised by Ihc extent of lhc impact. When performance dropped sharplylic

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Tapping Additional Resources: More Difficult Than Expected

squeezing more output from civil machine builders, Gorbachev has tapped the defense industry and equipment suppliers both within Ihe socialist community and in the West. So far, however, results have not met expectations.

Defense Industry. The leadership has .askedapom producers to boost production of consumer goods and machinery for investment. Reportinghowever, that they are not meeting these obligations.

At the7 Central Committee plenum. Gorbachev attacked three defense industryforformal attitude to consumer goods production as something secondary."

7 Central Committee conference, itveral difense industry ministries were criticized for failingeet commitments for food-processing equipmeni.

' Inlanning official speaking before the Supreme Soviei warned the defense indufy ihai it would be held "strictly to account "for failure io make its expected contribution to light industry.

Eastern Europe. Moscow wants to double imports of equipment from Eastern Europe. To date, however, trade figures show thai the East

Europeans are far off the pace needed lo meet this demand. The steady growth in East Europeandeliveries was interrupted6 at exports actually fell. Perhaps mosi distressing io Moscow is thai ihe countries on which it is relying ihe most-East Germany. Czechoslovakia, andIhe downturn. Preliminary dala7 suggest that equipment deliveries from Hungary and Cttchoslova-kia picked up. but those from Easl Germanyto stagnate. This slow growth may continue, in large part because Eastern Europe is stretched lo the limits. East Germany already shipserceni of its machine-tool production io ihe Soviet Union.

The West. Allhough Gorbachev has staled lhat he does not want io rely on ihe West for equipmeniinstead to develop indigenous producliondoes need io purchase key advanced Western machinery for specificsuch as machine-loot building, oil. meials. and chemicals. Evidence is mixed, however, on how much input the West will have to ihese sectors. Imports of equipmeni from Wesurn countries in real terms picked up6 but. according io preliminary data, declinedn the wake of the oil price decline and the resulting loss of hard currency. Moscow probably was forced to make some lough investment decisions among competing demands for Western imporu. In addition, reduced hard currency earnings will most likely limit Sonet equipment imports from ihe Wen during the next few years.

7 and showed no signs of improving, the leadership was forced to case up on qualily standards and on implementation of some of lhc reforms. Moscow probably thought this would cause performance indicators to rebound rapidly. However, only marginal impioverrents were made as lhc monihs passed by

When performance did not recover as expected.leaders became impatient and unrclcnlinc in their criticisms of lhc secior (sec. The Central Commitlcc held three conferences on. all of which were highly critical

fronl-pauc Pravda article ihat claimed machine-building managers had succumbed lo "sentiments ofituation it described as "cxlremcty

of the sector's progress. Summing up ihe extent ofbeing levied againsl them, oneofficial complained in8 Ihatto pul il bluntly, being skinned

Besieged by high-level criticism and tasked with what ihey believed to be unattainable goals, machinebegan loense of desperation. For example, inoth Soviet and Wcsiern mediahree-day strikeajor bus faclory. Workers who were losing income because of attempts to increase quality and to retoolrefused to resume workore rcalislic approach to modernization could be worked oui. J'crhaps the most telling description of lhc Strife that had crept inlo the secior was reflected last fall in a

The Immediate Task: Easing Pressure While Pushing Forward

Moscow appears to recognize that il cannot push Ihe sector lo ihc exlremcs witnessed over the past two years. Indeed. Soviet leaders have already begun layingore conciliatory course of action by:

iscreel retreateform measure Ihai attempts to make machine-building enierpriscs financially self-sufficient. The leadership hasthat it will provide financial help lohaving difficulty adjusting lo Ihis reform.

Easing up on its criticism of ihe secior. In rccenl months, the leadership has become more upbeat aboui machine-building performance and isihe positive.

Leaning heavily on defense industry and.esser extent, on Easicrn Europe for above-plan equipment deliveries, and looking to the West for help in key technologies. Even ihe mosi optimistic leadership elements realize by now that mosi five-year and remaining annual machine-building targets arereach and thai additional support will be needed to partially offsei ihese shortfalls

Al the same lime, however, Ihe Kremlin docs not want machine builders lo interpret its moves as signs of weakness and to begin resisting the modernizaiion straiegy across the board. Therefore, the announced program8 includes siifT performance targets for civil machine building and introduces several new reforms and expands existing ones

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Soviei Criticisms of Machine-Buildine Ministries in Monthly Industrial Performance

The Soviet Leadership: Committed to Pereslroyka

Since the introduction of his modernization agenda.aten performance wasoften laken ihe opportunity to remind foot-dragging bureaucrats, cautious party officials, and concerned Soviet citizens of the imperative af pereslroyka and the high-level consensus on il:

ere told that we must nowhcn. in ihe firstould never agree to ihat.o not wani lo link myself wiih any other policy. Therefore, for me there is no olher course; and for the comrades who work with mc in the Politburo and (he government Ihey have alio made the same choice. Il is our

common position, our common line.e'll

sec it through to the end.

Speaking before crowd in TallinFtbruo iw

No retreat is permissible from Ihe program outlined for (civil machine build in g's)There will be no turning back.

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The Near-Term Challenge: Holding leadership Consensus

Although Gorbachev has been forced toew key elements of his modernization program, hisrevitalization agendahole has yet in be called into serious question by the leadership. Indeed. Gorbachev himself has asserted on numerouslhal his policiesonsensus within lhc ruling councils (seelill. he appears lo be workingefinite schedule for proving the viability of his strategy. In an7 speech, he noted that the nest two Or three year* would be crucial for his program, and in8 he

If we stopped the emerging processes, gotby them, this would have most serious consequences. Tor weot be able to mobilize our people for an undertaking of this scope one more lime.

Speech before media chiefs ll

acknowledged thai over ihis period ihc (ate ofroyka would be decided.risis in

Easi-West relations oride-scalenperformance, most Politburo members probably are willing to give him this much lime to prove the effectiveness of his program.

However, Gorbachev's window of opportunity may close sooner than he expects At the All-Union Party Conference inrogress in modernization will almost certainly be discussed. Gorbachev could use the conference toartial victoiy for his modcrniialion program and emphasize the positive achievemcnls made to date lo deflect opposition to reform, strengthen his power base, and sei the lone for formulatingn lhc other hand, he could become even more aggressive and critical of machine-building performance to rout out resistance Whichever tactic lie chooses, when Soviet leaders decide earlyear on control figures for resource allegations duringh FYP. ihey will haveonfront the unpleasant reality lhal Ihc modcrnixnlion program it far behind schedule and thaih FYP targets nre already beyond reach.

Leadership reaction to ihese likely sborifalb inbuilding performance will be criticalhe support for Gorbachev's economic rcvitalii.ationAl issue in the high-level debates that could jflcc! the party chiefs political future will be whether civil machine building:

Will continue lo be lhc focal point of ihe Soviets' cconomk agenda and. thereby, continueeceive investment resources lo the probable dcirimcni of the ac fence industry and other industrial sectors.Will be able to "lurn Ihe corner" in an acceptable

lime frame, if it continueseceive such attention. Our analysis of lhc performance data suggests thai, because Ihc retooling program is behind schedule, much of the sector's capital equipment will slill be outdated0inimum.odernize production capilal in theigh-investment strategy musi be pursued intoh FYP

Uccausc Gorbachev has pjsrd much of his political future and long-rancc plans far cuvt.iining the USSRsuperpower status on his economic agenda.

wc believe he will wanlive ihe civilian economy Ihc investmcnl resources itif ihis means forgoing or deferring some inveslmenl in defense produclion capacity. The General Secretary's task, therefore, will be to hold (he consensus on the need for civil modernization and build agreement in favor of pursuing his agenda in the next five-year period.

Interference wilh defense needs would mosi erode support for modernization. Gorbachev probablytried lo convince the defense establishment lo support civil modernization by arguing that doing so would not jeopardize ihe USSR's military sceuriiy-and in fact would enhance military strength over ihc longer term. However, in light of civil machineslow progress and the needegin serious resource commitments lo support production of the Soviet weapons we expectee near the turn of the century, (he military sector may not be easilylo continue its support of civil nxaoernizaiion

Wc believe Gorbachev has tried to minimize the possibilityoncerted challenge from the defense lobby by;

- Appointing Gen. Omitriy Yazov as Defenseand replacing- other military leaders and defense industry officials.

Trying to put the military on the defensive by declaring that it must be more efficient and that in the future miliiary requirements will be based on ihe principle of "reasonable sufficiency "

Pushing for further arms control accords lhal would slow ihc pace of US weapon programs, especially SDI

The leadership probably will decideontinue the priority for civil modernization through al Icasi ihe first few years of the llih FYP Indeed, wc have evidence thai Ihc defense industry willajor contributor lo (he civil program during this period. Gorbachev has asked the weapons producersicp up product ion of consumer durables and has managed to impose onrogram for reequipping light

industry and food-processing plants. Defense industry has abo taken over many ofntcrpfbes orphaned after lhc dissolution cf the civil ministry responsible for producing the equipment needed for that program

If the modernization program runs intoill be able to gauge the leaders'to it by their willingness to accept shotlfills in other policy areas. Indications of such commitment mighl include:

Such intense*pressure on Eastern Europe lo supply machinery and equipment that those countries' own economic programs are impeded.

A surge in orders for and imports of Western machinery andthe leadership's slated policy of limited reliance on the West.

A further dilution of the defense industry's focus on weapons production by assigning it responsibility for additional civilian protects.

Large transfers of workers, materials, and output such as microeleetroriks and communicationsfrom weaports production to the civil sector.

Postponement of some investment needed to create the capacily tow weapons near the turn of the century.

Allhough we believe Gorbachev and the rest of the Soviet leadership will continue lo press theprogram, wc arc much less certain liow much Ihey will push the pace and extent of reform. While stressing that reform must go forward quickly.will have difficulty maintaining that position if other members of the Politburo get cold feet. If the situation in machine building docs not improveoverall economic growth continues lo falter, and workers become more restive, the balance in the leadership could easily shift in favor of morepolicies. In this situation, the reforms most likely to be weakened would be those lhat callayor demoralization of economic decision making

The Long-Term Necessity: lluilding in Systemic Responsiveness

Although plan goalsill be underfundedonsiderable margin and lhc reforms will still be under way whenh FTP begins, the real IcM of

the modernization program's success over the long run will be whether civil machine buildingelf, regulating "economic mechanism" capable of routine product and process renewal intond beyond.

The rnodcrnization program will result in somein the qualily and technological level of Soviei manufactured goods andnc-iimc modern-izalion of lhc nation's production capital. Gorbachev recognizes the importance of market information and decisionmaking authority at the enterprise level to lhc success of his rcviialization strategy, and his program attempts to create such an environment. Wc believe thai purchasers of Soviet machinery and equipment arc better off under Gorbachev than Ihey would have been if Brezhnev were still in power. Machinehave begun io provide the Soviet industrial and agricultural sectorsetter selection of more reliable equipment.esult, some improvement can be expected in production technology and. hence, produciiviiy

Gorbachev's program as currentlyot sufficient to induce self-sustaining product and process renewal. It retains major elements of central planning and price setting and. hence, docs not go nearly far enough in dealing eondiiions that will encourage machine builders to respond to demands for new products and to improve production processes. They will not be motivated to supply the rest of the Soviei economy with the advanced equipmeni needed lo achieve self-sustained growth. Consequently,gains will be short lived

We believe lhat. although Gorbachev is moving in the righl dircciion. the reforms he has introduced so far will not transform the sector into an effective engine of peresiroyka. In addition, his program probably will be insufficient to close lhc gap in advanced, military-related technologies and will fail to address lhc USSR's other domestic and international challenges (sec inscti For thb to occur, the Soviets would need to implement further, more radical reforms thaiarket environment, including freeing up prices and further decentralizing ihe planning vysicm Although existing decreet allow for ihcsc reforms, iheir full

Civil Modernizaiion: Wailar the Return

is looking to civil machine building lo help him surmount ihe military, imcinational, and domestic challenges the Soviet Union is facing. We believe his moderm:.vion program will go pari way tn addressing these challenges but will noi five him iheo overcome them:

Maintaining mililary parity, hi the near term, civil modernisation is not likely to .under or help the USSR's defense industry or military forces. The changes In the civil sector and the assignment of new responsibilitieshe defense industry hove had no discernible effect on weapons pr ducnon. and we see little likelihood that the capital good' and raw materials ret sired to supportion will be drawn from ongoing mililary produ,lion. Similarly, ihe drfense industryl receive limited benefits from high-priority civil programs lo advance key technologies during this five-year period: in fact, defense Industry experts have been tasked to bring civilianp lo speed. Over the longer lerm. ihe impactodernisation on mlluary capabilities will pr <ba-bly be mixed. To ihe exlem ihai ii is 'uceessful. the program will boost ihe USSR's capability tothe advanced weapons ihaieel io appear near the lurn of the century. W- believe, however, thai gains wilt be limited by .hes decision to centrally manage criticalwhich could moke the USSR less able than the Wen to pursue new technological opportunities. Moreover, if the Soviets encounter severein pursuing civil modernization inio (he nexi decade, the defense industry may be requiredefer planned investment, which could dc1 ayof some military systems

Improving consumer welfare. Soviet const. ;ers will undoubtedly be able to chooseid, rof more reliable and high-qu lily hou thold appliances and olher consumer He ns. Thr irw qualily control urogram has improved, and will

cominue io improve, iheof consumer goods. In addition, the above-plan rates af product renewal to date and the new equipment recently installed In enterprises suggest that additional quality gains and technological advance will occur over the nexi several years. Moreover. If theare successful in retooling ihe light and food industries, consumers can expect to see further improvements beginning in thehe benefits realized from the increasedof better consumer goods must be weighed against the costs. Because Soviet workers are being pressuredort, harder andess secure environment, it is not clearbalancr workers will favor this new social contract.

Improving international prestige. Glairostpositive image Gorbachev porirays wtli probabh do more than anything else lo Improve ihe USSR's international prestige. The Soviris will become more familiar wiih international trade andactivities, bui we are confident ihey will noi achieve their stated goal of attaining recognitionajor economic and iradirg power during this century and hence will not ratlically change their trading positionis other countries. Wethai ihe Soviets will not be able to boost exports across the board as theylanned, but will be forced to focus on select areas More-over. leaders of many socialist and Third World countries will probably be hesitant to look lo the "new" Soviet economic systemodel for iheir own countries. Some leaderseady Indicated they will not follow in Moscow's for"steps because :hty refuse to reject the "Slalinisi" .node! os ihe Soviets have done. Ollters may be reluclani be cause they do noi have the controlr is clearly required to pushforms through.

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