OA HISTORICAL REVIEW PROGRAM RELEASE IN9
CENTRAL INTELLIGENCE AGENCY Statement to the SUBCOMMITTEE ON NATIONAL SECURITY ECONOMICS JOINT ECONOMIC COMMITTEE September 7
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GORBACHEV'S PROGHAW: MOTIVES AND PROSPECTS I. HIS DILEMMA
By the time Gorbachev became General Secretary, he realized that changing economic, political and social conditions had made the strategy and tactics of the past increasingly anachronistic.
The Soviet economy was in the midstecade long slump in growth: GN? grew by just over two percent per yearhe technology gap with the West was growing, and energy and other raw material costs were rising precipitously.
Soviet leaders were Increasingly aware of the rising defense burden and its link to the USSR's inability to provide more rapid gains in consumer welfare and to generate high economic growth. He estimate that during the pastears, defense accounted for about IS percent of Soviet gross national product eachtwice as much as in the United States.
Leadership ineptitude and bureaucratic corruption had sapped the vitality of the system and eroded its legitimacy. This contributedidespread malaise in Soviet society, reflected in low worker morale, youth alienation, and an increase in materialism, privatism, and ideological cynicisn.
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These domestic problems had important foreign policy
implications. Above all, Soviet leaders began to worry about the impact of declining growth and the technology gap on the USSR's future military strength, putting at risk Soviet statusuperpower. Also, poor Soviet economic performance resultedore niggardly attitude toward pleas for aid from client states and diminished the appeal of the Soviet economic model to the Third World.
IX.EW PERCEPTION
These problems had been in the making for some time, and Soviet leaders from the Brezhnev period forward had acknowledged their existence. Gorbachev's perception differed, however. In the way he defined the nature and urgency of the problems as well as the scope and intensity of the necessary solutions. He believed that:
oviet economic problems werearge extent of their own mak ing.
he system of planning and management was too centralized and clumsy for effective guidance of the increasingly complex and sophisticated economy. He stressed the need for systemicat changing the basic operating procedures of thethan piecemeal chances grafted onto the oldystem.
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The strategy of low investment growth of the recent past and the pattern of investment allocation hadeterrent to productivity growth.
The global challenges of the future, in particular the technological revolution, would not yield to brute force. Technological change depended heavily on greater autonomy in decisionmakingystem of fine-tuned incentives. Above all, it required an emphasis on quality as well as quantity.
New managerial and moralboth party and governmentto be established and generational change effected.
The cooperation and support of thethe party elite down to the common workingessential to getting the econ<-* moving again and to regain regime legitimacy. Vet the party must remain in'ultimate control.
Reduced tension in international relations, particularly with the west, was essential to provide the breathing space for redistributing resources toward the civilian economy and acquiring the necessary foreign equipment and technology as well as forositive political climate at home for his reform program.
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Unlike his predecessors, Gorbachev also realized that these problems were interrelated,imultaneous assault, that the hard solutions could no longer be avoided, and that the window of opportunity for attacking many of these issues was relatively small. Heense of urgency in getting started but at the same time understood that his program was long-run and would not yield immediate gains. In short, Gorbachev could beragmatic visionary.
III. HIS STRATEGY
Gorbachev's strategy for change was molded by these new perceptions.
Growth and Modernization
Gorbachev ishuman factors" campaign that aims at quick returns from enforcing greater discipline and instilling moretive in workers and managersodernization program designed to update.the country's antiquated industrial base over the longer term. The modernization strategy includes:
a doubling of retirement rates for fixed capital during the current five-year, which will replace up to one third of the country's plant and equipment
an increase in the level of investment in the civilian machine-building and metalworking ministries (MSMW) byercentver the level achieved; and
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program that establishes government quality control inspectors at the plant level (known asto procedures used by the military.
Substantial investment in the defense industry in thendnabled Gorbachev to arguearger share of investment in machinebuilding could now go to the civilian sector without seriously affecting defense. Nevertheless, defense and industrial modernization compete for the same scarce, high-qualitymaterials, intermediate products, labor and investment.
Cadre Renewal
Gorbachev has made more rapid progress than previous successions in consolidating his power andarge turnover in key positions.
has infused the Politburo with new blood and packed the Secretariat with his supporters (six of theolitburo members are now from the Secretariat}. The most recent plenum in June promoted three reform-minded party secretaries to the Politburo. This increase in the number of seniorof the Secretariat who have PolLtburofurther dilute the power of "Second Secretary" Ligachev, who appears to be actingpokesman for more conservative party members.
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He has moved Co break up entrenched elites in non-Russian areas, particularly Central Asia, and has taken strong steps to rein in regional areas that had drifted away from Moscow's control during the late Brezhnev era.
He has purged the ministerial bureaucracy and has brought in new people whom he believes will be more competent and loyal. About two-thirds of the heads of the old economic ministries have been replaced, and nearly all the officials brought in to head the recently created superministries are new.
He has expanded Andropov's campaign against corruption, raised standards of performance and probity, and begun an attack on many privileges long enjoyed by officials but resented by ordinary citizens.
Improving Morale and Strengthening the Social Fabric Gorbachev evidently believes that increased personal freedomsreer flow and clash of ideas are necessary to revitalize the system and to overcome widespread apathy and alienation, particularly among the intelligentsia.
His policy of qlasnost or openness has resulted in more candor and less ideological rigidity in the discussion of Soviet problems,
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history, international relations and culture than at any time since.
Itariety of purposes: it enables the regime to compete with foreign and other unofficial sources of information, it can be used to pillory officials resistant to Gorbachev's reforms, it highlights social problems, such as alcoholism and drug abuse, that need to be addressed, and it appeals to the intelligentsia who had become alienated from regime goals.
regime clearly intends to place limits on how far glasnost will be allowed to proceed, but just where those limits are to be drawn is not yet clear, and for now the boundaries on public debate are continuing to erode.
The movement toward greater "democratization" is an effort to give the one-party state more legitimacy and thereater sense of participation.
Gorbachev has called for multiple candidates and secret ballots in elections of party officials up to the republic level, hinted at procedural changes in the selection of the Central Committee, Secretariat, and Politburo, andarty conference for next year to revise election procedures.
He hasew Enterprise Law providing for the election
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of plant managers, although their election is subject to "confirmation" by superior agencies.
At the same time Gorbachev is attempting to make the system more equitable and to fight social problems.
A legal reform is underway that attempts to make the administration of justice more equitable and the use of police power somewhat less arbitrary.
In an effort to make creative use of the ideas of dissidents and social critics, some of the worst abuses of human rights have been eliminated and the boundaries of permissible dissent widened; Sakharov has been released from exile and allowed to express his views, morether political prisoners have been freed, emigration of Jews, ethnic Germans and Armenians have increased several-fold this year compared with last year,reater tolerance is being shown toward dissident behavior and public protest.
The campaign to fight alcoholism has resulted0 percent drop in legal alcohol sales, and an assault on drug abuse has begun.
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Control over the Military
Gorbachev has moved aggressively to assert party authority over the military, whose short-term interests will necessarily be affected by his effort to revitalize the civilian economic base.
Since he became party leader, the military hasess visible public role, exemplified by its reduced representation at major ceremonies.
He has beefed up the party apparatus responsible for oversight of the military and reasserted the party's role in the formation of military doctrine.
Be promoted Levclosesenior party secretary for defense industry and tightened his personal control over arms control decisionmaking by appointing Eduard Shevardnadze as Foreign Ministr andew arms control group in the party's International Department.
Be used the Cessna incident in June to put his own man in charge of the Ministry of Defense, and there are indicationsroad housecleaning will take place in the months ahead.
Be hasine stressing "sufficiency" in defense spending and argued that security cannot be attained by "military-technical" means but only through political solutions.
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Despite some concern among the military over Gorbachev's policies, most signs point to broadbased military support for the goals of the modernization program, which promises to put Moscowetter position to maintain its longterm military competitiveness with the United States.
New Initiatives in Foreign Policy
Gorbachev is asserting his authority in the foreign policy area in order to make it more effective and better able to serve domestic needs. He is attempting to maintain Moscow's position internationally by creative diplomacy and arms control while he makes the wrenching and disruptive changes at home.
His proposals for nuclear arms reductions are motivated both by the desire to shift some resources from defense to the civilian economy and by the realization that international tensions will strengthen the hand of opponents of reform at home.
Beginning with the replacement of Foreign Minister Gromyko, he has carriedar-reaching shakeup of the foreign policy apparatus, enhancing his personal control over foreign policy decision making.
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has increased the foreign policy expertise and responsibilities of the party secretariat, which he heads, ar.d
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added longtime Ambassador to the US Dobrynin to that body.
used this new apparatus to place new emphasis on the manipulation of public opinion abroad to better serve Soviet interests.
IV. HIS BLUEPRINT FOR REFORM
Finally, an integral part of his strategy is his program for economic reform, which is the boldest attemptecentralization of economic decisionmaking since Lenin's NEP policy of the. Gorbachev justified it by claiming that the economy hadprecrisis" stage, necessitating "in depth, truly revolutionary transformations."
He apparently did notlueprint for reform from the beginning.
He started by extending Andropov's and Chernenko's reforms in the industrial sector that reduced and simplified plan indicators and emphasized financing more of an enterprise's expenses out of profits.
Heommission for Improving Management, Planning and the Economic Mechanism inhich was charged with translating his calls for "radical reform"oncrete program of legislation and overseeing its implementation.
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sanctioned an unprecedented no-holds-barted debate on economic reform chatrescendo just before the Central Committee plenum in7 called to ratify the new reform program.
The evolution of his thinking on economic reform was finally revealed at the June Central Committee plenum, which approved guidelines for the "new economic mechanism" to be "almost fully" implemented by the start ofh five-year planontinuing conflict over the reform proposalsostponement of the plenum, but Gorbachevre-plenum conference with reform-minded participants to put pressure on the opposition.
With the adoption of these main provisions, Gorbachev replaced his and his predecessors' piecemeal approach to reformomprehensive and integrated program.
The "basic provisions" released at the plenumide degree of flexibility possible in implementation; the reforms could resultubstantial increase in enterprise autonomyartial dismantling of the Stalinist economic model or potentially restrictive clauses could be used to foil this historic attempt at decentralization.
Eleven draft decrees detailing changes in major sections of thethe role of central economic bodies and the
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lanning, and supplyjust been published (but are not yet available in the Meat) and may shed more light on how Ear the reforms will be allowed to go.
The major changes contained in the new reform program touch the heart of the planning and management mechanism.
Obligatory plan targets covering an enterprise's entire range of output have been replacedystem of "non-binding" control figures and mandatory state orders that will compriseortion of enterprise output; this portion will reportedly be the bulk of the total at first but will drop gradually to well under half by.
Prices for the most important products will continue to be set centrally, but the number of prices fixed by the enterprises themselves or contractually with their customers is to be substantially increased; no figures have been released on the dimensions of this increase, however, and even these prices will be set on the same basis as state-set prices and subjected to similar scrutiny by central authorities.
Only -rscarce" goods are to continue being rationed by the scate, and other supplies (as much asercent,re to be distributedwnolesale trade" system, but the critical question of how free an enterprise will be to select
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its own suppliers remains unclear, and unlike other reform measures (to be implemented, the transition to wholesale trade is to be completed -within four to five years."
Under the new conditions ofnterprises are to bear full economic responsibility for their actions, but it is unclear how much discipline will be imposed since the new state enterprise law specifies only that enterprise activities "may" be terminated if an enterpriselong record of losses" and only after all measures to correct the situation have failed.
n the area of foreignstage-by-stage" convertibility of theability to exchange ruble holdings for otherplanned, starting with CEMA countries. The new enterprise law, also ratified at the plenum, reiterates the broader rights of enterprises to keep part of the foreign exchange earned from exports, but the enterprises apparently must seek permission from the ministries to participate directly in foreign economic activity.
These changes in incentives and operating procedures are being accompanied by organizational reforms. By reducing the size and rationalizing the mission of the government bureaucracy, Gorbachev apparently intends to reduce its ability to meddle in the affairs of subordinate enterprises.
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Although the recent reform provisions make no referenceeduction in the number of ministries, both Gorbachevouncil of Ministers' Chairman Ryzhkov indicated that there are proposals to do so; this process began onuly when four machinebuilding ministries were reduced to two. Sectoral sub-branches will also be cut and staff reduced.
A merger of related ministries and the creation of new coordinating bodies is also being attempted. The agro-industrial reorganization in5 and the new Machinebuilding Bureau, created inave not lived up to expectations, however, and the reform provisions call for an "improvement" in their work.
Gorbachev and Ryzhkov have called for the formation of "state productionof independent enterprises, production associations, and transport and marketinga way of reducing the number of production units Moscow must administer.
Gorbachev's reforms have thus far focused more on the industrial sector than on agriculture.
is somewhat surprising since Gorbachev has an agriculturalwas Brezhnev's agriculturesoon
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after becoming General Secretary he began using agricultureesting ground for some of his more innovative and controversial ideas.
Reforms in the agricultural sector have been the traditional starting points for reforms.in other socialist countries, particularly for the most radical reforms in Hungary and China.
Thus far Soviet reforms in this sector have focused on giving regional officials and farms greater control over the disposal of above-plan production (the6 Decree on Agricultural Management) and expanding the collective contract system and its variant, the family contract.
The family contract (in which the farm subcontracts some of its tasks to family groups and pays them on this basis) has been vigorously pushed by Gorbachev in recent months, suggesting that he sees thisay toproprietary spirit" into collective agriculture.
recently indicated that an agricultural plenum focusingide range of farm issues, presumably including reforms, would be held "in the courseear."
Reforms enacted since6 to expand the private sector are intended to satisfy demand for consumer goods and services
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neglected by the state sector and to bring some of the "second economy" under state control.
Such proposals in the past have encountered opposition from conservatives, who are concernedreater role for the private sector will reduce the party's control over the economy and create opportunities for individual enrichment; incompatible with socialist principles.
The new legislation sanctions self-employmentide range of activities, permits small groups of people to form profit-sharing cooperatives to engage in consumer-related activities, gives legal sanction toitinerant; construction and farmcracks down on "speculation" and "unearned income."
egulations on the number and kind ofis limited to housewives, students, pensioners, and state employees working during their freemuch more restrictive than comparable legislation in Eastern Europe.
far the development of the private sector is proceeding slowly because of inadequateack of enthusiasm and support at the local level,onfusing mass of red tape necessary for licensing and operation.
V. THREATS TO HIS PROGRAM
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The fortunes of Gorbachev's program and his own political position will be determined primarily at home, but external developments impinge on all of the decisions Gorbachev might make. In defining the problems as so major and the changes required as so revolutionary, it will be difficult for Gorbachev to be content with "muddling through" as his predecessors did. There are major dangers threatening the success of his program.
First, reform/modernization could cause serious economic disarray.
if the combination of human factors, redirection of investment, and economic reform eventually succeed in reviving Sovieteriod of economic disruption is likely over the next few years.
We estimate that this could depress economic growth during the rest ofo an average annual rate of less than two percent.
ndustrial growth during the first half of this year, in fact, wasercent, in large part the result of the introduction of Gosoriyemka and the extension of self-financing.
a disruption could severely complicate the delicate balancing of competing interests of institutions, classes, and nationalities.
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Gorbachev realizes, for example, that the populace will judge his policies by the "practical improvements in the working and living conditions of the millions." Slow growth would delay such improvements, thereby weakening the ability of the regime to reward those who worked harder.
Secondly, there might be little pay-off evident from his program to boost technological development.
Systemic and structural improvements in the economy, if at least partially successful, will stimulate an acceleration in economic growth only in the next decade, and even then, prospects for narrowing the technology gap with the West are slim.
Pressures to see some pay-off will mount as the next five-yearrafting period approaches, particularly from those impatient with the slower growth in military spending.
This mightew battle between those who would press for increased imports from the West to compensate for domestic shortfalls and others who argue that such imports stiflend encourage dependence on foreign sources for technology.
An equally contentious decision might be to scale back seme output targets to encourage innovation. The traditional Soviet approach has been to maintain pressure on workers, managers, and bureaucrats; Gorbachev vigorously defended this policy at the June
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plenum.
In another scenario, hl9 program could be damaged if little progress resulted from arms control and the West sharply boosted defense spending.^
he strength of military support for industrial modernization coupled with constraints in the growth of defense programs could erode substantially if the external threat assessment becomes darker. Pressures will mount to redirect resources toward defense.
It would be impossible to substantially raise defense procurements and fulfill the requirements of industrial modernization at the same time. harp rise in the rates of growth of military purchases from the machine-building sector probably would bring the scale of modernization down to the levels of the late Brezhnev years.
A more tense international climate probably would also disrupt Moscow's programs for joint ventures and expanded trade and foreclose the possibility of expanding the use of credits to finance import surpluses.
The Soviet leadership will also be looking carefully for signs of domestic instability and/or major power loss by the party caused by new freedoms extended to Soviet citizens and major revisions in the social contract.
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Party conservatives are alreadyear-guard action against qlasnost and the relaxation of controls over literature and the theater. Even supporters of greater openness in Soviet society recognize its risks. On the otherrackdown would risk killing the esprit Gorbachev wants to foster and might lead to greater popular cynicism than existed before.
Elections inevitably evoke the specter of factionalism that would undermine the top-down direction of the society and the economy that has prevailed forears. No doubt the leadership will do its best to control the election progress, but success is by no means assured.
The fear of public disorder is central to the Russian character. Reforms inevitably produce centrifugal tendencies intensifying divisions in society and the elite that could threaten the loss of control and order. Major demonstrations that get out ofas last year's riots ina case in point.
Many Soviet citizens already feel their job security threatened and their personal lives constrained by Gorbachev's labor and social policies. ougher work ethic and stricter discipline are straining relations at the workplace between high performers who stand to gain and low performers who stand to lose.
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Setbacks in foreign or domestic policy could cause powerful Interest groups to unite againstfate that befell Khrushchev, the last party leader who tried to shake up the system.
Gorbachev's attack on the Moscow party organization nearly ledebellion in the ranks, demonstrating the risks of moving forceably.
Gorbachev is particularly vulnerable on the security issue.
Some senior members of the leadership appear to view Gorbachev as too optimistic about his ability to control US military programs through arms control and may prefer increasing neartera military spending to compete.
Indicative of policy differences within the leadership over this issue was the January Central Committee resolution that called cor more resources to str- ,then defense as opposed to Gorbachev's focus on the need for efficiency and discipline among military personnel.
Finally, his economic reform program faces serious obstacles.
Many bureaucrats are increasingly concerned that the changes Gorbachev has proposed will undermine their traditional privileges and status and will work hard at frustrating implementation.
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Popular resistance to the reforms might coalesce among those who fear that pay tied closer to performance and the elimination of subsidies on many consumer goods and services will lower their standard of living.
Ambiguities and contradictions in the reform guidelines approved at the June party plenum indicate that many critical details are yet to be negotiated.
The major issue left unresolvedightly defined
division of responsibilities between central authorities and the enterprise. The ministry appears still to be held ultimately responsible for the production of its branch subordinates and is charged with "monitoring" their activities.
There isasic conflict between taut output goals and the emphasis on quality and innovation in the reforms, although some in the leadership have begun to speak publicly about the need to downplay quantitative targets.
There is no guarantee that when the reforms are In place, the decisions taken by the enterprises will coincide with national planning objectives; In the past,isconnect resultedradual erosion of enterprise authority.
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complexity of programmingassive transitionew and unfamiliar order, particularly when different parts of the system will be implemented in different stages, willormidable challenge.
Nevertheless, there are good reasons why Gorbachev's "new economic mechanism" seems toetter chance than previous reforms to be implemented with some success.
Itolder attempt to change the Stalinist system and imposes shorter deadlines.
It is a- comprehensive package affecting all of the necessary componentsupply system, prices, credit and finance.
Leadership commitment is at an all-time high becauseecognition of the severity of Soviet economic problems, in particular the technology gap with the West.
machinery to monitor implementation is in place; Gorbachev told the Central Committee that the Politburo and Secretariat had erred in the past but were now regularly examining the implementation of decisions.
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The next several years willine for translating general policies into specific directives and for taking evasive actions to avoid the obstacles listed above. Outside of the agricultural area, Gorbachev is not likely to initiate in this time period additional major reforms.
ecause the whole reform package is not scheduled to be in place before the, and there is likely to be some slippage in this schedule, it will take some time to know if the reformsuccess or failure; both Gorbachev and his critics probably will be willing to wait for results before proposing alternatives or major amendments.
Exceptional events, however, could change this scenario:
A serious stagnation In growth that was directly reform-related and thatear or more couldethinking about the wisdom ofeformist course.
As noted before, international tensionsreakdown of arms controls or serious domestic unrest could leadeneral repudiation of Gorbachev's policies by conservatives who were always uncomfortable with
decentg reforms.
erious destabilizing unrest in Eastern Europe, resulting
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from frustrated expectations for political and economic reforms encouraged by Gorbachev's programs, could strengthen Gorbachev's foes.
All of the obstacles to reform will not be overcome, and the final system in place most probably will be the result of compromise and delay. The new system will not result in market socialism but it could eventually approximate the dual-dependent Hungarian system (greater use of market forces but still subject to many bureaucratic controls), representing some forward movement away from the Stalinist command economy. Even partial implementation probably will bring:
Some increase in the quality and assortment of industrial goodsreater reflection of resource scarcity in producer prices.
More andsuner goods and services, largely the result of the expansion of the cooperative and private sector.
A more "rational" distribution of goods and services among the population; demand willarger role in consumer pricing, and state subsidies will decline.
A greater differentiation in pay and perks that rewards good workers and managers and yields previously untapped increments in labor productivity.
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These gains, however, are not likely to match Gorbachev's expectations Cor his economic program. IE Gorbachev is still in power in thehen it becomes apparent that his economic reform program has not produced dramatic results, this may be the catalyst that allows him to push for more radical alternatives, particularly if the technology gap continues to widen with the West and threatens the ability of the Soviets to keep up militarily. On the other hand, this could be the catalyst that finally allows his critics to unite and depose him.
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