GORBACHEV'S MODERNIZATION PROGRAM: A STATUS REPORT (DDB-1900-140)

Created: 8/1/1987

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Gorbachev's Modernizationtatus Report

CIA HISTORICAL REVIEW PROGRAM RELEASE IN9

Gorbachev's Modernizationtatus Report

Information Cutoff Date- I'J7

A paper presented by tbe Central Intelligence Agency and ibe Defense Intelligence Agency for submission to the Subcommittee on National Security economics of tbe Joint Economic Committee, Congressnited Stales

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TbW document hu been produced for officio) uw within ihr USand diiiribiHlon is limited to US GovernmentRequests Tor ihU document from ouUldc lhe US Governmente referred to the Defense InWlligenee Agency,

7

Gorhachev's Modernizationtatus Report

SUMMARY

Gorbachevs efforts to shake the Soviet economy out of Its doldnims began to pay off6 Hardyesult of his Icadcrsltip, partlyesult of some policies instituted by liis rardeccssors and partlyesult of some good luck, the economy rcbtxintled sharply6 On the strength of record (arm output and reduced loss of work time. Soviet GXP grew by anercent and industry by anercentdie highest ratesecade.

Gorbachev pressed forward with efforts to make modernization ofajor source of growth by tlie aid ofnvestment growth scared toercent last year, with greatest emphasis on renovating and recquipping facilities iliac produce rnachincry critical to modeniization

The Soviet consumer, in contrast, did not fare ncarlv as well. Per capita consumption grew by lessercent, in pan because legal sales ofajor componem of Soviet consumptionfell sharplyesuli of ihc ajitiakoliol campaign.

Irdonrarion on defense spending6 is los solid than that for consumption and invrstmew but our preliminary estimate is that overall defense cxjvnaiiurcs in constant prices increased bv'ercent AltlKmgh somcwliat above ihc rate oi reeeni vicars, Uiis growth does not appear ioiange in defense spending policy since Gorlnchcvs arrival.

Allhough lhe economy's vital signs looked good. >ovral major problems CTtinped up during ihe year Tlie most Serious involved

rogress in the regime's effons to iinprow the qualitv, reliability, and tccluioloeical level of Soviel machinery

A sharp dedinc in Sovici liard currency cxjion

- Ihe first significant bureaucratic resistance io >pccific policies, '

None of these problemsajor impuci onm war bul they, must be corrected or offseticxlCrni/Jlion is to proceed on track.

Despite tlic.se problems,7 plan showsup in Gorlnchevs drive to revitalizeW,.vvi jxitClU Ilea* dClliamb .1

Cci1-lie Soviets arc apparently tanking on lhe sharp rise in inrarrnrm in un: niaciniiolxiildiiiK6pur an aeerlcrsuon in output this year.

7 rums our. wc expect some unprovrnirm in Soviet economic pcrtomuncc over the new lew years relativeoscow probably will fall well short of its godercent average annual growth in GNPecause of the luge gams In productivity ihis would require. Based on Ckirbachrv's program so far and realistic assumptions about productivity, we project GNP to grow at an annual avenge rate ofercent7 90

* Growth at this ratewhile better than In the recent pastwould be inadequate to relieve resource allocaiion pressures and could eventually load to some major policy adjustments 1hc toiiglicsi decisions arc likely hi be in the Investment arena. Several branches of industry prolKil)ly will require increases in investment above current plans if output targets arc to lie nict, Ixn additional uivrsimeni in the consumer area will also probably he necessary to enhance worker prodiictnity Ai ihr same time, defense industries will require substantial investment to support weapon produc lion plans for. New weapon rrograms arc under way to update or replace maior systems with im provedvery mission area, withystems likely to begin series production in the.

wc do not know how Gorbachev will respond tn these pressures, but we do not expect tiHjor shirts in miliury production, at leastast heavy investment in defense industries and the momentum of ongoing produciion programs argue strongly for their continuation. Although there eoidd he some competition for basic rratcnals. intermediate gocxK and skilled labor which might cause the pace of production of some new weapon systems to be somewhat slower and their introduction to be somewhat delayed, most major weapon programs should go forward as planned.

rallurc to sustain6 economic upturn might also Induce Moscow to Increase demands on its Fast European allies for more and better quality goods, especially advanced machinery Ihis could heighten tensions within tht bloc because Soviet alius need advanced machinery for their own modernization pnigrams Moscow- miglit also Itxik ntorc to the West for technologically advanced equiprnetn. although its currcni hard currency hind would probablyharp increase in pualtasrs

null) if economic modernization begun to Mall.rlsachvv csentuauy could decide to adopt bolder ceonumc measures, suchaiorf poet strung or an production of real competition among enterprises Movemeni toward nnwc 'radicalowever, would generaie strung poliUcal opposition.

As long as the economy shows impnivrmeiiiwhich scene, probableGorbneliev will beNttlOTl to declare hissuccesi'- over tlie next few years. Hut the course (kirtwchcv is ixirsuing is inlierently risky How lie fares over the longer term will depend on such factors as Continued economic progress, ihc military environmentincluding possiNr anus eontrol agreements and external conditions such as weather and oilIbe decisions Gorboclicv will have lo make over the next few years will Ir- controversial and coukt well solidify opposing interests in the party and government.

1AI1IX OF CONTENTS

Cage

Gorbachev's Challenge: Acceleraie Growih, Upgrade

Gorbachev's Economic

Growth Good, Bul Some

Trends In Resource

Full Speed

Priority for

Maintaining

Prospects for Modernization Over the Longer

Emphasis on

Growth Through

Coping with

Battles Over Resource

Seeking Foreign Economic

Prospects For Economic

Gorbachev's Political

APPENDIXES

Economicood

on Soviet Economic

odernization.tatus Report

Since comingower in. Mikhail Gorbachev has put forward (he moat ambitiotis program ctonorrac. political, and social ctungr since Nikita Khnisnchcv. often linking the USSR's ability to maiittain its statusilitary "super power" to thr success of his efforts This jointeport provides an initial evaluation of GorrwclKTv'% (irograrii It begins by describing Gorbachev's policies and assessing their impact un the economy's pcrfra-rruncc6 The paper then analyzes the future direction of hrs ecnonrnic modernization program In light of7 Han and tlie demands lor continued military force development. finally, the ruprr addresses Soviet economic prospects over the longer term, highliglitiHK problems the USSR will face if Gor bachevs program falls to bring about the Intended acceleration in economic growth

Gorbachcv'h OiaUcrtgc:

Accelerate Growth, Upgrade Technology

Ai the time Gorbachev took over, the Soviet economy was in ihc midstrolonged growth -slowdown averaging justercent GNP growth pet vrar. Of the other majord countries. Only the United Kingdomower average growth rale duringyear pcnixL Altlmiigh Soviet economic growth0 was as good or belter Clian tliat of must odver nujor indnstrialiyed nations except foeini States and Japan. ilii> waseflectionconomic gruwth in the developed ttesiecovery of the Soviet economy (set tableIndeed, il was dear at the time (kirtwhcv became General Secretary thai overall GNP growth duringH5 Five Year Man (FYP) was going to be tlie smallest

percentage increase of any FYP period In fact, GNP had increased by less thanercentnd during the first quarteret before (iorbachev took overproduction was essentially flat

Table 1

USSR and the Developed West: Comparative Growth of GNP

Avaraga Annual Growth Rates (pa-cant)

S

USSR

4

5

D 0

0

3

1

hIih aoililnlwfHOOP) tOtnmit tetan. CS" I

Cu* iiihiiiiv Iioti ikid i>

r <iit*<titcntait>4i

Wttrnreo.

Ml St IMF ubhuuuiSuviivi

tjiowib rates by themselves do nothe scope of ihc USSR's proMem. low growth in ihcnion wasn economy that dMl not compare favorably in sue or teclint4ngical levri with that of thr IVuted States. Soviet tAT0 was roughly half thai of the United Slates After narrowing thr gap duringIK and WTOs and peaking in tlie, Soviet GNPercent of US GNP fell io aboutercent Hisee figurenn more sinking both the ISSK and lb East Eunipean allies coruimicd to lag far Ivliind nuf We.slem countries in lerms ol per capita GNP (see

(Hie rravni lor the economy's comparatively poor showing is the USSR's relatively antiquated indu-urtai base According to one esilniaie. tor xjrujWi dkr average length of service of Soviet industrial equipment is aboutears, corriparcd with average use limes ofears in France. West (krmjny. and Italy, andears Hi the Unitedn contrast to the West, wticre tlie rapid introduction of advanced nianiifacturingustained productivity gnrwth. the combined productivity of labor and fixed capital In the USSR has declined in absolute terms over ihe past decade.

Wc lielieve Soviet leaders worried about the implications nf these trends for the USSR's future military strength By dint of rwo decadesustained lostl) military buildup, the USSK las secured its positionililary superpower whose glohai interest* were increasingly rccog-

mvot In the pastearsore00 infantry fighting vehicles,0 armored personnel earners and like vehicles have been delivered to the Soviet Kmund forces Soviet strategic force* receivedtrategic missiles and aboutew and t< evened ballistic missik Mihmarines. and soviet air power was augmented withew fighter aircraft andelicopters

Even before the US Strategic Defense Initiative (SIM) became an issue, however. Sovietauthorities had expressed concern ilut the level of technology embedded in such US pro grams asca-launclicd ballistic missile, the stealth bomber, "smart" conventional weapons, and cruise missiles would onset the numerical superiority that the USSR had achieved in most classes of weapons and thus threaten some of their hard-fought military gains. The USSR has

foi tl* USSBdanved.am

wantageJA USM^ po-wtomn-iwcomind dotlan EsiimaMWammno bangd fV.tonctAdBtM-ntf

0 Uniled MKAfif. NtfwtHW Iw If

oUeaatedlim..from lwn4

Alanandirl *ra la^

fl. ^ Coo Aoow Mfcna HoM.na

! "ofhi Ualga-.i

mImw bjajl it, UN

3i MS

.gar. o-aaw

if

/

figuro 1 Gross NationalS

made significant advances in many weapontechnologies cutting into the IIS technology lead in deployed systems in some areas. But the Icadcrsliip recognized that in most advanced manufacturing technologies the USSR remains years behind die United States (seeoreover,y coventrating competition in ^those high tech areas where Moscow is weakest, -has clearly been slewed by the Sovietsew and even greater threat.

Gorbaclrev's Economic Agenda

Gorixiehevs commitment to revitalizing the country's economic baseand hence tofuture military mockrrnizationhas been evident since before heeneral Secretary. Even when he assumed power,(rttfbachcv may not have fully grasped the scope of the country's economic problems and the magnitude of the effort needed to attack

them. In fact, despite his frenetic efforts over ihcears, we still do notiable, integrated plan for nwefcrruzation; rather, we sec many individual programs being put forth, each dcaliiig with one facet of the economy.

Essentially, trorbachev has setwo-step approach. Initially, he is relyingombination of measures to strengthen piny Control, improve worker attitudes, and weed out incompetentswhat be refers to as "human factor" gains. The most visible pan of tliese efforts lias been his campaigns for discipline and against corruption and aJcoliolism. These measureswhich do not call for structural changehaveositive impact lor the most pan.

Cher the longer term, Gorbachev is counting on achieving major productivity gainsesult of organizational cltanges, reform iniliativcs, and, most importantly, an ambitious modemizaiion

71)

tz

40

0 0

Figuregr CapitaS-

Approximate Length ot US Lead in Veers 2 3 4 6 6 7 8 9 10 11 12 13 14

icroprocetsors Computer-Opera led Machine Tool* Minicomputers Mainframes Supercomputersware

Fleiible Manufacturing Systems

H

i i

US lead it bowd on pioivaiom of length of lime required tor Sovietschieve ssilet production tX levels of each fechiitilogy similar io ihose in US series production (otUy

figureelected Advanced Manufacturing Technologies: The United States Versus tho USSR

to uj>grade tin: country's stock of plant and equipment (see boxo this end, the current five-yearalls for doubling retirement rates for fixed capital, replacing upc-third of the country's plant and equipmentnd increasing tbe level of investment in the civilian machine-building and

ing ministries (MBMW) byercentver the level achieved. Gorbaclxiv has also instituted an ambitious new program to improve quality control in industry. Known as State Acceptancehe program establishes permanent quality control by state employees at the plantrogram

Defining Modernization

lhe phrase "modernization program" often has been used by Western observers as anto describe any policy instituted by Gorbachev for dealing with the 'country'sAs Gorbachev lias used it, however, the tentlore Limited meaning andliis efforts to upgrade the country's stock of plant and equipment. Basically, itincreasing the productive capacity of tlie maclune building sector, the primarymanufacturing technology and equipment. As pan of the efforts to iixxkmizc thebase, Crorbuchcv's plan calls

Improving tlie quality of machinery that embodies existing levels of technology by manufacturing ittricter system of quality control.

Replacing existing machinery with machineryigher level of technology, what Soviet planners sometimes refer to as "world standards."*

not unlike lhat used by tlie military to ensure the quality of defense goods. At present, itnterprises which produce an estimatedercent of all industrial products and nearly one-third of the output of the critical machine-building sector.

_ itirough these actions, Gorbachev has indi--catcd that he wants to upgrade the country's technological base so as to put the countryigher, self-sustaining growth plane. Soviet plan targets imply an average annual GNP growth rate ofercent, which is to acceleratecrcent average annual rate duringeriod

Although many of the specific policieshas adopted arc not new, the Intensity Gorbachev has brought to his efforts and his apparent cotnmitment to finding long-termarc attributes that his Immediatelacked Nonctlielcss, Gorbachev's program appears too ambitiousumber of counts:

Meeting output targets for many key eommtxlitics would require unrealistic gains in productivity, given planned investment largcts

F.vcn if output targets can he achieved, liigli growth rates and improved quality arc not rcaddy compatible objectives. The industrial output goals. for example, appear too high to allowlowdown in prixJuction to install new. more technologically advanced equipment.

Finally, despite considerable rhetoric, none of ihc proposals so far would greatly change the syvem of economic incentives that has discouraged management innovation and technological change.

conomic Performance

arked ihc initial year ofYP and the lirst full ye;ir of Gorbachev'sAs the result ol lus leadership, changesby his predecessors, and good6 turned our ioery good year lor lhe economy (secn the Strength of record farm

ouipul and reduced loss of work time, Soviet GNP grew by moreercent, the highest rateecade. Industry, the focus of Gorbachevs modernization efforts, also did well, recording its best growthecade.umber of problems surfaced during the year thai could spell (rouble fee Gorbachev's economic program over the longer term For example, the first significant resistance to specific policies, although not overall goals, surfaced in both the massive government and party bureaucracy,among many enterprise managers who complained that they were being asked to carry out coniliciing goalssuch as to raise quality standards and output simultaneously.

Table 2

USSR: GNP by Sector of Origin'

Annual Growth (parcont)

3 196

3

r mi

'I'M'> ivmtuiit (olpi<m-ieautuitf .i> olni-iiMt tov- toono19W i

ol tIMI.BSii-"in

Growth Good, Hut Some Problem*

Record farm output led the surge in GNP Iroduction of potatoes and vegetables increased suthiaiiiiallyover5 levels, and new lughs were cstahlisbcd for producUon of all major livesiotk products.iHiOn-tou gndii harvestthe highestelped Moscow reduce grain imports and contnlmtedercent increase in net livestockvcrail. uci farm output increasedercent (Secore detailed description of Soviet economic pcrfcirmance)

While not growing as rapidly as agriculture, industry -Uso (tunedcspec(ablc showing Iroduction largcts for the majority of the most

Important items produced in (he machinery'including metal-cutting machine tools and computer equipmentwere exceeded. The energy branches, dcspiie proMcrns caused by the Chernobyl nuclear power accident, exhibited healthy growth, with the output goals for coal and natural gas being exceeded. Similarly, those -branches producing industrial materials,of which have caused honlenccks in the past, did well. Several ambitious plan targets for the year were met or exceeded.

Underlying industry's improved performance was an improvement in productivity. Afterof steady decline, overall factor productivity1 in industry nearly stabilizedaster growth in lalxw productivity substantiallyontinuing though slowing decline in capital prtxluetivity. Much of the improvement in labor productivity appears to have come from reduced loss of worktimc through increased discipline, lessn the fob. and more effective management Tlie room for such reduction is substantial. Accordingoviet economist, on an average workdayercent of Mk work force does not show up because they arc on vacation or sick leave, and tltose who do show upn the average,ercent of their tunc.

Although the leadership could take comfort in the overall figures on growth and prtxluetivity. several serious problems cropped up during the year While not unexpected given all thata'cnev was trying to accomplish, they will have to be corrected or offset if his modernization program is to proceed on track, lhe most serious of these problems are associated with the regime's efforts, io improve the quality, reliability, and tcclinological level of Soviet nianufaeturcd maeluncry and equipmenthort period Soviet planners have estaUislved lofty targets for raising product quality duringhoercent ol all macliinery is to meet what tltcy callstantlards"o date, however, progress in meeting this goal has been poor.

leadership statements describe the problems encountered:

h Party Congress. several speakers pointedly referred to continued problems in the quality ofnoting that some of the macrtincry installed during reconstruction was still grossly outmoded, wliile "newcarcely exceeded older models in terms of productivity.

pecial conference inolitburo member lev zaykov criticized the recent performance of dvilian machinebuilders, indicating that targets for improving the quality of machinery were not being met and that poor quality machinery was being turned out even in showease factories.

recent TASS reportouncil of Ministers' evaluation of6 plan results noted that there was enterprise resistance to tlvc new state system of quality control and stated that the machine-lading and other ministries "did notecisive breakthroughaising the tcclinical level and quality of output."

A sharp decline in the Soviets' real import capacityhe result of railing oil prices and the depreciation of the dollaralso docs not Ixxlc well for Gorbachev's nhodemization ixogram over the longer term while the ultimate success of ih.it program hinges largely on internals goals imply that some highlyimports from the West for such sectors as energy, machine took, mlcrodcetrorucs. and telecommunications must be continued, if not increased. Moscow was ableope fairly wellifficult situation6 by remaining an active borrower, increasing gold sales, andimports, especially of agriodtural products. Such adjustments may not be as easy in the future, however, unless Moscow is willing to increase sharply its debt to the West.

Fkuh pf"uU<it>iiy iiHi-utc ihc dnTcrrncc between Un- urtiwin .itrudtiti nnd ilic growthwtiuhicdirfand, iilxir. ind cxpujl

6

Finally. Ixireauccatic low-dragging and outright opposition appear to have threatened some of Gorbachev'stachcv apparently has become convinced lhat success in revitalizing the Soviet economy will depend on intnxlocing niajor jiolitical and social as well as economic refornis. These reforms, nartRularly hisajgn for lycaier "openness" andof pouueaf lite, have met with resistance witlun the puny and government Ixireauvnum scheduled for6 wis. by Gorhulicv's own admission, postponed three tunes. We briieve die delay was the result of tfcnVukies in gaining support within the Central Committee Ibr the personnel reforms that he wished to introduce.

Trend* In Resource Allocation

Urate ccaewrrnc jjowthking up, Gor-luilic tried to lay the ground week lor future gains tliroogh his resoiirce allocation policies In line with the goals laid out in the FYP,urowth surged, with ihc greatest attention being given to renovating and rcequippiiig those faeSiues liut produce nu.tuners- criticalhe modeniuaiion eftort (seerxtirding to Soviet statisiics

Total new Jixed capiial investmeni increased byercenthe highest increase inecade and sUglilly above6 [Jan

SiatcxIlkihl capital investment chan nclcri niio ihe reconstruction and retooling Of cMMim> cntcijxises increasedeftyxl IXTginninglan that Calls lor -loinercent annual increase in rcnociiioii exjendiiurcs.

wjw'e. lhe overall amount of newrouglii on streami"i o4 perceni growih coni|urcdW6 plan rarget ofhis suggests tliat Moscow-'* i .to mime new consinKlnni and concentrate on finishing uncompletedwere not realised

SSR: Selected Indicators of Capital Formation

0 0

Average Annual Rales ot Growth in Percent

II

33

NOV. Iiaisd tiPW ifivesl men!

Si ale produriivM

Mplial'

44

'.A

he reconstruction and idooUnn olenterprises CommiuioiiAjj ol

3.0

aa

4 MMID-HI

lull-aMNa Hi in)

Although thereew surprises, the in VBUnWiH priorities laid out inP appear lo have heen adhered to6 Wulun industry, theivilian maclune buikkng nun istrrrs apparently received the laggest boost No vearend data were released, bill Insedouth results, investment in this sector increased byrrecnt Similarly, plan goals and press convnen tars on6 results suggest that Divestmentk*ndustries rose sharply, althixigli again no figures were released. Scrnicwliat unex pcitedly, investment in the agrtvindustrialincreased by almostercentar more thanercent average annual ran iciordcd dunng tlie lirst three years of ihc progr.im which was csiaUislvrd in2 tlx largest gains were in the nonfarm sectoruklusiries thai supply inputs to agriculture andrm pnxlucrs. whale lhe increaseix what high ihe* structure of agro-induMn.ili:tx hi appear* consistent with Gorluchev's emphasis on pnntding-more resources toMippon

loio the rapid growth in investment'tlid not iarc nearly as well Irom theMrung diuvving6 Per capita curMOnpunn grewlesserceni ir. i< in ixm hecairve legal sales of alcohola uuiot compiocnlonsumer expcndilurcsIfy v7 perceniestili of the antialcolfl

campaign Nonetheless, gains in key components of consumptionfood (excluding alcohol) and housingmay have earned Gorbachev some points with the populace and helped underscore his commitment to improving worker incentives, ficxxl suppliesone of the main indicators by which citizens judge their weU-bcingim-^proved6 Fruit and vegetablearticular rebounded from5 lewis Construction of housingillion square meters,ercent5 and the largest gross increment to the housing stcxrk inears.

Despite unproved supplies in some areas,consumer demand is reflected inqueuing in state stores (with fixed prices) and rising prices in collective farm nurkcts.growth in wages, coupled with the drop In alcohol sales, resultedarge increase in the amount of Cash held by the consuroer.

One Indication of the regime's concern over the imbalance between expanded disposable Income and goods to buy was Its failure toigure on the addiUon to household savings

while our information on delense spending6 is less solid than that for consumption and investment, our preliminary estimate is thai overall defense expenditures in constant prices increased byercent (sec box insertiscussion of Soviet defense spending in currentlthough somewhat above the rate of recent years, it does not appear that this- growth represents any change in defense spending policy since Gorbachev's arrival Rather, it TO largely driven by the Startup or acceleration uf produciion of several new weapon systcna that were under development before Gorbachev kh* office.56 at least, these programs helped raise pnx.iircment growth toercent per year.

Measuring Soviet Defense Spending in Current Price*

In Western estimates of defense spcrKUng, constant prices arc usedn defensethat is ctfahges in niiliiary manpower, die volume of procun and the scale ofand operations and maintenanceexcluding the The Soviets, however. danot use Westcm-sryic constant prices. Rather, most references iti literature to defense spending arc In terms of current prices, and prestiiraWy thclcaoersliip uses this measure, along withvanous physical Indicators, to assess trends

Because current prices show higher rates of growtli, the leadership mightf defense spending trends than constant price estimates would suggest. Indeed,nd DIA agree that defenses share of Soviet GNP rose fromercent0 toercent2 Although the real growth in defense activities and overall economic output was roughly the same in ihis period, defenses share of Soviet GNP increased when measured in currentecause costs and prices of defense-related goods and services increased more rapidly than those of nondefensc goods and services. Our estimate of defense's claim on the output from individual sectors of the economy supports tills viewising defense Ixirden when measured in current prices Ihcsc shares generally grew2

'lliis notionising defense burden is also consistent with Icadcrsliip statements over die past decade. Although Soviet leaders have always made passing references io the high costs of defense from die late Brezhnev period onward, they have increasingly linked tlie USSR's inability to provide more rapid gains in consumer welfare and gcncraic high economic growth to the high costs of its defense effons Gorbacliev has been particularly vocal on tlus topic In February, for example. GorbaclKv said tliat delense spending wasoad on dieit diverts enormous resources that could be redirected" to other sectors.

Ihe largest jump In expenditures5 was in aircraft procurement The inillal siagcs of fvtxluction of tltc newxunherwhose development dales back toandcontinued emphasis on fighter production helped drive up aircraft expenditures, while increases in both tactical and strategic ^missile procurementled by outlays (or the TlA-lQ andir del erne systemsalso raised missile procurement56yclical decline in the. Al the same time, wc believe (rorbiclvev has told military leaders thatlike their civiliiin counterpartsthey will liavc to use resources more effectively. One apparent manifestation of this hasreat emphasis on conservation and less cosdy training practices. For example,ajor naval conference in5 attended by newly appointed Commander of the Soviet Navy Amrural Chemavm. it was reported thai some comman-dcrs hail tailed to understand the need for "an in-tensificaiion of combat training"5 and instead had "decided on an wmcccssary increase in the number ol" sea exercises, which leads to overuse of engine capacity, oveteonsumplion of fuel, and premature aging of equipment" .

ThePlamccd Ahead

Ikiikling6 start,7 Plan shows no letup in GorbaclKvs drive to revitalise the economy by modernizing the industrial base, improving management, and motivating worker effort 'Ihe goals for overall economic and indus trial growth areothercentbut appear consistent with the targets originally laidh FYP (see.

lhe industrial plan focuses on producing more and betler itucluhcry for nvodcmizaiitHi and more goods for the consumer, llie Soviets are appar cntly hanking on ihe sharp rise in investment in civil machine building6 to Spur anin *wf put this year Machinery outputafter increasing by-iA percent last yearis slated to pimp byercentace not achieved Since the. Machine builders ,irc to concentrate iheir efforts on high-technology products for investment and durables for the consumer, lhe output of advanced machine tools, uistruinentauon equipment, and computers is to

grow almostercent faster than production of machineryhole. Machinery quality also is to improve substantially, with the share of equipment corresponding to "world statKlards" lo rise toerceni

Moscow's plans for some criticalumber of important agricultural targets have not been released, although grain pnxiuction is lo riseillion tons.largcts for other consumer-related sectors have not been released, nor has irfforrmiioil on production goab for such commodities as cement and other constniction materials, 'lhe plan does make dear, however, lhat growth In steel output ise achieved primarily from efficiency gains, not increases in production of inputs such as coke and pig iron.

Prltfrity for Inwstmeut

In line with Gorbachev's mtxfcniizauoninvestment once again seems to have been given priority Total new fixed capital investment7 is slated to growercenifaster lhan overall ccociomic growthand apparently somewhat above Ihc rate originally called for in0 Plan. The central role of the machinery sector in the modernization program and the need io invest more in the energy sectors,

partlyesult of lhe Chernobyl' accident, may have rcsiiltcd in ihese sectors getting liigher allocations. peech outlining ihc Plan for

iair Planning Chairman Talydn suggested that more investment than was originally planned would also go io sectors wrvinB 'be consumer Hased on the amlMtious target for constniction, housing is apparently scheduledarticularly sharp rise.

As usual, no meaningful information wason Soviel plans for defense spending? Given the defense industrial opacityin place, lhe overall priority afforded ihe military, and Soviel concern about ongoingdefense pnigrams. we would expectto lemain at levels high enough to allow for continued mtidembaiion of the USSR's strategic and conventional forces Major weapon systems such as theCBM,urface-ttvair mis silc.0 tank, and ihc HEAR bomber should

I fidt' V

Si-

IMS

Plan

Mtl

Machinery

Pi.r>

4 USSR Selected economic Indicators /Average Annual Percent Rate ot Growth).

ro enter tlie inventoryteady pace, adding to Moscow's strategic and conventional capabilities

Maintaining Momentum

Gorbachev is apparently counting on payoffs (romot men is and continued returns from hK "human factors" campaignpanicularly his elltwis to incicasc labor prtxluctivily through

iI:ii"- to meet 'A'.'

argets. To this end. average wages arc scheduled lo increaseercentiili ihe increasesavor of good performers and technical persotuiel The goals iVii wages, consumer durables, housing, and pikl services esited ihe targets called for inmarther incentive to iiii|jrovcil worker ellort, GOrtMChcv also has enacted Icgisiaiionscheduled lo takehai will allow some expansion

of private ixixluaiOrt Of consumer gtxxls and

services.

(Mefbachcv faces in this regard is the circular loop of material incentives andy raises will not provide mean uiglul worker incentives without coircspondinj'.iiis in the quality and availability ot food,nd consumer goods and services Yet, higher productivity Ls needed to increase tbe suppiv of such incentives. Workers will luie inpersuaded ti) cliange iheir liindamciii.il .hiuikIv's toward work based on tlie expectaiion oionsutiKT welfare in the future

Ifcsklit- trying lo improve worker incentives Gorbachev probably Ls hoping tliat some of the numerous cioihitnk icforms and organizational cluntus thai have been promulgaied since he tookwill Ix-gin to briar fruit. Most of the changes ui these areas are Just lxginning to lake ellect. however, and Gorbachev probably realises

lhal. whatever ilie benefits to beiscussion of economic reform under

will materialize over the longer term. (See

Economic Reform Under Gorbachev

G<icriachcv has repeaiedly stressed that maior structural changes are needed In the Soviel economyeal rixaktfuough in performance is to be achieved. Ilisviiriar^Jy. on four areas: streamlining the bureaucracy, increasing enterpriseallying workers' incentives and cncouraging.personal initiative. None of the measures adopted so far. hovvever;Iould be dassiJied as the "radical reform" lhat Gorhachcv said was needed atthfttfry Cc*igressv Moreover, many of these rneasurcs have been only panially implemented and aU.fafe encountering, the kinds of problems eiidcmic to changing old Insulutions and creating new

Reorganizing ibeThe corrierstonc of Gorbachev's refonn^rVfigram.has his efforts to reorganize and streamline the bureaucracy. According to his ownolicies are designed to achieve ruore effective centralized control over the 'maui^ccUon of'tite cconotny. while at the same tinKJcaving more of tlie day to day management to lower levels. His insistence that the bureaucracy sliift its focus to strategic planning has beenumber of organizational changes. New supcragcncics answering directly to theurifaters have been created to oversee key economic sectors. Such coordinating bodies have been ScMpTor trachinc building, live agrmndiistrial complex, energy, construction, foreign trade, and social development (secost of these bodies arc not yet fully operational, however, and pir-grcss in achieving intended sharp cutbacks in pr^sortnel has been spotty

Increasing EnterpriseAn impressive number of new initiatives attempt toautiioriiy and responsibility of the enterprise and to motivate them through"atlministrative" levers.

A new enterprise law codifies enterprise rights (including election of enterprise managers)and attempts to give them legal protection from burcaucractic meddling.

The so-called live-nrinistry experiment, which makes contract fulfillment the mapr measure of enterprise Success and expands enterprise control over investment and incentive funds, is being extended industrywide

The self-financing experiments in Sumy and Tolyatti will he expanded to additional ministries this year

Selected enterprises are given the right to trade directly with foreign firms.

Improving Workers' IncentiivsGorbacliev's clucf accom^ishmcnt in this area has been the passageage reform designed to reverse the leveling trend of the Brezhnev years and toloser relationship between workers' pay and their performance Although litis reform callsay increase for many categories of workers, no state funds Iwvc been Set aside for it

Encouraging Personalpromise to provide greater scope for indivklual initiative lias brought new legislation sanctioning ex|xindcd business oiiportijiiities outside ihc StaiC sector for individuals and small businesses, especially in consumer gixxls and services.action is greatly clrciiniscribed Imwcver, and the impact these action* will have remains to be seen

Prospects for Modernization Over the longer Term

While counting on cite human factorsin the short nm, Gorbachev is depending inainly on the proliferation of more teeluiologi-cally advanced equipment to improveacross the economy Over the longer term He has repeatedly said lhat the USSR must replicate

tltc ongoing Western technological revolution in wtiich advanced macliinc tools, robots,devices, computers, and lelccornmunica tioci systems are making operations more flexible, thereby raising quality and cutting costs. At die same time, Gorbachev is hoping thatesulteries of organizational and adiriinistraiise measures enterprises will have more incentives to demand and use tlie best equipment available

Major ReorgaiUJntions Since Gorbachev Took Over

Machine Ikiildiiig

Agriculture

Fuel and Energy Complex

Nuclear Energy

Date Established Oct 85

Nov 85

Mar 86

Jul 86

Taken

Machine Building Bureau established to overseeivilian machine building ministries. Bureau to carry out "unified technical policy" Given authority to redistribute resources of ministries but no line operational authority over enterprises. Management structure to be reduced

USSR Stale Agro-lndusirial Committee (Gosagroprtmi) established by merging five ministries, one state committee, and elements of tliree Other ministries Similarcarried out at regional levels. Central staff reponeuly reduced byercent Rights and resjxinslbilities ol regional and farm officials enhanced

Fuel and Energy Bureau created to coordinate energy policy and carry out unified conservation and ledinological policies Given authority over Ixidgctary allocations within broad parameters *el by Gosplan. hut nu oiKratioinl authority over enterprises.

Separate All Lnion Ministry of Nuclear Power Industry of the USSR was Created following the Clwroobyl' incklcnt.

Current Status

In" Soviel press charged ministries were circumventing the order to streamline management and sharply reduce central staffs.

Thus far. die only "supcr-miiiistry" io be created Some Soviet officials claim it has paid off in greater efficiency, but numerous press complaints suggest Gosagroprom still in state of confusion.

Still apparently ul initial phase of organization wilh its responsibilities vet to be decided

Dale

i-hr,1 Action Taken

existing constnictioneorganized Into regionally.focuserj ministries: Four specialized construction ministries unchangedio State Corvaruction tlomniiticc and given enhanced autliority over all construction ministries

Foreign rxonornic (iomniission cstahiishrd to formulate anil coordinate foreign trade policy, but does not have management authority of Gosagroprom and Gosstroy Gimmission members include heads or deputy heads of all rranrsines or agencies concerned with foreign iradcinistries andnterprises given right to engage direeily in export and import trade.

Bureau for Social Development.

Responsibullies have not

>et been denned and may be still undecided GosjxJn Chief implied in November

peech that the bureau would have broad overslgni over various ministries and iratituclons concerned with consumer goods and services, health education and social

policy,

First serious attempt in overears io bring some order into chaotic construction sector. Reorganization aimed at sitcngthcTung centralized direct km while allowing regional authorities more control over local projects

loo soon to assess Rcor gaiii/ation ends Minisiry of Track's long-standing monopoly over foreign trade. Should give end users more say Hi contract ncgotutMwisright to buy foreign goods limited to foreign exchange they are able to generate through saleoail of above-plan pnxluctioo. Should help facilitate rsiaNrshmcnt ofventures.

Still hrlng ffirmed

il Supply

Unlike tbe West where motlcmi7ation has been driven by ImIi supply and demand lactorswith inirr.i. oon herween the iwo stimulmng self-sustainira: growthGorbaettrv'stion program has concentrated primarily on increasing the supply of more lechrarfoglcally advanced equipment To the* end

l*roduction of computer equipment is slated

to gnwv hv IH percent annually tl0 By Hut lime, the Soviels ptm tospersonal computers annually, compared with almost none until the

Output of the main producer ofequi|imcntslated lo grow byercent per year in0 period, upercent tn theS year period

Production of ruins Ineriod is lo increaseCTCcni. numerically controlled maeluhc tools byercent, and nactunmg centm byercent corn paredH5 traduction

whilemci> prrjrnhly will not meet aU of these targets, they have alreadyumber of major steps to provide more and better irochinrry in each trf these areas. Most significantly, as indicated ahuvc. Investment in theivilian machine building ministries is to iiicrcascassive HO percent0 compared wiih1eriod. Meanwhile, nindmg forough indicator of the resources committedis also to increase sharply. The USSR lias created iuicrlTaneh scientific and technical Comdexes to expedite development and incorporation of new technologies into the machine building production hase. Finally, foreign support is to till in the gaps tliat cannot be met cUirnesiically Moscow probably plans to increase tlie impure, of capital ccjojpmcnt from both Fastcm Curopr and the developed West large,) programs have also been established with FaMcm Fiiropr in keytcchnulogies

In contrast, the Soviets have put far fewer mechanisms into place on the demand side to promote the innovaoon and diffusion of thetechnologies into machine budding and the rest of the economy. They have yet to change tlie system of plan targets and incentives sulliciently to make it generally advantageous for managers to favor innovation over nointaining the status quo Instead they have tinkered withlike tbe enterprise production development funds to give factory managers greater authority and ability lo procure ncAV machinery ;uid equipment Ihis will not work if managers an' pciuii/cd for stopping production to aecominodatr modeml/ation or cannot induce machinery suppers io produce the nght equip ment and provide rclwWe Installation and main-tenancf support these are stiU likely ohsracies cnnfruntiiig ihe innovation nijndcd manager

The Soviets also continue to rely on admin-atrativc measure* toffective demand far new lectin. 4ngy Ihey have attempted to im

prove quality by estalilishing independent quality control inspectias in selected enterprises. Ihey also have directed the State Committee forand Terminology and the Academy oftoproxies for rnachinery customers to determine (ust what technokigtcs are suited for industrial users But this Is Imposition from the top down and assumes that these agencies will nuke die nght choke

In short, given what we know of Gorbachev's mtxlcniiatiun plansand the results wc have seen so farwe believe that the Soviet focus on supply side factors will certainly result in die machine buildingodiicing higherof more modern equipment. It Is not at all clear, however, wlielher tlx: sector will be able to transform itself or the rest uf the economy unless managers throughmit the economy demand, and are given the opportunity to select, tlie correct products

Gronih0

Judguig the success of Cor hoc no's modenua-lion program win not be easy Even approaching some of the technology goab or output targets for key items such as computers or nuraeri caUy controlled nlactone toob would be quite an achievement Since the beginning of the Brezhnev era in the, the Soviets have generaJly trussed the maior FYP targets, and this plan is likely to be no different, (iorhochev probably realizes thLv ttluk talking tough and saying that no excuses will be Iraokcd, he has also .icknowlrged that the targetsere set at tlie upper limit and Out tlieir attainment will he dillicult.

Gorbachev, luiwever. is prolably counUngeasonable degree of siKicssinimum, lie would like in reverse the deebne in the rate ol growth thai Ills oa uned in nearly all sectors of tlie economy over die last decade Wide the measure of acccpta!*is some

wiiat arhiirary; Soviet krader* would probably' give Giatuchev good gradrs if national income (tlie Marxrst mrasure of overall productkin) and

industrial growth increased by one percentage

point pet year over the depressed levels of the

lltli

We believe that Gorbaclicv probably will have some success for ihe following reasons

The full poicntial of the "human factors" campaignparticularly ihc discipline and lhe anilalcohol program, as well as his efforts to increase managerial and worker -incentiveshas yete tapped

Siniilarly, there should be some improvement in higher-level plaiiniiig and management. Gorbachev hasumber of younger officials, many of whom appear more willing to consider new approaches

to solving economic problems. His efforts to improve incentives for enterprise managers and workers and to reorganize the machinery, trade, and agricultural bureaucracies cotikl also pay some dividends, although Itow much is impossible io say.

Finally, for the reasons just given, the massive jump in investment in tlie civilian machincbutlding sector should yield some dividends in higher output growth and improved quality, even if the needs of major industrial users arc not fully taken into account

It would be misleading, liowevcr, for US and Soviet leaders to look at only aggregate measures of output and industrial growth. Gorbachev is Interested not only iu raising rates of economic growth over (he next few years, but also in changing ihe stnicture of the economy SO that even higher rates can I* achieved during the

n this context, observationsumber of other variables will giveetter liandle on

how modernization is proceeding. These include:

Rate of Capital RenetcatGorbachev has decreed tltat0 more than one-third of the country's capital stock

will he replaced. Of all the major goals Corlwohcv has established, achieving this panicidar oik: will probacy be the least difficult Our calculations show that even wilh no increase in retirement rates, this

goal will be aclueved as long as tlie current target lor overall investment is met.

The tevel of Technology Embodied in New EquipmentsVrasuring tlus will he extremely difficult Machine builders will be under Intense pressure to declare maior quality improvements whether they arc warranted or not, and wc are likely to be bombardedost of statisticssome positive, someood surrogate measure of the USSR's ability to produce world class machinery will be its success in increasing hard currency sales of manufactured goodsthe test of the market place.

Eactor Productivity TrendsSuccess in meeting tlie first two goals should be reflected here. Of all the variables to watch, this is the most critical becauseunless the positive results achieved6 can be sustainedthere is litde hope of accelerating growth during.

Our overall assessment is that, while we cxpcci some improvement in Soviet economicover Ihe next few years, we doubt dut sufficient progress can be aclueved in Improving the level of technology and reversing producUvity trends to permit substantially (aster growth in. More concretely, wc believe that tlie Soviets will fall well sliort of dieir implied goal ofaverage annual GNP growth. Similarly,ercent target0 appears to be out or rrach,

Tlie regime's implicit goalcrcent average annual GNP growthsbecause of the huge gains in productivity it would require According to Gorbachev, "human (actor" gains are .to account for one-diird of the increase in ptoduciivity, and modernization the remaining iwn-tlu'rds. Using an econometric model to project what this ini|>lics. the elasticity of ouipui with respect lo capitalthe model's measure of ihe percentage change inercent increase in lixedould liave to increase by nearlyercent compared witheriod, and workers

15

would have to be. oncrccni more productive dian Ihey were

much improvement in cither facior seems implausible In diend, output-capital elasticities of this magnitude were approaclied, but the relative cost of material ^inputsfuels, ores, mineralswas much less. Material input costs since then have risen dramatically and are likely to continue to do so in the years ahead, making the required gains from capital expansion difficult to achieve. As for "humanhile we still look for some improvements, there are limits to the gains that can be expected. Absenteeism, for instance, can only be reduced so much, and the slow growth in the supply of consumer goods and services is Ukcly to rule out any significant increases in worker incentives in die years ahead

Based on what we believe arc moreassumptions about productivity, wc project growth of GNP at an annual average rateercent. Thisubstantial improvement in capital productivity overeriod, but less than half of what would be required to meet plan.

Coping Wltli Shortfalls

We believe growth in the neighborhoodercent, wlulc better than that in the recent past, would still be insufficient to solve theecononiic problems and could eventually lead to.

severe Ixmlcs over resource allocation;

-Greater reliance on foreign econoniic ties, and, depending on Gorbachev's political standing:

push for more ambitious economic reforms.

The severity of Moscow's resource allocation Nnd during the current FYP will depend primarily on its ability to sustain the recent economicIf. in fact, the economy's strong showing6 proves transitory, then increasingly difficult resource allocation decisions will have to be made between competing civilian and defense interests, as well as among competing interests within dvc civilian and defense sectors themselves.

Over the next few years, the toughestarc likely to be in ihe investment arena Despite the high investment growth targets for those branches of industry key to the rnoderniza-tiixi program, we believe achieving output targets in critical areas like the machine-building and the energy sectors will require further Increases in investment above those currendy plannednvestment is already being givenhowever, and finding addidonal resources will not beajor part of tKirhachcv's human factors campaign depends on increasing workers' incentives and, as noted earlier, the leadership has already deemed it necessary to boost investment in consumer-related areasurther uicrcascs will probably he needed if momentum is to be maintained

Soviet defense industries also will requireinvestment over the next few years.of Soviet requirements and programs under way indicates that the Soviets will maintain their historic level of weaponsajor new and modernized systemsintour evidence shows that new programs are in progress to update or replace older systems with improved models in every mission area, with many likely to begin series produciion in thehe Soviets commit investment resources to prepare for weapons

' CIA'* mu-ron'unuiiMi:it the Soviet economy SOvstM wu>rr hmli inn. (he inoUct lo ft'ew the regime* effort* to mcidc-miM- tlieexample would heamimibtitm .if more rriixleni. dumc*tieill> produced zutomutan udliiK* ntru-illiii wit dune In jutgnin? higher muni* topiul thin io obi up,!jI. In addition, livem modified to illow (ofin* oiigiliaiiiK hum "humanpoiicic*oiIkcOonihe otherck-mcnu ofomic uratecy Model mulls siieecM du< wiilwui ihese initutives (hehu Sown would he jMc io oo in live iW6 WincrCenttW. Some &jin<plial miKlexiiiaiii.ii nul htinun ficior* will bi- icul&ed. Krnini mhI uruwili nmcrtmi mji-tim be pm^flilc

producUcMi rougluy during ihc.ears prior to initiation of scries production, with the largest csa^nditures, including those to pui in place most of ihc machinery and equipment, occurring in the last half or this period This Suggests that they will be allocating substantial investment resources in thendo ^prepare for systems entering production during -the last half of. Ai least some of these funds, however, would have already been included in tlie budget allocations for this FYP and the Soviet military would undoubtedly resist any efforts to renege on these commitments Indeed, depending on the race of major L5 defense programsptuikularly SDIthe military might

argue that their requirements have increased and press fnr additional funding

We do not knowrbachcv will respondhese pressures, but the state of the economy. Moscow's perception of tltc military tlueat, and Gorbachevs domestic political standing would all come into play. Even if economic growth has not picked up however. Gorbachev would be unlikely to push modernization to the point whereby key military requirements would nol be met. Lagging economic growth woukl Iwwevcr, certainly make arms control agreements more attractive (sec box on impact of Soviet economic problems on arms control positions).

however, is apparemly viewed by the Soviet leadership as the key io long-termMifbciency. As such, it has created an important additional incentive to meet these requirements 'to'ways that would minimize the immediate need for significant growth in military costs. One potential means of accomplisliing this might be for the Soviets to defer or stretch out the weapons prognuns that liave been designed in response to these requirements, thereby easing the military demand for scarce resources. 'Iliis approach, in turn, would be facilitated by arms control agreements that would reduce the growth or the absolute size of IIS military forces, especially in the defensive arena.

The greatest potenlial economic benefit to the Soviets from an arms control agreement would almost certainly be the avoidance of substantial new military cost growth. The near-terra benefit lo ihc civilian economy from reducing or even eliminating particular strategic systems, however, would probably be minimal. Produclion fatiliucs take time to correct and spending on strategic Offensive Systems currently represents only aboutercent of total mililary spending.

Amis conuol related savings achieved throughvoidance of SDI costs during, in contrast, could be substantial. Touccessful SDI program wc expect Moscow would continue as well asumber of technical and operational countermcasurcs to iivsure thai its weapons arrive on target. Depending on how ihc Soviets tespond. deiensc spending could increase substantially. Also, any major attempt to offset SD! probably would draw from key tcciuiica! and industrialike those engaged in software and sensor developmentviial io other Soviet military and civilian programs. Although we do not know precisely liow uiiponani these economic considerations are, given diat the Soviets are committed to SDI related pnigrams, the potential lor long term savings is significant.

Apart from an agreement on straicgic forces, the Soviets have also proposed an accord involving convemional forces Although the precise detaiLs of such an agreement remain unclear. Soviet and Warsaw Pact leaders have been publicly talkingact that could eventually lead to a

would result in overall reductions of aboutercent (more force level

reduction of several hundred thousand men In earlyarsaw Pact leaders issued an appeal to NATO to join the Pact in reducing conventional and nuclear forceshoih troops and weaponsin Europe trom'tbe Urals to the Atlantic. Tlie appeal follows statements by Gorbachev' inApril 'that called for initial reductionsnnrfc by each side. Further-cuts, tp^be.ajmplctcd by theneti) from

Oneibencfit tootKers to an already ;f, especi^jy in.^

to maintain the active Gorbachevcale suggested could ha

conventional forces would be ihc availability ofSovieis have been having trouble fifling Jobs inhad to be made in conscription policy in recentlhe armed forces.peecharty plenum inalreadyorkers Troop reductions onai die: margin, particularly in certain areas such as theindustrial regions; The releaseew hundred thousand soldiers would not.an appreciable impact on the overall Chilian labor force now numbering some va.

On balance, we do not'lelicvc the military and economic imperatives of Gorbachev'slead die Soviets id: accept any arms control agreement thai would prevent tliemkey military objectives. Ruxlamcnially, what ihey appear io want arc agreementsWestern defens^efforts, facilitate Sovici force niodeniizaiioti, and allow them dinethe USSR's economic development program vviiilc staying within the bounds oftoense'spending

vvc believe thai Gorbachev will face difficult decisions in ihe investment sphere over lhe next few yeans wc ck> not expect his focus on the civilian economy toajor impact On military production ai leasts last year's joint ClA-DJA assessment argued, the defense esialxishmem is well positioned to accommodaie ihc shifts in machinery demandsy die industrial mcxlernwation program1 Mosl of the weapons wc expert io be delivered to Soviet forces0 will Ix manufactured in plainsib equipped, and operating Allhough competition could Ix- suff for some basic materials and intermediate gtxxls needed for both industrial modernization and weapons productionand might result in the delay or scaling ixtcic ot some weapons systemsmost major programs should go forward as pdanncd

esult, we anticipnte Utile change from

tlie picture- we presented in last year'sEven with Utile growth in procurcmctu over ihc next lew tears, the absolute magniiudc will remain high enough to permit substantial upgrades ol Sovici strategic atKl conventional fortes New generations ol land andsed ballistic ami cruise missiles recently have entered or will soon enter pnxliietion. which slvould resultomprehensive modernization of the USSR's strategic ollcnsive forces by iher.ittgn defense force improvements. al though less .substantial, also will pemiii sustained

i;.. ip.ib.Iitie-,

l forces williniihureneration fighiers, lhendre entering ibe inventory, while new submarinesd warships, including llie USSR's first full-size aircraft carrier, are improving naval

ip.it'-!i- v. whi i.r:eiv oi

* Stmi bnmautCIA/OIa irpwi pilihtlHil In- DIAt<6July Wfi

land arms (mosi notably new artillery weapons and0 tank) arc being deployed to the ground forces.

While this analysis suggests that Uie overall levd of spending on weapons procurement need notajor source of contention in this FYP. _the picture would chaise If the military and some "uuluential leaders wanted to undertake large new initiatives in either the USSR's conventional or strategic forces. In this case, the leadership would have to decide whether to reduce splinting on other types of forces or increase the resources allocated to defense at the expense of civilian programs. Marginal increases at Ute expense of conventional forces might be possible, for example, if the Soviets deckled to boost spending on strategic forces in reaction to SIM. Any large cuts, however, would almost certainly generate strong protests from those service dements being ait. The same would be true, of course, if the Soviets decided to raise spending sharply on conventional forces, as some dements in Ute military are currenUy arguing The alternative, however, would be to shift resources from tin-civilian economy at tlie expense of industrial modernization

Seeking Foreign Economic Support

besides complicating resource allocation,or the modernization program to Supply industry with Ute necessary' machinery andto sustain higher growth levels probably would also lead Moscow to make adjustments in its trade relations.

Eastern Europe. In lite first instance, we "would expect Moscow to increase demands on Fastcm Europe. Gorbachev has posited for greater CEMA integration since beconuhg Generaland demanded moreiicr quality goods from Eastern Europe. Existing trade protocolsW protaUy call for the East Europeans to increase exports to run trade surpluses and pay back outstanding debts owed Moscow

A serious shortfall in the nxxWnizaiinn pro gram would likely lead Moscow to demand even more capital goods from the region. Suchhowever, would be resisted. The USSR

alieadyabsortisalargcsltarcof East Europeaniu most hightech industries, and even in those countries best able to meet Soviet requests

notably East flermany and tiechoslovakia

rentcndous need for advanced nuchinery for domestic investment.

Eastern Europe, moreover, finds itselfetter position to oppose Moscow's demands because of its improving terms of trade. Tlie value of Soviet energy deliveries to Eastern Europe

comprise the bulk of exports to the regionwill decline over the next few years as the CEMA pricing mechanism Incorporates the drop in world oil prices Without adjustments to current trade plans, the USSR could begin to run large trade deficits with its East European allies. Moscow would Uten have to rely on these countries to finance large trade credits if it wishes them to maintain or increase die net flow of resources to the Soviet Union

Developed Countries. Faced with adrop in its hard currency earningsesult of falling oil prices, the Soviet leaderslup has said that it hopes to increase machinery exports to the West. In fact, one of the rationales Gorlndiev has used to sell his niodernrzation program has been the need to produce machinery that will be competitive on world markets

Failure of the ntodcrnization program to ruse Uie tcclwological level of new equipmentwould seriously hinder any sharpin machinery sales, which now account forercent of Soviet haid currency exports, liven with the recent Soviet moves to re organize the foreign trade sector and to promote pint ventures with Western firms, we believe that unless Moscow abandons its conservativestrategy, the USSR's hard currency unpOTO could fall even further over the next few years (see Ixix insertiscussion of Moscow's recent initiatives in the international trade area)

Regardless of the trends in Soviet hardearnings, we expect Moscow to continue its massive efforts to steal Western technology lu numerous instances, illegal acquisition ofhas reduced development time and/or

cm harkedar-reaching campaign to.Jricrcascnclude resiructunng the foreign trade;ith Western firms, and seeking greaterajor objective is to raise both rhCflualityeans to expand exports of manufactured goods mce on sales of energy and otherrials and,arge industrial nation.

Oyer the past year the Soviet Unionrolen world economic aflairs. Soviet 'permitting the establishment of in international economic organizations, icdinical level of its domestic output, ps The leadership believes it must reduce itsi instead,rade structure more

a major overhaul of ihe foreignonopoly over foreign trade. Astins and er.icr|srises had Ixenl [xescnt. flic Mimit ry of Foreign aboutercent ofventually also be given the power to

Foreign Trade Reorganization

In6 the Soviets ai breaking tlie Minisiry of Foreign more lhaniitistnes andonduct trade directly with foreign control of trade in raw materials, food, additional ministries and enterprises

transactions. Moscow also created the State Foreign Economic Commissioncd Of ihc major ministries and departments."involved with foreign trade. Tliis new have limited power over resources, liovvevci, with its function limited largely to giv on trade matters

.joint Ventures Willi tlie West

A Second nuijor initiative was the establishment of guidelines in? that permit formation ot joint ventures with Western trading panncrs. The new icViIution allows uppercent foreign equity, icpumuon of jsofits. and Western participation in management, although Soviets must occupy the |xisitions of chairman of thend director general ln addition, Soviet law wii) apply to the wages, work hours, and vacations of Soviet eii /ens llie current joint venture resolution is somewhat vague on many key pointsercst fo Western fiims. and furtlier< -Ah; .rSoviets legit itupthisicci-

Soviet inierest in joint ventures is widcsiecad,ought on everything. ik[.. nrl-.il.liiL- iiur.iin ioici

Indeed. Moscow is prolxtlxy looking io |oini ventureseans of acquiring Western lechnolrigy with little io no up-front hard currency expenditures. Moreover, ihe Soviets may also believe dot joini eciiiurcs will allow tor an easier transfer of technology and niamgemcm skills than has Ixxn tlie case wnh traditional (xircltase of macltinery and equipment

Olher Measures

The Soviet leadership has also explored expanding relations with international economic institutions such as the European Community and lhereemcni on Trade and Tarius. Some interest in Uie liucrnn ional Monetary FuikI has also surfaced, bin Moscow tlocs not appear to be aa serious about this organization, at Icasi at this time IVilitic.il motives may partly explain

.i, [LIL'.H , ' . Ill i il |, ., plive.:

with major world Ixxlics. Uul the Soviets have said that ihey are counting on the association

wilh important economic UistUuuons to open up new trade opportunities, especially through

Inh recent trade activity, Moscow has also Ixoadened the scope of itsJFpr example, Soviet orhanks in tlie West have Stepped tip the usefinancial instruments. last ycar.thc USSR invested

jn an irrternatiijna! bond issue lor the first time andettlement with the British on outstanding Tsarist bonds, ptomptfiig speculation lhat the Soviets may soon issue their own hoods. These actions not only help diversify Moscow's sources of funds but also cut borrowing costs.

Outiook sil-l

Moscow. wil| cautiouslyonti ability to become <a';tnajor *pta die trade apparatuses In fact,-many remain and will SomespeciaHy

countries.n the

its. recent trade-related endeavors, it will proceed urrency shortages acturther constraint on therade circles anytime soon. The reorganization of most trade still remains dominated by central planners,distorted prices and Ute lack of liKCtuivesthe qualitative improvement of Sovict-manidacturcd exports, will be established, but most western firms appear unenthusiastic sohe problems they have encountered with joint ventures in oUtcr stjeialist dgn trade.sector does not operateacuum, and rapid expansion is unlikely until numerous shortcomings in the domestic economy are

Moscow toeapon system more capable than otherwise would have been the case. On occasions ihis technology has also benefited the civilian economy. Diversion of advanced manufacturing technologyfor example,processing know-how and equipment

raised the quality and performance ofused in both military and Civilian products. Indeed, this probably will be even more the case in the future Many of the products needed for Gorbachevs modernization program in the areas ol information processing, computers, and liiicroelectronics also have military apixicatlons.

Prospects for Economic Reform

Ultimately, under tlie pressure of hardon resource allocation and insufficient foreign Support for his modernization program. Gorbachev may decide to put more leeth inio his calls for "radical reform" Adopting some of ihe bolder proposals that have been put forward

ajor decentralization of price setting or real competition among state(see boxiscussion of reforms being

talked about)would be aimed at stimulating production and innovation, and would certainly be consistent with the direction in whichis already heading. Still, he would have to overcome stubborn political and bureaucratic opposition, which could be expected to intensify if his programs were faltering

A Ixoad spectrum of the itpparat would prolxibly oppose nioviiig too far in this direction on ihc grounds thai economic decentralization wouldoss of political control

A major decentralization would threaten the jobs, status, power, and privileges of thousands of officials now running the

The specter of unemployment, inflation, and widening class divisions witiiin society would undermine what Soviet citizens and leaders consider to lie some of the ixincipal advantages of socialism.

21

Reforms Under Discussion

; Some reform-minded economists-in the USSR hare taken advantage .of the moreunder Gorbachev- to advocate bokl measures that could transform die economy.more far-reaching ideas now hcjpg discussed ""

competition arriong sme enteiTX^ AtelAganbcgyan. an economic adviser to k'; Gorbachev', has indicated that inefficient enterprises should be allowed to fail. -

v Sf. -

ajor decentralization of the price fwmaiicm and supply systems. Articles in the Soviet

press have called for allovving suppliers to deal dirccdy with their customers and set pricesegotiation, bypassingentral supply system

use of "family contracts" for agriculture production and long-term leases of land and 'Vmadiinery by small groups of fanners. Such measures-have been used successfully oh an

experimental basis, and their broad introduction is being promoted by some Soviet economists.

there has been significant opposition to some of Gorbachev's political reform effortsnd Gorbachev certainly recognizes the tlireai posed to his programs. Many of the actions he has taken since coming to power can be explained as an effort to trim die bloated party and government bureaucracies so that they will be more receptive to his policies. Since taking over, he lias made sweeping pcrsonnd changes, replacing about half of the government ministers and over one-third of tlie provincial ponySubstantial changes have taken place at the mid-and-lower levels of the bureaucracy as well.

Just how far Gorbachev will go on reform Is impossible .to say, although we shouldearer idea over tlie next year or so. Dunng the niapr party plenum dedicated to the economy scheduled forssues of economic refonn almost certainly will be debated. Al the recently completed Party Plenum inorbachev also called for an All-Union Party Conference to he heldecond onlyarty Congress in expressing the official "will of lhehe All-Union Party Conference, said Gorbaeltcv, sltould address changes in the political system diang.es that might lay the groundwork for more substantial reform, lhe fact thai Party Plenum did not endorse his call for an All Union Party Conference, however, shows just how hard changes in these areas are likelye.

Gorbachev's Political Standing

Despite the oppositkm sliown to some of his policies, Gorbachev is likely to benefit politically fiom his modernization program over the next few years As long as the economy shows some improvement Over the rt'cord posted in thepastwhich seems probableGorbachev-will beosition to dedarc hissuccess."

Over the longer term, how Gorbachev fares politically is much more open to questionavorable scenario. If

the economy continues to show some progress (even if the PYP goals are not met).

the military environment appears less threatening either because of an arms controllower Western defense Ixiildup. or other factors, and

external factors (eg. weather, oil prices) arc favorable,

then Gorbachev could emerge at the end of the decadeuch stronger position politically

Bul tlie course Gorbachev is pursuing isrisky, and things could just as easily go

wrong Allhough lie may be able to dalm some success in ihc immediate ntture, his repeated attacks on those slowing the process ofand the strenuous nature ot his goals suggest that he is by no means conlkiern of the

future. The decisions he will have to reach over llie next few years in areas ranging from resource allocation to political and economic reform will be controversial and could well solidify opposing interests in ihc party and government.

23

Appendix A

conomicood Showing

h FYPgotofftoafast startecord farm ouipuidainelysxrfid perforniaiice in industry helped propel GNP growth to moreerceni, ihc highest inecade. On the strengthtrong showing in the livestock sectorood grain crop, agriculture reboundedoor performance last year and increasedercent. Industry, meanwhile, also did well, growing byercent with all major branches doing as well or better lhan last year.

Despite the strongumber of problems cropped up during the year that were not captured in tlie aggregate growth figures. In particular, ihe rnaeluiie-buildiiig sectorllie key to longer term growthattracted repeated criticism from ihe leadership for its failure to meet goals for output quality, product mix and deliveries. Meanwhile, shiftingrade resultedecline in liard currency imports and led Moscow toumber of imponam projects scheduled forh FYP.

Industry

Industrial output increased byerceni6 (seeie best inecade and only slightly below plan. Growth slowed during the year. Ivowcver Industrial growih during the first quarter6 was up byercent compared with the first quancrelleciing lhe very poor industrial performance during the winterhen severe cold and heavy snows hampered production and transportation During the last tlircc quartersndustry grew at an annual rate ofercent.

Machinery. While substantially belter Utanerceiil average annual growth rate acliieved, the rert'tumancc of lhe machinery sector was probably somcwliaiisappointment to ihe leadership Ouipul grew byerceni. well bekm- plan. One of the reasons for die below-plan output may have been that the very heavyhe Civil machinery sector last6 plan calledpercetit increaseincreased the amount of downiimc in enterprises as they installed new equipment or rcixivatcd their facilities. Whatever the reason, targets were not metumber of important types of equipment, uiduding industrial robots, electric motors, chemical cquiprocni. forging and pressing machines, and petroleum equipment. Prodiialon largcts were exceeded. Iwwcver, for the majority of itemsiiKludirtg metal-cutting midlines and computer equipment.

In addition to failing to meet plan targets for some key items, machinery producers also had trouble getting their products to their Customers. As indicated in,f ihc II civilian niachine-lxiilding ministries were criticized during the course of live year for not meeting contractual deliveries In most machine-building ministries, (ulhllrncni of coniraciual commitmcnis deteriorated comparedccording to ihc Central Statistical Adininisir.uion's report6 plan fulfillment, "violations of contract discipline were committed by one in foiireuierpriscs"

Industrial Materials. Ouipui of indusinal materials (ferrous and mmfcrroiis mcials. clvcmicals, consuuciion materials, and forest products) grew byercenteflecting in part poor

Continued)

performanceost individual sectors performed well, exceeding die growth rates achievedhortages of industrial materials caused bottlenecks throughout the economy during thend. Continued strong sliowing by these branches is needed if Gorbadievs mcxlcmiyaiion program is to stay on track;

Production of ferrous metals increasedercent from the previous year, led by hcaldiy increases in crude steel and rolled products. Output plans were not met, however, for specialtyey product in the mrxlcrnlzaiion program.

Hdpcd by Gorbachev's "chemicalization" drive, the chemical industry registered healthy production increases

Timber output, wtiile exhibiting the sharpest growth for basic materials, still did not reach5 level. Rapid growth was fueled by the opening of new timber tracts along the Baikal-Amur Mainline railroad (BAM) corridor.

Corisuuctiijn materials were able to shake off tlie lingering effects of5 harsh winter andebound In growthercent

- light industry continued its slow, but steady progress, with the largest gains in textiles and knit goods.

Dcvetopraents over theearsthe modernization and expansion of capital stock, administrative reforms, personnel reshuffling, and bettertrong foundation for

USSR: Growth of Industrial Production by Branch* Annual Percentage Growth Rate

8

materials

metals

metals

4

products

materials

-

3

power

nondurablcs

l

goods

8

5

foods

s

:

ValueH2 factor com Biwxl un CW*lindawUI praduc-tion

26

Continued)

Machine Bulliimj

and Transport Macnina Building

Equipment Industry

and Petroleum Machine Building

Tool end Tool Building Induit-y

Making,qw'pmenc and Control System*

Industry

and Agricultural Machine Building

Building tor Animal Husbandry and Feed Pioductlon

Road, and Municipal Machine Bu'iaiia

Building for Ught and Food Industry and Household Appliances

Central Statislicef Admir-WMiO" plan furf.Hmem report* Tan o> thaMWi machinery ramnsre* have been oeoMd These orobieins lakerom 'leemcautl obt^anont notconeactual Jeft Pin not met" "Eowactnd "auwutMmWh-

ivilian Machine Building Mmiatnes Criticized lor not Heeling Delivery Coals.6

6 acceleration in output txpamled use of contract himllmem iialieaiors,ithout pnihlerns. improved the flow of raw materials. Meanwhile, managersfeeling the heat from new ntinlstcrs in the ferrous metal ant! construction materials hraneliesapparently succeeded in finding hidden caches of labor, materials, and equipment linaily, several key industrial facilitiesecond work shili under an inieasification program.

Energy. The energy industriestrong prrtbrmanieargets for coal and natural gas were exceeded ml producoon reonered mist of the ground lost over theears, and die electric power industry coped well with Ux-itvrd hy the (hemobyl nuclear power accident and by reduced hydroelectric output. The pnee of Out successrge ruri hill, however, anothern Moscow's drise to conserve energy.

earutput, idl production6iC*on barrets per daybove5 level All of the increase resulted from growth in West Siberian output, based largely on the return tif idle wells to productionharp increase in tlie pace of drilling and well completions 'Ibe cost of wising output was apparently high AldKxigh figures on investment have not been released so far. it was slated lo rise byercent

Natural gas ouipul grew byercentillion cubic meters last year, once again outstripping giowth in other energy industries. Ihe increase was, luiwcver, smaller lhan the recordllion cubic nxiers po>icd5 Productionengoy supplied most of last year's increment. Yamburg, ihr USSR's second largest field did not begin producing until the final quarter

Continued)

Coal production6 soaredillion tons, an increase ofillion tons above5 level and one of the largest gains since World War II. Improvements in labor productivity (possibly through lengthening work hours in selected minings well as higher output from surface mines located east of the Urals, accounted for most of the production gains. Because most of the coal from the Eastern basins is much lower in Itcat value than that produced elsewherein the USSR, the net addition to energy output was probably less than Uie amount implied by the -eportcd production.

Electricity otdptd was only slightly below plan,roubled year for the power industrythe loss of capacity in the Chernobyl nuclear accident and drought-reduced hydroelectric-production Electricity output grewercentillion kilowatttrong performance from fossU-fuel power plantselectricity from this source grewercent during tlie yearboosted total output enough to assure an adequate power supply to most of the USSR.iscussion of the economic impact of Chernobyl, see the box insert.)

Agriculture

Farm productionew highontinued growth in lite livestock sector combined with substantially increased production of important crops such as grain, potatoes, and vegetables resultedpcrccnt increase tn farm output (net of feed, seed, andercentage points above the previous record

illion-ton grain cropthe largest grain harvest since the record cropillion tonselped Moscow reduce grain imports and contributedercent increase in

Economic Impact of the Chernobyl Accident

Analysis of the Qtim>byi .aeddcht Indicates that the ultimate cost to the economy and in human lives will he-high', even though the direct damage to agriculture, industrial facilities, and the alvirottment last year was limitedairly small area.

The biggest economic cost so far has been the loss of electricity generated by the Chernobyl reactors and the resultant increase in fossil fuel used by replacement power plants Wc estimate that an additionalillion barrels of fuelillion cubic meters of natural gas.illion tons of coals were usedn addition. Eastern Europe, particularly Hungary, may have been asked to bear the burden of some dectricity cuts duringinter period of peak demand.

Longer term consequences for die Soviet civilian nuclear industry include the investment writeoffs of one or more Chernobyl' reactors and die costs of modifications to improve safely at otherough toial of lliese capital costs shows them to be cqiiivalcntears' investment in the industry. Nevertheless, we exject that tlie Soviets will Strive to minimize the impact of the Chernobyl accident on their long-term plans for nuclear powerill continue to expand the role of this energy source.

In contrast. Chernobyl's impact on agriculture was small. According to tlie Soviet press, the area contaminated by radioactive fallout is largely restricted toquare

28

Continued)

reportedlyrop ; a. pan of theestp^^"

stantial. The initial casualties, wil] probaH^acro

-rf-icrm cancer risk. Theoretical caleolations

irslicatc that over theears radiation exposure from Chernobyl could "result ineallis from cancer amongeople evacuated. This would

ikLr frnm tUi'ruix'nl*irI.

rsjuniquc Tnedical and' psyehologica! proMems. cycri though the overall statistical increase in cancer rates will be

net livestock pnxluction. Probably most welcome from Ute consumers' view, meat producdon roseercent7 million tons, exceeding planned outputurprising marginons. Meanwhile, potato production reached the highest levelncreasing by nearly IS million tons from the5 level, and vegetable producdon was up byillion tons

Most of die growth in agricultural output was the result of productivity gains according to the Soviet press. Milk yields increased markedly, as did average slaughter weights, and the period of time required to raise animals to marketableearly twice as long as in the United Stateswas reduced.ear hiatus, feed efficiency also appeared to improve somewhat.

Transportation

Helping to support Industry's and agriculture's strong showing was the improveddte transport sector. Better weather6 spurred ihe general recovery of majorand Increased the demand for transport services, particularly rail freight. Tliisercent and rail passenger turnover byercentboth wdl ahead of planned ratesyear for agriculture also increased shipments on rail and liighway carriers, and Uk increaseproduction6 raised the overall growth rate for freight traffic by reversing lastin oil pipeline

The railroads squeezed anercent more tonnage on ihc mainlines and met the increased demands of industry and agriculture by increasing iraln weights and reducing turnaround times for freight cars. In addition, as part of tiieir overall campaign to increase efficiency and control rising costs, ihe railroads began trimming excess labor lasi year.esult, labor pnxfuctivity sixiredercent last year

Meanwhile, die volume of traffic moved by highway carriers increasedercent last year,ear dedine. Wc suspect that the turnaround in performance reflects the adjustments

Continued)

of carriers to policies In lhenotably higher fuel prices, an increased emphasis on conservation,rackdown on padding cnicking statistics.

Trade

The USSR's trade sector was Iwttercd for the second consecutive year, although Uic Soviets coped fairly wellifficult Ntuauda The collapse of world oil prices coupledharp drop In the cktOar relative toother major western innrncies resulted in anercent deTcnoratKm inSR'snviiey terms of trade. The dollar value of hard currency exports6ercent, lused on Soviet trade data for January6 Despite Soviet attempts to mitigate the effects of the fulling oil price by btxtsting sales, die value of oil exports to the West fell by an estimatedercent. While Moscow increased the dollar value of arms exports to the Third World by roughlyercent, the beleaguered position uf many of MuMxnvs principal arms customers probably has limited the Soviets' ahtliiy to increase hard currency receipts from these sales.

Reduced hard currency earnings contributed to ancrccnt decline in the dollar value of hard currencyith real rairctases dropping more 'Ihc largest decline in imports was registered in grain, as improved domestic agricultural pericirmaiicc and loner world grain prices allowed reduced foreign cxpcndiuircs without jeopardizing consumption goals Deliveries of machinery and equipment last year Increased slighily in dollar terms, hut dropped in real terms. The Soviets were able to limit tlie extent of import cuts, however, by selling markedly more gold at higher prices last year, as well as by horrowing actively in work! financial nurkcts. Moreover, Moscow vxight lo expand us financial horizons by tapping new sources of credit outside of iiaditional syndicated loans and export financing

In contrast to trade with ihc West. Soviet trade with the Conirrnuust World grew slighily, increasing io about rwo-thuds of total trade compared with aboutear earlier Moscow's terms of trade with its (oniniunjsi trading partners improved slightly last year because the large drop in worid -oils not yet been factored into the CLMA oil pricing formula. One oulcome was an increase in the USSR's trade surplus wilh its liast Ruropean partners, despite Moscow's repealed calls for more lulanccd trade.

s:i

Appendix B

Tables on Soviet Economic Performance

I

Table 2

Table 3

Tahle4

Table 5

Table 6

Table 7

able 9

GNP by Sector of Origin at Factor Cost2 ruhlcs)

USSR: Value Added in Industry at Factor Cost2 rubles)

USSR Average Annual Growth of Per-Capiiastablished prices)

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

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

USSR; Gross Fixed Capital Investment (billion4 prices)

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

USSR: Totalbillion current US dollars) USSR; Selected Indicators of Agricultural Output

USSR; GNP by Sector of Origin at Factor Cost2 rubles)

3

8

Const ruction

?

I

i

3

1

2

I

v 0

HO

(uiclud-

3

6

2

mililary personnel)

oulhivnux-.il "iim.ling

Continued) Tabic It 2

uvdustry1

rerrous metals

Nonferrous metals

Fuel

FJcciric

Macliine building and metal working

Chemicals

Wood. pulp, and paper

Construction materials

light industry

I industry

Oilier industry

2.8

1

3

'QKHrxmtniA miy not add cxniiv idhcciusc of rounding;

Continued)

USSK Average Annual Growth nf Pcr-Capitastablished prices)

Preliminary

6

consumption

l

1

goods

i

1

2

6

s

0

1

i

<

and

1

i

1

I

1

;

5

1

Ccmtlnucd)

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

6

national product'

1

inputs1

factor productivity

rxoductivity

9

7

productivity

productivity

compuilngmuol rtto oi groMh. ihc base yar I* (he re* prior lo (he luied ncnod 'Bawd on iitdcxc* of GNP 0W1 nibta) by *ecior of origintcior com

. DougU* (hw. homosencous) productton liwwi rfnc wcighu .cprcscm .he dlMrihuiton ofakulMtd capiuld Und rem in Ithe boiellurxlcrtymg (he growth rale .Jculjiliuit.

Continued)

USSR; Growth of Industrial Output and Factor Productivity (average annual percentage change)

Preliminary

production

7

3

inputs-'

1

factor

2

0

produciivit)'

1 for vompuiii* the average annual roe* ai growui. Uie base lew it ihe yen poor to lhe ttaicd penodoi workhmir* uid cupful aiC wnibi'ned utina welghit4 perceni6 percent. rcspccli-etv:ourIk (lineai homogentoui) produclion (unaiua These weighis reprcxni ihe daulbuiion of labor cou> (waves, social tnweanceid oihei income) and capiul con* (depreciationapiiri <li*rge). lhe hew(c< ill 0iiJc.es undf ilyttig ihe giowih roe eueuluiom

35

Continued) Tahle

USSR; Gross Fixed Capital Investment (billion4 prices)

51

By source:

Stale

farms

enietprises

housing and

6

sector

and

and services

Soarte NaiodnorS

36

Continued)

OBOfc Estimated lUfd Currency Balance of Payments (MUllon Current US Dollars)

1

account

5

Merchandise trade

mports, fob

Net interest

Other imidhles and

0 5 0

Capital account

Net foreign

Net change in asset brie! iei western

25

065 470

( *Wil-im lo MMi

Appendix l- (Continued)

CSSR: Total' (Billions of Current US Dollars)

Annual Average

Exports by

7

countries

developed

Imports by

countries

developed

'Include* both Wid currency irade and trade conducted with wft currencyn(Idling account tizii 'lYebmirwy

to

Continued)

J

UMb Selected Indicators of Agricultural Output

0 9 0 5 0 1 2 3 4 5 6

Value of3 (billion ruble?,)

Contmodity production (mUbon metric ions)

Grain'

beets

seed

i

(billion)

1 Ntt uf feed. wed. and waste, in2 prices

'Hunker weight To be comjunblc io Weiicm mcasires. mi average ridiKimo o(ercent it requited

Original document.

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