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soviet Intensive Economic Development in Perspective (u)

A Research Paper

Directorate of Intelligence

Soviet Intensive Economic Development in Perspective (u)

A Research Paper

i.Hnenis and queries are welcome and may be directed to the Chief. Defense and Economic Issue; Group. SOVA.

Soviet Intensive Econoniic Development in Perspective

Information available as of SI5 was used in thii report.

Stalinist growth model for industry stressed the rapid infusion of labor, fixed capital, and raw materials and minimized lhe importance of productivity growth. Byhe Soviet leadership realized lhat thu extensive growth strategy could no longer bc maintained. Sharply reduced birthrates, the exhaustion of the rural labor reservoir, and the approaching ceiling in female laboruch lower growth in employment. Sources of cheap raw materials and fuels were being depleted. Fixed capital stock growth rates were falling sharply. (

Intensive Development Policies

The intensive approach lhat was approved in theosustain development sought as much as possible to preserve the existing resource allocations among consumption, invcsimcnt, and defense. Accordingly, Moscow had to loolc for relief more in the supply side of thepolicies affecting labor, land, fixed capital, and productivity. The focus has been on measures to raise capital produciiviiy.

Accelerating Retirements of Fixed Capital

Attitudes and policies toward the rcilremcnt of fixed assets havegreatly to declining capital productivity in lhe USSR. On average, fixed assets have been retained in service iwicc as long as in the major market economies. Since produciiviiy gams depend upon adding new capital incorporating recent technology and discarding technologically obsolescent assets, Soviet practices clearly rcurd productivity improvement. Despite official recognition that shorter asset lives are desirable, the steps taken in this direction have been inadequate.

Replacement Rather Than Expansion

The emphasis given since theo raising the share of industrial investment devoted to replacement of old assets complements the campaign to shorten asset service lives. Tradmonally. with the extensive growth approach, investment plans stressed building new plant or expanding capacity of existing enterprise. By emphasizing rcequipmcnt of existing plant, Soviet planners hoped lo accclciaie ihe introduction of newlo the produciion line. Rcequipmcnt might require somebut the cost was perceived to bc small compared with lhatew plant, t


Why the Intensive Investment Campaign Stalled

Old equipment is kept in service mainly because enterprise managers and ministerial officials are led to do so by the existing incentive structure.arket economy, firms discard old assets primarily because the new capital is usually more economical in the use of manpower and malerial or because it is necessary to manufacture competitive products. As long as current production targets remain the overriding criterion for judging success and costsecondary consideration. Soviet managers have little incentive to discard obsolescent assets.

Soviet construction practices have also blunted the effort to focuson recquipping existing enterprises. The Soviets have favored heavy prefabricated concrete structures wilh overhead bridge cranes lhat require large columns and overhead building supports. These features often make it impossible to install automated production lines without cosily and time-consuming reconstruction.

The ultimate success of the replacement investment campaign, however, rests upon the accelerated introduction of advanced technology into the production process. Thus, technological performance has been the most critical determinant of the success of ihc planned transition from extensive to intensive economic development. The explanations for lagging Soviet technological progress can be found mainly in managerial incentives, the institutional relationships between research and development andand the technological drain caused by the priority given to defense production:

Technological progress in market economies depends upon bothand supplier initiatives. In the Soviet system, the influence of the consumer is weak, except in defense pioduction where the initiative comes from the Ministry of Defense with reinforcement from lhe top leadership.

Reliance on internal sources for machinery has also slowed technical advance. Much of Soviel machinery has been produced in small machine shops attached to the consuming organization rather than in plants belonging to specialized machine-building ministries. Only theministries, however, have been able to afford to support the research and testing facilities required to develop advanced technology.


In ihc Soviel system, research and developmenl is separated from production. The incentivesrganizations reward expenditures of budget allocations more than completion of projects or the satisfaction of consumer demand. This supplier-consumer gap is not closed by the central-planning coordination process.

Still another major deterrent to technological progress in the production of producer durables has been the superior priority accorded to defense produciion. The share of GNP allocated to defense changed little over the pasi decade, but the burden of defense on capital productivity continued to rise in terms of the preemption of advanced technologicaland the economy's innovational energies.

On balance, then, the defects in Soviet technological performance are primarily systemic. Their amelioration will require reforms in central planning. But the modifications introduced in organization andby Andropov. Chernenko. andthe economic experiment now scheduled to be extended to alllittle to improve enterprise incentives to find and use belterar more sweeping shift of authority to the enterprise manager is required.

Gorbachev's Program

Gorbachev does, however, seem committedrontal attack on the modernization question. In laying out his program last summer, he focused on lhe familiar objectives of accelerated retirements and greater emphasis on replacement of capital slock at ihc expense of expansion. Gorbachev proposed that retirement rates be doubled and that the country's capital stock bc renewedombination of new investment andretirements so thathird of it, including up to half Ihcportion, will be new.6 Plan goalsong way toward supporting these objectives. Gorbachev will have to demonstrate more sustained commitment to modernization than did his predecessors,to assure lhat obsolescent plant and equipment arc retired and that sufficient investment is provided during the remainder oflan to raise the quality of machinery outpui and deliver it in the necessaryto the economy.




Soviet Development Strategy

Strategy Imperative

Development Policies

Retirements of Fixed Capital

Rather Than Expansion

the Intensive Investment Campaign Stalled

Retirement Rates, Reproduction Instead of Replacement

Practices Hinder Replacement

in Obsolescent Technology

for Successful Intensive Development

Approach to Intensive Development

Soviet Intensive Economic Development in Perspective

Soviet Development Strategy

As both Soviet and Western economistshe traditional Soviet approach to economic developmenl has stressed ihe rapid infusion of labor, fixed capital, and raw materials into industry.with the path followed by industrializingeconomics, there has been proportionately far less effort devoted to increasing the productivity ofand capital assets.heamong the major industrialthe most rapid growth of employment and. along with Japan, the fastest growth of plant and equipment. In sharp contrast, it has shown the lowest rate of increase in both labor and capital productivity

la official Soviel jargon the traditional approach is termed "extensive" and the alternative path ofproduciiviiy.hile Soviet planners have long accorded lipservice to productivity objectives under lhe rubric of "hidden productionhey have embraced intensive developmentajor policy focus only within the past decade.

The historic preference for extensive development can bc explained in terms of both resource endowment and institutional factors. Untilhe Soviel economy could draw upon an exceptionally large pool of underemployed agricultural labor. Laborwas much higher in nonagriculturalTbe vast migration to lhe urban work force was reinforced by lhe success of the system in inducing its female population io seek employment in urban areas. The female labor participation ratio (employmentroportion of working-age population) is considerably higher in the USSR than in the major market

The high growth rate of "productive" capital stock (fixed capital stock in lhe nomerricc sectors) was

' See Notes il lhe end or ifeii paper for tourcei used m

achieved by high rates of increase in capitalwhich in turn were made possibleigh national savings rale. Through its control overallocation, lhe Soviet Government forced the populationuch higher share of national income than would have prevailed under consumer sovereignly. In national accounting statistics, forced saving is reflected in ihe high share of investment and the relatively low share of personal consumption in GNP. Usually, ihe national propensity to save is directly proportional to an economy's per capita GNP, However, while lhe USSR's investment- to-GNP ratio is second onlyhai of Japan, its per capita GNP level is the lowest of ihe major industrial economics

The favorable consequences of high rales offor growth were reinforced by an investment policy that favored heavy industry and energy and directed minimal shares to the consumer-oriented sectors of light industry and housing. The stress on industrial investment, however, was accompanied by underinvestment in the complementary transportation sector. Even from the narrow perspective of planners' priorities, this neglect was shortsighted and required urgent rectification by the

Finally, the impact of the strenuous investment effort on economic growth was intensified by maximizing the rate of net investment. The aciivc lives of plant and equipmeni have been unusually long by market economy experience. Obsolescent machinery and equipmeni have been retained in production through large and wasteful outlays on capitalhus, the overwhelming portion of investment in newhas been directed into new plant or expansion of existing plant capacity, rather than into replacement of obsolescent assets.

I. HHU JuiiinL


Real Gross Product, Factor Inputs, and

Productivities in Major Industrial Economic*
















n-ycir of emplc-ymenl intccanomWinooitrriocot tbe

e->'rui pcf unit ol fLud tii-ii cafBUlmrleiad ofcaraul ml

tti< Sonti Kwony

Soweet. MuSct ciiiaiKTiift- Eihmiiei uf Jnbn W. Kcndrick

piifvccd loi iM New Yorl Slock Eichvcfi Mudy, VS ffovi fi'tv-HHut mGl<*al

USSR-CIA niMia Timncl*Mifi<d

planner* realized lhat large physical invest-meat* had to be accompanied by investment in human capital through education ofaod oo-the-Job training The USSR first eliminated mass illiteracy, then proceeded io overtake and surpass Western fcurope in providing access to both secondary and higher education. Alphysical investment,in human capital was structured toaximum impact on industrial production. At all levels of education. Soviet schools emphasizein maihemaiks. science, ande high priority accorded lo education resultedncrease in the quality ofthe Soviet labor force

The eilensive approach io development is integral to Soviet central planning. Central planning isan arrangement for resource mobilisation rather than for tfpcitnt use of resources. The system origi-naicd js ihe mechanism for implementing Stalin's program of frenetic industrialisation during (he first threefive-year. Il has-nh little alteration since that period. The system was later adopted by the Communist retimes of Eastern Europe, liast Asia, and Cuba.

Table 2

Per Capita GNP and

Iweslment-lo-CNP Ratios

In Major Industrial0


USSR: Crowth of CNP,

Inputs, and Factor Produclirity


Fiud Investment





Per capitaSummcit aad A. Hcstox."Improwd International Comparison of Real Product" Rrtiti of Income and Wealth.0djoued for changes in ibe icrmi of iradel aod CIA estimate,ollar*

Invetiment-IO'GNP ratios -OECD. Ilistoeieat.od CIA Hwdbook of Economic

Thii table it Unclassified

While the planning authorities have direct control over the allocation of labor, education policy, and Ihe rate and structure of investment, they musi rely upon plant managers to organize labor and plant and equipment so as to maximize their productivity. They must rely also upon scientists and engineersevelop and apply ihc new technologies, which are the keys to produciiviiy gains.

But central planners have noi succeeded inystem of incentives to elicit high productivity fromeither have they devised appropriate institutions and incentives to generate the requisite flows of advanced technology from research and development organize lions or (he efficient application of RAD by industrial ministries and managers.1reformers in Eastern Europe and China have found il necessary lo introduce market decisionand institutional decentralization tointensive developmental policies.

national codua



od OCt ivi |y



Estimate5 it preliminary.

Source: CIA estimate*. This table is Unclauified.

New Strategy Imperative

The traditional extensive growth strategy was yielding diminishing growth in the USSR bynd threatening stagnation by. Sharply reduced birthrates, the exhaustion of the rural labor reservoir, and the approaching ceiling in (he female labor participation raiio resulted in much lowergrowth ratesith the attainment of universal secondary education and Utile expansion slated for cliiist university education, the rate of increase in human capital also declined. This trend was further strengthened bv the decline in the size of Soviet youth cohorts.

Efforts lo sustain earlier rates of growth byunder such circumstances would have led to rapidly diminishing returns. Even though theshare of CNP coniinued io rise gradually, falling GNP growth rates led to declining growth rates for all resource claimants, including investment.esult, plant and equipment growth rates fell



USSR: Distribution of Gross National Product by End Use at Faclor Cost-


Bceauc of rouadifle. component- may not addo""Incladet defease.minium, inventory change, nei exports, and

Soarcet CIA esiinuiet of GNP0 rubles at factor cost. THfnclassified.

sharply. Even with large reductions in. investment growth rates, investment-to*CNP ratios still rosealarming Soviet economists and planners. By Soviel measurements the return on investment has fallen by half in the pastears andhird in lite past decade.*

Slowing erowlh of factot inputs is typical of the industrialization process. It has occurred generally in market economies with the onset of industrialWhat is unusual in Soviet performance is lhat productivity fell from levels that were below (hose in market economics at similar stages of economicMarket economies have managed to offset declining rates of increase in labor and fixed capital through productivity gains. |

During the remainder of Ihe century, demographic influences promise even more drastic declines in additions lo the laboriita the easy gains already attained, the stock of human capital will increase at much lower rates. Moreover, there is Utile margin to raise Ihe investment share of GNP because consumption cannot be squeezed further withoutproductivjiy and because the leadership isto sacrifice the high priority given to defense. Rather. Capital stock is likely lo grow more slowly as the Soviets pursue such declared policy objectives as accelerating ihe retirement of obsolescent assets and increasing iheof investment allotted tothem.

The course available to the Soviel leadership isihc same as that available to and pursued by marketfocus on productivity. Thus, the intensive approach to development has become Ihe dominant path.

Intensive Development Policies

The new approach io sustained development has thus far preserved existing resource priorities. There has been some slippage in the personal consumption share of GNP in, but part of (he explanation may lie in subnormal agricultural performance. The share of invesimeni has been creeping upwardhile lhe share allocatedefense has remained inol4-pcrcent range wilh little variation" For decisions related to intensive development, one musl look al what has been happening in Ihe supply side of ihc economy, in policies affecting labor, land, fixed capital, aod productivity. The leadership's options regarding manpower and education policies have been few, so the focus of intensive development ts upon fixed capital and technology.

A further rise in the labor participation ratio is not feasible. Tlie regime continues to pursue pronatalist policies, but these are neutralized by continuingshortages and high labor force participation by women of childbearing age. The most recent labor initiative has centered on motivating workers by means of lighter labor discipline. However, tougher disciplinary measures in Ihe workplace areong-term solution, because worker attitudes andare strongly Conditioned by recurrentsupply disruptions, tight labor markets, and the necessity to use working time lo purchase consumer goods.

Havingid on lhe number of students admitted to higher education, the leadership is tryingirect more students at both secondary and higher levels into vocational and technical education.reforms proposed4 would raise the proponion of eighth-grade siudenis assigned toand professional-technical schools fromo



percent, reducing the share striving for admission to higher education.

Investment policy is focused upon measures to raise capital productivity. The priority given investment continues to be high, as shown by its rising proportion of national product. The continuing decline in the return on investment highlights the crucial necessity to raise iu productivity. But the productivity of investment depends on technological advanceswith the investment, so investment andpolicies arc complementary.

Accelerating Retirements of Fixed Capital Attitudes and policies toward the retirement of fixed assets have contributed greatly to disappointingproductivity performance. On average, fixed assets have been retained in service twice as long as in the major marketince productivity.gains depend upon adding new capital incorporating recent technology and discarding technologically obsolescent assets, Soviet practices clearly retard productivity improvement, t

Asset lives are prolonged at high cost through capital repairs. In the, outlays for repairs were one-fourth as large as gross investment in industry and nearlyercent as large as outlays for industrial equipment. The resource drain of repairs wasabsorbing one-tenlh of the induslrial labor force and one-third of the stock of machinever the total lives of these assets, capital repairs generally exceeded original investment costs."

Despite official recognition that shorter asset lives are desirable, the steps taken in this direction have been inadequate. The most recent change in officialnorms,owered average service lives for industrial equipment fromoears."with average lives ofears in France, Germany, and Italy andears in the Unitedoviel economist estimates (hat machinery on the average becomes obsolescentht years of service under Soviel conditions."

In actual practice the official guidelines have not been followed. The annual estimates of equipmeni reiire-mcnts in the Soviet statistical abstract are limited to

equipment discarded because of physical wear and tear. This retirement rate averaged onlyercent (equivalentyear service life) inoviet economist, relyingample survey, included retirements for obsolescence. His estimates doubled the retirement raie and implied an average equipment service life ofears."

Replacement Bather Than Expansion

The main new focus of Soviet investmentraising the share of industrial investment devoted io replacement of oldtheto shorten asset service lives. By emphasizing rcequipmcnt of existing plant. Soviel planners hope to accelerate the introduction of new lechnology to the production line by shortening the investment cycle. Construction of new facilities is the most time-consuming clement of capital investment, so the idea is to avoid construction by replacing equipmeni in existing buildings. Rcequipmcnt may require some reconstruction, too. bul ihe cost is small compared with thatew plant.

The Soviet replacement effort has been much lower than lhat in the United Stales. In lhe,ercent of US industrial investment was directed toward replacement andIn Soviet nonsen'ice sectors, this proportion averaged onlycrcenlhile the US proportion may bc tootandard for the Soviet Union given slower US industrial growth, some Soviel economists had recommended that lhe Soviet share should be doubled or tripled."'

The replacement share of "productive" investment has, in fact, been steadily rising duringive-Year Plan, reachingcrcenl" The draft version ofh Five-Yearet lhe proportion at one-third, but, in his rejection of this version. General Secretary Goibachev reportedlythat it be increasedalf."

The advantages of an intensified replacement effort are severalfold, according to special surveys carried outhe USSR. Labor productivity reportedly was


USSR: Deliveries of Producer Durables, by Plan Periods

of Total



equipment.quipment, agricultural mlcninety,Jtlion mac direr y

metallurgical, bottling equipment

pi ngpreui ng, metal-cutting equipment

automation. Jiw-ic energy eq.iprnem

Imestment time tenet are measured9 estimateddjusted br selected wholesale price cbangc*

Source: V. FalHtmaa. V. Borisoi. "Mobil'nosi* miihmmnoyto-iya."khaiyayairo.

This table is Uoclaisified.

"scientific-technologicalutomation serves the dual objectives of facilitating substitution of capita! for labor in an era of worsening labor shoelaces and raising (be productivity of capital. The grossing share of high technology ia product km of producer durables can bc seen by comparing the composition of total deliveries of producer durables since theiih (hose projected forive-Year Planhe deliveries consisting of high-technologylo the extent that Ihey can be segregated in the ilalistici. presented by Farts-man andbe found in lhe third and fourth rows of tableewer machine tools included in the third row arc increasingly computer controlled. The share of high-iechnology products has nearly doubled since lheow constitutes one-fourth of total investment.

These uends in Soviet investment policy hive ledising dependence upon foreign technology' Imports of high-technology products surged daring the early and. leveled off in lhe latter part of ihe decade, anded signs of renewed resurgence in the

ercent higher and capital productivityercent higher for capacity introduced throughof existing facilities than for capacityfrom new planlhese resultswere attained wilh cost savings of one-half to two-thirds and with capacity being brought on stream threeimes asbe calculationsthese findings arc not explained. Much of the discussion turns on the faster assimilation of new capacity through reconstruction compared with new construction. But it is not clear, for example, lhat lhe production losses incurred during reconstruction arc taken into account. Nonetheless, the arguments for reconstruction in present Soviel circumstances are persuasive. New plants require additional labor that is not availableeriod when no growth is planned for the industrial labor force. I

The rising share of replacement in investment has been maichedising technological intensity of investment. The key feature of (his trend is the accelerated automation of produciion. In Sovietparlance this policy panacea is termed the

Why the Intensive Investment Campaign Stalled

Low Retirement Rates, Reproduciion Instead of Replacement

The accelerated retirement guidelines adopteds noted earlier, have not been implemented. Official retirements for wear and tear, as reported ir. the annual statistical abstract, have shown nochange.oviet investment specialist has asserted thai rates of retirement of obsolescent assets haveuringhe average age (number of years in production) of currentoutpui rose significantly. The share of new products fellercent of total ouipul while the share of machinery in produciion for more thanears climbed fromoercent.1*

The failure of the new retirement policy is partly due to inadequate financing. Specific proportions of amor-lira lion allowances are earmarked for replacement

and for capital repair. Even though the replacement proportions were raisedhey are stillto finance higher replacement rates. Theof Finance has found it necessary to authorize transfers of accummulatcd and unused funds for =apiial repair to finance replacement outlays* More important, the reduction in specified service lives has not been matched by adoquate financial incentives to get rid of old equipment. Enterprise managers and ministry officials arc led to keep old equipment by the jxisiing incentive structure.arket economy, firms discard old assets primarily because the new -apilal is more economical in the use of manpower ind material inputs or because it is necessary to manufacture competitive products. As long as current jroduciion targets remain the overriding criterion for judging success, Soviet managers will have little nccniive to discard obsolescent assets.

noted earlier, replacement invesimeni is the key-none of the push for intensive development. In ana-yzing pasi Soviet performance, il is important to listinguish between progress toward formal goals. :xpresscd in proportions of lotal invesimeni, and ihc ntrinxic effectivenessarger replacement effort In mproving productivity. The USSR has raised lhe jroportion of replacement in total investment but has "alien woefully short in ils bottom-line objective of tccelerating capital productivity.

have the productivity-enhancing results of inten-ive invesimeni not been achieved? The explanations ie first in Soviet construction practices and second in be failure of the system to generate and assimilate he advanced technology necessary to support the eplaccmcnt investment program.

:ocis(ruction Practices itindtr Replacementmajor advantage of the new approach, in theory, is he time and cost savings attained by retooling with-ml reconstruction. Existing buildings and structures upposedly can be used with little or no alteration >hilc obsolescent machinery and equipment arewith technologically advanced models. Ree-luipmeni is easier if lhe working spaces are unob-trueted by immovable columns and supports. If the wildings arc buili of light materials (aluminum, sheet, led. andtructural alterations are iot difficult.

The installation of automated production lines and assembly-type operations in the process of retooling, however, often requires some alterations of existing factory buildings. Improvements ia light andare orten required. Moreover, traditional Soviel construction practices have favored heavyconcretehile more durable lhan those built of lighter materials, Ihese buildings are less amenable to (he alterations thai accompany equipment replacement. In the same vein, Soviet construction design favors the use of overhead bridge cranes, rather than more mobile lifting and transport equipment. Bridge cranes require heavy columns and overhead building supports that limit lhe possibiliiy of rearranging lhe use of fioorjpace.

These features of Soviet industrial construction have often required cosily and time-consumingas part of equipmcni replacemcnl programs. Consequently, the theoretical cost and time savings envisaged in the Soviet investment literature have not been fully realized.

The replacement effort has also been confounded by organizational deficiencies in construction. Soviet consiruction organizations work best in building new plants, where standarized techniques can be usedarge scale. Reconstruction is typically carried outmaller scale, requiring specialized lechniques for which construction organizations arc ill prepared. The incentive system is skewed toward those indicators of construction that characterize newesult, reconstruction activity is often performed by inefficient repair organizations belonging lo thebeing reequipped rather than by specialized consiruction organizations

Invesimeni io Obsolescent Technology Since lhe ultimate success of the replacementcampaign resis upon lhe acceleratedof advanced technology into the productiontechnological performance iserceptive Soviet economist who analyzed the reasons for the continuing decline in Ihc rate of return on


investment ciicd such external influences as thequality of natural resources, the growing share of investment in high-cost eastern and northernrising pollution control outlays, and reduced manpower availabilities. However, he asserted that the principal reason has been the insufficicni support of the investment process by scientific and technical progress.**

The explanations for lagging Soviet technological progress can bc found mainly in managerialthe institutional relationships between research and development and production, and thedrain caused by the priority given to defense produciion.

Technological progress in market economies depends upon both consumer and supplier initiatives. In the Soviet system, ihe influence of the consumer is weak, except in defense production where the initiative comes from the Ministry of Defense withfrom the lop leadership. Innovation is inhibited by the chronic seller's market that prevails for Soviet producertrailoviet scholar called plannednder such circumstances, consumer demand provides little effective pressure for technologically improved or lower cost products. The potent influence of consumerbsent. From the point of view of suppliers, the willingness of Soviet managers to pursue cost savings through asset replacement is deterred byeading Soviet investment expert termshetoward perpetuating existing technology, which has assured sources of material supply and provides near-certain productionn his speech to the plenum on science and technology last June, Gorbachev declared "it is first of all necessary to adopt measures increasing the influences of the consumer on the technical level and quality of output" by encouraging competition among lhe suppliers, expanding wholesale trade, and increasing tbeof direct bargaining and contracting between suppliers and consumers."

Reliance on internal sources of supply for machinery and equipment and components also slows technicalentralized planningroducer an adequate allocation of necessary supplies butno guarantee of timely und sufficient delivery.

ood deal of Soviet machinery is produced in small machine shop* attached to the consuming organization rather than in enterprises belonging to specialized machine-building ministries. Only the specialized ministries, however, can afford to support the research and testing facilities required to develop advanced technology. To the degree that the tendency toward vertical integration (self-sufficiency) prevails. Soviet industry forgoes the division of labor lhat characterizes industry in market economies.

Even withinodd machine-building ministries, product specialization does not match administrative specialization. The main exceptions are thoseministries largely engaged in military production. Even in the production of general purposeas gears, castings, forgings, anddegree of specialization is far lower than in US industry. Production of single-unit customized equipment is not organized in specialized machinery ministeries. By default, such items arc produced in Uk technologically backward internal machine shops.

Technological backwardness is abo explained bysupplier initiative. In market economics, most technical progress at the plant level originates in sales pressure by equipment suppliers. In the Soviet system, research and development is separated from production. The incentivesrganizations reward expenditures of budget allocations more than completion of projects or the satisfaction of consumerhis supplier-consumer gap is not closed by the coordination process under central planning. The defects in Soviet technological performance are thus mainly systemic in nature. Their amelioration will require major reforms in central planning institutions.

The other major deterrent to technological progress in the production of producer durables is the highaccorded to defense production. The share of GNP allocated to defense has changed little over the past decade, but the defense drain on advancedresources and on the economy's innovations!has risen

culling edge of improved capital productivity is the application of high technology in the production of producer durables. The heavy defense produclion drain on high-lcchnology ouiput may be deduced by combining information on the reconstructed versions of Soviet interindustryovietestimates of the breakdown of deliveries of machinery to investment*he military probably accounted for more lhan half or finalfor four high-technology machinery sectors-precision instruments, communications and other electronic equipment, clectroicchnical equipment, and transportation machinery and equipment (whichthe aircraftefense claimsimilar proportion of high-technology output. Conclusions7 are more tentative, bui they indicate ihai the mililary procurement claim was of similar magnitude

The technological burden of mililary produclioneven larger when product quality is taken into account. Information obtained from emigresthe presumption thai ihc presence of mililary inspectors in all plants producing defense products enables the Ministry of Defense to refuse defective or inferiorrivilege noi afforded lo civilian customers. The observers also assert thai factories thai produce products with both mililary and nonmili-tary applications set higher quality standards for their mililary customers.

The importance of advanced technology lo thelishmenl of increasing capital productivity cannoi be overestimated. As noted in tableuringive-Year Plan, one-fourth of all investmentconsisted of high-technology products. Someof future trends in the high-technology content of Soviel invesimeni may be conveyed by recounting recent US experience. By the, purchases of office and computing machinery andequipment constituted over one-third of the producer durables component of new fixedIf this definition of high-icchnologyis expanded lo include scientific and engineering instruments and photottraphic equipment, the share rises tu nearly half.'

This rising investment imperative collides with the continuing push to upgrade the technological content of mililary produclion. Even though ihcre has been link increase in lotal military procurement in the Soviel Union since thehe technological sophistication of most systems has risen markedly."

Prospects for Successful Intensive Development

As the5 party plenum affirmed, the future dynamism of the Soviel economy depends uponimplemenialion of an intensive growthTo date, the fruits of the "new" approach have been meager. The common theme thai emerges in the analysis of the failure is the unsuilabiltly ofplanning and control as an institutionalfor implementing intensive development. While admirably devised for directing the resourcethai promoted extensive development, it is ill suiied to stimulate lhe productivity improvements that are the core of the intensive approach.

Economists have differentiated between tangible and intangible technical progress. The tangible component refers to improvements in the quality of inputs, whether human or material. Such qualitativeflow from education andespectively. The intangible component depends upon the ingenuity of management infactor inputs in the produclion process. All of these improvements depend upon individual efforts and cannot be prescribed by centralized fiat.

This conclusion has been most recently reflectedimited-dissemination statement preparedroup of Soviet economists affiliated with tbe Academy of Sciences' Siberian Division in Novosibirsk. Citing the steady decline in economic growih in recent years, lhe Novosibirsk economists blamed the traditional system of administrative methods, with its high degree of centralized decisionmaking. They urged itsby "truly economic" (socialist market) methods of management."



group highlighted ihe continuing improvement in the Quality of worker and managerial skills and criticized the failure of the system to adjust to "the core of highly skilled workers" who are betterthan their predecessors and capable of "critically assessing the activities of political and economiche essence of ihc new institutionalwouldast expansion in the authority of the "leading officials ofn particular, plant managers would be freed from centrallyconstraints in such matters as investment, technological innovation, and wage and salary pay-menu. The reforms introduced by Andropov. Cbcr-nenko, andthe economicnow underlittle more lhan linker with existing institutions. Their thrust has been to strengthen rather than dilute centralized controls. So far, proposals for fundamental rhanges have not emerged in the open literature.

Gorbachev's Approach lo Intensive Development

Instead, the USSR's new leader seems lo bea substantial redirection of resources toward refurbishing the country's stock of plant andWhen Gorbachev came to power, hethat,esurgence of economic growth, the USSR would have trouble meeting consumer expectations while providing for defense needs. To reverse the downward trend in growth, he is relying in the short mnombination of measures to strengthen discipline and weed outemphasis on so-called human factors. Bui hispolicy in the longer run will succeed or fail in proportion to his ability to follow through on an extremely ambitious modernization program

In laying out this program last summer and fall. Gorbachev proposed doubling retirement rates on fixed capitala combination of new investment and acceleratedthe nation's capital stock so lhathird of it, including up to half the machinery portion, will be new. Taken at face value, the target for renewing the country's capital stock implied an annual rate of growth of investment in machinery and equipment orercent or more.

The demands on the Soviet machine-building complex will be great. Therefore, the Soviets plan to raise invesimeni in the civilian machine-building sector byercent. compared. Meanwhile, the qualitative side of Gorbachev'shas emphasized development of thoseespecially those producing machine tools, robots, microelectronics, andprovide lhe advanced equipment needed for modernizing (he civil-ian industrial base and ihe defense industry.

The priority given to invesimeni and industrialhas at least been embedded in6 Plan. Investment6 is scheduled to growate lhat implies an increase of nearly IS percent in the machinery component of invesimeni, the highest in moreecade.plans foreriod will not be finalized until lhe parly congress meets in February, bul the preliminary figure-ercent growth per year given in (he draft guidelines suggests that the priority given to investment6 will not be maintained during the remainder of the obviously counting on large gains inlo sustain continuing high rates of machinery output. The productivity increases called for inlan, however, are far greater than achieved in recenl years and are unlikely to be achieved. To maintain lhe momentum of his modernizationGorbachev would have to boost investment substantially above the planned target. as his predecessors did duringI-B5 Plan when expected productivity gains were not forthcoming.

Gorbachev could be taking considerable risks inhis modernization program:

If he tries to carry oul the program without raising the overall investment rate, the impetus to growih based on6 Plan is likely io trail offew years, leaving the shortages andcharacteristic of an unbalanced plan.disillusion might then set in, with Iheseeing Gorbachev as no more effective than Brezhnev or Chcrnenko.

A determined campaign to introduce newmodels and thro* out outdated capital stock is likely to cause interruptions in production notin the plan.

If he shortchanges the energy sector, for example, the resulting decline in oil exports, and thus hard currency earnings, could force the USSR to reduce imports of state-of-the-art technology for theprogram.

If he tries to curb military demands for machine-building outputesources, the military might become restless while waiting for tlie deferred improvements in the technological base of military industry.


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The New York Times. pphis information is Unclassified.


Original document.

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