THE SOVIET ECONOMY SHOWS SOME IMPROVEMENT, BUT HARD CHOICES REMAIN (SOV 85-1000

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The Soviet Economy Shows Some Improvement, but Hard Choices Remain

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ThcSoticI Economy Shows Some Improvement, but Hard Choices Rcmair

I

Recent Soviet economic performance has been mined. Average annual growth of GNPercent perup from (he unusually low rales. It is Still below the modciatc rales of increase polled in the, however, and substantially below the relatively high rales of thc

wib in mosl sectors or thc economy speeded up from ihc slow rales of the previous four years. This accelcraiion reflected improvemeni in several major factors:

wimer weather helped transportation and slightly eased Ihe demand for energy, while belter giowing conditions contributed io an increase in farm output.

Discipline ant! anticotfupiion iniliatives seem to have generated greater elTort in both labor aod management, including their more efficient use of resources.

Substantial growth in new plant and equipment helped reduce raw material and transportation bottlenecks.

Stable military procurement since ihcay have eased thc pressure oo the machinery industry, which also supports investment.

Productivity improved substantially because of these changes

Although difficulties in agriculture pulled GNP growih down toercenl Ihb year, the higher rale of growth in induslry and key service sectors has continued. Agricuttuial production fell slightly inoutput of several major crops was down from1 level, even ihough livestock oulput reached new record levels. Outside airkulluic. growth for thc year should eo.ua)3 raicercent

Growth3 was most rapid inkey lo modernizing theconsumption grewate somewhat below that of GNP. The rate of investmentd is hard to establish, butinformation suggests that con.iimpt.ion has grown at roughly3 rate, otittle faster There have been noelear signals aboul changes in the level of outlays for defense, but recent increases in overall growth, in the economy suggest that Soviet planners coutrl have increased growth in defense spending while still allowing somewhat higher growih in investment and consumption. Majorin the shares of these uses, however, can be made only slowl-

Thc annual plan icccnlly announcedSrowih :atc target (or ONP of 3'Arare wc ihink is Optimistic. Assuming lhal crops recover somewhat and thai rcccm imorovcmeni in non agricultural economic performance continues. GNP growth probably will averageercent over the ncil year or two. This Outlook for GNP could worsen, however, if new transport or industrial bottlenecks arise, or if the gains from improved labor discipline arc not sustained. On thc up tide, unusually good weather could leadurge in growth

Over (he second half ofc capcci GNP growth loi toperccnl per yeat. This is below ihc rate of ihc last half of, when ihe Soviet industrial growth slowdown first became evident. This somewhat lower outlook for growih over the long term teftecis Our judgment that the special factors contributing to improved performance34 probably will be hard lo sustain orbeyond the neat year or two. Two fundamental factors will continue to constrain growth, as they have since thc. These are the slowing growth of thc labor supply and ihc rising costs of extracting, processing..and transporting raw materials. In addition, energy supplies Couldrag cn growth if capon levels arc kept high and the Soviets do not mcci their aggrcss-.veconservation plan. Clearly, ihc dr*ggrowth cicrtcd by slow labor force grgswih and rising costs of raw materials will getater in. before possiblyil in the neat decade

Thc potential for easing these constraints on growth through greater investment is limited, however. Machinery oulput cannot expand fan enough to support high growth in deliveries for defense and investmeni without limiting growth in consumer durables, and this -ould work against rccenl policies lo iiiipjove worker incentives. Given the need lo step up the replacement of obsolete equipment, problems with assimilating rfcv.and Ihc Soviets' highly centralized management and incentive system, overall productivity probably cannot do more than hold Stead)

Ovetall. recent speeches onl.tn and budget seem to reaffirmlhal the leaders have been (olVnw)ng Tor ihe last few years. Thisan effort to provide ai least some Growth in livinggiowth in fucd investment ne,ir recent rates, .md >omcresourcci commit led lis defense Given the reaffirmation.believe.hi no iirreenin theud>*ctrather than yn acviirjic guide lo planned defence

ii.!

Although these growth prospects do not suggest 'bat the Soviets ate facing an economic crisis, this growth is too low to enable the Soviet leadership to meet ambitious goals fot modentirine industry and the military while raising; living standards at perceptible rates. Even if the economy grows in thc second half oft an average rueear (above the average rate we believet would not citable Moscow at one and thc same lime Io improve living standards at past rates, to meet rising investment requirements, ami iu return defense spending growth rates to those before the. Our analysis indicates that, at current rates of growth in invesimeni and defense spending, growth in per capitavrould slow further. meaning little perceptible gain foe thc average consumer. Moreover, any substantial shift toward defense would endanger consumer programs. Wilh present per capita consumption in the USSR substantially below even most Easl European standards, such limited prospects suggest little likelihood for gains in worker morale lhat would have importani implications for growth in general

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St

Tom.-ni

Key Judgments Introduction

Economic Performance3* Key Sector Performance Indutlry

Industrial Materia It

Energy

Machinery

Consumer Nondurable! Tramon

Agriculture

Recent Trcodt in Resource Policies

Investment

Ccsnsumpt'wn

Defense

Reasons for Improved Performance

Weather

Discipline

Increased Investment

Stable Productivity

Economic Ourloofc

Short Term

longer Term

Implications' for Leadership Policy Options

Figurej

Growth of GNP and Nonagricultural GNP

2.

Crowi'hof Output of Key Industriai Materials

.

Growth of Output of Fuett and Electric Power

Growth of Output of Consumer Nondurable!

Growth of Transponation Activity

Between Funnc G'owih in Defenser Capita

t6

Tho Soviet Econontv Shows Some Impro.cmcm. bui Hard Choices Remain

The rale ol Sovici economic growth declined fairl) steadily Irom iheor moreecade,harp droperformance >ai pirticulirly HaftI, when vmisuilly

cold andnten inarkd transportation and inu/nt[rtcd indus'.risl produetion and pooi-to-

mcdiocrc grain harvcaii heldt -ural output

down

The So*ict Union is now inperiod cf Improved economic performance, butelieve Ibe seepeof the recovery is limited and its longer tern imptitaiioni ate probably small. Tbis paperIhe perform-snce)* and identifies the major factors responsible for the upturn ia growth.ount of thu reeent rooord.alsoa range within which future Soviet growth ii likely to fall and (limine major influences on lhat projected range. Last. consider 'he conseovenccs of thcie protpcett lor Soviet policy optior* |

Ccononiic rerforminrend IV*4

Sovici economic growih accck/aicd) from the un-imlly ilow (aica. when GNP growth averaged only about IVt percent pcr|ycar.NP increaied by Inlaiie' than wc had protected torerformance in industry, transportation, and igriculture improved markedly Production of key basic malcriili turned upward, railroads cheated move dlmmi, andproduction icachednew high i

iowih owiiwlc agriculture halIt

ast Miii rale In agriculture,ownturn in crop output init likely to ciute

GNP growth lor ihe yea' tonercent

Industrial giowih ihiough iha fairambt appe.au hi ue at kn(nd leinl tniVi aim

lilt dwni well riani|<OitJlir>ni-ib lot been slower

thanartly because thc gain in ihaia rebound from ihe very pee* pttlorminccFigures for Soviet economic growth arcin

Although General Secretary Chernenko noted aacceleration in national income growth in hit* address to the Politburo, ihii better performance does neneturn to Ihe rapidercent) growth of the, nor even to the brin (nearlypercent) growih of the early and . It doeslhal Se-vri mam gen have had some successe tuning the cccnomy. They have collected some of the problems lhal uereand 'educingof Uf raw materials, railroad tic.pt. Us labor oVict-phnc. and weak lints between produciionly and results. While recent Sonel growth itby Wcitcrz 'itandirds.it clots htlVc loight internal competition for resources. It alio gives little hope for much improvement in average Soviet li'ing standi rdt

Key Sector Peeformnnte

In any consideeationgrowih. il il utelul to tepneate agriculture from the other scetoet because It it SO voUtite. being heavily affected by weather. Per terminer, in nor.agriculturaland keyshown tlo- butort'ill growih int. at an annual rate ofterin (hgurc II. Th'S is well belowverage annual rate of thet and

pproscl lhal ol ihe nwd

inoi

ndustry, which accounts fur

h idNP andey va-tee en"rr itnii. ilio-ed itiWein both tug) and

Figure i

USSR: Cm-IU of CM' ind Nonagrieuttoral

Firuic I

USSR: Cro-ih ol OutputKey IndustrialM

ai)Vi percent (higher (ban lhe me for rtonagricultural GNPerformance by branchcs within industiy changedoweverage growthhigher lhan4 in branches of industry producing industrial materials. The energy and consumer goods icctois were less dynamicut machineiy growth increased;achinery production is leading overall industrial performance, but problems in fuels have continued

Industrial Moit'tott Irf the recent production upturn, thc most significant improvement in growth has been in branches producing industrialraw materials and intermediate products used ihioughoui Soviet industry. These branches lallcrcd in the last lull ofOs (figureheir sluggishtransformed some of these industries intoas iheyunable to supply theuued by ihe plan Production in thesebyier cent)ercent4iarr annuall. iailurint II'VS?

Erw'tf Cro-th of electric power has increasedui growth In the fuel industry has continued to fallhe contribution to GNP of the combined output of fuels grewinkercent per year3hereas Ihis figure had beenercentil production4 may show iis first yearly decline since World War II. Coal production too continues to fall slowly. Offsetting ihc decline in production of these types of energy, however, is the robust growth in gat output, which it hkcVr to increase byercentlectric power also is showing improvement: growth in ouipul of clcclrac power* -id be higher than in any other year since theO>

floi'in/ry Growth in total machinerythe source of consumer, investment, and defense

ih|miiifiiei..J

ItSJ.ni-r. U, lin.eem-rr

Figure J

USSR: CiomIi of Output of fuels and Electric1

Figure *

USSR:ul Outputonsumer

i"ii< i"

has beenabove theindustry average II picked opJ. snd accclcr-

i fenneltd by f high-technology touipn-enl and OtheJ producer

onetheless, growth in orodwcrxsa of

iCB-acedcd transportation'* "Titiii inn oil tqjip. mem his remained Slow

Conrumwverall growth ingoods did noiupRecent growth his continued at therairercent The decline to growth pf soiltco-upin annaal po-i' of pro leaseda large ciicai. pecforaBincc in the taller sectorresult of larger harvests of vegetables andof Moscow's continued large imports olrumen'- 'purring growth in the output of

ey serviceanother of thc economic sectors1ery poor performance2 (figurereight traffic in ton-kilometers grew bypercentercentage points above the rate or the previous year. Rail transport was the major factor in) upturn, more than piiVnig up thc slack causedecline in (he volume of traffic catricd on highways and rivers. Railroads, which carryercent of norspjpcltnc traffic,ercent more IralTsc) than1 andercent murebe amount of gasby pipelines hasrowth of I) percent per yearlthough preliminary indicators pointomewhat lower rate of inceeasc for thc vectorhc rate still remains high enough iocontinued stronger pace for industrial

gionlh

Ow ciiiiiiiri nlirm*ri**.

lili-nalt otbI-IOiii* tfv ll.ll il-"

i illii" miehinrrvmiu*

Se

Figure 5

USSR: Growth ot Transportation Activity.

lu make sudden large wait shifts of rc-titurcri among ihc three major categoric* ofinvestment, consumption, and defense.J upturn of overall economic growth, lhe share of investment in GNI* rose slightly, while the share of defense remained roughly constant; consumption's shaicof GNP slipped slightly.4 rjrxs no* indicate any meaningful change in these shares. Despite some acceleration in growth over the last twoompetition for resources in ihc economy remains tigh'

ItfiiiritBi. DuringSS Plan period, new fixed capital investment islowly rising share of GNP, and this suggests that planners hive recently given it higher priority. Investment increased at an average rate ofear. and4 economic plan calledimilar increase Fragmentary information on4 ini'csimeni, however, suggests lhat it is below plan

rlg'fccrrirre. Farm output rote by 6V> percent, spurred by record production of livestockmeai. milk, and cggi The recent emphasis onthe tonnage and quality ol well forage crops as hay andaided by longer and more favorable growing seasons* andfeed supplica and led io higher mil* yields ar1 heavier slaughter weights wellild fallrought the forage crop close IO) recordl helped sustain meal and milh production, andeap-dlivestock production records again4 Nonetheleu. farm outputhole be down slightly from) peak, aa productionSlip belowl for several major ciops. The grain croparticular is etiimatcd to beill>on metric torn this year;ilhou tons below1 level and li mi"ion ' the average level6 IP

Recent Trends in Resource I'olieirs

Although Iwo recent leadership change! have created

sumet unity loulwics. ir i. dilliciili for

TTfnan Cbcraenko. like Brcrhnc- andbefoic him. hat shown considerable concern foe Use welfare of the Soviet consumer through tome ot lhe policies he hat supported To increase theof meal, dairy products, fruits, and vegetables, about one-third of Moscow) lotal bard currency outlays -ere spent em farmhe Soviets also have stepped up lhe coast ruction of new housing: lhe increate1 in new rtousing comple-t- he largeti rue in more lhandecades

Nonet he kss. duringet capiia conssmption levels have risen Quiteflat1

and increasing by onlyI pertril ir IVI) Our

preliminary eiiimase is lhat the gains* will be about ibc same at) or perhaps slightly greaiei Despite growth through most of ihc postwar period, however, Soviet consumption pei capiia rrmaint low by Western standards, less than half the US* even below Ihr level in most of Eastern Europe

Of/rmr. Since the mm-flC* ihcU In-

crcited defense 'pending inoiclhan in ihe previous1n military activities grew on average byeroc.nl. and procurement ol military equipment -at about fist (albeit alvery high lexll Our utiauici] ateprchmmjiy. but they suggest tome gro-th in procurement spending in that year With both the economy and defeat: spending gio-ing more slowly lince tbe9 id thc ihare of GNP allocat-ed to defense has nayed ai about IJboul doublecrecm figure for the United Staler

Some key industries.however, mustarge ihare of (heir output to suoport defense programs. For eiample. more lhanercent of all machinery production it allocaied to military procurement. In the proceu. rcvouriet arc denied to tbe emhin vector that otherwise could be oied to promote economic growth through in-eatmem or to bolslcr contumer morale by improving the standard of livingrecent improvements in industry do provide Ihe regime with somewhat more leeway lo increase growth tn defense without reducing growih in con Sumption and investment

Reasons lor Improved Performance

Thc fatter growth1ui. norWaem demean of GNP could repraentemporary recovery from the skrwdown in their growth that began in the 'aim hall ofore lasting break from the long tern irend of deceleration in thc rale of increase in rtonfarmTo aitcss the likely rate of future Soviet economic growth, it is essential lo understand why growth outside agriculture accelerated recently. Ifbit accclcaiion rctuttcd Irom tcmncrary influence!docs not alter tbe (wdgmcait reached carter aboutdtmcmal constraint, on Sc-Ki eeemunve (jfOwth through it' rcnuiBth' of the decade and ihe

limit thai these conuraintt wnpuve onotiCvn the Dtlici hand it the inipiO'C mem

resulted frmii vhaniiei in rvalicici allrelingiii and list productivitvof thehen ourf growthc icviseclup-ird and mar ttVn iuT Stwletoptions beeomei -ider "

Our anilviii tuggtvu thai ihe rccenl more rapid growthleft* irmiwinWe do nothc Scwict leaders have dealt aekcruatcly with ihe lung-icnn conilraimt holding down economic growth tn the Sot vetgrowth in labor andinputi. ri.ing resource COtls. and fundamental shorieoniingi in Uie economic syi.em iisclf. Rather, the upturn hat followed temporary changes (fora certain amount of luek with ihe wcllberlreater effortfine-tune" ihc economy through greater dnctplinc. belter management, and better planning of additions us industrial capacii) to easeni ben tie neck t

Wcalhrr

Among ihe fKton that accelerated economic gtowih rcccnilr, wcalher it perhaps the most obvious. Aside from tis crTcct on agricultural production, oircme cold and heavy snow during the wintersncreased the demand for electric power und dicrapied transportation Transport problemsIhe delivery of (uppiiet. forc-ng many plants to wait lor the materials they needed

The much warmer wintersI)I* tabtianiially helped the production of livestockTransportation had fewer -eat her-related inlcr-luptiom.eduction of the initial demand foe rail capacity lo support the Afghan opceationi may also have helped transportation performance. Warmerinters also Cased the demand for fuel. and. as more electricer was generated, ibc rate of use of

production capacities Climbed

r.nhennort.ating of luapty beailrnecki phruugh betitr transportation and groin use of rtntwig labor andandhad aIfttt ihinvr hnui ibe economy The eatliei imbal-

economic sectors lud tree ad negative

ilK> it thiovehnui ihc cconont) and ihru reduction enabled |Uuduciiiin io inn nuiic <niuuihlv and dov-a-

llllH " . i

Discipline

Tlx disciplinenticorruption initiatives begun bi

Arvdror-Jt and rcalfirmed by C'hcrncnlohi hue spurred Ixitlij rcmcni to greater clou

Spot Checks' 'gt oiuuilVKiKil kave and otherhave increased ihe average number of hout> woe lei) pei peiion lo ihe railroad sector, manage-men! Change* have impeoved performance, discipline hai been tightened, and nev. programs-solb as lequitinr. enterprises to eepair any freight (an that aie damagedare being trice

A tougher line with lhe officials responsibleging nev- plant capacity oniireim hai alio Jppai-cutty yielded some results. CtCTi missioning! increasedeiccni each year2p sharply from Ihe rale of thc, but tj'0-th of commission! ngs* appears to have slc-ed. Sonse Of lhe new plant capacity went lo industries producing industrial materials, and ihis helped to case supply bottlenecks in the industries lhal relied on ihem. Higher growth in new capacity foe railroads probe Sly hetped) performance.-hile increased ea> pacity in thc irade and supply sector may have facilitated the disiribulioo of raw materialsum. tributed to reducing shortages

Increased Inrestmeot

Growth in new plant and equipment -ateadership decision io push investment markedly above plan levels.ib Five-Yearad called for investmentrow more slowly than the overall economy. Thaislow down planned investment growth to the lowest rate in Soviet postwarmade on the assumption thai eeonomk growth could Uc itimui.ued by more etTieieni useofeaisting plants and workers.

Apparently ihe leadership abandoned thatlan from itt very outlet InvestmentaCCekrated toercent per year inprovide more balance between (he reno-at-oneconct ion of ei isli< il iicor ne rsthe onginatthend budding ol new ones. Duringesamp'c reconstruction ol "pudvUivr byrar,u- hadup th.isrenuieincni duimp

Tnlile

USSR: Ca-th of Induttrial Outputand Fnctor Producti.ily '- X

u. ii

r-oSicie-

-

sueJassfidrj

"

prolilOHtiy

ee Itll ire pcSVimr,int -eiatme/

pucc'l an* it txreeni. caocciinliletlM. These -othuhe CiHrlvvioa of htoren an* social imuraneeVTCsthe bastIw ill inOoa .ndirljw* ike im-lti riie eatoliiioni.

same period, it would have been difficult forto grow at lhat rate and would have increased the overall demand for (he resources most neededachinery, and energy.

Stable Productivity

The faster grry-ih of GNPhole1 and of most sectors outside agriculture* teems not io have been primarily the result of fatter growth in inputs (labor supply or industrial capital) toRather, it seemseflect improvement in the peodoetivity of tlie available labor and otherAfter years of iteady decline, overalltivuy in indutlry tlabUiiedtable .

Much of this ttabiTrtalion echoes the more efficient use of available capital stock and labor force becauie of factors alreadybreaking of supply

ncincicnci- rcsultce! inii.iur.ion tiir "illegal speeied idnigcnH-iu

dCCK 'Oi'uOliO'i and

ipt-knee and

Tint may

Cconomk Oui

Short Term

our judgment, annual ;iw-i*xi GNP could continue it1 peicent forear or two. provided lhat short-termgricultural oui;iut are moderate.iven yearfavorable for agriculture, GNP growth co-Id even risee-cent, but it probablyl re> ao.iltyercent perumber of favorabk eonditiom would have lo coincide for growth to reachercent,and ihc rate probably could noi be sustained

Until wc have mote mformaiiot'm confirm any change in the rrceni Soviet gio-th trend outtidr agriculture, wc assume thai) ladaury and other hey sectorscontinue iheir improved growthf the tin two ycart. and thatwill poll tome moderate garni We cancel the moil promising source* of sustained near-term grnwih to be the same indigences that contributed lo the apparent stabilir.aiion of Wf.rjvgiiv.iy in Iff)

Relief of supply bottlenecks

Motese of labor

- .

as needed to ease oi prevent boillcnccts.

even ihc thori runumbe' of uncertainties Whether the labe-ampaign has run its countajorn. althoughfar Chernenko apparently hat been able to Miliar* the momentum creaied byanagers will have iu continue eliminating oldlingand raising the rite of air nf their cap>ial Thi>

it entccitary. but diwtea*

arc CurrentlyalnfUCilt.

trantpiiri lieupt Ci-lltl ocvui al ail)

ite tirongi'inn.)

or ihe Iwagtrij.is ui.igherre*i-

ii.: ear. The tcccni

a< led ui ioi.by;lelj

ercentage point our proiectian of averagethrough the itinainder of thc decade (wc now cmiiiiii it} io JViuch an

iasrea* rtLigM lo 'Xeantly leitcn cayntpeti-

mcnnlianary clairni on rnourcci ur iu tirund the leaden' polity options

Our (cmcd projection is tlill lower thanereem average annuil growth that wc projected fori half uf ihc decade Ihc tptoal factorstbe hard in depend on or to suuaia in the inline Moreover, the gain* from partial relief of tome boillcnccts in areas like trantporiation ami iiiduitrial material! will have to cipand at ihc mure fundamental factor! that have constrained growth since thcontinue to tighten

Wt cincct the energy conitraint lo be kit ttverc lhaoimplied in our earlier projections,ue partly to our current assumption that in the long run thc planners will shift tome of the available

energy fiom ciporu lo the domestic economy and

partly io the Scwict sueeeis in the last few years in sScr-ing the gro-th in overall domestic energy ton-tumpiion. Nevcrthclcli. energyiltty drag on growth by the end of Ihe decade, especially as oil and coil tupplics tighten. Thc constraintbe wortc lhantprxi if progreat in conservation is not adeouaic or if gain*of gas for Other ftrctso-

ln looking at longer lerm gruwth peospee1'. Sovici planners lecognitc lhat past demographic trendtlimit additions lo tbe labor force. Therefore, ihey are vcchmglo boost growth of capital inputs and to eww:in general butiirctching imotmciU remuico ino thin At pliosegin tu late ihare. Sovici economists arc proposing

i "rit.uaSOt* iiiojii .

- 1 '. w,

lucncl) mm "consumpiiran oriented and inve-imenioth addtcs* the ley inue ofiui their apprnachr* in railing neoductiiiiy differ

The convuniplion oriented strategyattempt io increaseof labor productivity by "upply-iig more and brucf consumer goodinccaiitev

Tbe investment-oriented strategy would attempt to raise labor productivity by producing mote and better new machinery. This ttiatcgyrcrauirr substantial increaia ut in.ru mem

Itifficult lo foresee -hai thc Soviet leadendo |ai yet ihey have rekatcde offirial ir, lor mil ion aboui their plain. but they have already adopted Iwo cottly piotranu lhal will continue into the oral plan period. Invcitmcnti for the Foodare eipected to coil as mudiillion rubles, and for the long-ierm Eneigy Progrtm,illion rubles These two alone eommit thc leaders toelatively high rate of invesimem growth. Inoviet planner has stated informally thai investmcat wiTI continue to grow t' abou' the cairtai rateercent per year ia the tvcit plan period Anything leu lhansomiag continued investment in ike load and energyleave little loom foe growth ol investment in areas needed to support futureans ionbuilding and transportation

Even if the recent improvement in growth were linkedactors operating over the longer teem, the average annual rate of inereaie over the remainder of Ihe decade is not likely lai to 2VS percentundamental lenprovjment in ptodueiiviiy appearseTer ihe potential foe moviag loafer term growth inOtercent Unleu ibc Soviets develop growih ithat leaduaiacd return to ibe productivity trendi of. growth will flatten or decline again,id in

" Ctiiift*tiriitgwt itin fulfilli at u* millludrf in-th Mvcurvtai In irx urh,nii, wltw. Inicr rnln-Hi" ul alnilmtuaniliilat rncigi ind attic mini iih.uiklen iiOieedrracniemcni Ilrlw roiM lr> In(iriur rllmriy timii.rg. mr-fti*etiiu'I Inrmtmin*

nctwi-ii irw r^n* mi'A(Vfrm*

ih>iie*

I la IjIi IfTIknipruiiiiMnl i> untihrli br. i

and ihc hm piub-ib'l 1'

pr.iblc'ni will tn remedied Ur I

Several fundindlaetOft-

hnwilonger term growth (Hoir-Xii

- AdditmrK to the vmrkvng age population will bem Ihe nen several rears than at anyiheh. and the fullof these changes -ill not br fell until the

ol capital slock will probably held Ready at ercenl rates, despile tomr impiovcmeni ingrowth.

costs of industrial and agricultural rawlmost wrely will continue ton though thc Soviet Union has great raw material rtseivet. the cost of eaplm'ting them has risen sharply with the depletion of the most readily available sourcci Opening new sources requires thai more money be spent to fwewide iramprx'^tion links and workerr cove i. if the oil'sy ofow. money also rn-st bc spent on CQaipmcnt for ennehiny the oir or Other rawbeing-produced

beoivomic growth wilt alto lie held back by thc USSR's highly ccnliahicd syilem of planning and management. The greatest potential for economic gain over the longer lerm continuesie in economic reform. Hem-ever, nothing in Cherneoko'l background or past rvrorHMncementt indicates an inclinationreforms involving systemic change. Theof the Soviet system has contributed to its irehJiotogical back ward not. and Ihe gap between ihe USSR and the developed Weil continues lo grow in ihenc technologies lhat are not directly related tjlytic The Soviets bawt been particularly unsuccessful in stimulating the advance ia the tcch-renogict lhal underlie ihe resurgence of Wcaiein ftoduclivityreelection MS. comr-iiicrs. robotic', and advanced inalcrials They eoncentraiecopying WcMeinimr-enntunsing ruiKON lhal impedet rapid devevopmem

I 'ii moil impcHOiii ol the economic innovationsr from Aridrot.iv i, ih< economicintroducedimned basis in( seeksspur productivity d) giv.ng enterprise roaoag-en mate latitude tn using investment and wage funds andromote efficiency by sircning conlrael fulfill-mem at (he main indicator ol performance success, li hat had tome limited Success, but analysis mejeits that the eipe'imenl itself is too limited at this lime to have much potential lot improving industrial pcffoe. ma nee. Iu reported success so far probably has resulted more from thc priority gi.cnhe needs of participating enterprises than to the new operating pCOCedures themiel.es

Implicalioeu for Leadership Policy Options In Ihe future. Moscow's abilityatisfyhe military and (he rsonmilitary claimants for resources will be limited by slow economic growth. This(even the slow projected trend rateercent growth per year) does not suggest that thc Soviet economy is In desperate straits. Ii does indicate that thc leaders will have to make choices among their ambitiousmake them all some-hat less ambitious. The lower the rate of Overall growth in (he economy. Ihe harder the chokes become. At the growih ratesproject, the USSR cannot simultaneously:

Increase coniumptton substantially in oedcr to stimulate labor productivity.

Moderntte thc economy rapidly to incorporate more efficient plant and advanced technology.

Makee-boa id increases in defensein responseS mililary buildup. Alercenl growth per yeai. there will have to beajor commitment could be made in One of these areas, but (hai would probably reejuire little or no gain in one oe both of ihe others. If. instead, effort! in defense, investment, andare all alloweX! some growth, none is fikely io grow enough to meet (he full range of challenges faced. The decisions will be (oogh to make and thc results peeO-ably noi satisfying lo any particular

Future linkages in truwili between delensccapua eonsumpt^n. and investment dependtrend! inand ihe luivren' ley resources like liiels Oliviouslvn.e

Success the Sonet leaderseeping upind rcioiiicc iudoIks. the more lieliti.lily ihey .

will have in cbiosing among competing goals. If.e think likely, they -ere to choose to maintain the respectable recent growth in investment"ear Land if overall gro-th reached (he high endercenttof thc rangeb.nl it possible, lhe leaderi could continue to increase defenseat recrat rates and still have something left over foe modest improvements in living standards, ]

llustrates these variables. If Moscow shifted the rate of defense growth up toward the rate ofnd4crcenil whileinvestment growth al its present level, any falter -ing in overall economic growih would cause living standard! to stagnate or even decline.ailure of living itandardt to improveevel thai is already Iu- compared with those in other enveloped countries and much of Eastern Europe) wouldause ol concern for political leaders, al Icasl as it would be likely to affect workers'(heir wort effort.

Given our outlook for Soviet economic growihipeci Ihe competition between defense and civilian uses of Output to be particularly acute in the machinery sector. If growth fell toward the low end of ihe range we espect, machinery output could not grow (an enough ioercent-per-yearin investment, plus increased growth inspending, plus continued delivery of consumer durables at Current levels. Producon of consumer durables would have to decline, as machinery output would be increasingly directed to investment and defense: or investment would have to be increased by imports

The leaders couldto slow (heir industrial modern! (alien drive, allhoughhink thii is IcSS likely. Oy Culling investment gtowjltereeni (lull of ihe recent investment gro-thhey could make room to increasein consumption or

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USSR: Linkages Bel-een Defense Spending and f'er Capita Consumption in Terms of Future

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nsodestty; but ihey would rcejuire generally good luck or very effective policies lo ma inn in overall economic growth ai doseear. And the pursuit of this option would Seriously threaten the prospects for GNP growth iny limiting the introduction of new pUoi and equipment during thc rest Of

Overall, the leadership will probably try io continue recent policies, wiihr

A fairly high commitment to investment inmodern rat ion.

Defense growthom': he rate of GNP growth

Improvement in living standaidi, butaic slower lhan the rate of growth lor the economyhole.

The pressure to raise defense spending substantially is eertainly strong, as acknowledged in4 speech and as hiiiMd a; in theS defense budget.ecision to actually increase Ihe rate of growth for oefense will constrain investment and, therefore, ihe prospects for growth and future consumptioi

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