POLICY IMPLICATIONS OF THE SLOWDOWN IN SOVIET ECONOMIC GROWTH (SOV 84-10104)

Created: 7/1/1984

OCR scan of the original document, errors are possible

oa HISTORICAL REVIEW PROGRAM RELEASE AS 9

"Policy Implications of the Slowdown in Soviet Economic Growth

An latfUigeoce Aucunrtl

Policy Implications of the Slowdown in Soviet Economic Growth

Policy implications of the Slowdown in Sorici Economic Growth

Judgments

i iii '

ascfiM<

-oi(Mi rriwi

annual giowtli in Soviet GNP fes measured by the CIA| and in per capita consumption is likely lo remain at low levels throughout ihis decade.

Moscow* hopes forong-term declining growth trend depend critically upon improvement in productivity and acceleration of investment. But at least over the midterm, competing; dernarids of consumption and defense, together with polilical opposition lo major reform, will constrain Soviet room for maneuver. The Soviet leadership is concerned about possible political instability arising from consumer discontent. The Politbu-ro will probably seek througho combine al least some growth in living standards and iivcreasinE allocations for new plant and equipment with some increase in the giowih of miliiary piocurement

Although individual large-scale localized disturbances could well occur, the chances are low that,he growth slowdown will precipitate sustained and widespread popular unrest in the USSR or compel the leadership to shiftecentralized socialist, market economy like that of Yugoslavia or even Hungary. The slowdown is not likely Io lead Moscow to forgo major weapons programs, forsake any of its force modernization goals, or introduce major changes io miliiary force dispositions. Nor is il likely lo substantially increase econcrmically based Western political leverage, drive the leadership to accept aims control agreements it would ' otherwise reject, substantially moderate Soviet behavior in lhc Third World, OT push ihe Kremlin into high-risk adventures abroad.

Analysis of ihe resultsariety of alternative economicwhich place greater emphasis respectively on consumptioo. militaryorthat less "balanced" resource allocation strategics based onceivabte adjusimcnts in thesewould probably still not significantly affect our conclusions

Soviet responses lo Ihe economic slowdown are likelycccnlujte certain already existing challengesS interests. The need:

To rationalize stagnating living standards and justify sacrifice by the population will probably lead Moscow to continue to saturate its media with mendacious propaganda about the US threat to Sovietwilh serious effects on Soviet public opinion.

For trade with Ihe Wesi will probably lead Moscow lo redouble efforts, rooted in political and military objectives, to exploit and widen existing differences between the United Stales and its allies over East-Wcst trade

pol;cics.

ccw

tut, iu*r

To increase hard currency earnings is likely lo inlensify Soviet efforts iu expand commercially profitable relations with the Middle East, and it might tempt Moscow loqueeze by others on deliveries of Middle East oilhe world market to raise the price of its own oil and gas".*

To increase hard currency earnings will provide an additional impetus to Soviet efforts to sell -rms not only in the Middle East, bul elsewhere inThird World as well "

But. Ihe Soviet slowdown in growth may also broaden various potential opportunities for US action:

The Soviet population's support for the regime should be vulnerable tothai reinforces the perception ihat living standards arc noi what Ihe public believes they ought io be.

Moscow will have to tighten ihe economic screws on Eastern Europe, which will almost certainly make East European regimes and publics the point of grcatesi poteniialUS economic and political initiatives in.

The Sovieilready low capability to compete with ihe United Slates in providing economic and technological aid io morearrow group of Third World countries will decline further, and Soviei unresponsivenesscQUcsts for aid will increase pressures even in Marxist-ruled LDCsurnhe West for help

Soviei arms decisions probably will continue to be driven by calculations of political-slrategic advantage and ihe dynamism of weapons technology. The direct savings in hardwaic and manpower that could be gained through the terms of any START. INF. or MBFR agreements Ihe Soviets would now be prepared lo consider arc probably noi large enough to influence significantly Moscow's policy. If it thought itoscow could substantially accelerate military spending; thishoice that faces the leaderships il sets priorities forive-year plan.teep increase would have painful consequences for economic growth over the longer term and for consumer well-being even in the shorter term. Thus, ihe slowdown should increase Moscow's inicrest in slowing the pace of high-technology arms competition with the United States through eventual renewal of arms negotiations

The slowdown will give theontinuing ineentr to obtain US grain and state-of-the-art technology in Such key areas as energy and agricultural pioduction. even as Moscow strains to avoid dependency and to buy fiom US suppliers onlyast icsort. But potential US prospects for exerting trade-based political leverage on Moscow are. al best, highly limited

Economic Sloi-doma

. USSR isonlinuinfj slowdown in economicverageowih ineasured by ihe ClA) droppedpercent in iheercent. We believe lhat giowth in ihe currentill al best remain at roughly the rale achieved

to ihe pattern ofndustrially developedwhich

increased productivity hasey element in economicduringnd ihe first tiairofontinued to beon massive injections of labor and capital. Severalexternalweather, easily accessible fuels and otherand huge windfall increases during ihecurrency earnings from sales of oil, gold, and rawio high growih

Theurning point in the Soviei economy. Average annual growih of GNP has been sharply lower5 and. in fact, was only about one-half ihe planned rate during ihe lOih Five-Year. Industrial growth began to slowew. declining irend line. The slower growih during ihis period was parity auribuubk Io unfavorable weaiher, whichajor role in agriculture's poor performance and exacted ils loll on ihe light and food industries. Thed wide-ranging naiure of the growih slowdown, bowevw. reflected more fundamental problems related to the USSR's inability to generate ihe necessary resource inputs and sicm falling produciiviiy.

A new sirategy to increase efficiency, inaugurated6 and pursued wiih somethe remainder of the Brezhnev period, noi only failed io raise the reiurn on investment but also made ihe situation worse by further delaying actions long overdue. Il ignored ihe rising price thai had to becostly plan miscalculations, technologicaland distorted managerialfailing io change ihe traditional system of command planning and management of Ihelso pot off ihe wed io modernize ihe stock of plant and equipment, which manifested itselfudden drop ir; utilization rales and productivity during Ihe second half of. Mosi important, il failed lo address key areas of underinvesimeni and thus failed to anticipate three ciiiical industrial bottlenecks ihai were to seriously retard the ejeonomy's growth5 (especially inheserowing shortage of energy; shortages of several key industrial materials, especially steel, nonferrous metals, and lumber; and inadequate rail transportation

Thc economic results of Andropov's only full year in office were improved. GNP roseeicentercentage point above the average tale of growthi1e are not fully certain how the Soviets achieved this moderate improvemenuand,culi, :hcalue projections presented in ibis paper should be viewed asreat cr-than-usual range of uncertainty. However, werogress basically to belter weather. Andropov's campaign lo enforce labor discipline, and an alleviation of railway bottlenecks. There has been no improvement in the underlying determinants of deceleratingincluding no significant movement on economic reform, which Chernenko is likely lo approach more conservatively than Andropov.

Moreover, power Jul inertial tendencies guarantee that sustained progress will come neither easily nor rapidly:

Pasi neglect of investment or unbalanced investment in strategic and heavily capital-intensive sectors such as transportation and ferrous metallurgy cannot be quickly overcome.

Many raw materials have become increasingly less accessible, and the cost of exploiting and transporting them will continue to rise sharply through.

The average annual rale of growth of lhc working-age populationill beof what it was in the previous decade.

Among workers there are king-established habits of casual discipline, slack effott. and shoddy workmanship, as well astrong sense of the irrevocability of job tenure. Among managers thereeeply ingrained drive lo meet quantitative outputof cost, quality, andess to innovate or take risks in the face of ittcentivc systems that discriminate against change

Policy Options

Moscow's hopes for ending tnc trend of declining growth depend critically upon an improvement in the efficiency with which capital and labor are used in produclion processes. The instruments available to achieve this goal include economic structural reform and shifts in resource allocation among majordefense, and investment

Because of Die enormous inefficiency with which ihe Soviei economy presently operates, major reform would stimulate economic growth more tjian any feasible shift, in resource allocation. We estimate, for example, thai, if Soviei industry were operating inhe level of' produciiviiy allaincdrowth ofjndustrial output would be almost Iwicc its actual rule

However, the chancesadical reform being implemented inre small, in particular, we think the chances arc slight thai the Soviet leadership will replace the command economy with significant stepsocialist market economy, given the challenge to political control and vast uncertainties ihai would inevitably flow fromevolutionary move. The political clile strongly opposes full-scale market ixatiott; most policy advisers do not believe il would be the right solution even if it were politically feasible; economic managers would resist its implemenution; and the working class would bridle at many of itsthe loss of job security

The "reform" Moscow is likely to pursue will probably combine attempts lo improve central planning and the performance of centralizedfor accelerating technological innovation with Untiledof operationalodest slreitEtbening of financial levers, and further expeJirnentalion with plan indicators intended lo reward risk taking, high-quality output, cost reduction, and efficiency. There will be powerful bureaucratic resistance io such changes, and we doubt that regime efforts along these lines will succeed in altering the downward trend in productivity,ery slight upturnJ

Thus, in practical tetms Moscow's capacity to improve productivity will hinge upon providing Incentives lo spur labor produciiviiy and investment to raise Ihe efficiency of capital slock. The Kremlin's need to meet these requirements,ime of increasing pressure onhe /eason that wewith many Westernthe Soviets' room for maneuver in resource allocation inmong military and civilian claimants is severely constrainsd

Having examined the outcome of simulationsange of resource allocation scenarios that lilt toward consumption, or military spending, or investmem. we believe that the Soviet leadership will probably attempt toarefully balanced policy of at Icasi some growth in living

^eertT-

and increasing ntlocaiions Tor new pUnl and equipmentwiih some increase in (he growth uf military procurement

Initrnal

Concern over possible political instability ckjrly eaisit.within^!he parly elilc. Doth Andropov and Cherncnko have warned in speeches that public dissatisfaction, if unattended or mishandled, could assume "crisis"Apprehension about (he popular mood has probably significantly influenced regime policy over the past several years. It acounls at least in part for:

Tbe high priority assigned to the Food Program.

Massive grain imports.

Attempts to strengthen worker discipline.

The higher profile assumed by the KGB.

- Attempts to curtail contacts between Soviet citizens and Westerners and reduce the flow of information from Ihe West

on more blatant forms of corruption and official abuse of power. There will almost certainly be instances of unrest in ihe future -halcver economic strategy the leadership pursues We by no means rule out thethat spontaneous large-scale localized disturbances may occur.

Nevertheless, assuming that average annual growth of GNP6uns at our projected rate oferceni (orercentage point

1 Under ifcii scenario, for ibc balance al the decadeONI* and iaduisry nilrigc anenial growth Ia per capitaI (ill io teaaeeccnl; average annual growth ia new fued inns*mem will drope-postwar low ot around lifrom average annual irowth of new fiaecl in-eiimentf percent; and Ihe delrntr burden will remain al about I* perreni of GNP

This i- 'ii ii ij aisiunei that, HPJS aoviet defeiue spending inincreaar al- ute ofear, with militaryprocurementrowth1 aad then growthear0 Military research. ate>rVapu>eat, luting. and evaluation (RDTetFl growth lath slightly} Sreond. lhc iDotation of mvealmcnl and labor among producing sectors ihrough Ibe decade will muror iirgeti set inIS five-year plan. Third, ihe shares going ir> the energy seetois will increase (at the rapenae of some consumer Melon) The share*torvjuiiry -ill remain relatively CMtttaalourth, oil production will (all ihonoflhe pun targeto millionaynd decline to between II ind0 tUsc curieni ptodactiecial Fifth.cowuiwcdn denseaiK encigy rettuiieateiai. Mcncow will hi-e. io cheaae bei-eea tnaiatitaMg oil capons aad meeting daaaalic needa Uader Ihis scenario, there wmI be a

iiWii-uil induction ia oat einnrit. hut menl erf the encigy iliorttaLl will be absorbed

rowth in the divnciiic economy. And. mlh. average -eiiliei conditioni ubK'-rd duringI-S0 period -ill continue

less (linnc believe lhai Ihe chances ate low thai,he economic slowdown will:

Precipitate sustained and widespread popular unrcsun-the USSR.

Pave ihe way for eilher signifies nniberalizationolish-style militarization of the regime.

- Biingeadership group with significantly different foreign policy aims.

New Soviet leaders will probably be less ideological and more pragmatic than Iheir predecessors, and some will probably be more willing to aecepi change, bui ihe sparse data available provide no persuasive evidence lhai ihey show any unique generational policy orieniation

.Military Ponvr

Even if growth remains alercent, we project impressive force gains in. Important programs in developmcnl that could be deployed through thenclude several military space sysiems. siraiegic cruise missiles, another generaiion of strategic ballistictrategicarge transport aircraft,arge carrier for conveniional aircraft. If it chose to pay the heavy price, ihe leadership could evena while atgrowth of military spendingate somewhat higher than theerccnt annual average duringpeak years of Ihe Soviei military buildup. The leadership faces Ihis choices it sets priorities forive-year plan.

Nevertheless,rojected boost in military procurement from an estimated zero growih at presentcrccnt annual growih. weccl that ihe flow of at leasi some weapons inio the stock of Soviet military equipment would not be as rapid as in previous decades. The Soviets might:

Curiail some weapon programs that are near the end of their production run.

Cut back or eliminate some support programs.

Sireich out selected weapon procurement programs and slip the time schedule for force modernization slightly.

Extend ihe service life of some older weapon systems.

Yet. if they were to make ihese adjustments, we estimate lhat the Soviets would not have io forgo any maior weapon program or forsake any of their force modernization goals

Foreign Policy

Overall, wc believe lhat Ihe economic slowdown will noi result in major changes in Soviet foreign- policy. We do not see economic problems atotivating the leadership to undertake high-risk adventures abroad thai are designed to distract an unhappy public or produce^conomically beneticial geosiraiegic breakthroughs. Nor is the economic slowdowno significantly constrain continuing Soviet political and military activity in the Third World. "

Europe. The economic slowdown will have its most serious external impact on relations between the USSR and its client regimes in Eastern Europe, which currently receive most of Soviet economic and military aid. To achieve the levels of GNP growth and per capita consumption wc have projectedoscow would have to impose further cuts in oil deliveries to Baiterr. Europe beyond those already levied. Additional reductions, if accompanied by price hikes and reductions in other raw materials deliveries, and even if partially compensated for with exports of additional gas. would create new poliucal and economic strains in Eastern Europe.

We believe, nevertheless, lhat the Soviets will risk aggravating popular unrest in Eastern Europe byhe economic Screws because they:

Resent the East Europeans' higher standard of living.

May believe there is enough waste in the East European economies toadditional costs without cutting consumption sharply.

Appreciate the purely coercive power of the police in maintaining social order.

Count on the East Europeans' ability to help ttiemselves somewhat through selective economic links with Western Europe

Bilateral US-USSR Relations. The economic growth slowdown will give theontinuing incentive to obtain US grain aod state-of-the-art -technology in such key areas asd agricultural production, even as they strain to avoid dependency and to buy from US suppliers onlyast resort

The robust outlook for global grain production over the next few years suggests that the Soviets will haveimiied need for purchases from the United States above the Long-Term Grain Agreement minimum commitmentillion tons. Therefore. US grain-based political leverage is likely to be quite limited. Nonetheless. Moscow still finds the Uniied States attractiveupplier because of its unique ycar-rounrf capacity io deliver large volumes of Erain quickly at short notice

Urgc-scele US alliance would be helpful io Moscow inuipui and developing Arclic offshore resources. The Uniied Stales remains the solcsupplier of cerlain oil and gas equipment, ihe need for which should.inc.easc as Soviei oil production problemsry-namcly. high-capacity submersible pumps,plling_rigs. well- and mud-logEing equipment, and various items for offshore oil produclion. The Soviets urgenlly need high-capacity submersible pumps, which can lift increased volumes of fluid and thereby stabilize outputlreadyfields where ihe ratio of water to oil being lifted is rising steeply. Over ihe2 to IS monlhs. mstallaiion of WO million worth of submersible pumps now on orderS supplier couldubsianlial role in hold.ng up production. Soviet trade officials are also currently pushing1 billion Soviei venture with the United Slates and Canada to manufacture drilling equipmeni and rig assemblies for oil devdopment in ihe Barents Sea and possibly elsewhere in the USSR. Only Ihe United States has the technical and financial resources neededroject of this magnitude.

Whether this degree of technological dependencearrow range of US cquipmcnt-particularly high-capacity submersible pumps and offshore equipment-translates into much political leverage for the United Stales is problematic. Any Soviet willingness to accommodate US political interests in remrn for assistance in oil produclion would be highly limited in any event and would depend greailv upon Moscow's assessment of tbe overall state of US-USSR relations

Soviei decisions on arms comrol arc likely to continue to be driven by calculations of political-strategic advantage and the dynamism of weapons technology. The direct savings in hardware and manpower lhat could be gained through the terms of any START. INF. or MBFR agreemem which the Soviets would now be prepared to consider are probably noi large enough io significantly influence Moscow's policy. But the Soviets probably do believe that arms agreements can:

Set quantitative and qualitative boundaries on procurement.

Increase the cakulabilily of future military outlays and channelinto predicsnble areas.

Helpolitical environment that would contributelowinghe overall US defense effort, thereby easing military spending demands

on ihe USSR

There is evidence thr-l. in individual instances in recent yean, demands of Ihe civilian economy have been given rwe*edencc over militaryStatements of Soviet leaders have suggested lhat Ihe drain of military spending on Ihe civilian economy has probablyatter of

increasedonly because the economic slowdown threaten* to weaken the industrial base On which the growih of military powerubstantial increase in militaryhave painful consequences fas Soviet economic growth-over ihe longer term and for consumer well-being evenjn the shorter lerm. Thus we believe that ihe overall growth slowdown increases iMoscow's interest in slowing the pace of high-technology arms competition wiih the Unitedin space-based strategic defensethrough evenlual renewal of arms negotiations

The Third World

The slowdown in growthactor affecting Soviet policy toward the Third World, although it is less important lhan military and geopolitical considerations. At ihe3 Plenum of the Central Committee,bluntly to frequent LDC complaints of Soviet light fistedness in nonmilitary economicthe Third World on notice not to expect much in ihe way of such aid from ihcUSSR. In line wiih this policy, Moscow has ailcmptcd to:

Cui back on new economic assistance to non-Communisi LDC* and focus aid on allies in the Third World.

Force Communist clients to be more frugal in their use of Soviet-supplied resources.

Insist on timely payment of debts.

Counsel some regimessocialisttoithdrawal of Western assistance by engaging in economic radicalism

Simultaneously, Moscow has sought to increase its involvement in the Third World by expanding hard-currency-carning arms sales as much as possible. Armsforoviet arms agreements climbed to S9 billion,ercent higher lhan1 and well above the average for ihe previous frvc years.

However, ihe exceptions arc as important as the prescriptionardline Soviei economic posture toward the Third World. Toward Cuba, Vietnam, and Afghanistan, where the USSR incurs its main Third World economic costs, political and military-straicgic factors have far outweighed economic consideraiions in forming policy and will probably continue to do so. Moscow has complained to both Cuba and Vietnam about inefficient use of Soviet-supplied resources,irm position or< irade-related issues, and pushed hard on debt repayment. Nevertheless, we believe lhat the Soviet military and political interest inommunist regime in Cuba assures Havana of continued large-scale support fit is5ikewise. Vietnam's strategic importance in Asia makes any major

i

reductionSoviet aid to thai nation equally unlikely. Nor do wcihe USSR's behavior in Afghanistan is likely to beby economic

Regimessocialist orientation" havebeen unhappy about not receiving aid they requested, and some have explored the possibility of more help from the Wesl. Nevertheless, the Kremlin has been supplying some increased assistanceor example. Moscow provided new aidngola. Ethiopia, and Mozambique, and major increases for Nicaragua.

Moscow has also responded to increased Western competition and the worsened world tiadcdimaic by offering better military supply deals and more sophisticated equipmeni lo key non-Marxist client stales, including Iraq. Syria, and India. These deals have featured softer repayment termsfirst genuine agreement to transfer some of its current advanced miliiary production technology outside the Warsaw Pact. Moscow also agreed to increase Soviet soft currency oil deliveries to India3 byercent and maintain them at this level

Wuh or without the eeonomic growth slowdown, the United States would continue to be confrontedtrong Soviet challenge in the Middlen. Bul rxonomie needs will intensify Soviet efforts io expand commercially profitaWcrelations there and might tempt Moscow toqueeze by others on deliveries of Middle East oil to the world market to raise the price of its own oil and gas exports. Pursuit oftraiegy would depend on Moscow's assessment of its probable impact on the terms of East-West trade, on the Middle East arms market, and on the likelihood of an expanded US military presence in the Persian Gulf

China

In promoting trade relations with Chinaoscow's main objective was to improve its position in lhc US-USSR-China triangular relaiionsHp. There is no evidenceesire to relieve internal economic pressures motivated the Soviet leadership. Nor is it likely Ihat Sino-Soviet trade will significnnilv help to ease Soviet economic stringericics in the foreseeable future

Because one-fouith of all Soviet Groundroops inivtstationed opposite China, there would in principle seem to be both opportunity and incentive for significant savingsutback But:

Evenr these troops were released to the civilian manpower poolhe impact on GNP growth and growih in per capita income would be slight.

A slowing ol equipmeni modet iiiraiion of the force* already in place would have orly marginal effects on the economy, although it would lessen allocalionalihin (hr Soviei

Soviei security against China in the cvenT of war appears to entailolding actionajor invasion and occupation of aj leasi northern Manchuria, whichontinued strengthening of the USSR's military poweris Chino

'feirernnd Japan

Tocounter the economic slowdown, ihe Sovieu will need to increase imports of machinery and industrial nuicrials from Western Europe and Japan above present levels. Bul our protections suggest that, even allowing for realistically possible increases in nonfuel exporu and arms and gold sales, the USSR will not have sufficient hard currency to pay for an increase in imports from the West later in ihea sharp increase in borrowing. Thus Moscow's capacity to expand hard currency imports will depend significantly on its willingness to shifl oil exports from Eastern Europe to hard currency purchasers, sell more natural gas lo Western Euiope, or overcome itson fear of being subjected to policialincrease substantially its long-term indebtcdntu to the West.

The USSR has vast natural gas reserves and tbe ability to increase dclrvcrics rapidly beyond alrcady-coniractcd-for volumes. Some surplus transmission capacity exists even now.8 the Sovieu will easily be able on short notice lo expand deliveries lo meet foreseeable incremental Wesi Europeanai extremely competitive prices. The main constraints on expansion will be ihe level of West European demand and the willingness (or lac* thereof) of West Europeans tosecurity premium" for higher priced Nonh Sea gas

Imparl . -

Analysis of the resulu of alternative economicplace greater emphasis respectively on consumption, military spending, or invest-menlhat less "balanced" resource allocation strategics based on realistically conceivable adjustments in these parameters wouldnot significantly affeci our basic conclusions. Nevertheless, there would still be some effects.

If the Soviets decided to continue to hold military procurement levels flat throughouto increase growth of consumption, they ptobably would spread the shortfalls among the military services, although making ihem somewhat deeper in general purpose forces, especially ground forces. Even with flat military procurement, the level of expenditures is so high that Soviei military forces would coniinue to grow throughout.

Of all lhc scenarios, one oticnicd toward consumption would probably moil polarize ihe Soviei poliiicalol internal accommodation and external-relas at.on ranged against advocatesardjirje both internally and in foreign policy. Aboption oftrategy might be impossibleajor shakcupie Politburo andew general party line |

The defense-oriented strategy We examined involved an average annual growth of lotal military spendingercent, which in turnmall absolute decline in average annual per capita consumption. Wc believe that during the planhe regime could handle the projected average annual declineercent in per capita consumption without seriously risking mass unrest among the population, although growth in tabor productivity woukl probably suffer further erosion.ecline in consumption could not continue indefinitely, however, withoutrisis io relations between the regime and Soviet society. Externally, Eastern Europe would bear the brunt of the High Defense strategy. Not only would pressures for higher defense spending and deliveries of goods from Eastern Europe be stepped up. but Soviet oil deliveries also would be severely cut back. This move would depress living standards in the region and increase the likelihood of unrest and poliiical instability. Paradoxically, in view of its ultimate aim. the High Defensewould necessarily require an internal intensification of anti-Westernalso require an expansion of Iradc tics with ihe Wesi to acquire Jiighigher share of Soviet oilwould have to go to the West to pay for larger imports of machinery and equipment

A high investment slfateey would have roughly the same internal and external effectsigh military spending strategy. However, it might be somewhat less likely to undercut the morale of lhc labor force. Because Ihis strategy would be publicized not by playing up the immediate Western military/poliiical threat but by stressing the strategic importance of promoting general economic might, it would be compatibleess hostile propaganda posture toward (he United Slates

<ii to the United States

Soviet responses lo the economic slowdown are likely to accentuate already existing challenges to US intetcsis in several areas. The need:

* To rationalize stagnating living standards and justify sacrifice by the population will probably lead Moscow to continue to saturate its media with mendacious propaganda about the US threat to Sovietwith serious effects on Soviet public opinion.

V

r trade with Western Europe wilt probably lead Moscow torooied in poliiical *nd military objectives IOnddifference sbclweivn lhc United States and its allies overtradecould involve renewal of the credit and *dependency.

increase hatl" currency earnings will provide an additional impetus to Soviet efforts to sell arms and miliiary assistance both in the Middle Easi and elsewhere in lhc Third World.

Opportunities for the United Slates

But, Ihe Soviet slowdown in growth should also broaden various potential opportunities for US action:

The Soviet population's support for the system should be vulnerable tothai reinforces the perception that living standards are not whal they ought to be. thanks to the regime's bungling and its waste or resources abroad.

There are limits to the extent to which Moscow can simultaneously cut its costs in Eastern Europe and compel the East Europeans to reduce trade wilh the West, wjihoul precipitaiing new crises in the Bloc. Theleadership may miscalculaie ihese limits. Even if it does not, the East European regimes do not see greater CEMA "integration" as the solution to their critical economic problems, and they will intensify Iheir efforts to expand trade with the-West lo the extent that their economies permit. As living standards stagnate or decline. anti-Soviel sentiment is likely lo increase among Easl Europeans, who will continue io look io the West for information and support for their own national aspirations.

The slowdown will further reduce the USSR's already low capability to compete with the United Stales in providing economic and technological aid to morearrow group of Third World countries.nresponsiveness to inquests for aid will increase pressure* even in Marxist-ruled LDCs lo turn to the West forthere will undoobtedly be lar less readiness in-egimes to take corresponding steps toward poliiical liberalization.

(.'onti-nis

- - .

Key Judgments

Executive Summary

Introduction

The Economy Dunne the Breahncv Years Growth

The Economy's Performance Duringh Five-Year Plan

. Reasons for the Turnaround

The Lead en hip's Response

The )Uh Five-Year Plan

Initial Responses of the Andropov Regime

Resource Allocation

Foreign Trade Policy

Labor Policy

Economic Reform

Outlook for Economic Growih: Some Policy-Conditioned Projections

High Consumption

High Defense

High Growth

Cost Avoidance

Scenario Summary

Impact of Ihe Economic Slowdown on Internal Affairs The Political Regime

Society

Military Power in

Impact of the Ixonomie Slowdown oo Foreign Policy An Overview

Eastern Europe

The United Slates

Ttelrdrd

China

Western Europe and Japan

Policy Implications of lhc Slowdown in Soviei Economic Growth

Average annual growth of Soviet GNP as measured by the CIA has dropped from moreercenterceniercentsee figure IL We believe ihat. despite torne-whst improved economic performancennual growth during the balance ofs likely to beerceni.

The difficulties of the Soviet economy have suggested to many observers that economic factors mightSoviet policies inn ways thai could significantly affect Western interests. Observers have hypothesized thai economic shortfalls might generate serious internal tensions, constrain military spending, and motivate Moscow to adopt moremorepolicies. The purpose of this paper is to address Ihese important proposUrons. proceeding from present CIA assessments of trends in Soviet military procurement and spending, forecasts' o| net energy balances in, and ecorvometric prelections of likely growth trends in Ihe USSR's econuny during

I

USSR: GNP-Average Annual Rates of

Economy During the Bicibno Years Growth

During the first two five-year plans of Brezhnev's, the Soviet economy grewthan lhal of the UnitedIhe USSR solidified its position as the world's second-largest economic power

Contrary to the pattern of most industrially developed countries. inVhich increased productivity hasey element in economic growth. Soviet gains during

this period continued to be based fundamentally on massive injections of labor and capilal Severalexternalweather, easily accessible fuels and other raw materials, and huge windfall Increases during then hard currency earnings from sales of oil, gold, and rawcontributed to the boom. Tbeeconomic successes enabled Soviet leaders at thai time to achieve miliiary. foreign policy, and welfare goals simultaneously

Theerformance During Ibe lOtb Fire-Year Plan

Theurning point in ihe Soviei economy. Growth of GNP has been sharply lower5 and. in fact, was only about one-half the

X

liri" 1

USSR: Growih in Outputs'. Inputs, and Productivity inI-8Z

Mtlf

i.- uie ini> I* j* rall.i ilinc -nSn> Ih |h'

planned rale duringh Five-Yearndustrial performance began io detcriorarcew. steeply declining Irend line (seehile Soviet leaders might well have consoledwiih ihe (houghl >hai Western economies were suffering equal or more severe difficulties in ihis period, the comparison did not alter the fact that the problems confronting Moscow were becomingseriou:

Reasons for ihe Turnaround

The reasons for the Soviet slowdown were largely different Irom those which retarded Wesierngrowih in. The turnaround in the Soviet economy duringh Five-Year Plan was partly attributable lo poor weather, whichajor role in agriculture's decline and csacted its toll on ibe

light and foodhe seventy and wide-ranging nature of Ibe economic slowdown, however, reflected more fundamental problemsSSR's inability lo generate ihe necessary resource inputs and efficiently employ ^ficm.

By IfS, the Soviet leadership had evidently become sufficiently worried by an accelerating decline in the productivity of new invesiment in industry (meaning that more and more investment was being required toiven increase in the level of output! and by an awareness of the labor crunch coming early inoew economic airategy. The newhift from extensive to intensivepredicated upon Ihe achievement of large productivity gains. These were to be attained by temporarily lowering growth in industrial output, sharply culling investment outside of industry and agriculture, and changing the pattern of industrialit was hoped, reducing tautneas in the economy, eliminating botileneclcs. and raising ihe immediate payoffs from investment

This strategy not only badly failed to raise ihe return on investment bui also made the situation worse by further delaying actions long overdue. It ignored the rising price lhat had to be paid in costly plantechnological backwardness, and distorted managerial decisionmaking for failinghange the traditional system of command planning andof the economy. It also put off the need to regenerate ihe stock of plant and equipment, whkh manifested Itselfudden drop in utilization rates and capital produciiviiy during the second half of. Most important, it failed to address key areas of underinvestment and thus failed to anticipate three critical industrial bottlenecks lhai were to scriocsly retard ihe economy's growth5 (especially inEOheserowing shortage of energy: shortages of several key industrial materials, especially steel, nonferrous metals and lumber, and inadequate 'ail transportation

ailrrship's Response

Rcsponding lo what -at happening, the Rrerhncv leadership introduced new shifts in iovcstrTvtnl policy, further expanded trade wilh iht Wcw, possibly made adHnimenu in military spending, aod look henitm step* toward altering punning and managementf J

Inrtiimrm Policy. Annual investment growth wasto an average ol leueicenl. and increases -ere reduced futihef iotage annual rate ofol leuercent during lhc final two years of ihe lOtti Five Year Plan. The Interwai partially due loin Industrie producing Inputs forarked dcviaisM-fivsrn theplan which called for both output and inveslmenl growth to rebound

Soviet leaders also reacted to their economie problems by reallocaling funds lo key problem areas, especially the energy sector.8verage annual in veil men! in primary energy wasercent above the le*tl of that6

rjje. Benefiting fiom rising energy and gold prices, as well as burgeoning arms sales, Soviet hardnings increased dramaticallyeaihirgaK) billioecsuli, Moko- was ablerease iupartiea.-tariy of food and steel -from the West

De/imir Spending Trtnii. After increasing at aa annual average rate ofercent duringeriod, defense ipcnding has increased at onlyearargelyesult ol almost no growth us military procurement' Wc cannot judge the eiient to which Ihe leadership intended from the outset to cut the growth of defense spending, acquiesced in (lower grown, or failed In an attempt to overcome constraints

]

Unforeseen economic and technical problems appear to have been at least partly responsible for the (lowdown in the growth of defense Spending.to comply withnd the unratified

1

SALTreaty also may have slowed the pace of piocuremenl. The cancellation erf new US weapon systems (foe example, the tVI bornbetj and iheftoot ihef linMtedS defense spending might have led the Soviets tothai Ihey could safely reduce their own rate of growth In military spending. Whether orormal policy decision was made to sticich out procurensrai and lo slow overall defense spending, ihe leadership may have recngnLrcd in midstream lhal technical problems and industrial bottlenecks were hampering piocuremenl. If ihis was ihe case, the leadership apparently chose not to reallocate the additions! resources required to offset ihe procurement stow-down Whatever the cause, lhc (lowing of defense-spending growth facilitated cffoils lo meet competing demands in ihe real of the economy

Ciaagei ia Economic Maaageaxnr. Having avoided ihe istue of reform foe some yean, the Brezhnev leadership was finally induced to9road range of changes in planning and management of ihe econocny, and this was lot lowed ewer the next several years by note thanmplementing rcscnutiont. The decrees combined measures aimed at achieving more effectiveplanning withat ion of operation-al authority to large industrial asaociatims and btoad-er ejnpierymeni of certain market issocaiet! nvxbanrirns. They were implemented only haltingly, ami they did not significantly affect rxonomieduring the rest ofth Five-Year Plan.

TW nit Fur Year Plan

lat reasserted the demcourably flawed strategy ofational income growth target lhal could noi be icached with projected inputs of capital and labor unless unrealistic gains inwere achieved Thus improvement ta productivity was to be obtained by reducing the backlog ofconstruction, devoting most investment into the lemyratMo of existing enterprises, and railing capacity atiliaiionwme lactic put sued onvuceeisfully

The12 revealed Hie lack ol realism of Ihe five-year plan Growth inciccnt. somewhat above lhai attained91 percent) but (ar below thefl-perccnt annual rate of growth plannedI-8J. Average annual growth in industry was alsoercent, only halt the rate called for in Ihe plan The slowdown was evident in practically everybranch, while productivity of tabor and capital employed in industry continued to [all dramatically Moreover, poor weather curtailed larm output1utting most of iheh Five-Year Plan's agricultural goals beyond teach. Transportationincreased in severity;otal freight turnover declined. According lo our esiimaies. per capita consumption showed almost no growth ai all17

Initial Rcspomn of tbe Andropoi Regime

The economic results of Andropov's only full year in office were pretty good. GNP roseercentercentage point above the iveragr rate of growth12 The mainoccurred in industry, where growth accelerated byercentage point toerceni

Wc arc not fully certain bow the Soviets achieved this moderate improvement, and,esult, the single value projcciioni presented in this paper should be viewed asrcater-than-usual range ofHowever, wei piogrcasto:

weather, which not only helped boon farm production bul benefited nonagiicultural sectors as well.'

- Andropov's discipline campaign (see pageLaborhich appears to have eairactcd greater effort from both Labor aad rnanagemcm

high-priority effort to alleviate railway bottlenecks.

'i|taTi-ikan->annalin ihr USilthr wimei uleeds la Ivcl Ivfl lie In kiirdvcrd. in mmmotta torol'lmrvHliilonaiflicaltiu idaitd lei fenrliitw| linM) mitt

iiOvteO rlauvie waimn wimeirim thai Vttt fanl n

rioviiid per -mi cT Duloil. rrnwhly lixualwlr-it

hrmum tint hirvn piMmtvlKeond< eropi'iimkaai Grim tiiI.Ii ilia

If ihii pattern of weather, higher labot discipline, and improved railway performance remained constant, however, it would have little or no additional impact on the rate of growthTTo maintain the rate reachedn each succeeding year there would have to be still better weather, still Blester labor intensity, andgreater railway capacity Thus, we do not believe that Moscow will be able lo maintain for long the rate of growih seen tnwhen there has been no significant improvement in the underlying determinants of decelerating growih already noted.

Powerful menial tendencies guarantee lhat sustained progress will come neither easily nor rapidly:

- Because even large increments in annual growih of invesiment could haveelayed impact on total stock of plant and equipment, which actually drives economic growth, past neglect of investment or unbalanced investment in strategic and heavily capital-intensive sectors such as transportation and ferrous metallurgy cannot be quickly overcome.

raw materials have become increasingly less accessible, and ihe cost of up-oiling andthem will continueise sharply throughout.

average annual raterowth of tbe workine-age populationill beof what it was in the previous decade (see Figure 1J. Aboulerceni of the increment will come from (he republics of Central Asia, whosehas been increasingighhas less education, fewer skills, and less capital than other ethnic groups-

workers there are long-established habits of casual discipline, slack effori, and shoddyas well as wage-leveling proclivitiestrong sense of the inevocabilily of job temtre. Among managers thereeeply ingrained drive to meet quantitative outputof cost, quality, and efficiencyto innovate or take risks in ihe face of tncniive systems that discriminate against chant.

Jjrtatt

On ih*r inforniaiion publishedJ iciults and4 pUn ind of actions taken to dale, wg think thai lhc.(ill holding mainly lo Use course set byh.fi of crnohasis is deieeiabk la trade and labor policy, and new management iiuiiaiivca are probably being eons-lered Bated oo ha pau speeches. Chernenko might be slightly more prepared lhan Andropovio uress eonsomer welfare andlocated Kail abekty of cccesumce goodt. .Ink beuuj ku reccpove lo serious ct-ange in planning and man. t<f ihe economy

Resource Allocai'on

4 plan implies (hat consumption and invest-mem aie each sl.ted io Bio- aler rent This tn.enmeni target it substantially hither ihan the perceni average annual growth implied byibPlan, and aligthily higher than ihe rale actually achieved1ut ii It lest thanerceni growth reported by ihe Soviets1 Since maeaimem |ro-th hai im well ahead of plan each yeariheeave4 may e greaic.

4 plan alto does nothanceocals of investmenTieaenice. among .he Lillian of lhc economy The urge, lo.nergy irmgeledive-Yea,But. eon.umer good, production and chemical, may be teeciving iltghlly greater attention lhan *

We haveon Mot-

uiure mniiary spending plant So.ieteC ^asserted lo Westerner, lhal deeiiiont on defcme resource allocation hare been affected by concern for consumption. Foreign trade represents, lives have staled-seH-soingly -thatund in, intended for defense industry purpose has been reallocated for additional tmpom of Wnir,.ecuipment and technology Theseed Ibe Food Progiam as Iheur infer manor, on current and planned allocaiiont of inveslmenls. ri .nsufo tell whether ihrs asterted realroca iron represents an .totaled casen mdrealtor,hange in priorities or. for thai mailer, whether it Is even true

ereent growth targeted

an be compared with an achievedf roughlyercent estimaledhe regime', tniereai in consumption is also suggested by the coniinued large share of investment allocatedhe Food Program in4 gill Hail one-lhird of icnal mveatmenrwithstand ing iheae signs. Men cow appears to beaunoui approach on consume, rssoes In his1 Centul Committee Plenum speech. Andropo* Sir rated thai improverneni

the Soviet standard of fating would be slaw. Increases ine maintained or. severalmust depend on increases in labor produeimiy.

* Al lhcuroratfiw

r.h..is.Imtmm lh,

l

m.-a

l,tUa w-nvnlliiBu,

'oeirr. iiflmi the luaVnhipi own

andm

ruf ih.,,

This One was1 al Ibe Ccntral Corrrrr.iuee plenum and Supreme Soviet ses. lion While Chcrocnko has supported the Food Pro gram tn ihe past and made efforts to cultivateeader ai tuned lospirations, both political and ccoriocme eotturaintt would probably prevent turn fiom ilieapt rag It sharply accelerate consumption if this were his dent e

Foreign Trade Policy

) Ibe Soviets have publicly espoused an even more cautious line on East-Wen trade thanreviously andqualitatively new level of eeonomk integration" among tbe CEMA economies. US linkage of bilateral trade with Jewish emigration from the USSR in ihe, ihe etposure ofast Euiope-an regimes to Western leveiace altempti (notablynd Western sanction* following ihe invasion of Afghanistan and imposition of martial la* in Poland Clearly motivated the Soviei leadership to seek lo reduce the USSR's poteniial mine rib. hi, io polili-catly motivated Western economic pressure. At the tame lime, doubts may have increased about the capacity of the Soviet economy to effectively am mi. Uie large amoeots of iraported Western leehrtoloty

A mayor (borne of Andropov'sspeech at

ihe Warsaw Pact summit in1 was ihe vital importance of reducing: the ekpeooence of CEMA countries on Western technology and credits Indeed, ihe Sovieu have urged the developmenl of an overall coordinated CEMA foreign trade plan,would increase Sovieti CEMA economic ues to ihe Wesi. Inaspian Chad-man Baybakov said that trade wiih Socialiilre* would increaseerceni inmore than double the annual rale of the cist thtee years -and he implied that trade with capitalist countries would drop aboutercent. This is an even more ambitious plan for reducing trartr wuh thethan lhal)

credit to the East Germans.

Adopted .nore stringent lending practices in dealing

-ith other CEMA countries.Warned CEMA countriesjhal furthet icdueiioni in

delivcrsei of oil and other raw maieriah may be

necessary.

the East Earopeans to prervade more aad for Cuba. Vietnam, and Other Soviet clients in the Third World

Labor Policy

The sharpest break -ith practices of Ihe flrerhnev eia has been the labor discipline campaign, with which Andiopov personally irkr.UT.ed himself. Although the regime has fired some allegedly corrupt or incotnpe-lent cnTieiali, Ihe campaign appears lo have been directed primarily against blue-collar workers. In the winter3 internal security forces and militia teams were used to search for workers absent from their jobs without permission

A seeoerd phase in ihe campaign was introduced inew decree introduced sanctions floss of vacation, loss of pay. and even dismissal) against workers absent without per mutton or drunk on the job and offered ftaanciat rewards to more prodaborers The saitcisoes are carefully limited,e. so Iheir impact may be less than expected Judging from leadership suiemcnu. we think additionalmeasure* to reinforce labor's commitesob performance are likely to be (artbeaming, although CVrnenko may not adopt asosture as did Andropov

What ibe post-Bicahncv leadership has noi done in Ihe Field of labor policy has been io remove ihe safely nei of virtually guaranteed employment in theirvrewkpliccs for all in the labor fence whose pee forma nees meet minimal recruit cm ems Dismissal remainsunitive measure, not an option available to management for cull In* costs and raiting the productivity of an enletpritt

also has indicated its intention ofEast European burden on Ihe USSR The

- Appealedniform CEMA food plan and an increase tn East European food and consume goods deliveries to lhc USSR, some at ihe ripe roe of hard currency sales to ihe Weal

(ton..mi, tMorm

Because of Ihr enormocs rocflicicaCylwca-thc Solei re own, presentlysacccasftl reform wouldccsrsornic ffowih ever, nvore than would an acceleration of investment We estimate, for esamplc. thai i' Soviet industry wcic operating int the level of produciiviiy attained beforemeant of indiicctly attesting with outmodel the potential impact of effective te-formor industrial output would be almost tv/scc ill acual rate '

How theaccession to Andropov exslvts wall undoubt-edly affect ihe course of economic change mtant ways Nevertheless, there appears to bewithin ihe present leadership on certain key aspects of economic reform. Substantial continuity is likely with ihe Bre/.hnev legacy of seekingombine more market associatedexample, siiff-er enforcement ofbelter planning, more decentralisation of authority with moreation of lliategic decision ma king, and more appro priatcly tinctured material incentives with more effective empleryrncat of the State's power toAll members of the leadership are committed to ceatraltrcd planning as the organinng principle of the Soviet economy and almost certainly would nor tolerate market socialism of the Yugoslav variety At most, ihey would probably be preparedccept only limited borrowing from East European eaircrtmcnta-tion witha few elements of ihe "Hungarian model."

The steps taken by the retime since Brcihnev'a deaih indicate thai the present agenda for change appears to inehark

- The placement in key pom of officialstrong technocratic background and exposure topractices in the military-industrial sector

' In It* rviiietirM 4rtinted in this rape.our moSrlt loninvii-

Ufaauipn arr taint en <hi cuimiitd hiiiniMal

t basoiticri amoni earniai. ita<

l>l milheIMHH"

. Inr Itcto*in mi ol inavury IMlKII'.il iv nrevninir had increased aMag ih> It rut aaarvas (rxa.* nUh la* HlaiSr

anaOtwsfc rata ammi a

HS arm - jMat ii 11 0itnn ihaa-

r"w

Improvement in the performance ol ccntiatizcd mechanisms for accelerating scientific andinnovation throughoutlhc economy.

Organisational changes in the Central Committee apparatus and Council of MTnisters intended to improve the center's capacity to undertake and implement effective strategic economic planning.

> Decentraliiation of some operational authority to large production associations.

- Modest strencthening of the role of self-financing, contractual relations and economic levers ioagriculture, and other sectors of Ihe economy.

Further experimentation with indicators employed to measure managerial success and intended to reward risk-taking, high-duality output, costand efTicicncy

Greater wage differentiation.

We believe thatrogram of modest change, even if implemented in good faith, would probably not succeed in turning around current negative growih in productsvity and restoringS rates ofgrowth

Outlookonamlf Growth: Somerojreriona

Mounting resource ahoitages and competition among claimants, ihe alarming costs of decliningand the opportunity for policy shifts povided by the needormulate Ihe five-year planre all likelynduce Ihe Soviet leadership to review its policyit hai not already begano so. To csaniiac the pros press lor economic growth ia the USSR60 aad to see what difference various policy choices might make, we have made fourliedarticularpolicy thai allocates different shares ofto consumpiion. military production, aadvery arcai where there ii the greatest uncertainly concerning the future [see boa, pagec call these the High Consumpiion. High Defense. High Growih. and Cost Avoidance scenarios. The last of these scenariosegime policy of "down

Unteetainiies in Economic Projections

econometric modeh require two lypet of data. Hiltoelcal lime irrits are used lo estimate the nature of behavioral relations between variables, such ascapilal and labor have combined lo produce ouipul Such relationships are projected inso ihe future through she behavioral equations in the model. All models also require information on how terlain future events will play out

There are differing defect in the certainly that can be attachedhese doto on ihefulure. Our estimatei of t'owth of the labor force are relatively firm, for example, because participation rates for the woeking-age population are near the ceiling, all the people who "ill Stan working duting the piojettion period ton already be identified in existing population data, ond we have good information on mortality rales. At ihe other end of the certainly sptciium is the distribution of GNP among primaryinvest' mem. defense, and exports. Although Ihtre are ob'i-cus rigidities, this distribution is ultimately subjeci to ihe policy ehoicti of Soviet leaders. Therefore, thefor the allocoitotls to defense spending,and txpotts that we must develop and put into ihe model are'analytic assumptions on our pari, which may be subjectubstantial revision as events unfold.

theattemptake profits* ia con-sumption, military produclion, and growthriminaling markedly againii any one ofocked, for reasons discussed below, wc believe ihii to be lhc moil likely scenario *

-These projections of growth were developed using SOVSIM. tbe large-scale econometric model of the Soviei economy that has been developed and refined by the CIA over the pasi firebc projections Ihat have been calculated fallange of growth considered to be realisticroad consensus among Western academic and government specialists on ihe Soviet economy. Difficult trade-offs Involved in resource allocation suggest thai there arc fairly severe limits on the options available to policymakers. Our scenarios attempt to reflect these limits. Ncveriheless.

I'm example, we assume attain tit>*tth rates for' overall defense eipendituees ond for miliiaryprocurementn the basis of our analysis of observable current and historical trends Similarly, although the total value ofis calculated in the model, the estimated flows of investment goods to producing sectors depend on ihis total and on an assumed pantrn of investment distribution.ecessary for our projection of the trade balance, ate also estimated outside the model. The actual growth rales of ihese variables in the future con be influenced by decisions of ihe leadership In ways thai the site of the labor force inarge extent alrtody determined by demographic factors) can not '

In general, we are more certain about input values that are subjeciittle, if any. manipulation through polity or art clearly reflections of long-itrm trends ihai ore noi likely to be revetted quickly. We aie less certain about the assumed valuesnput variables ihai can be strongly influenced by Suchfaciors as policy decisions and international market forces. One reason for looking at alternative GNP projections isauge how sensitive the values generated by ihe modeling process areome of the met important uncertainties in iht input variables

in add11ion to the icenarioi described In ihis paper, we hive eiamined cases with more eatreme assumptions (for caamptc. defense growth at rales corniderably above any noted in ihe past, or sudden improvement in factor productone of these eatreme cases resulted in rates of economic growth duringhat were dramatically different fiom the growth rate* in the projections deacribed below, either by showing growih of the economy comingall or byeturn to the growth rales ofnd

ladle I

l'lo'tumcni: Distribution5y Scenario'

The rationaleigh consumpiion policy would be ihe need to provide the material incentives needed to ipui productivity. Politically, ihis policy would have io be justifiedove lo pieempt likely popular unreal under international conditions benign enough io permiltep. The scenario would involve relatively greater shares of investment lhan in other scenarios for housing, trade and services, and agrieuliure (see table ll Total defense spending5 would be helda zero giowth rate through ihe real of theincrease total invesiment. and the volume of food and othergoods imports from the West would increase

The gain to consumers ofolicy wouldbe lhai growth In per capitawithinimesdecline only slightly and wm-td still be wellercent0 (see table 7)

the sectors that produce investmentandfrom the sectors providing industrial materials and services, which would in consequence tend todepress industrial output.ihe supply of consumer durables would beas would the output of consumer services and tctail Irade. We do not know what the effect of ihese consumer benefits would be for labor effon and produciiviiy. Given the notoriously poor quality of available consumer goods, increasing the supply of goods without improvement in variety and quality might not in fact provide incentives for greater effort In the workplace. Additional costs of this policy would be that, wiih lower economic growih in, there could be less opportunity ino accelerate technologicaleffect on both civilian and defenseprowth of consumption would continue to decline

principal Cost ofolicy in terms of economic growih would be slightly lower growih in GNP than in ihe other scenarios during the last half of ihe decade. Resources would be shifted away from

comirami cm capital utilisation of plant and equip-mcni prevent iraore rapid growth of the ccosscany0 under ihis scenario*

Com Aaoldanee

Each of ihe strategics Oct hard entails hey costs thai the Icadershtp would pre1 sbly wiih to avoid: the High CoAiuniption and High Growth strategics sacrifice enhanced military power; the High Coniumption and High Defensedifferentthe prospect! lor economic growth in; and the High Defense and High Growih ilialcgics run the mi of further depressing labor productivity or even kindling active public discontent. Thui we believe thai the moil tilery course of action that the Soviets willthere is no pronounced worsening of the inter national situation, no serious internalinability, and eo sadden ibarp deterof the euiciomicbe an attempt to make lome progress along all three fronts at once (consumption, military production, and growth) whilearked swing in any one direction. The relatively good results3 may provide additional impetus io choosingtrategy Over the decade. Ihis strategy would provide giowth sufficient toange of policy initiatives, especially in tbe areas of defense and investment, and still keep living standards from declining

Having both guns andtrategy we call theidan.ce approach, could be viewed as an citcnsion of certain trends observable already in

ssiirrdUry miw pradrartitaa -ill tm try ittm

Ipermit v" If an aacrate (or tha real al Ih* deeadr.

limnprncM fatcledn |tl orarHiiVi b>Wi V? oartiniai ad praduciiaa and coriinvnl ai| waa atwapai TW almiri aw Wasuttea* at ciualso Gamin llii'orx and iiponih* Wm lor hud

(viranry artr mil Al ihr lame ow proyccitou Mdnatc

lhaicnuUcwHi letw*ach an ll'frlyby sax. aad aaauaasniaa of she caput'iwitii toai aaofiirtai aaovtay Taw Ip^rrraataa ol iracac trcjaataiSai iHr tajaomy may br.

optrailni under angr

Uiiixtntnii lOcf-aed in Himi ol Jull oaibuimn oThaa iht ii anitahli lorai

ahr rad ofnnki Ai iK .iiMinfii had of

noiIh* omira.nl0

an nl avaitibM (Ipila'

t foresees quite low growth with nearly stagnating livingderaic yptuin in military procureroductivity break through as Ihe rtsosllilelyeovrse of development0 (ice boa.

Srrtrw Saaaraai-r

The most striking feature of the outcomes of all thencluding Highthe limited degree lo which the new leadership can affect GNP growth duringhe pcjacy oe-ionsdo not alter the estimate of GNP growth by more than about half of t> percentage point per year

aaatav* <

during the rest of this decade '

lo contrast with its limited ability to influence the talc of GNP growth for, the regime can loa significant degree determine howistributed. Within the i- enai.os wc have csamircd. our analysts indicates that

The lowest irvW of per capita consumption in Ihe scenarios could beo IS percent below that of the highest.

The share of GNP going for defcsise could vary fromocrceat.

-Industry'i share of new fiaed investment could vary by aboutcroeniagcese differentials would haveimc^tcaiioei for economic growth in

The neat two sections ol ibis paper assess tbe eifects of Ihe economic slowdown if we assume that the Soviei leadership pursues Ihe Coal Avoidancemeat of the assessment here holds true

r

a*

u-ei. lo Ibe cue" lhat tnihcl .ro-rth items fromol icwccaeorngoaplionalI--

i

Tht Ceu Awidmnct Sttnario

Tht Coil Avoidance sccnano assumes, in particular thai Soviet defense spending inilltait ai an ovetoge 'ait ofem. wiih ho'.ti.a't procurement thawing no growth throughnd g'Owlhear. Ktiea'ih. development, lining, and evaluation IRDT6EI growth will fallIn the High Crowih and High Ccnutmplion stenartot.spending is held ai ic'O g'OwlhS. In Ihe High Defense scenario,ssumed to growercent per year.]

Tht allocation of investment and labor amongtttlotl through the dttedt mirrors target! let in! -dJ flan. The shares go-ng to the energy lectors will increasehe expense af somestciors) The sharei accorded to heavy industry will remain telatively coweniIn the High Growth and High Dtfenst sctneeios, invettment tharei to industrial moitrials and investment goodsre increased and shorn io consumer goods and services lectori are reduced compared with this scenario In the High Consumption icenano. this incremental pattern is reversed)

Oil production will nearly reach the plan target6 millionay5 and thenlow decline5 million bid0 Uhe turrtni production level4l (Thisii ihe san-efor all temariai except High Growth, where production declines toi

With continued growth of domestic energy rcouire-menu,will have to choose betweenoil exports and meeting domestic needs. We

an ufir lUeJl there willubstantialil exports but that mail of ihe energy shanfall will be absorbed through slower growth In the domestic economy. {In the High Investment and High Defense scenarios, oil exports lo the West are higher than In this icenario. end. in the High Defense scenario, all exportsastern Europe are lower.;

Given these assumptions, our bell OSItltmenl al Soviet economic growthhai

Grovth will continue lo decline inverage annual GNP growth will be about 2abit higherit lower

Avttatt annual growth of industrial outputill fall io ilighilyerceni.

Observations of average weather conditions duringeriod suggest that average annual growth of agriculture output it likely ta varyread of kitercent, although ogrtevliure will remain the moil volatile tenor of the economy

Average annual growih in per capita consumption will fall io letsercent.

Average annual growth In new fixed IntSimrni will dropew postwar low of around JJ perceni

dtfenst burdtn will remain at oboulercent of GNP0

all scenarios Tbc subsequent section sets forth deviations fiom the basic findtags,he leadershipto pursue other strategics I

and intractable, do not threaten the continued eatst-enor of theolitical system Fcorvxiuc growth, according to our project icru. .ill remain positive duringbe regime it cushioned Iromadvene reactions among the popula-Impaci of the tconomlcn Internal Affaln lion to the growih ilowdown by an enormous pataiitic

The Political Regime

Regardless of which policy-determined scenario is cSnien Moscow'i economic prob-cm. while serious

of political controllers andic.iu-cialshave lb* strongest vested interest jn.ma title nance o( the cabling system of Communis! Pany rule

owever, may occui in the institutions of iht regime, lhc types of people representing il. and the propaganda line employed to manipulateu lace. Many facton will influence Such change, not ihr lean of which will bectional Struggle within the Politbaio But the rcautrcmenii ol coping with consequences of the growth Urr-down should bting two partially incompatible 'unctions eta met to the fore than in receni decadct' maintenance of political control and promolion of technologicaland more rflicient rruugeancnt J

Neither of these fane) tonal impcraiiirs is likely to produce najot changes in the iitsinational structure of the Soviet party-slate. In particular, we think the chances areslight Ihat ihe technological imperative would lead the leadership to replace ihe command economyoyalist marketith the challenge to poliiical control and vast uncertainties Ihat would inevitably How hornevolutionary more. The political elite is strongly oppoied to full-scale markeli-taiion, most policy advitcn do not believe it would be the right solution even if It were polilically feasible, economic managers would resist its implementation, and the working class would bisdlc ai many of the consequences olove especially ibe loss of yob sccuril]

What is moat likely to occui imi unisonally arc shifts in tbe balance of power among the bureaucratic empires that underpin Ihe regime lor eiample. there has alreadyetc in tbe KGB's overallnd we might tec it acquire greater enfotec*ncnt rcsponstbin lhc economy going beyond the attack onthe capansson of its role under Andropov probably created aniiety io Other power centers Shortly after his accession as General Secretary. Cherncnko emphatiied lhcof reducing the burden of day-to-dayby the party apparatus of governmental organs, to enhance the siiaiegic leading role of the pany. If ihere isigorous reatscriion of Ihe dominance ol the party appo rathas not occurred so far

following Breahncv'irole of lhc military could grow. Bul party and police controls at al) leveise-military establishment wilDcinsin strong enough to pi eve iii any military takeover, in the highU unlikely event that clematis wlihin the militarywith the parly's management o! the economy might seekssume powet We might see further Utempii to upgrade the ccnltal economic planning apparatus while reducing ibe role ol middle ec be tons of the economic ministries Tbe Academy ol Sciences aad Slate Committee for Science snd Technology might be elevated in the planning process And large industrial associations might be given more power

Ltadtit. The political control and technocraticcms highlighted by lhc ilowdown in economic growthill prrObly also iBfluence selection of ihe types of people likely to rise to high office in lhc regime. Top-level changes made soon after Breihnev's death couldarbinger of futuic recruitment patterns. On the one hand, there were promotions of people likeand Gcydar Aliyev (ihe former KGB prolessional and chief ofboth long csperienccd In intelligence and polite work, but lacking in economic mining or economic managerial capcrieocc And. on the other hand, there have been promotions of people like Nikolay Ryihkov.new Central Committee secretary; Nikolay Slyunkov. the new first secretary of Bcsorussia. and Lev Zayiov. the new first secretary ofclearly technocrat! *itt rtsodest political credentials. The losers here appear to be the genera list political cadres who have traditionally manned the top party posts in the ptennnces and in ihe Central Committee Secretariat Tbc new appointees arc probably leas ideological and more pragmatic than their predecessors, and tome aie piobably moreto accept change, bul the inane data available provide no persuasive evidence that they differio their policyindeed that they share any unique pohcy orientation, internal or eater-nal

P'opa/anda time. The dual demand) ol grearer polili-cat control and technological progress arc likely io leada lion of piopigarda themea thai were evade nt under Artdropo*'a rale. Thai, the need lo (unify or Obscure greater consumer deprivationoil certainlyigh level of teapegoalinf throughouthe media will continue to place heavy (tress on live puiported US military and ihreal.combined with chauvinist appcali to "Soviet patriotismmd-o'-mouth propaganda probably will highhghl Sonet sacrifice! to uagralefal allies and cult file rationalist scntimcnii more open ly. And, within the framework of an updated Man ill. Lcninin doctrine (perhaps codifiedew party programk we arc likelyind an emphasis on lechnocraiictheme already voiced by Andropov

Society

Die growth slowdown ofould in principle confront the leadershipo quite distinct societal problems active unrest, and poor morale/low labor productivity. Each has its own threshold ofabove which people give vent to then diseonient (in the former easel or cease to eiert ibemseKes oa the Job (in Ihelthough there are objective condi-tionl (fore disappearance of meat and vodka ftom the stores) that, if they came to pass, might niggerspouse, the populace's lubioc-live assessment of in well being in companion wiih its current sense of -haioughte will probably determine lis mood

Uitiftifases of civilis. incidents involving demonstrations, strikes,evenbeen0 Most frequently these

have been caused by complaints about working eonci lions and pay or by unitappiness over ehronre shori ages of mrat and dairy products There will almosi certainly be more insiances of such unrest in tbe future, whichever economic iiratcgy ihe leadcislup pursues

Reported cases of uarcsi bunch heavily la the non-Russian Baltic. Ukrainian, aad Caucasian republics, when economic O'sconuni has blended wiih maimer ing rcscnimcnl of ihe Rug-an presence and Moscow's repiessive iiationaliiy policy

J thu reporting

may understate the incidence of unrest in the Russian ncaiiiarsdin the large industrial . nit- whoserobably ofhe Kremlin

Concern over possible political instability cleailyhe patty elite. Roth Andropov and Cher-nrnVo have warned in speeches lhat publicf unattended or mishandled, could assume "crisis" pfOfvxtiora Debate in the press about the implicat-oni of failureeal adequately withdemands and public diseonient baa intensified Thisin terms of dealing within Socialistbecome more .significant as Soviet leaden prepare the neil five-year economic planew comprehensive parly program

ApcrerVeni.cn about the popular mood has probably significantly influenced regime policy over the past several years. It accounts ai least in panhe high priority assigned to ihe Food Program.

Massive grain importsAttempt! lo strengthen worker discipline

The higher profile assumed by the KGB.

Aiirmrns to curtail contacts between Sernel citirens and Weiterners and reduce the flow of information from lae Weal.

Attacks on more blatant forms of corruption and ofbuse of power

Wc believe,e leahat the reap- ic will be ableuppress those disturbances that ck occur and to prevent any chaining of them Ic-geibci Concerned by what it has seen ia Poland, the leaders lip has already moved to strengthen controls over the abor force. And. in contrast with Poland's espe'.ertce, Moscow has been highly successful in oooL'.ning unreal Where food shortages have caused demons!rations, ast has effectively employed firelight-inguch aa ruihing food ia from auiroutsding airsa and maintaining suppliesime, while targeting demonstration leaders for repression liven when force has been uted lo quell disturbance* lhat have occurred, the unrest has not spread

1 j

In contrast wilh Pol and0ere wasiiadiiionally stiong Catholicoweilul newly formed national labot union created by ihe workers, andupportive lis between workers and iniclligrntsisthere are no irMinutional-iicd cauirtorli foe effectively transmuting specs Is lor mats action lo lhc pjbiic al luge screw ihe >ast tettiiofy of lhc USSR Strikes over wc-king coodi-lions in Gor^iy and ToTyaltiex caample. were not exn mcnlioncd in lhc Soviei pressear (ind thennd nvjsl of ihe population seems lo be still unaware thai Ihey occurred

Soviet workers lack Ihe oi fa mutton, discipline, and recent historical experienceollow Ihe Polishleasi in. They live in ansaturated wilh police informers who workegime thai has notts nerve and it intent on crushing dissent. And they cannot count on effective assistance from disaffected elements within theor bureaucracy. Wi by no means rule out the possibility of 'pools neous Urge-scale localized disturbances of ihe type thai occurred, for rumple, in NovorjHtfkask inuldo not believe ihat tbe threshold of sustained and widespread mass unrest wiH be crossed in

ad lam**Much opcntouicc

commentary and variouo

suggesterceptible decline in worker morale and growing social malaise have occurred in reccnl years. Alcoholism has probably risen, as haveassociated withfamily bieakup.adult and infant morn lily (secbsenteeism, industrial accidents, and spoilage.have involuntlrily increased, thanks to ihein the maikctplace ol many high-qualitygoods and services Worktime it lost while employees spend noun shopping for food and other consumer goods and services Corruption has probably increased, and enormous bumia effort it beinginto unsanctioned or illegal Second Economy activities None of these trends can be tarned around easily

The caitnt to which inch ptstnorncna have affected productivity already and the estenihich their amelioration would improve itubjctl ofamong Wesitrn specialists.t

ihey iheimelvei say, Soviet lenders believe ihat public, ditsatisfaetion with lhc availability eOonvumer goods is an integral cause of low labor productivity and lhal progress in raising contuinjyt Ion levelsecessary- -if notfoi sharply improving productivity. Alihoogh ihey will continue thecampaign and continue so appeal to rntriotisrn by citing lhc "imperialist danger"timulus lo labor effort, ihey probably caiect only modest pro-dnctr-ityfrom iueh gambits. Theyalso rccof nitc that the policy of increasing wageto Stimulate productivity can work only ii il is progressively backed by an increased supetty of qs.ai-.iy goods thai lhc more ambtticus workers ear. hope to aequrre

Military Power inGrowl* Likely We believe ihat the Soviei leadership will seek to continue its policy of ihe pastears of balanced and large-scale forceThis assessment is based on our reading of Soviei objectives, knowledge of Soviei military needs, and physical evidence about weapon systems.

Deployf these systems will encounter obstacles. .We think ihai these obsiaclcacan be overcome only if theinecision4S on reaouicaa to be allocated for weaponsand ptoduciion inio increase spending on military procurement ibghlly. while reducing growth somewhat in or her component) of miliiary spending. Thus, our Coatise of average annual procurement from icroerceni.cosion would be presented privately io elite audiencesesponserowing ibreai posed by increased US defense spend

mrtt Mrndtrnitmiiom. Even with this

boost,cancel ihai ihe flow of at least some new weapons into ibe slock of Soviet military equipment will not be as rapid as in previous decades The Soviets might:

Ciin til some weapon programs that are near ihe

end ol iheir produclion run. Thit would permit the transfer of resources to civilian production orollow-on military piogrartH

Cul backliminate some support programs, suchthose for naval auxiliary ihipi and irarispotl aircraft, incrcaiing the use of merchant ships or civil aircraft to support military operations.

Stretch out some weapon procurement programs and slip Ihe lime schedule for force modernization slightly.

Extend the service life of some older weaponto reduce Ihe rcoui'ement for new equipment in selected areas-

Yet, if ihey were to make these adjustments, we esiimate that the Soviets would not have to forgo any major weapons program or forsake any of their force modernization goals.e project impressive force gains for the Soviets in. Important programs in development that could be deployed with military forces through thenclude sever-al military space sysiems. strategic cruise missiles, another generation of strategic ballistictrategicarge transport aircraftarge carrier for conventional aircrafi

Impact i< ibe Economic Slowdown on Foreign Pottey An Overview

Overall, we believe thai the slowdown in growth will not result in major changes in Soviet foreign policy. Wc do not see economic problems at home motivating the leadership to undertake high-risk adventures abroad that arc designed to distract an unhappy ublic or produce economically beneficial geoitrategic breakthroughs

Moscow, however, will continue to exploit opportuni-ties thai might arise to increase economic pressures op the West and divide the Untied Slates from West European or other frtends while gaining economic adva.rtagc itself. Setsitrviiy to economic problems wilt almost certainly lead Moscow to teek to avoid roajor new commitments of economic aid tn tbe Third World. Moscow is also aware lhai pursuit of its

Hi

jnjectives there through force and subversion could negatively affect Ihe USSR's trade relations with Ihi: Weil Nevertheless, awaicneai cJ ibiaIherobablyunlikely inni io sigmfieaalty constrain ihe Semen' too-I nd military actively in ihe Third

World

pe

The slowdown inowih willts mowmpact on relaiioni betvern the USSR and iu cbeoi regimes inurope, which currently receive rnoat of Sei-iet economic andassistance. From the Soviet iiandpoini, the coil of lubfidited i'iI and other raw material delivcriei to Eaiiern Europe hai been caucmely high infor got- for relieving domestic enerfyi or earning hard currency Overall, ofiporii- Moscow! leading ha id currency earnerover half goes io East European and other Commanrst countries. Bccauie of ilow'ng oil production and rising internal demand, as well ai continued need forof foodstuffi and plant and equipment from the Weal, the opporiunity coal to the USSR ofastern Europe is likely to remain high Thai the question is not whether the Soviets will iQuerir Fanerrv Europe for ihe rest of ihe decade, but how they will do so and howCEMA inietraiion, Warsaw Pact force modern!tilion, and Irade

We believe lhat there is little more that the problem, plagued Eail European countries can provide lhai will help the USSR economically and that calling back on Ssmet oil deliveries to Eaatern Europe would be riaky Yet to achieve tbe levels of GNP growih and net capita consumption ilipulaied in our Cost Avoidance scenario,0 Moscow wouldmpose further cuts in cal deliveries to Eastern Europe beyond those already lesriesl Additionalfby price hikes and cuts in other raw materials, and even if partially compensated for with eiporis of additional gas, would create new tWittcal andstrains in Eastern Europe

We believe, never the leas. that the Sovieu will risk sggravatiag popular vniest ia Eastern Europe by lightening the economic screws becauser.scnt the East Europeans' higher standard of. and feel that drpn-aitonsiho-jld be shared equally within the "fraternal commonsvealth "

May believe Ihcrc ii enough waste in then economic!mpose additional costs without cutting coasumpnon sharply.

Appreciate-1he purely coercive power of tlieaintaining social order

There is also ihe safety valve of East/Wesi European trade. Although suspicious of such relationshreat to Soviet political hegemony and economic inter eats, Moscow will piobably continue to tolerate selective East European economic links with Western Europe that could relieve the burden oa the USSR and arc unlikely to be used by trading partnerfor political leverage

Ihe United Stales

Potentially, the growth slowdown could rrsotl affect the Soviei pasture inward ihe Uniied States in trade and arms control

8.tttiul fraaV Moscowommitted uruicr the recently negotiated US-USSR Long-Term Grain Agreement (LTA) toinimumillion tons of grain in each cf Ihe neat five years. The USSR, however, also has LTAs wiih Canada. Argentina, and several smaller suppliers, whichMoscow to boy in theinimum ofillion tons annuallyarotocol signed with France last year reportedlythe USSRillion tons ofoor domestic grain harvest could push Soviet gram import leouirerncatt considerably higher lhanillionear wc estimate they may need in tbe longer term The robust outlook for global grain prodoeiion over the nest few years, however, suggests that the Scivieis" need icon for purebasea from the Uniied States aboveA commitment andUS leverage ate likely te be suite limited. Men-cow stillhe United Stales attractiveuppliei because of its unique year-raund capacity' volarnes of grain quickly at short notice

Out analysts of Soviet equipment manufacturingand the continuing problems in the oil induiiry indicate that requirements inor

importscenter on Wenernequipment and deeper dulling, fluid lift, well completion, and servicing In ioIhum. ihe Soviets will need rciphis'.icaied exploration equipment, offshore drilling platforms, ind secondary Cnl refining technology Be* cause tie it criticalaintaining lotal Sonethit decade, continued impotti of pipelayerx. turbines and compeeisoe'. and otherequipment -ill be neeessaiy. Western equipment and icchnolocy will be eipeciallr crucial for exploiting tour gainch ai thote at Astrakhan and Tenghit. The Soviet! will alto need Western help if Ihey arc to intensively erploiicoal resources during

Although the United States is the preferred supplier of most types of oil and gai equipment throughout the world, in recent years iu share of the world market has decreased, even before the embargo on sales to the USSR. The Soviets have been able to purchase almost all of what ihey have needed from non-US suppliers, and termination of the embargo hat notaffected their policy of buying from ibc United States, onlyast resort

Nevertheless, large-scale US assistance would help Moscow in maintaining ml output and ckvcloping Arctic of ft bote resources The United Stales remains the sole supplier of certain oil and gas equipment, the need for which should increase at Soviei oilproblemsmcly. high-capacitypumps, deep-wel|.dnlling rigs, well- and mud-logging equipment, and various items foroil production.

The Sevielt urgently need high-capacity submersible pumps, which can lift Increased volumes of fluid and thereby iiabilite output ia already producing fields-where ihe ratio of water to oil being lifted is rising steeply. The Soviets reeogniie Ihat this equipment is necessarytermination of tbe USand approval in4 of an capectplaced aaillion order foe submersible pump)S manufacturer Aorder is possible Delivery and iottalUtion of the first order will takeo ll months We estimate that this rnove could Havrote in boMing up oil production.

Sr.viei iradc officials arc currently pushingoviet venture with ihe United Slates and Canada to tnj nut act urc drilling equipment and assemblies lor oil eVrvclerpmcni in lhc Barents Sea and possibly else-here in ibc USSR.ontort turn reportedly would be sKorparatcd ia Western EurcoCcomplei eorrtponenia would bebe United Slates, and simple components would be rrurnsfaciared and final assembly carried oui in the USSR. Tbe USSR has lo develop offshore oil deposits io maintain future oil supplies. The Soviets presumably rccognixe thaineed US and Canadian participation. Only the United States has the technical and financialneededroject of ihisigure ofillion has been trieniioned for the eosi erf the project alone, with lotal Barents Sea development cosis running5 billion

Whether this degree ol technological dependencearrow range of US equipmeni, particularly high-capacity su'omeesiblc pumps and offshore equipmeni, translates into much poliiical leverage for ibc United Staves is probicmatic Wc believe that any Soviet willingness io accommodate US prshtical iniacsu in return fot aid in oil equipment would be limited and would depend upon Moscow's asieiscnenl of ihestale of bilateral relations The Kremlinmight show some poliiical ftcaibtlily if leverage were derated quietlyore favorable diploma (ic environment. Bul if Soviet leaders felt lhal trey really had to openly choose between significant US-dictated political concessions and lower oil production, they would probably opt for the Utter to avoid what would be regarded both inside the regime and abroadumiliating display of weakness. At tbc rriomeni ihey -obviously peeler to boy the submersible pumps and cross the leverage bridge when and if areuinstances require

Heavy official eniphaiu on the Food Program indi cates that Urge investments will continue to be made through then agriculture and ibe food industry. Ministry of Agriculture and foreign trade officials have indicated that imports will play an important role in this food-related investment. They have expressed inieretl in acquiung Western farm

among some lc:deri that even small Kern should be taken lo satisfy urgent den.mils fV materials and equipment in other programs by lightening mililary oollays. These leaders might therefore be willing toote moderate posture In arms nesotiations without any precise reckoning of ruble benefits lhat couldtlRy could secure iheirflanks against ihe charge of undercutting national defense

Tbe Third World

If the slowdown in economic growth were toey factor shaping Soviet policy toward the Third World during ihe rest of. wC( wouldespect Moscow to:

Cut back on already low levels of economic aid to non-Communiel less developed countries (LUCs) and focus aid on allies in the Third World.

Insist that Communist clients be more frugal in iheir use of Soviet-supplied resources.

Insist on timely payment of debts.

Increase hard-cutrency-earning arms sales as much as possible and provide less concessionary financing.

Avoid provocative and nonremuneraiive military assistance to regimes like Nicaragua, which do not contribute significantly to Soviet security. In fact, changes in the domestic economy haveecondary impact on Soviei behavior in Ihe Third World in comparison wiih tbe impact of military and geopolitical factors, and thus Moscow is likely to pursue these objectives only in part

Al the3 Plenum of the Central Committee. Andbluntlyrequent LDCof Soviet light fistedness in nonmilitarythe Third World on notice not to expect much in the way of such aid from the USSR. This poslure, of course, was not intended to signa' less Soviet involvement in the Thirdrmsfor hardbeen accelerating:oviet arms agreements climbed to S9 billion.ercent higher than1 and well above the average for the previous five years. But, economic assistance is being channeled even more lhan before io the USSR's Communist allies and leflisi client slates. Ihey receivedeicent of Soviei aidcnts:12 ihey receivedcrCcn

Towardd nam, and Afghanistan. 'vhervincurs iu main Third World economicand military' strategic factors have fareconomic considerations and willto do

O.A* Soviet aidear keepsafloat and help, to bankroll Cubanin Africa and Central America. Moscowstepped op iu complaints regardineuse of resources.

Sovietccentiy nave

OwiiKiaKini ia moan Government representatives about the low productivity of Cuban workers, the island's inefficient utilization of land, and theof Soviet advisers and technicians. We espect lhat. although Moscow will maintain thevolume of iu oil deliveries to CubaS. the oil price subsidy will fall sharply as oil prices charged to CEMA countries approach the world price. Moscow has also been pressing Havana to fulfill iu sofi currency sugar contracts with the USSR, even at the expense of hard currency sales. Soviei pressure is likely to become most acute5 asnegotiations forrade proiocot get under way and as Januarydate when Cuba must begin repaying its long postponed debt to the ;

Nevertheless. Soviet interest in sustaining aregime Ihere assures Havana of continued large-scale support- Cuba remains Moscow's hey beachhead in Latin America; il hasighly valuable resource in achieving Soviei objectives in the Third World; and il peovides an important channel for Soviet aid to leftists. There are0 Cuban military and civilian advisers in Third World coon-triesrge-scale Soviet presence might be viewed with alarm by the locals or by the West. Cuba also offers the Soviels important intelligencefacilities, servestaging base for Soviet military reconnaissance aircraft, and providesfacilities for periodic Soviet naval deploymcnu. To exercise influence over Castro withouthim. the Kremlin must exerl some economicnot too much

Vietnam. Vietnam's strategic importance in Alia makes ally major reduction in Soviei aid lo lhal nation similarly unlikely.ulcrum for exerting leverage against China Irom ihe soulh. and use of Cam Ranh Bay allows il to increase its naval presence between Japan and (he Indian Ocean, maintain aerial reconnaissance,deploy limited attack forces. As wiih Cubs, recent Soviet public (taiemenis suggest thai requests for further increases in subsidized shipments of oil and food to Vietnam may have been turned down to persuade the Vietnamese to make belter use of aid already available. The Sovieis have pressed the Vietnamese hatd on debt repayment. Although they almost certainly will provide the assistance theynecessary to sustain the regime. Hanoi'sof its needs will undoubtedly differ from.

Afghani nan. Finally, the USSR's behavior inis not likely to be determined by economic considerations, because its commitment there results from security and geopolitical factors. Although ihe cumulative economic costs of theat moreillion for opcraiions, maintenance, construction, equipment repair and replacement, and subsidizing the Afghan armednot too large, they nonetheless are undoubtedly higher than originallymall fraction of theseis offset by Soviet exploitation of Afghangas. Cost calculations conceivably could be one among other fautors nowajor expansion of the Soviet military presence in Afghanistan. We believe, however, thai,hange in policy inwere dictated by strategic considerations, economic calculations would not constrain Moscow's actions I

Otter Martin Regimes.has notsocialist orientation" all the assistance they have been requesting, and ihey have not been happy about ihis. Indeed, the Soviets on occasion have counseled some of theseexample, thetoithdrawal of Western assistance byolicy ol economic radicalism. Some of these states have explored the possibility of greater help Irom the West.the Kremlin has been supplying increased aid. The overall riue in Soviet economic assistance to

LDCs2 was accounted for primarily by new aid to Marxist diemAngola.and Moumbique. Nicaragua scouebmsjor gains in Soviet aid0 million in new agreements to finance development projects. Soviet military deliveries to Nicaragua jumped from S6 million1 lo SSO millionith an expansion In lhc number of military advisers. More-aver, dcpailing somewhat from its earlier practice of concealing Soviei aid by largely tunneling it through surrogates. Moscow has recently been increasing the direct delivery of nonlethal military equipmeni io Managua

Important Non-Marxist Client States. Moscow has also responded lo increased Western competition and ihe current world trade climate by offering bctiei miliiary supply deals and more sophisticatedto key non-Marxist client states. The military resupply accords signed wilh Iraq and Syria, fo: example, underscored Moscow's desire to recoup lost influence and prestige and. in the case of Iraq. Moscow's inability lo improve ties with Tehran and its intention of preventing further erosion of lis arms market to France and other Western suppliers. The inclusion of softer repayment terms, new2 tanks, high-performance aircraft, and air defense missile systems in ihe latesi Iraqi aodignificant change of course forir dealing with Its major Arab clients.

Particularly alarmed by India's overtures toward Western arms suppliers, Mram. look unrccccdcnied slept23evitallie the miliiary assistance relationship. The Sonet armsdescribed by Indian officials asadvanced military produclion technology andtoange of Sennet hardware and compooenit India, and represented Moscow's first genuine offer lo transfer some of Hi current military technology outside ihe Warsaw Pact. Furthermore, the USSR and Indiarade memorandum which increased Soviet soft currency eel deliveries io IndiaJ byercent. Commerce Minister Singh's visit io Moscow in) prcdtieed an agreement lo4 Soviet Oil deliveries to India1 level.

Spinoffo'les Behavior. In addition io the direct gains ind losses entailed in Moscow's bilateral relation, with Third World regimes, (he Soviet.ience indirect or spinoff tains and losses. Afghani-Stan. Tor example, has seruiliied Mcrscow to the 'possibility lhat aggressive actions in the Thud World can provoke Western responses that impede efforts to improve the USSR's economic performance. Bui il has almost certainly not convinced the Kremlin that the link between Soviet action and Western reaction Is absolute or enduring; irideed. it has shown thateconomic consequences can be somewhat offset by political gains from splits within the Western alliance over how to react.

Soviet military assistance to Nicaragua demonstrateswhere there are economic costselationship wiih an LDC within the US sphere of influence and where the USSR's security is not at all atKremlin is still prepared to lake actions that risk worsening the environment for armsand trade relations with the United States. Where one or more of these constraints does notexample, in Afghanistan oris even more unlikely thai concern over US or Westeio-inspiied economic costs will evoke major Sovieimuch less retreat, in the foreseeable future. If they can also expect positive economic gains from assertive behavior in ihe Third World, the Sovieu are that much more likely to discount Western trade-related responses. Given their urgent hard currency needs, for instance, ihey are likely to value cash in hand from arms sales and military assistance far more than the intangible benefit of Western good "ill attributable to any eschewing of such sales

Another development in the Third World that might conceivably be seen by Moscow as likely to measui-abty improve the USSR's economic prospects wouldignificant reduction in oil available on the world market, ouch an occurrence might be perceived as once again dramatically inflating Moscow's hardearnings from its own oil exports, permitting il either to increase imports from the West that would stimulate economic growth or to retain more oil and gain in energy production- Higher world oil prices, while likely lo alfeel the price of Soviei imports, might make additional purchases of Soviet natural gas and participation in compensation deals more

ji tractive to Western Europe And such prices,mining East European economics (which imporimall fraction of their oil fromould lurther enhance the Sovieu" leverage lo extract more goods from their CEMA partners by raising energy prices in intra-CEMA trade"

In contrast to obviously high-risk scenarios of forcible acquisition of oil by the USSR. Moscow might believe that it could benefit without major risk of military confrontation with the United States from reductions in oil deliveries to Ibe world market caused by local rivalries in Ihe Persian Gulf to which ii coniributed only diplomatically or as an arms supplier. Or.might assess the risks of supporting surrogate or Ihird-parly-aclivaied attempts to reduce the flow of oil rrom the Gulfe relativelyecision to back such aitcmpts covertly would not preclude tbe simultaneous pursuit of alternative policies in tbe tcgion, such as gieatei coordination with OPEC and eiponded military sales to regimes presently in power. However. Moscow would have to weigh the likelihood thai any forcible restrainU on oil deliveries from the Persian Gulf wouldtronger US mililary presence in ihehighly undesirable dcvolop-meni for strategic and nolieasons from the Soviet standpoint.

China

Economic calculations are subordinated to broadand military-strategic concerns in Soviet relations with China, whosea fundamental and implacable long-term threat. The Sovieu seek to build Soviet military power in Asia and isolate China diplomatically, while at "the same time bringingimited detente between China and ihe USSR tin would stimulate reluctance in Washington to help China moderniae its economy and military.

tiedc Relations. In3 Moscowew trade agreement with Beijing,onthross-border trade protocol was initialed. While the agreementciccnl increase in tradehisstill amount toerceni of China's toUl trade aod about OJ percent of Ihe USSR's. In pushing ahead with these

-

a

USSR: Hold Currency Financing Rcquirernents Under Allcimllv* Scenarios *

ikirn-li C

iwc-1

tei.l

PI m

aa d

it i

ofxllll

7en: im-tril

4

'i

'

alt.

1

crrdu. ai.vn

rmrall annual infiaiie* ratell trade escrpiI-1 thn riseate tiitliiiy

indl rem. Nominaltaan that of inDuioo. Silo o* told riseorn ia

nrioes droppedi< ofarrel for theo TOOwbere teal imperii arc IseS*

owSr nil andprMvcliio lardandJOO toutmrmst crowtreewt a

(oumnct Inio10IM1-I4 tad iken roseIkeInflation Nomiulnca fail (remrr ihtnund

future enraordinary dilficuliies in ihe Sovietwe believe ll ii unlikely thai Ihe leadership wouldarge increase in the debt service ratio, even if Wealern Irndcra were veiling to permit this. Moscowessening of economic dependence on ihe Weal over the longer terra:ainfully aware of the troubles that could ante fiom overeitendcd borrowing (Poland looms large in the Sovietnd it probably ts mindlul of the eiample it mutt set for order CLMA regimes lhat might be leas concerned than it Is over fiilinc-al eaurujlcrrtcsu with the capita lot West. Moscow, trerelce. will probably seek lo finance thoseas much asby inereating iu hard currency earnings

Through, the Sovieu* ability to accelerate hard currency carningi depends significantly onoil supplies to Eastern Europe while extracting greater export comrniinicnli from hard-pressed Rloc regimes. Bui the possibttlfiei for expanding Soviet hard currency cxparii late In the decade and intorc greater. Apart from the chance lhai oil prices will again lisc. the main question concerns Wesi European impoits of Soviei natural gas

The USSR has vast natural gas reserves and the capability to increase deliveries rapidly beyondconn acted-forome surpluscapacity exists even now8 the Soviets will easily be able on very short notice io expand deliveriesr cm cable incremental West Europeanat em em el yprices. The main constraints on eipansion will be the level of ihe West Europeans' demand and their willingness (or lack thereof) tosecurity pram,for high priced North Sea gas.

We believe il is unlikely that ibe Sovietsignificantly more conciliatory position oo mililary -political issues in the hope of landing large new orders for gas later in. If such purchases made commercial tensehe West Europeans, il is highly doubtful lhat they would attempt lo impose such preconditions Inwith Western Europe, the Soviets would be loath to give the impression of being willing to make political concessions out of economic need

-

Moscow hai long sought eipinded 'ipanctcion in Siberian cnctgy and resource divclopment. The Soviets clearly could alto uie more"Jar*otic !ceKnok>ty|(lo' example.tecl prcdutu. ind heavy eouipmcniiraoui political and economic reasons.cn*ill;nfncfi lo agree lo further compcniaiion deals, the Japanese have showninterest in recent yearsarge-scaleofiiadc with the USSR Wc believe thai il Moscow were to offer major concessions on the Northern Territories issue. Tokyo would irsatcaa its economic reUirons wiiH tbe Sonet Union However, there ii no evidence whatever to suggest lhat growing economic pies turns might lead Moscow to set aside the military and political calculations that hair inng inspired in inlransigenee on this key issue

Impact ol Alternative Economic Scenario*

We have assumed so far lhai ihr Soviet leadership wouldalanced Coat Avrsidancc stiaiegy. However,hose to follow one of the caner scenario* what might the effects be"

High Consumption

K the Soviets decided lo continue to holdrocurement levels flai ihioughout, they probably would spread the shortfalls among theservices, although making them searnewhai deeper in general purposespecially ground forces Outlays for general purpose forces are currently larger lhan those for strategic forces, and they lake up more of the defense budget and more of Ihe energy, manpower, and key material resources needed by the civilian economy. Unlike strategic wesponiproduclion of general puipose weapon lystemi competes much more directly with prodwci-on of equipment (or sectors scheduled for further bunts inagriculture, andEven with flat military procurement, the level of expenditures ia so high lhat Soviet militarywould continue to grow throughout ihr IVHOs

Ii is not clear thai under preseni cooditiora increased produclion of consumer goods would leadigher labor ptoductiviiy. Therefoie. we cannot tell whether the High Consumption scenario would achieve its

hypoihciited economicto bring aboul an upturn in productivityolifv that did not produce result) perceived by Soviet consumer, as true improvement! could tirr-ply exacerbatee"ith of resource jl location aad growth

Inlernationally, High Consumption could'li. -ely more moderate policy. There mighi noi nerde Quite as much pressure applied to Lutein Euiope to allocate resources for mililary puipoics orrade on disadvantageous lerms with ibe USSR. Thus Ihe prospects for noncoercive stabilization in this critical region might be enhanced. Tbe attempt lo increase imports of foodlluffl and consumer goods dom the West might be accompanied by somewhat less aisfitivc behavior in the Third World, (c) Of all theigh Consumption wouldmost polarize the Soviet politicalof internal accommodation and external iclaiation ranged against advocatesard line bothand ia foretga policy. Adoptionighstrategy might be impossibleayor thakeup in the Pohiburo and formal proclama-lionew general puny line

High IMtuse

A High Defense strategy, oo the contrary, would entail more coercive pressure on the Sonet population but probably less tension within tbe political elite. We bcliex that during ihe plan. the regime could handle the projected average annual declineercent in per capita consumption without seriously risking man unreal among the population, although growth in labor produciiviiy would probably itflet farther erosion.ecline in oontsmption could not cootiaueithoutrisis in "Matrons between the regime and Soviei socitl)

i

Eiternally, Eastern Europe would bear the brunt of the High Defense strategy Not only would pressures for higher defense spending and dclrvcries of goodsaitern Europe be nroped up. but Soviet cal deliveries would be severely cut back. This move would depfcsi living standard! in the region and increase thr likelihood of unrest and political iniiabitli)

Paradoxically, in vie*il* ultimate aim. lhc High Del ernewould necessarily require inenien Hon of anti-Westernwould also require in expansion of iraoe lies with the Wesl lo acquire highigher share of Soviet oil exports would haveo lo ihe Weil to paylarger Imports of machinery ind equipment. In keeping with Ihe rationale for High Defense, however. Ihil drive lo eapand trade would probably beby s'lll more active effortsplit the Atlantic Alliance Whether Western Europe and Japan would accommodate such an eapaasion of trade in the faceudden acceleration io Sonet mitts') tpendlng would probably depend greatly onincluding Western awareness thai ihn acceleration was occurring The search for hard currency wxild also give Moscow in even greater interest ir.conflicts in the Third World so thai il could promote arms sales

The High Defense strategy would not involve any radically new alignment of forces within the Soviet poliiical elite and could be justified persuasively in terms of "Statef these ihiee alternative scenarios, it would tlteiefore probably be least likely to provoke deep splits within the leadership

High Growth

The High Growth strategy would have roughly the same internal and exteCftat effects as the Highstrategy. However', tl might be somewhat less likely to undercut the morale of tbe labor force. Because this strategy would be pubJicircd not by playing up lhc immediate Western nuiiury/political threat bul by stressing the strategic importance of promoting general economicould be eom-patibleess hostile ruoruganda posture lowaid the United Stales

olitical tiaridpoint. the High Growth strategy would combine the poliiical deficiencies of both of ihe other two alternativeyero growth in allo-catioi. for ihe military and heavy pressure on theappealing fundamentally loany major alternate constituency. Its main attraction for theprospect of anbase foi force expansion in would, yeihaps, be sufficiently compellingieclude the profound divisions within lhc leadership thai we would eincct under the High Consumption scenario

Irrrslicarioni

Hit-hly Unlikely

Under any of ihe scenarios ihat we have described, we believe thai ihe chances are esirrmely slight thai,he ccoraortnac slowdown will

widespread giopular unrest in lhc USSR

ihe way for either significant liberalizationolish-style militariration of Ihe regime.

Bring toeadership stratum wiihdiffcteni foreign policy aims.

Compel the Soviet leadership to introduce major elementseccntraliicd socialist marketlike thai of Yugoslavia or evenall the possibilities for political unraveling or rcallo-caiion of power this might email.

Force an absolute rrduciion in military spendingayor change in the disposition of miliiaryor example, reversal of ihe buildup against China)

Render the USSR substantially more vulnerable to Western economically based poliiical leverage thin it is today.

the leadershipccept arms controlit would find basically unacceptable onor political grounds.

the Kremlin in undertake high-riskabroad that arc deigned to distract anpublic or produce economically beneficial geo-strategic breakthroughs.

Lead Moscow to variously reduce assistance to Communist slates (Cuba. Vietnam. Afghanistan) or other Marxist clients (Angola. Mozambique,Nicaragua) ia ih* Third Wortd.

Ccovitrain Measeow io reject all requests for ecooom-ic assistance from strategically situated old or new

LDC clients.

-jeerff"

Bui il the growth slowdown it unlikely to induce such profound chances in Soviei behavioe, it will never! he-less shape Soviet aflairs in ways ihai do bear signift-camly upon U5 concerns

Challenges to the United States

So'iei responses to the slowdown of economic sjiowth are likely io accentuate already existing challengesS interests in ihree areas: maintenance of ihe Western alliance, siabiliialidn of ihe Middle Ban. and arms competition among LDCs

The need to significantly increase trade wiih the West under all scenarios except High Consumption will lead Moscow to redouble efforts rooted in political and military objectives to split Western Europe and Japan from the United States, (is first aim will be to undercut any united Western trade policy thatWestern eaporls or credit to ihe USSR. The Soviets will work hard to exploit and widen existing differences between the United States and its allies over East-West trade policy

If world energy supplies were to worsen appreciably or Western economic growih accelerate, Westernmight become more interested than il presently is in expanded Soviet natural gas deliveries. This situa-tiun wouldew dilemma for the United States in the second half ofecond dilemma mieht resultossible gradualof Western lending to the USSR,remlin decision to allow atoderate rise in the USSR's debt-service ratio.

With or without the slowdown in economic growth, the Untied States would continue to be confrontedtiong Soviet challenge in the Middle East in. Out economic needs will intensify Sovietio expandofiiablc relations there. Moscow will seek to extend trade relations with the region's more conservalive states and may attempt to use talks with OPECeans for broadening its contacts. While doing so. Moscow might be tempted by economic motives to covertly encourage ain deliveries of Mic'dlc East oil lo the world market lo raise ibe price of oil and increase Soviei hard currencyihis did notaffect the USSR's capacity to earn hardfrom arms sales to eustomets dependent on Middle East oil money, nor obviously threaten lo drivesupply envCes of Soviei imports above acceptable levels Moscow might attempt lo reduce deliveries by tanning interstate conflicts within ibe region, backing MbvcisiOraaor supporting eapanded terrorist "activities Although we believe that the chances are greater that military and political cakutaiions would lead the Kremlinschewtiaicgy, its riskwould be fa> less lhan ihai of an attempted forcible acquisition ol oil

The Sovieis* main lever for maintaining or increasing tls influence in the Third World is its role as an arms supplier. The need to increase hard currency earnings provides an additional impelus lo Moscow's efforts lo ciploit tensions and lo sell arms and other military assistance toonly ia the Middle East, but in Africa and Latin America, too

Opportunities for Ik* United States The Sonet slowdown in economic growih. however, should also broaden various potential opportunities for USinformation policy, irade. arms ncpoti-al-oris. Eastern Europe, and the Third World

More so than in the pail ihree decades. Soviet economicheas il does on improved laborbe peculiarly sensitive to the state of public morale. At the tame time.| be lest able lo satisfy aspirationsise in living standards and more driven lo justify Ihc need for sacrifice with mendaooui propaganda about ihe US military threat Thus, the regime wifl be vulnerablenformation that

Reinforces the perception thai growih in tVing standards has slipped in comparison with what it "ought" io be, as measured not by Western criteria but by the yardsticks Soviet cm/ens themselves privately employ.

Strengthens awareness of libera tiling solutions to Soviei economic problems lhat aic rejected toy the regime for narrow political reasons.

- Counters the regime's efforts to blame the West (or high Soviet military spending

etailed appreciation of the cost of Soviet involvement ltl the Third World I

ln bilateral Hade relations, ihe growth slowdown will noti iht Uniied Stairs fundamental opportunities to exercise pofliical leverage againstihe rest ofeither ihe carrots not ihe. sticks available lo Washington arc likely to be that potent Bul the slowdown "ill lead ihe Sovieu to seek lo continue to obtain US state-of-the-art technolocy in such key areasood production and energy. Under condition of improved reUtsona bet-err the United States and the USSR. Soviet dependencearrow taoge of oil productionhigh-capacity submeriibTe pumps -conceivably could be translatedimited degree of political '

In military spending, what the So-ieU have reason to most fear is an accelerated lugh technology arms race with the United Stales. If the Sovietsncrease mililary spending, ihe consequences for economic growth over the longer term and forwell-being even in the shorter term would be painful. Soviet leaders assert at every opportunity that, if they have no alternative, they will compete arith the United Staiea whatever ibe cost. Bul arms agieemcnu that appeared at least tolerable militarily would give Moscow such an allcrnaiive. We believe thai ihe slowdown in economic growth increases Mosoow'isubsisting and capping open-ended high-technology armswith the United Sines, particularly in space-based llrategic defensive forces

Moscow's response to ihe gtowih slowdown willcertainly make Eastern Europe the locus of greatest potential vulnerability to US eccoomie and political initiatives iahere arc limits to ihe extenthich Moscow can simultaneously cut iu costs in Eastern Europe and compel the Easl ^uropcani lo reduce trade with the West, without precipitating violent new ones in ihe Bloc The Soviei leadership may miscalculate these bmiU Even if it eVoea not. ihe East European regimes do not tec greater CEMA "integration" as the solulion to their critical economic problems and will intensify iheir cffoiU lo expand trade with the West as much as their economics permit. As living lis retards stagnate or decline. anti-Russian sentimeat is likely to increase among the peoples of ihe region, who win continueook lo the West for triform*support for their own national aspiration'

Finally, ihe impact of ihe growihn on rravailable for foreign economic assistance will also stung then certain opportunities lor US action in the Third Waid Moscow will be evenr.tr. it already is to compete with t. he United Stales in rendering economic and lechnologiGfl aid lo many Third World countries, although il will eoniinue lo play the gameimited number of clients like India. Eisssn the Soviet standpoint, ibe mosttargets are probably Marxist states in which Communism has noi yet been irreversibly institution, allied, which are under internal pressure, and which have flirted with the idea of Western economicsuch as Angola. Mozambique. Ethiopia, and Soulh Yemen. As these countries' needs 'or assistance mount, their leaders will probably grow mil more dissatisfied with the Soviei failure to provideaid and more templed to turn lo ihe West forat ihe risk of having to make political concessions, which they will stoutly resist.esser cHeni. andonger trim, the same kinds of pressures arc likely lo intensify in ihe Communist regimes of Cuba and Vietnam

Original document.

Comment about this article or add new information about this topic:

CAPTCHA