The Soviet Economynd Prospects0
CIA HISTORICAL REVIEW PROGRAM RELEASE IN9
National Foreign
Assessment Center
The Soviet Economynd Prospects0
A Research Paper
Research for thts report was completed
Comments and queries on this paper arv welcome and may be directed to:
Director of Public Affairs
Central Intelligence Agency
6 For information on obiaining additional copies, see ihc Inside of front cover.
ERttn-iol}*
Tinsil rotparod for ihc oar Ofrwil
officials, and ihc formal. eo*et age. ind cootcnt are deiigrxd lo meet then specificeon nr. menu US Ooterniricni officials may obtainopies of ihii document directly ot through liarSCA channel* Irom lhe Central Iniellift/ice
Requesters outtrdc the US Oovernmcnt miy cfatam lurncnpiioo* to CIA publication! timilar in ihu ooe By addrcswng inqairie* to
Hv-imenlFxpedlHantIXKTXlP-ol.il tachrsat* andf (aagrexD.C. ItSdO
or
Part Ray al Rm> SariatfltU. VAUIil
i mtaide ta* US (lommiuinmevlrd ir vntxripaiofl scrtiee may purchase sf*sifk poWwaiions euriera.irr copy or nucoform from
PhModupkVaikin Serttre Library tfluairm Waiklngtoa.i
Oi; NalioaalTtthaaial5 Port Roval Road SttinfTieU.To ciprdir. arole* eaR Ihr VriSOrda.i
it* Aii-ih. Percent Chaste
Growth of Cross Nationaly Sector of Origin, Selected Periods
I" 1
ms-TT
79
Ainu
i i>
'
40
fa 11
Scrnota
4J
S
ai factoriclndei mtra-nirieuilural use of firm product, bul doe* not make an adjustment (or purchases by ainculture from other sector> Value -deled in airicullurc vtm ByigeercaniTO.
-JO ptretniercent,fJ pctcem
I able Z
I SSR: Growth of Gross Nalional Product, Faciot Inputs, and Facto* Prodoctisit)
HTO-7T 9 la.
tl
Cae-ul
racior
ll
The Soviel Economynd Prospects
Soviet economy slowedrawl. The average annual GNP
growth raleercent was the lowest for any two-year period since World Wararm output declined during the period, primarilyesult of last year's major grain crop failure, while growih in almost every other major sector of the economy fell considerably below that of recent years (see
The economy's poor performance was attributable, in pari, to unusually harsh weather during the period. Record-breaking cold duringinicr crippled transport, hampered factory operations, and raised the demand forsubstantial losses in industrialrolonged drought over most of the European USSR last spring and summer was the main reason for agriculture's downturn.
The severity and the wide-ranging nature of ihe slowdown, however, reflect more fundamental problems. Afterears of sustained high rales of growth fueled by ever larger amounts of capital and labor the Soviet economy haseriod of increasing strain. During ihc past two years, ihe USSR has experiencedirtual level ing-off of oil outputecline in coal production,ajor rise in raw material costs, andalloff in investment growth. These problems cannot be overcome easily and will restrict growth through much of. On lop of these problems, and partly because of ihem, overall resource productivily (output per unit of combined inputs of labor, capital andeclining and prospectsurnaround arc bleak (secow to raise productivity is now the key economic question facing Soviet leaders as they enter.
Because of the economy's lackluster showing during ihc past two years, ihc lot ol" the average Soviet citizen improved link. Growth in per capita consumption was lessercent annually. Per capita mealkey indicator of improved living standards -dipped slightly9 comparedhile housing, automobiles, refrigerators, and other high priority consumer items remained in short supply.
* Umitrtyimtfierce* nut8isi-rrctmmXtMrr ike appertil* lot an mutuall GATby wkw of origin0 ami an indexh by ttciot mf origin5
lighter note, record grain imports ofillion tons in calendar9 and additional large purchases this year have enabled Moscow to avoid the massive distress slaughtering that otherwise would have resulted from last year's disastcrous grain harvest In addition, Moscow was able to take advantage of the runups in the world price of oil and gold to increase hard currency imports and stillefty current account surplus.
IV
(oiltt'lllS
PaSt
Overview
A Major Disappointment
Norowth Leader
Struggle To Boost Output
Gas
and Nuclear Power
S
8
8
Availability and Use
Force
in Capital Formation: Future Impediment to Growth
Raw Material Cosis
1 'Al ^mi
I
ol Kesourcc use Consumers Receive Little
14
lard Currency Trade: Some Windfall Gains
tbe Books
Perceptions
0
Outlook Grim
I'r.KrvrK frtrwtiiii1 rI'll
Rebound Likely
i 22
Gain* Doubtful
Outlook Uncertain Statistical -
-5
able*
1.
of Gross National Product, by Sector of Origin
of Grow National Product, Factor Inputs, and Factor Productivity
of Major Crops and Livestock Products
Inventories
in Industrial Production
m Ferrous Metals
in Chemicab aridOuipul
Freight Traffic Sutistics
of Capital Formation
Currency Balance of Payments
Orders Placed With Hard Currency Countries
I9H0 Plan in Perspective
of Gross National Product, by Sector of Origin
of Gross National Product Growth, by Sector of Origin
jluc1inC Hen!-
Production
Production Trends and ProjextiOM
in Averse Distance ofr Selected Fuels
lothc Working-Age Population
Factor Productivity for Industry
Between Ihc Average Levels of State Rciuil Price* and Collective Farm Market Prices for Food
of Key Industrial Commodities
Tbe Smict Kconomynd Prospects0
A Major DiMMc-ni^i
Last year's poor (run harvetlillion tons below ihe record level oftogether wilh decline* in production of most other crops caused farm output to drop byercent more than off/selling the previous year's growthercent. Only cotton and eggs, which showed record production levels, did much better thun planned9 (sec
As usual, weather was the main factor affecting agriculture'srolonged drought in most of the European USSR during the spring and summer9 cut grain yield* sharply and reduced
pasture and forage crop availabilities dramatically. Record grain imports ofillionn calendar9 precluded massive slaughter of livestock (seeut were not sufficient to sustain increases in output of meat and milk. Indeed, per capita production of meal declinedercent
Increased supplies of livestock products- hoped foresult of encouraging production in the privatenothe initial tvperceni
' Including purchase, uli million lont for elicMhe private teeter lupplic* mure lhan IS peicenl of Ihe USSR's total farm outr-al. including mora than tO ptrceol of iU litctloch products
lable'
USSR: Produciaoa ofot* and Livestock Products
ctodb
Ounce
1
/.
product*1
J.6
*
69
1*
Tons
4
0
it
1
J
0
teed
i
1
4
fs' itiab'rf
ia o
t
t 4 f
i
Mi .
Mad
P.4
y, ii
J-ff
i ii
*
fl aldL
A ai
* *3
a 1
a.
*
J
:
Net af vrcd aadf etherrd ad.-wcaratEacludlat chaaccarder TW aciaal docevai aa*
'buawerUul|rcaa oaapol froanoa average aaoalaee at tha uaM of fcancw and ihe sue of the
coeahme-*athadc* atccaa aworaie. aanpt aadxced seed*raia In .vdar so conaart Scnci
:
- I
nlock In.cntoriev
ladca
asc-
SaiihrM
i n
'
1 ii 1
Cattle
Mill**
ft
951
Head'
I ii n
> in i
91)
j i
| / A
FYwilc
*%/
vt
9 4
MO
920
Soi lll'ed
ens
J7.9
4? 1 1
J
101
i
115
11
Prfeaac Sheep ind gem, SociiHred Private
3 2
2
122
IIM
J II 1
ift) 2SJ
1
1
141
:iifl
1
iicu paid ill producer*.anuary of the Haled year
in lhe value of private livesiock holding, thai occurred7 hai not continued (seerivaie holdings declined byercent8 and were off fractionally againlthouzh Ihc leadership continue* lo stress Ibe need to provrde official support loihe private Hector, the press is replete with comments describing the difficulties private livestock owners have experienced obtaining feed and the problems in marketing surplus products.
Other problems which bode ill for future farm outpul also alTecied agriculture's performance last year. Farm receipts of tractors and fertilizers, including feed additives were down from8 level (see the tabulation below):
i
0
lUprtued la Smm Mandanl unil.8 IheilHnn loot nl taliHrer -ot ecm*aiiwina ol
Overall, investment in agrieullurc grew byercent8 rale and only one-fifthperccnt yearly average.
Industry: Norowth UaoVr
Faltering under the strains of transportation snarls and inadequate supplies of raw materials, Soviet induitrial growih continued its downward slide, posting an increaseercent8ecordercent last year (seehortfalls in the produclion of key industrial commodities -especially steel, oil. coal, construe!ion materials, andcontributed to an abrupt slowdown in the production of investment goods and brought growih in construction activitylthough production shortfalls are common in lhe Soviet economy, the tiringcrKies encountered during the past two years were unusually
' Mla Mfc, ancrom
1
USSR: Value of Livestock in Privatelybring new capacity on stream hasintroduction of materials and labor-saving tech-
nology which, in turn, hampered efforts lo
End-ot-yca,
severe and reflect problems that have become mutually
reinforcing. In particular:
Reduced energy urowlh and stringent allocations, especially during ihcinter,operation*road range of industries and
transportation facilities
Shoilages in domestic steel output have slowed growth in machinery production and coninbuledhot lages in drilling equipmeni and pipe, preventing planned increases in exploration
Bottlenecks in rail transportation.caused in pari by declining output of railroad equipment, and the failureepair existing stock disrupted deliveries of raw materials and industrial products
iruuKlc lo Boost Ouipul The past two yearsurning point in Soviet energy production After increasingercent annual rate for moreecade, growth in primary energy fellcrcenl8ercent lasi year (secrowth in oil production dropped precipitously, while coal output declined. Natural gas. which continued to expandear record-breaking pace, was the one bright spot in lhe Soviet energy picture
Sovici leaders have responded to their energy problems by bout ling lavesimenr in oil and gasrash basis (at the expense of other sectors) andbysiepping up the drive for energy conservation. Inresident Brezhnev established the fuel-energy sectorleadingeaning thai Ihc sector had priority lor investment lhat would achieve "maximum and rapidn effect, tbe investment programlanned forh Five-Yearn primary energy was scrapped in favorore ambitious undertakingor example, the incrcmem in investment ia oil, gat, aad coal increased by more thanercent and accounted for almost one-half ihc increase tn lotal industrial investment* Despite these actions, we believe the downwardin Ihc growth of Soviel energy production will continue
' In (om|dtnun. ibe locremM ia invewnwal in al. tit. and etial in
iQTSaotuuaird Torercent nl ilir increase lo toial iMjuilnal investment lhal year
Annul foiesi Cbjcj:
Crowlb i>j.irul Production
product jua
i i
1
> a
A
nulfrali
Ferrous rrwuk
4.0
:.7
O.'l
l.f
*
-Of
J
tied
croc
7
u*
1
NNriik
5
1
5
1
6
iiiiiin'iiii
! 0
ill SI.
Soviel oil production hai beenirtual plateau sinceoutpul7 million barrels per dayhe same asduring ihc Ibuilh quarterecause produclion in Ihc early months9 was above lhe corresponding periodowever, lasi year's local ouipulercent higher.
Nearly all lhe increase in oil produclioname from Wesi Siberia. The supergiam Samotlor field. which by ilwlf accounted for roughlyercent of lotal produclion. may have reached peak outputarge increases in output had been expected from newer, imalier. more remote fields in West Siberia, bul because of severe wmlcr weather,of oilfield equipment, and rail transportihey failed to reach production goals
Production in basins outside West Siberia alsoisappointment to Moscow. Despite efforts Io boost output in Ihe UraK-Volga region through enhanced methods of recovery, production drupped from8 loast year. Ouipul in other regions declined for lhe most pari during the period and is now running al.
Mosi indicators of Soviet oil production point to continued trouble With produclion dropping both in ihc older areas and. in the not too dtilant future, al Sarnotlof. the Soviets will have to develop new fieldsar greater rale lhan they have been able lo do so far to keep national production from falling as well. Although Moscow has been pouring large investments inlo Weil Siberia, ii is unlikely lhat declining output can be foreililled
i
USSR: Energy Production
Annual Percent Chung*
Primary
II
.
. -V- -
-
< y'
m
USSR's perceptions of iti energy situation have hecome more pessimistic in iccenl months and Soviet leaders and bureaucrats alike have become more candid in discussing then energy problems:
- Vladimir Doigikh. the Communist Party's secretary lor heavy industry, acknowledgedecent article (ha! oillans for the key Weal Siberian region are unrealistic without -itajwmem-in technology .md productivity. Me admitted that wilh existing technology and at current tcrrpos production plant* could only be achieved by inc/eav ing Uw number of drillcisby hundreds of thousands
' Whik ftoia.fct. vcclladbjMm
MikMil i* Wctix Mhrvc ihr tick of to.
t.-ii.-utvee
Alexanderember of the Soviet Acat!etn> ol Scienceseading petroleum expert, noted ir .mother recent article that if present Sovielion methods continue, production of oil willpeak and then start to fall. Krylov places ibe HUM vQuarely or the Soviet planning syslem which rewards oil producers on lhe basis of the number o* meters drilled'
mSSR i't poid Bonn wi on the aura of acicr. Jn mOm lean .jr. ihcf oil letomed Thu often ?iompii
xun'hucr Hiou
.iliirdr.-fd. Sec ihc iilicla "fl tampnkh riiribotx)n the0 Issue of Ekonamta i
.
Large unexplored areas of tbe USSR may contain substantial oil and gas, but they are remote and their potential is unknown. Soviet exploratory drilling has not increased for years because of continuous pressure to raise oil output through further development of known fields. In any event, it wouldecade or more to attain commercial production in any large offshore or remote onshore fields that may be found.
Coal. Substantial increases in coalwhich Soviet planners were countingnot materialize during the past two years. In fad, Soviet coal production9illionillion tons less than7 andillion tons below plan. Coal output declined even more in terms of average heat output, when measured in standard coal0 kilocalories perecause of the larger share of low-grade Siberian coal in total product ion.'
Although the decline in coal production has affected most coal regions, problems appear to be most severe in the Donetscountry's largest producer of high-quality steam and metallurgicalwhere output has stagnated in recent years. The Sovietsumber of reasons for the industrywide shortfalls, including:
difficult mining conditions, especially in traditional coal areas in the European USSR.
A reduction in the average workweek at some mines in the Donets Basin fromoours.'
Labor shortages in several basins.
of rail cars.
Aside from these problems, production has been held backlowdown in the commissioning of new capacity and an increase in mine depletion, especially in coal basins in European USSR. Gross annual commissioning? of new capacity fell loan average ofillion tons. the lowest level in almost
' Forfull discussion of Ihc ptoHerns in the Soviet coal industry, ice VSSR:Coal Industry ProbUmi and Proipnli.
6 Ihe Soviets bavc reduced ihe underground miners*fromnours in ihote mine wilh paiticuttily arduous, forking conditions. Ihc transfer of minershortened -celwtek is reportedly well advanced in the Donets Basin where the program was launched. Plant callhour workweek IO be phased In at all mine's with steeply sloping or narrow sums, heavy dual, or risk of mciaane gas.
a decade. At the same time annual depiction increased to more thanillion tons, up fromillion tonsears ago Moreree-fourths of gross annual commissioning* now simply offset mine depletion.'
Natural Gas. Soviet gas output continued to expandear record-breaking pace. Production94 trillion cubic feelcf above8 level. More significantly, the jump in gas output last year accounted for more than two-thirds of the growth in total energy tupplies.
West Siberia was responsible for practically all Ihe growih in Soviet gas output, with produclioncf8 and morehb ouutanding produclion record was achieved despite the fact that only three (Medveihyc, Urengoy, and Vyngapur) of moreozen important fields have been ex plotted.
The cost of developing these remote gas resources has been enormous.9 aboul one-third of lhe lotal inveslmenl allocated for the three major fuels (gas, oil, and coal) was slated for the gas industry, whereas its share0 was onlyercent. In West Siberia alone the value of fixed assets in the gas industry has skyrocketed at least tenfoldnvestment costs for new pipeline systemsajor component as greater volumes of gas are sent over longer distances. During Ihc pastears, the average distance of gas transport roughly doubled, reachingilometers
Electricity ami Nmelear Power. Annual growih in electric:'y production averaged an alltime low of lessercent. wdl below thecrccnt annual increases achieved in theespite the slowing of demand, due to slower growth in overall economic activity, there is evidence ofproblems in electricity supply. In particular, an imbalance between addinons lo power plant capacity
* Commission! rigs ire defined ti trte amount of capacity brought on stream at new or (lining mi net, hated on official SovietIn most catct ti taket several yean before these areas reach peak production lereli DtpleD-im are defined at theourn of* opeeaiing capacity low because ol mine cahaui lion and Ihc lower prodactiriiy of nlder mine* Ihal are Hilt operating
I:
and increase* in ouipul has left ihc Soviel power system wilh little reserve capacity.. dectricity output rose byercent while power pla nl capacity increased by onlyercent.esult, brownouts and power fluctuations ia tbe nciwitrks have been increasingly reported.
Besides lagging growth in new capacity, adequate supplies of fuel Tor thermal power plants are becoming more difficult lo obtain in the energy-short European USSR. Since most potential fuel supply sources arc limited because of vast distances between potential resources and the centers of industrial concentrations. Soviet planners regard nuclear power as ihe most promising source of growth in electricity produclion in this region However, the nuclear program is lagging badly. Ouipul of nuclear-generated electricity9 was aboutillion kilowatt-hours aod accounted for lessercent of primary energy ouipul last year Projections, which have been scaled down by Ihe Soviets in recent years, now call00 megawatts (MW) in nuclear capacity5 (lessercent uf all energy)Wlmost all this capacity is to be developed in Ihe European USSR
Comsertiioa. Despite well-orchestrated publicand the irnpositioa of stiff new tariffs on excessive energy use in industry. Soviet cotucrvation efforts paid few tli.ider.ds. President Brezhnev admitted io the Central Committee Plenum in8 that even with lhe expenditure ofillion rubles on conservation measures "in practical terms there is no lessening of waste and losses ofSec cartoon
Some oil savings, however, have been achieved by tbe substitution of other fuels, principally naturalignificant proportion of Soviet heat and power plants now switch from nl to gaseasonal basts, and increased gas supplies to this sector would reduce oil consumption even further However,ercent of Soviet oil is now consumed in internal combustion engines, and large-scale conversion can come only very slowly.
Moscow's limited ability to conserve oil slems in large part from Ihe current put tern of oil consumption. Oil consumption in the Soviet Union is weighted in favor of residual and heavy fuel oil, which together account for aboutercent of total oil usage, while gasoline accounts for less thanercent. By contrast, gasoline accounu forcrceni of the total in ibe United Stales. The USSR has only one passenger car for everynhabitants, compared wiih more than one for every two inhabitants in ihc United
Practically all lhe potenlial energy saving in oil is concentrated in six sectors, representing almostercent of Soviet oilhe savings thai conservation efforts have been able to wring out of these areas have been limited because (a) theof three of theseproduclion, electricity generation, and railexist* ing capital stock is already high by world standards and (b] because the Soviets have been slow to convert io more energy-efficient equipment
Cor-scrvation in the heat and power sector already has been given considerable emphasis with fuelper unil of electricity output declining byercent0mproved efficiency was achieved largely by upgrading generatingAs for the transport sector, energy consumption per ton-kilometer and passenger-kilometer is much lower in the USSR lhan in Western Europe or the United States. The USSR uses only one-fourth as much energy per passenger-kilometer as the United States and only aboul two-thirds as much per ton-kilometer of freight.
Ferrous Me la Is.
Tbe Soviet steel industry, plagued with problems since the, continued to expenence difficulties in
seclthough crude steel production
rebounded sortie what8 over the depressed level of the previous two years, ouipul dropped9 by
irst such decline in production since
World War II.
" Conseeiuently. oolyercent af Sonet gasoline was used in lU.sscngcicirs. while the compirabk US llg^re was I)lecif iCity and heal generation, iron and ileal produclion. ihc residentector, oxwl ruction, transport, and ag'i-CUltbie.
Although raw material shortages and harsh weather have hampered operations, inadequate investment in all sectors of theiron ore mining to rolling and finishing steel productsbeen the main reason for the industry's dctenorating performance in recent years Because the cost of corutructing new capacity hai climbed greatly, the gradual increases in capital spending that have occurred have resulted in smaller increments to capacity. In addition, ai in (he developed West, outlays for environmental pur pones have increased substantially. For example,for pollution controls, although not as Urge as in the United Stales, reportedly have been runningercent of total investment, and even higher according to one official '
Construction of new stcelmaking capacity has lagged badly, and most ol* the potential for squeezingoutput from existing facilities already has beci tapped. Roughlyillion loos of steel (nearlyercent of total output) are still produced in open-hearth furnaces. Much of the current capacity for rolled sheet is very old and technically obsolete. Major deficiencies exist in equipment for the production of cold-rolled steel, high-quality transformer sheet, linplatc, and other coated steels. The continuing failure to produce the desired assortment of products, especially large-diameter pipe, and casing and drill pipe has contributed to lags in pipeline construction and exploratory drilling for oil and gasesult, (he USSR has had to rely increasingly on imporu from the West io meet its domestic needsubstantial cost in turd currency (see the section "Hard Currency Trade-Some Windfall Gains" beginning on page Its.)
Machinery
Machinerymajor source ofgoods, defense hardware, and consumerits ranking as the fastest growing branch of industry, although growth9 dippedercent for Ihc first lime ibis decade. Trends within the branch were decidedly mixed Military production accelerated during lhe period, reflecting ihe high cost
" la anpabfcahed ni Irom omm"i Yeifenyead of Use Stat imi king InbtoI-cny Depattratnt. institute of Manatcmcnt Scieneaa inaied lhal lha current nut of air pollution ounirUercent of ihe capital cost of ihe iiccUnalintf cuurpineni "
of several major weapons programs. In contrast, growth in the output of investment goods anddurables fell off. Mere the lower output of railroad equipment augurs poorly for any immediate relief to the overencumbered transportation sector, while the near stagnation in production of labor-saving machinery will curtail plans for reducing manual labor. More importantly, unless machine builders can reduce metal consumption rates, the decline in steel output will slow down machinery growth still further.
Chemicals
The usually fast-growing chemicals branch alsoto (he industrial -lump. Production increases, which averagedercent per yearndercent. plummeted to an average of lessercent during the past two years.output of several major chemicalertilizers, plastics, manmadc fibers) fell below ihe level8 (ice
The Soviet fertilizer industry lurried in lhe most dispirited showing Theillion tons9eclineillion from the previous year -ihc first lime since World War II lhal the output of fertilizers has fallenearly basis.esult, fertilizer supply to agriculture9 wai almostillion tons below plan. Shortfalls in phosphate fertilizers have been particularly damaging because phosphates accelerate (he ripening ofritical factor in areas with short growing seasons.
The weak performance of chemical* can be ascribed mainly to shortages of raw material* and labor, together with construction and transportationIn addition, the shutdown of the gas pipeline from Irannd sharply reduced deliveries alter it was reactivated indversely affected operations at some ammonia plants.
Transport
The Soviet transportvictim of inadequate investment and woeful management in recent years-also performed poorly, especiallyotal freight hauled last yearrillion lon-kilomctcrs, an increase of lesscrcenl8
D At*"-
art* tt7)
TableAnnual reiient Change
USSR: ('lovlti in Ferrous Metals Ouipul
Pgf Mat mciaK
an
IT "'
n a
i.f
^
oi
'
1
a
T 1
I
1 *
J
0'
j 32
-It
1
I ableAr.neil< hj',-'*
Iuwftt in Chemicals andmkal Our put
int) txi-whermcab
fii ill iter
>
J
1 0
fibcri andt
1
*.l'
*
(scceflecting both the poor performance of the railroad and the falloff in industrial growth. The rail system, in particular, which accounted for almostercent of the freight turnover, fell far short of expectations, with only two ofategories (grain and ferrous metals) meeting9 plan. Reflecting the rail sector's poor performance, freight car turnaround time continued to increase while the average train speed continued to fall,"
Record cold temperatures duringinter hampered Soviet rail operations, crippling operations over widespread areas and causing raw materials and fuel shortages throughout much of the economy. Further disruptions occurred last summer and fall whenf railcars had to be diverted from their normal operations to move record grain imports.
Tables
USSR: Total Freight Traffic Stailstics
Metric Ton-Klloineiers
Annual
?(.
Average annual growthverage annual growihverage annual growih.
Availability and list-labor Force
The low rate of population growth reported from the9 census confirms the existing projections that lhe Soviet labor market is becoming exceedingly tight. Data from the censusillion people in the USSR, an increase of7 million, or lessercent annually since the last census
While the full impact of the labor crunch will not come until the, employment growth has already begun to slow (seerewercent annually, compared with an annual averageercent. Agriculture has been particularly hard hii. Despite official efforts to slow oul-migralton from farms, tbe continuation of such migration has apparently helped temper the impact of tbe labor force slowdown on industry. Even though the current Five-Year Plan calls for industrial employment to grow alercent per year, it grewercent annually. More significantly, ir>ciemcnts to industrialrose from about one-fifth of the country's
"he average freight car turnaround tie* increasedercent, while the average train speed fellercent. No mrend figure* have been reportedut scattered data for the firit nine months suggest the situation was even worse.
total employment growtho more than two-fifths. With smaller annual increases in the labor force over the nexlontinuation of this trend would create labor shortages in other sectors of the economy.
Government efforts to maintain output despite low rates of productivity growth during this periodexplain above-plan employment growih inNonetheless, Moscow may have difficultythe policy, given the impending labor shortages. Industrial employment grew byercent last year, the lowest rate inears. Within industry, however, employment in coal, gas, and oil, grewuch fasterercent annually, indicating lhat these priority sectors have fust call on available labor resources.
Slowdown In Capital Forrnation: Future Impediment to Growth
The sharply falling growth in the capital goods producing sectors noted previously has retarded the growth of investment and greatly complicates lhe tasks of Soviet planners who must allocate already taut investment resourcesrowing number of "critical"
- This il not unusual. Soviel managers have historically tried to compeauie for inadequate productivity bya'fining industrial employment plans. During tbe Eighth Fix-Year. industrial employment was scheduled to grow at an average annual rateercent, but actually increasedate ofercent.
10
Figure 3
USSR: Inctements to the Working Age Population.)
I _ I
particularly in the energy Held In an era of general resource constraints, such allocationi lead to lean investment diets for less favored daimanu.
Thiss emphasized recentlyeading Sovietho warned that restrictions on the growth of investment will become even more severe because of the need to redistribute capital investments to the fuels and power branches; to metallurgy, lo overcome us problems; and to transportation, which has become an impediment to growth throughout the economy. Furthermore, the Soviet scholar noted lhat for many lypes of raw materials, the potential for increasing extraction is limited, mainly becauseis becoming more capital intensive and on be ciprdcd only in remote, geologically difficult regions where capital COM* are extremely high.
Ai-aocmKK" A.rinbepan. editor in chief of'omyihlriutoto prxAiftfdit'O. in In article"Novyyvij,viiii litlcraytuectobero.
Further adding to Moscow's problems has been the rapid growth in uncompleted construction projects, despite numerous verbal campaigns to concentrate work on protects Bearing completion Projectcontinue to be frustrated by bottlenecks in tbe supply ofa lack of appropriate incentives in corulructionwhere bonuses are slill based largely on the value of the workesult, the increase in gross additions to new fixedmeasure of new capacity broughtercent8 loan alltime lowercenteanwhile the growth of unfinishedaccelerated in many branches of industry during the period, climbing bycrcenl last year (see
" Ban. cOMIluOioo <aoikigh ruble value, bul 'mailing -ork does not.
i:
A itnnual Percent Change
Indicators of Capital Formation
Tttal new filed
Grow addition! of new fucd
Backlog of ocfinjhed
Capital
' Preliminary.
' Excluding net additions to litestock, capital repair, and change* in inventory.
1 This term differs from gross find investment in that il counts only those investment rnolects that have beenstimated.
tt work haiaublexjfire. bulproject* art ofitopatstd along before ihey artduetion "iiar/jff"
"Hold ilittle longer theigning the
certificate."
A. (Jar maty
M.rukStktkayaGaitlo0
The slowdown in capital formation could not be occurringorse time. Greater investment is needed to counter the declining increments to labor, to modernise obsolete plant and equipment, and to stave off the impending energy crunch. The requiredprograms are becoming much more costly, however, and their payoff further away as more investment resources must be devoted to Siberia.
Skyrocketing Raw Material Costs Capital costs have been rising rapidly, particularly in the extractive industries,esult of the declining quality and quantity of easily accessible raw materials and. in turn, from the increased reliance on more sophisticated and expensive recoveryhe need to transport these commodities over much greaterfrom areas such as Tyumen OWast where little or no transport facilities yethas pushed up capital expenditures (seeto llie Chief of the Administration for Financing Heavy Industry, the expenditures needed toon of petroleum have increasedSon orercent:ubic meter ofercent."
" Bated on official So-iei siatisiKS.m pie. Ihc heat >alue per :c. olil has declinedercent inoreover, these percentages reflect only an amoriiration charge for Iked capital If interest charges on capital were included. Ihe increases in these costs would be even higher.
1 1
USSR: Growth in Average Distance of Transport lor Selected Fuels
4
j /
/
/
j /
1
/
17S
t' 0
79
70
'By ItlL
125
ft
t'llkiency ol Resource Use
To some extent ihc recent decline in economic growth reflects increasing lightness between ihe demands of ii burgeoning economy and readily available supplies of labor, capital, and natural resources. Bui more impor-lani. il reflects the Soviel failure to use resources more efftcsenlly While pnxluaiviiy has neve: been the primary engine of growth in the USSR, declining product ml) in recent years has constrained growth (sec
This is especially true in industry, wherea decade-long trend- the growth of investment and capital iiock in Soviet industry again outstripped growth in both labor and output8he result has been rapidly diminishing returns to new capital stock and hence to investment. The continued existence of diminishing returns means that whatever new technology has been embodied in capitalcoming on stream, its impact has been insuffi-ckm io offset the rising costs ol processing raw materials.
The inability to bring new capacity on stream more rapidly also has delayed tbe introduction ol labor- and materials-laving technology, further hampering the USSR's cf forts to conserve resources and raiseThisbecoming particularly important in the case of energy. Because the energy consumption structure in the USSR is dominated by heavy industry, major gains in energy efficiency have to be obtained largely by upgrading industrial technology ery time-consuming, capital-intensiveby major shifts away from more energy-intensive heavy industry and toward relatively less energy-intensive light industry andhift contrary io tbeof dominant Sonet interest groups. Even sharpin the present backlog of incompletedand uninstalled equiprnent will do little toore energy-efficient capital stock in the near future since only now arc Soviet planners beginning lo call for the design and production of more energy-saving equipment.
i
'
( OriMlllll I- rlcu.n'i-
The Soviet consumer made little progress in improving his living standard. Growth in per capita consumption averaged lessercent annually during the period, as the food situation was especially bad last year. Per capita meal productioney indicator ofercent lust year, while milk production decreased for the second consecutive year. Shortages of high-quality fruits and vegetables also were reported throughout the USSR Average food prices in collective farm markets were roughly double prices in state stores, with meat prices sometime* three limes as high (seen addition, less housing was buiIr,9espite ihc cotuury's severe housing shortage and tbe priority treatmenti* sector in receni years.
Soviet leaders have been unusually forthright in recent months in acknowledging consumer complaints la his speecharly plenum last November. Brezhnev asked why such baste items as soap, diapers, bread, and milk were in short supply, lie slated lhal unless the flow of desired consumer goods was increasedit would be necessary "to find specific people to Name for everynd punish them "of the next Five-Year Plan, he said its principal goal waso raise ihe welfare of the people."
Regional party bosses echoed Brezhnev's remarks in local election speeches in0 throughout the country. The leaders,rank disclosure of iheir problems, detailed shortages of meal, milk, bread products, and olhcr consumer goods. Bclorussian First Secretary Mashcrov, for example, indicated that the Belorassian Ceniral Committee had been receiving Inters "expressing anxiety over shortcomings inof livestock products for the cityometimesery "emotional form" and with "rash evaluations and conclusions.""
Similarly. Uzbek First Secretary Rashidov stated in an election speech in January thai Uzbekistan "continues to have difficulties in supplying its population wilh meat and milk products" and that there arcbout the poor quality and supply of butter,and fruit 1
The US embargo on grain shipmentshe USSR has made the leadership even more worried aboul the food situation. In an interview in Pravda this January, Brezhnev was unusually defensive in reassuring the population that "plans for providing bread will not be affected by USoviet consumers, however, apparently greeted Brezhnev's remarks withLong lines for flour were observed at food stores in the center of Moscow and outlying areas, and consumers reportedly have been hoarding supplies.
ebrur* IvSO
antury I
Mm
Unlike Ihc average consumer, ibe defense sector was not affected by the slowdown in the rate of economic growth During the past few years, estimated Soviet defense spending grew more rapidly thanesult,9 the defers effortercent of Soviethis it in contrast toeriod, when defenseelativelyercent of GNP.
The relatively high growth reflects the fact that defense programs have great momentum as well as powerful political and bureaucratic support. Even against the backdropisappointing economic performance, major mililary programs were well funded, and new production and clevelopmentwere initiated. In addition, the defense sector continued to siphon offlarge share of theest scientific, technical, and managerial talent and large amounts of high-quality materials component* and equipmeni.
Duringeriod, about one-half of loul Soviet defense spending went for procurement of new equipment and major spare parts and for construction of new facilities.
Operating expenditures which include spending for military personnel and for the operation andof miliury equipment and facilitiesittle mote than one-fourth of total defense spending. About one-fourth of total defense spending went for miliury research, development, testing, and
No mayor shifts were evident in the shares of defense spending allocated among the military scrvicca. The Air Forces and Ground Forces continued to claim ihc largest shares, while the Strategic Rocket Forces claimed the smallest. Duringeriod. Soviet uniformed miliury manpower, includingsecurity forces and construction and transport.!
imore detailed treatment ot Sos in defease ipcndiiii. we So-toi amJ US Pt/tnitollar Coil Comfl-torn,
" TbaNPallocatedM* peeceai aader Ibe btoel defter >c* ibe Savietaoaa* aee. a^ defused ia the Uarte* Sum. lb* defease share of GNPbe aboci one pcrccotarcm
lion troops, totaledillion men moreercent of the total labor force. The largest share of military personnel-epresented Ground Forces.
Despite the poor performance of the economy,on Soviet miliury production and development indicates that Soviet defense spending will continue to increase at least5 at or near the long-term rateercent- If so. the defense share of Soviet GNP could rise to about as much ascrcenl
Hard Currency Trade: Some Windfall Gains
Imports
Soviet hard currency imporu climbed steadily. bul heavy gold sales8 and higher oil prices last year allowed Moscow to keep iu current account in surplus and limit the growth of iu hard currency debt (sec. Imporu jumped ISpercentillion, and increased anotherercent,illion, last year. Disappointing grain harvests7 andogether wilh the leadership'sio steadily increase meat supplies, ledapid rise in grain and soybean imporu. Hard currency outlays for theseounted6 billion8 and an estimatedillion last year; the United States supplied aboul two-thirds of Soviel needs.
Problems in the steelitsto produce enough large-diameter pipe to support Moscow's ambitious pipeline construction program-ledharp boost in steel imports from ihe West. Deliveries5 billion8 and an estimatedillion9 and were fairly evenly divided between finished steels and large-diameter pipe.
In contrast, machinery and equipment imporu fell slightly last year after0 billion8 The decline was presagedalloff in equipment orders from the West beginningn all likelihood the result of the growing backlog ofconstruction and uninstalled equipmeni (see
.
Miii.op us i Table 11
Hard Currenc, Balance- of Payment
KOMiia balanc*
lob
and other hard currency unk. mi 1
r iinnf
European kuu for
1 ilS
_ 1
chanfe ia aiiclt in
ill
240
I 2
ere*ta taunted
100
error*ns
LM
larJadm notfrom soarfcan. umportaucc..ncaaw. lUI -itlcn miLuoaadardtamaq lade grtdci bilateral during agreements.
Exports
Soviel exports,illion8 and anillionere dominated by oil sales Moscow earnedillionolume89 exports fell lo less. but Moscow reaped the bencftU of OPECIed price increases to earn at least S9 billion. Earnings (rom iuiLr.il gas sales reachedillionomrJ-ed withillion8 The volume ofld io Western Europe increased by aboutercent,s prices were hiked substantially in line with other led cosis,
EipOrl pel formancc of olher commodities has been mucd Timber sales8 fell slightly but appar cntly rebounded last year on lhe strength of priee irn re Nonfcrioui mclal uporta km iMraaWd whileores and metals haveedine that began irilhe. One positive note has been csports of machinery and equipment, which loulcd Si; bsllton8 and probably increased soim-sslut lust year as well Aboul Ihrcefounhs of the
Chemical aad petrochemical
naival gaa
and
metallurgy
>wl wjod
and port oauipmeat
and
n
erircirun*c>
tk i
41
ns
4
otal were exported lo lew developed countries, salesO passenger cars accoumed for one-half of ihc USSR's hard currency earnings from equipment sales to the West
Balancing Ibe Books
The USSR had little trouble covering us hard currenc>
trade deHcils the past two years.8 Moscowurrent accountillion,
aigcls through heavy gold and arms sales. Asgross Soviet hard currency debt grew by only SIilL-Mi. toillion The regime took advantage of the increased liquidity from heavy gold sales to cither prcpav or refinance on better lerms roughly SI billion in loans si radicatedhe redaction ia ihc ir.ide deficit last year led to an even larger current account surplus more thanillion Although goldre reducedons8ons in
he runup in prices allowed lhe USSR to earniii-ftn. earnings from arms sales were also tubsiantial.
Leadership Perception*
Soviel leaders are deeply troubled over lhe economy's poor performance. Although Moscow anticipatedslowdown in overall growth as reflected in their plans forleadership dearly was not prepared for the sharp declines thai occurred in almost all sectors. In fact, lhe Kremlin was apparently so embarrassed by the economy's poor performance last year lhat yearend data recently released publicly by the Central Statistical Administration did not contain the usual comparisons with the previous year's output.
Nevertheless. Moscow still probably believes thai tbe economy's problems arc correctableajor shakcup of the existing economic structure or basic operating principles. Regarding energy, many Soviet officials probably realize that oil output is at or close to its peak and could begin to decline shortly.Soviet leaden appear to remain confident about long-term energy prospects They point to thereserves of coal and gai, in addition to the greater use of nuclear power, is more than sufficient for future needs.
Soviet leaders haveimilar attitudetheir labor problems. Although clearly aware that increased productivity is the key to future growih prospectsharp slowdown in employment growth isbey apparently remainthat this can be accomplished without any radical change in ihe current system of central planning and management. In fact, recent actions by the leadership point in just the opposite direction -namely, thai during the remainder of Brezhnev's era. Moscow will attempt to boost productivity through even greater centralization of planning and stronger labor9 Central Committee-Council of Ministers decree on planning andin particular,ictory for the more conservative dements of tbe party and Malewho oppose fundamental reform.
The resolution, whkh represents Ihe first"reform" package to be adopted inecade, calls fur
Strengthening long-term planning by upgrading lhe operational role of ibe five-year plan.
I-
TableAnnual Percent Change
USSR:0 Plan in Perspeetiic
0
1
1
1
:
1
steel
1
Meet
:
v r*
'
1
I
0
1
nondurable*
ndustry
Food tndusiry
4
*
not available.
' Including9 fiiurca
' Annual rate required to reach0 seal in the ordinal
Fue-Year Plan.
1Gton value of output
Outlook0
0 Plan reflects Moscow's awareness thai lhe Soviel economy will have difficulty rebounding front last year's dispirited performance. The economic failures9 are reflected in the coolshich scale down the targets originally envisioned for
nh Five-Yearsee table
Two themes dominated ihc speeches outlining the new plan at the party plenum last November (a) Soviet living standards must be raised and (b) greater conservation of resources itparticularly of energy and steel Moscow recognize* that more and better consumer goods are essential to spurgrowth and seems determined toleast
mollify- -the growing material demands of tbeThe emphasis on conservation reflects the leader ship's dashed hopes for large gains in energy and raw material production in the short term.
Despite lhe restrained nature of Ihc plan, prospects for achieving ibe implied GNP growth rateercent arc poor. The goals set for oil, steel, and other industrial commodities all appear too high (seco restore rapid growth rates in Ihe face of reduced increments of capital and labor, Moscow has been banking on sharp increases inIhc system was unable to deliver in.
0 results for industrial production indicate that the Soviets will coniinue to face rough sledding in this sector. Total industrial oupul was upercent, compared with last year'* extremely depressed first quarter. The failure of processed foods to recoverupthatwill experience little, if any. growth in living sundards
We believe that the firsi-quartcr rebound is temporary at best. Below.plan output of several products essential to overall economic performance such as rolled ferrous mcials. forge presses, sulfuric acid, resins and plastics, andustainedof growth. As tbe year progresses0 comparisons arc made with more- typical quarters, the growth rate will decline Overall, wc expect industrial ouipul0 will improve slightly over the record lowercent posted last year, but an annual growth in excessercent will be hard io achieve.
Energy Outlook Grim
Growth of primary energy will continue to slow thu year. The oil production goal of0omedown from the original plan. Even this level is optimistic in view of produciion problems in the oil industry The revised target calls for all of tbe production increase to occur in West Siberia where access is difficult and where shortfalls in output occurred last year. New fields in West Siberia were to accoumrowing share of ihc rise in oil produciionui thev failed to reach productionesult, some of the giantnd Agawpushed harder than originally planned.
Ftguin H
13
10
75
declines in output are likely lo be more rapid than expected beginninge estimate that oil production will peak this year at less thannd then begin lo decline (see
Wide ranging problems also will continue to plague the coal industryfter last year's poor performance,0 target has been setillion tons, someillion tons below the0 goal. As with the oil produclion plan, the reduced target for coal appears considerably beyond reach; production will once again be impeded bylowdown in commissioning new capacity,ise in the number of depleted mines in western coal basins, (c) continued deficiencies in transport, and (d) difficulties in attracting und retaining an adequate labor force.esult, coal output0 is not likely toillion tons.
Natural gas remains Ihe one significant high-growth area in the Soviet energy sector. Production0 should reach or exceed the plan targetercent more lhan production9 and above the upper end of the range set inlan Almost all of the growth will come from tbe large fields in the permafrost rones of northern Tyumen Oblast (West Siberia*owever, some const runts on growth arc possible as investment requirements mount The need for pipeline is risingime off larne-diametcr pipe, valves, compressors, and skilled labor.
Prospect* for Other Industrial Sectors
The announced iron and steel production targets for
hough less lhan the lower range goals in the original five-yearalso unlikely to be met.
The targetillion ions for etude steel isillion tons higher than lhe9 target, but would require an increaseercent higher than the best annual increments previously achieved. Although production of industrial materials including steel began to pick up afters the negative effects of the harsh winter wore off, wc believe that labor and raw material shortages will be even more severeepeat of last year's dismal performance wouldamaging impact on Soviel machinery production and investment plans.
Slowing investment growth and declining productivity of capital will also limit industrial growth. Following the pattern of slower investment growth established at the start ofh Five-Year Plan, investment is scheduled toincrcase byercentoreover, the drop in growth rates in capital goods output and the inability of the construction sector to bring new facilities on stream more expeditiouslyownward trend in the growth of capital Stock for the next several years.
The planners are calling once more for investment resources to be concentrated on finishing projects already started; the continuing rise in unfinishedtotaling moreilliona major sore spot with the regime. In this regard, Finance Minister Vastly Garbuzov told the9 party plenum that Ministries have been instructed to limit as much as possible the number of newly launched construction projects except for those intended for ihe production of consumer goods.
The transportation system, especially the rail system, also will be hard pressed to meet the demands levied on il. The average distance of hauling freight should again rise as Soviet dependence on new energy sources thai lie far from established industrial bases increases. Military demands on the syslem arc also heavy and the military activities in conjunction wilh Afghanistan and the Middle Fast will add to the load. Nonetheless, the system should operale somewhat more effectivelyeturn lo more normal weathereduced volume of grain imports.
Over the longer term, transport problems in the USSR are likely lo worsen unless investment in this sector is increased considerably during the next five-year plan Transportationilemma lo Soviel planners. On the one hand, domestic transportation is critical to the developmenl of new supplies of energy and raw materials At ihc same time, investment in transporu-uonlaimant on scarce resource*ime when the compeiiiion for resources is becoming moreThe greater amounts of equipment, construction materials, and labor that will have lo be allocated io the transportation sector if future bottlenecks arc to be avoided mean less investment resources available for other sectors.
Agricultural Rebound Likely Following last year's poor performance.lanning to increase farm output byercento goals for specific crops or livestock products have been announced. In his speech to lhe9 parly plenum, Gosplan Chairman Nikolay Baybakov stnlcd, however, that plans for procuring livestock, poultry, milk, wool, and grapes will be lower than originally targeted in the Five-Year Plan.
Because annual Soviet harvests depend heavily on weather cooditiorj throughout the year, we cannot nowether the agricultural product son goal will be achieved Although the late arrival of spring in tbe USSR is likely to reduce the yield for winter wheal somewhat. Ihc outlook for Ihc grain crop is tull generally good.
Consumption Gains Doubtful
The outlook for Ihe consumer0 it particularly gloomy, especially ihe food situation. The decision io limit US gram exports io the Soviet Union will result in withholding aboutillion tons of US grain in calendarvenood harvest, lhe Soviet* can only partially offset tbe loss of US grain by additional grain purchases elsewhere, orombination of otherdrawdowns of grain stocks lhat arc probably al low levels already, increased imports of other feedstuff* such as soybean meal, or increased imports of meat.
22
Tbe public mood in ihc Soviet Union is already one of pessimism and cynicism as food shortages become more widespread, especially in cities where supplies have been relatively good until recently. Media and party officials bave offered inadequate explanations for the shortages Soviet consumers, for example, have been (old that leaser developed socialist countries have received increased foreign aid. The population appears to discount such propaganda and holds government mismanagement responsible.
While consumer frustrations do nothreat to the stability of the regime, there arc substantial economic and social costs at stake. Reduced productivity, excessive labor turnover, alcoholism, and absenteeism, as well as increased corruption and private (often illegal) economic activity are all manifestations of unfulfilled consumer demand, which will continue to rise unchecked through at0
Trade Outlook Uncciiaia
Despite higher prices for gold and oil. along with greater earnings from arms sales,hard currency imports0 will expand link, if at all-Because of lhe US grain embargo, grain imports will be substantially lest than previously expected, but still should be close io last year's total ofillion Ions. Judging from tbe value of orders placed for Western equipment during the past three years, deliveries of equipment should also fall substantiallyn ihe debit side of Ihe ledger, slocl imports shouldew record as tbe USSR continues to look to Western Europe and Japan for la rge-diameter pipe and other finished siecl products.
Production problems al home will limit export growth. Oil exports, lhe mainstay of Soviet hard currency earnings, will fall in volume for (he second straight year; the precise amount will depend on Soviel success in meeting oil production targets Higher oil prices, however, will keep revenues up. The USSR also will be abkount on higher revenues from natural gas exports because of both higher prices and larger export volumes.
The bearish prospects for imports, combined with higher prices for exports,urther reduction in the hard currency trade deficitinancial position will be further strengthened by high gold prices; the USSR could earnillion just by selling out of current production al SSOO per ounce. This financial strength should allow Moscowflexibility in handling ils trade and payments account.
Statistical Appendix
lableAnnual Percent Chaser
USSR: Growth of Gross Nationaly Sector of Origin
1
1
kin
7
0
4
nsporia lion
0
m un was tons
0
at factorccals.
' Excluding inira agricultural uae of farm producu but excluding an adjuiiment fee purtrn.se* by agriculture from other sectors
USSR: Index of Gross National Product Growth,by Sector of Origin
R' H
D6 S
tut *
.9
ilVl ti
OO
'
t
J
"-J "1
ji g
>l
in/
Transportation
il j
4
at 4.
at 1
aa 4
OS 1
A. *
IV
1 ni
*
1 6
S *
.
ll).R
1
I 6
loduit.'y Construct uti Trans-otiatian
d 0
9
a a
"M0
t jiii
TwmAm
ias
aCT.V
not.
.1
.
0
s? a
1
S::rvi..
*
i
:?S7
li-S
!
1'
St factor cost*
25
ERRATA
Notice to recipients of CIA document: he Soviet Economynd Prospects
able Al. fterin the stub, and changeo read "Ex-ludes intra-agricultural use of farm products but does not make an adjustment for purchases by agriculture from other sectors."
une0
Original document.
Comment about this article, ask questions, or add new information about this topic: