THE ECONOMIC IMPACT OF SOVIET MILITARY SPENDING (ER IR 75-3)

Created: 4/1/1975

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cia historical review program release a38

intelligence Report

The Economic Impact of Soviet Military Spending

Copv No. 7

The Economic Impact of Soricl Military Spending

key judgments

inosl important conclusions concerning the Influence of economic considerations on Soviet military spending art:

The Soviet leaders have not acted as though costs haveajor factor in their military decisions. Defense programs have been well funded, even during periods of lagging economic growth, and the followthfough on new programs has been strong.

Defense costs are unlikely to constrain the Soviets unduly in the future. Political priorities favor continued emphasis on defense, and expected economic growth should permit continued increases in defense spending.

Defense spendinghare of gross national product is often usedeasure of the burdenation's defense effort. In fact, however, no single measure adequately describes the economic impact of the Soviet defense effort Furthermore, the notion of burdenerception of Ihe political-economic benefits lo be derived from the use of economic resources for defense, compared with those to be derived from other uses. The weight of the burden therefore varies according to the outlook of the observer.

In terms of shares of national economic aggregates, the Soviet defense effort currently takes less thanf CNP. lessf the laborf industrial production, and% of machinery output. All of these proportions have declined over the past decade even though defense expenditures have grown by abouter year.

Looked atifferent perspective, defense impacts heavily in the' high technology areas where.itriority claim on manpower and output. For example, defense still takes the lion's share of high-grade scientific and technical talent, and in electronics, defense requirements account foi almost the Iota! output of integrated circuits.

Finally, Ihe peculiarities of the Soviet economic system introduce additional uncertainty to the evaluation of the economic impact of defense programs. In the USSR the character of planning, management, and incentives poses substantial and persistent obstacles to the efficient use of resources released from the military sector.

Soviet perceptions of the burden of defense spending could be shaped by considerations quite different from those that influence Western perceptions.

e Unfortunately, we have little direct evidence on how Soviet leaders view the burden of defense.

the rare occasions that Politburo members have addressed this question, they have simply noted that, although defense spendingurden and the resources could be better used elsewhere, defense requirements will be met as long as necessary.

Although the Soviet perceptions of their defense burden are elusive, Ihe magnitude of Soviet military programs can be assessed against the yardstick of US programs and US costs:

The dollar costs of Soviet defense programs measured3c grown steadily since the.

They have exceeded US expenditures each year1 and amounted toillionighci than US outlays.

DISCUSSION

Introduction

I- The nature and dimensions of the burden of Soviet defense programs on the USSR have been the focus of intense interest in the intelligence community for almostears. Conceptually, there are two kinds of factors that bear on the assessment of the Soviet defense burden. The first are "objective" measures of the economic impact of defense programs. The second arc the "subjective" valuations that Soviet leaders attach to defense programs of various sizes, compared with their valuations of benefits to be derived from the application of economic resources to nonmilitary programs. Although this political-economic calculus probably is not performed explicitly by Soviet decisionmakers, these factors must play some part in the Soviet decisionmaking process, however imperfectly and implicitly.

Z This report begins by settingumber of "objective" measures of the economic impact of Soviet defense programs. Even these measures are not easily understood. (There arc, for example, frequent allusions to the so-called gross national product (GNP) paradox: with Soviet GNP about one-half that of the United States and with the scale of Soviet military programs equal to or greater than those of the United States, how can the share of GNP devoted to defense be roughly the same in the twohen, the report considers the quite separate question of how Soviet leaders perceive the cost of defense expenditures in terms of lost alternatives. Inthis is an exercise in politics rather than economics, with the aim of discovering whether the political impact of defense spending on Soviet policymaking might be of different weight and direction than the economic effects.

The Nature of the Burden

The commonsense notion of burden is an obligation or expense that constrains freedom of action. The burden of defense programsountry has been looked at in the same way. Military programs use manpower, raw materials, and production capacity that could otherwise be employed to increase economic growth and improve living conditions.

Typically, the cost of military programs is accepted as the measure of the value of nonmilitary goods and servicesountry forgoes because of these programs. The resources needed to produce, say, one billion rubles of military goods and services are assumed to provide one billion rubles of consumer goods or new investment if transferred to civilian uses.

5. This assumption will not hold unless

prices of goods and services in ill sectors of the economy arc proportional to the costs of the resources (labor, materials,sed in producing them,

the amount of resources transferrediven sector is not so large as to reduce sharply the marginal productivity of additional labor and capital, and

political or institutional factors do nol foster systematic differences in the productivity of resources in different economic sectors.'

As we argueollowing section, the Soviet pricing system Nurs the accounting of gains and losses, while sharp differences in the management of military and civilian production in (he USSR tend lo make the transfer relatively less effective than in Western economies. Even in the United States, the transfer would cause dislocations and take time, although the economy is far more flexible than Ihe Soviet economy and US pricesetter approximation of resource cost than Soviet prices.

In considering the economic impact of military programs, some important spillover effects must also be kept in mind. In both the United States and the USSR, military outlays have resulted in substantial gains in civilian technology. The development of computers, microelecIronies, and successive models of (et passenger aircraft has depended heavily on military RAD and production experience. In addition, the Soviet and US armed forces have trained successive generations of servicemenide ran or of occupational skills This training has been particularly useful in the USSR,arge share of the draftees possess only the most elementary technical skills before callup. The benefits to the civilian economy of these kinds of technology transfer and manpower training art important and must be taken into account in assessing the net cost of military programs.

Perhaps the most senous obstacle to arriving at an agreed-upon burden measure is that assessments differ because perceptions vary. The point of view of the economist is not that of Ihe political leader. More important, perceptions of burden inevitably depend on national institutions. Certainly the US leaders responsible for shaping policies must dealider range of political constraints than Soviet leaders. Even so, Soviet leaders loo must weigh many conflicting interests in assessing the burden imposed by their military programs.

I. wipUon of Ott iMttiwitoml Mtltat.A.

"Objective" Measures of Ihe Burden

espite the qualifications noted above, there is little choice but to use military program costseasure of the civilian goods and services forgone. To place these costs in perspective, they are almost always presented in relativehe share of defense expenditures in GNP, the share of defense procurement in total industrial production, and the like.

he indicators of defense burden in the United States and the USSR may be compared in this manner.hows the shares of GNP, industrial production, machinery output, the working-age population, and employment that were required to support the military establishments of the USSR and the United States2 The defense share of Soviet GNP is stated at factor cost because of problems in pricing that are discussed below. Moreover, the shares are presentedange because of the possible downward bias in our estimates due to problems of coverage and pricing (see

TaWe 1

USSR and Ihe United States: The Defense Share of Selected National3

Percent

nafmnal pioduct

dust rut production

of machinery

of working jgr

in.

industries

estimates. The GNP Uiaieuiot toil; ihe oihei Uiaiei are bawdalculation! and Ihenfoic inuit we ctlabtitbeal

The Iciwci end of theepieteott current riliraatci oldefenh ipenOini. marc of GNP: ihv hiihci end lake* tniu% un* rem mate ot ovfeme outlay* due loort diitoivcd in paragraph U

I ctcnption of wme of the alternate mcaiutet of burden, sec. The

ehoien to: companion became lltherecent year for which reaionably firm dau aie available.US fipne imludc, S6 billion ofhicho

he Somt figure. Defend expenditures include the pay and allowance* of uniformed and ctvlban pecionnel. the operanon and miintcnancc ofhe procurement of wcaporu irilemt. and military reteareh and development The ipcndim;ii ihat ol the Depart mem of Commerce, whichot example, transfer payment* tuch a. pension*

Excluding manpower costs, Ihe defense shares of GNP would ben Ibc USSR andn Ihe United Slates, reflecting ihe fad that Soviet military pay is low relative lo US military pay. The share of GNP devoted to defense in both countries has declined since the, when it was moren ihe USSR andn the United States.

The defense share of industrial outpul and particularly the output of the machinery or engineering industriesey aspect of the economic impact of military programs because il highlights the potential tradeoff between military goods and investment goods. Soviet industry3arger percentage of output to defense than did US industry. In the middle and, however, the US share was closer to the Soviet shareecause of the large Vietnam-related US purchases ofid ware.

A comparison of Soviet and US uses of machinery outpul for defense purposesharper contrast. In the USSR, the defense share of machine building and metalworking output has declined from0oday, whereas the US defense establishment normally lakesf the output of the comparable US engineering industries. The much higher Soviet share results from the fact that consumer durables are relatively much less important in Soviet machinery outpul than in US machinery output. During ihe Vietnam involvement. US purchases peaked atf machinery production. Although reliable data are hard to come by, wc have estimated that in ihe USSRf ihe output of integrated circuits went lo defensef the production of the aircraft and shipbuildingff communications equipment,f numerically controlled machine tools.

Because of Ihe well-founded suspicion of Soviet prices, comparisons of Ihe manpower preempted by military programs have been frequently used in comparisons of Ihe burden of military programs in Ihe United Slates and the USSR. Uniformed and civilian employees of the Ministry of Defense in the USSR and the Department of Defense in the United States, employees in Ihe defense industries of the two nations, and employees in nondefense industries that support defense production accounted for more thanf all employment in (he USSR3 andf all US employment. All defense needs preemptedf the population of working age (more thanears) in the USSR andn the United Slates.

Bui manpower comparisons have iheir own defects. The shares of defense-related manpower in toial manpower willeasure or relative burden only if labor productivity is the same in military and civilian production in both

the USSR and the United Slates. Indeed, the estimates of manpower engaged in rniliury-related production in the USSR depend on the assumption that labor [tjoiluctrvity in military production equals that in civilian production.

The GNP "Paradox"

considering the reliability and meaning of the measures ofin Tablen alternative measure must bendthe years, it has been estimated that

the dollar value of Soviet GNP has increased from slightly less than one-half to slightly more than one-half of US GNP. and

Soviet military expenditures valued in US prices have climbed from somewhat less than US defense outlays to somewhat more than US outlays.

Some observers concluded from these estimates that the economic impact of defense programs must be roughly twice as large in the USSR as in the United States.

fact is. however, that the Politburo spends rubles, not dollars,Defense goods and services are relatively cheap in the USSR,the United Stales.esult, the share of defense in GNP in dollarmuch higher than in ruble prices' (see

outcome is not surprising. First, defense manpower is paidow

rate in (he USSR compared with average military manpower costs in the United

States. Outlays for military manpowerf total -military expenditures in rubles; the dollar share would.

i. Hon of ill* dollar compariaoni of ihe Soviet detente tuidenown wrong on two countsave uted douir pticei mitcad of rut*nd ihey haveoth: value of detente wiUiddferent kind of doUir GNV. Hon often,alued In dolliih* do Hit GNP uwiUyhe rewlt of muliiplyine. US GNP Iny ihe geomeuic avenge of comparboni of USNP calculated alternatively in dollar and ruble prkci.or ciampfe, the dollar value oflown) would be onmpaied not with ihe dollai value ofillion) but withtower valuedlion)i Ihe groroeittc mean of we rompaiitom fit eh.teduble prtceiatd,OIU1 prionO)

production is also relatively less expensive than much ofin the USSR. Throughout its history the USSR has concentrateddevelopment of war-supporting industries to the neglect of consumer-related

Tabic I

USSR: Gran National3

ubin

orian

Con&impuon Inveilmcnt Defenw Other

62

100

914

0 10

100

52

21'

production. This has resulted in what has often beenual economy -thatelatively efficient heavy industrial sector standingelatively inefficient consumer sector. In addition, the most important element of consumption in the Sovietood and other farmas been dogged by the inefficiencies of collectivization, the draining away of the most productive manpower, and the high costs associatedoor natural resource endowment These factors all lead lo differences in relative prices that make Sovietarger proportion of GNP in dollar prices than in ruble prices.

Scale of eftnrf.everal Kepi away tiom military capability r'si riantpU, Ihe number of weaponi availableven point in time ii the- result of procurement programi carried outeriod of .ran at well at related hardwiit nttnemenl polictea. Capability alto depend) on the training and rnoeak of the form. geography,eat many other factor*.

In contiatl. tha (rend in US defers* outlay] reflect*ouna.evel ofubo*S defente rpendiitt droppedS. roat tohash of9 taOao* in IHl and then drdiatrd. fntl gradually and then tharplr. lo about SMl. tipendinireied lo daetine. although moteoulior.1

lthough ruble costs should be used in dealing with burden, dollar costs of defense spending arc extremely useful in their own right. To compare the scale of effort represented by military programs of different countries, the program* must he pricedomparison of the dollar cost of US and Soviet defense spendingiven yearense of the size of defensehe two counlncs in terms of the relative prices prevailing in the United3 dollar prices, Soviet defense programs have grown steadily since the, from anillion4 toillion1 Cumulatively. Soviet defense programs measured in dollar cost terms amounted

to0 billionf the US total.1 the dollar costs of Soviet defense programs have exceeded US defenseyogically, the comparison of scale of effort should be carried out in ruble prices as well. Touble comparison, US defense expenditures must be converted to rubles by appropriate average ratios of US and Soviet prices for the various categories of US defense spending. Accordingery rough calculation, the ruble cost of US defense programs4 was4 billionoviet outlays4 are estimated at5 billionigher than the level estimated for the United States.

quantitativehat the comparison in dollars is morethe USSR and the comparison in rubles is more favorable to the United Statesthe fact that each country is better equipped to produce its ownoutput than that of the other country. Practically all internationalhave found that the ratio of prices of goods between twoinversely related to the ratio of quantities produced. In other words, goodsproduced in large quantities in cither country tend to sell at low pricescountry, and vice versa. Compared with Soviet prices, forgoods in the United States are relatively cheap in comparisonproduced for investment and defense. Within the defense accounts,relatively cheap in the USSR compared with its cost in the Unitedequipment tends to be relatively more expensive for theestablishment. Thus dollar pricesreater weight on thosewhich the USSR has an advantage while ruble prices give greater weightin which the United States has an advantage. Since the relativemilitary goods and services differ in the two countries, noof their defense efforts is possible, except in the unlikely caseare buying an exactly proportional mix of goods and services.

Reliability of the "Objective" Measures of Burden

he ruble companion hai to be rough and duty mainly because (l) die luvciuit of Ihe- US oefeiue ipentkng accounu doe* not tend Itwtl to thatof calculationlmott impotable lo itoUic individual haidwaie itemi. for example)b* aiallabk ruble-doUU convection raiioi have been developedil ih* Sonet procurement mix (we do not have rauoi for categoitci of equipment that aie bought by the US Depuimenl of Defense but not by the USSR Miniiuy of Defense).

measures of total GNP, civilian industrial production,and manpower used in the estimates of defense impact in Table I

are reasonably firm, probably subject to errors of no more than plus ornd such errors would not change the indicators much. But the accuracy of the measures does depend on whether all of the rubles spent on defense in the USSR have been counted and whether the ruble prices reflect the full cost of the resources employed in defense programs.

Coverage Problem

Since the USSR reveals nothing about its defense spending asideingle "defense budget" total of uncertain coverage and doubtful reliability, CIAirect costing approach to estimate Soviet military expenditures. Judgments with respect to the number of weapons and forces are based chiefly on what is counted or estimated from observations of Soviet military activities. These numbers are then multiplied by estimates of their unit cost in rubles.

The estimates of Soviet defense spending are generally good on the large visible items such as missiles, aircraft, and ships and on the pay-and-allowancc bill for uniformed personnel. These items account forf total spending,. The estimates are weaker for activities that are not readilyuch, operating, and general support costs.

Pricing of Military Products

The evidence on Soviet pricing practices in military production is scarce and often contradictory. The goal of7 price reform was lo set prices so thai they would cover direct costseasonable profit based on the value of fixed and working capital used in the manufactureiven item. In the past, militaryike many sectors of civilianrobably has been subsidized. There is no evidence that this is the case today. The aimed forces seem to pay the same price that industry does for common-use products such as electric power, coal, and petroleum products. Sometimes the military reportedlyigher priceroductuyer in (he civilian sector. Upon further examination, the higher price usually turns out to be justified by Ihe higher quality of the goods sent to the military. Military representativesefense plant closely inspect finished products to ensure their quality before acceptingractice without parallel in civilian industry.

While defense production is not subsidized, profit margins in defense production may be lower than in civilian production. Several apparently knowledgeable sources assert that the strong hand of the military consumer forces

a periodic repricing of newly introduced military hardware. As costs fall, prices are renegotiated. Prices for civilian machinery, on the other hand, frequently arc kept at the levels established when production firstespite regulations calling for the setting of permanent prices after an initial break-in period. To the extent that tighter military control squeezes the profit margins of military industryegree not typical of civilian industry, the comparison of military and civilian production is distorted. The bounds of the potential bias perhaps can be estimated by examining profit rates in the machine building and mctalworking sector, where most of the new product pricing problems arise.2 the average profit rate in all machinery production. If profits on military machinery had been heldhe raising of profit margins on military products to the level prevailing in civilian machinery manufacture would raise the value of military purchases from the machinery sector.

n additional source of error in the estimate of Soviet defense spending results from the sampling procedures used to get around the scarcity of information on actual ruble prices for military hardware.ubstantial part of military hardwaref total defenseoviet weapons arc priced in dollars (an estimate of what they would cost the US Department of Defense) and then converted into rubles by using estimated ruble-dollar ratios. These ratios are obtained from samples of pricesew military goods and of civilian goods with similar characteristics. Errors from this procedure can ariseesult of

the estimation of the dollar prices,

the on representativeness of the sample from which the ruble-dollar ratios arc calculated, and

differences between the ruble pnecs used in the sample and the actual prices charged in the year for which Soviet defense expenditures are being estimated (ruble-dollar ratio calculations have been based on data from different years and updated by price indexes for fairly broad categories of goods).

he net effect of these possible errors is difficult to evaluate, but wc believe they probably result in an understatement of Soviet defense spending. This judgment is based on partial completionecalculation of the ruble-dollar data base. The work completed to date has raised the estimate of purchases of new equipment and spare parts by.

Evaluation

Reasonable adjustments for the vagaries of Soviet pricing or for possible errors in esUmating Moscow's defense bill do not greatly change most of the objective measures of defense burden. Our estimates of Soviet defense spending are more likely to be too low than too high, but errors probably have not caused an underestimation of total defense spending of more. Increasing the current estimateould raise the share of Soviet defense spending in GNP by slightly moreercentager from less thano aboutn established prices,

To eliminate some of the distortions in Soviet pricing. CIA has carried out an adjustment of the GNP to put itactor cost basis. Wc have imputed the average blue collar wage to conscripts, subtracted indirect taxes and added subsidies, and imputed an average returno fixed and working capital in place of the varying profit rates that characterize the Soviet economy. These rough adjustments increase the cost of defense somewhat, bul rot greatly. The defense share of GNP is raised by less than one-halfercentage point.

Independent estimates of Soviet GNP have resulted in like differences between the share of defense in GNP in established prices and the share at factor cost. Studies undertaken for the RAND Corporation by Abram Bergson found that05 ihe defense share of GNPt factor cost andn establishedbraham Becker, also working for RAND, calculated the defense share of GNP as0 in both established-prices and at factor cost; whereas,efense wasf GNP in established pnees andt factorAll of these estimates of the defense shares were based on the explicit defense budget and are lower than the CIA calculations for these years.)

Although most of the estimates presented in this report arc single valued, the various "objective" measures of the impact of defense spending clearly should be thought ofange ratheringle number. To review some of the underlying uncertainty:

bram Berjaon, "re flruf Income of the Sonet {Mmarvard Utuvetiity. ISO; "The ComparaUvc National Income of Ihe USSR andUnitedMenution) Companion of Pntei aid. Dal/,Columbia Umveraty. MBbraham Becker, "Soviet National" Nttioiut Account! of Ihe USSR in Ihe Seven Year flan PenoO, Univeciity of California Press, p.0S).

Total GNP, industrial production, employment, and the like probablyange of error of plus or minusalthough the estimates are more likely to be too low rather than too high because of the difficulty of measuring private activity completely).

Estimates of defense spending in Soviet established prices conceivably could be understated by as much.

If the profit rate on defense hardware production is less than that on civilianefensible adjustment might raise the factor cost of Soviet military hardware by upr so, and total defense at factor cost by

Because of these uncertainties, the ratios in Tablehich represent some of the facets of defense burden, are shownange reflecting the cumulative effect of such errors in measurement.

other factor cost adjustments might be entertained, no setchanges would greatly alter the picture, factor costholly adequate guide to the effects of resource transfer in thewe argue below, the persistent disequilibrium in the Soviet economythere are as many opportunity costs as there are alternative uses ofin defense. But, as Becker notes, factor cost prices require onlyof factors "be proportional to their relative productivities on thethe economyhole, not in each and every use."9

Assessment of Static Measures

The traditional static measures of the economic impact of defenseven when adjusted for anomalies in the relative prices of military and civilian goods ando noteliable guide to the effecthange in defense spending. First, static measures do not account for differences among countries (or over time in the same country) in the ease with which resources can be transferred or assimilated. More particularly, they do not convey the factransfer of one billion rubles can be accommodated more readilyransfer ofillion rubles. Second, static measures have nothing to say about the influence of shifting economic policies and priorities or changes in the degree of tautness in the economy, although such factors surely are important in determining the effectransfer of resources out of or into the defense sector.

Aside from frictional difficulties and the sensitivity to policy changes, two basic problems interfere with the interpretation of the static measures in the USSR:

Abraham Becker, Some Hrthodologeal laun to US-USSR Dtfente Outlay Campemont, RAND Corporation,

disequilibrium in resource allocation is Ihe rule in Ihe economy, and

production tends to be more efficient than civilian production.

The disequilibrium results from the lack of an effective mechanism for distributing factors of production so as to reduce differences in the value or thcir margina) products. Because the marginal products or factors or production (valued at prevailing ruble prices) vary widely among alternative uses, the value of the civilian goods and services that could be produced by transferring resources from military lo dvilian employment depends on where the resources go. This general feature of the economic landscapeingle-valued measure of the opportunity cost of defense programs.

Static measures of defense impact must also contendarticular facet of the disequilibrium in the Soviethe institutional differences between military and civilian production. Soviet military-related productionre carried on under special rules

They have priority in obtaining materials and labor.

The buyerowerful voice in determining what will be produced, in sharp contrast to the buyer-be-dsmned attitude prevailing in civilian industry.

as closer lies with production than does. The tighter project management stems in part from the (act that military producers face keen competition from product development in the West.

Party interlerences in military productionems to be minimal compared with the pelty tutelage exercised over civilian ministries and enterprises.

of these institutional disadvantages, resources transferredpursuits are unlikely to be as productive as they were in militaryis no reason why milirary plants producing, say. tanks cannot beto producing tractors, if they areike priority.the preferential treatment granted to some part ofight be withdrawn and grantedivilian activity. Thesuch advantages would, however, have to be concentratedarrowthe pnonties would be ineffective. Large-scale transfers of resources from

defense, which would involve productionide variety of civilian goods, would be subject to the usual incffidencies in civilian economic management.10

Impact of Defense Spending on Economic Growth

assessing the burden of Soviet defense outlayshetrends should be kept in mind. The central fact is that whilehas more than tripled over the past two decades, total defenseincreased by.esult, the share of GNP devoted1 toefense spending patternsajor trends.

, outlays increased markedly.

The demobilization in theedharp decline in spending.

During, Soviet defense spending increased again, although irregularly. The path of spending was influenced heavily by two waves of strategic weapons procurement as the USSR sought to close the strategic gap with the United States.

After leveling off0oviet defense outlays rose rapidlys the USSRew cycle of strategic procurements. Total Soviet defense spending is expected to grow fasterhan at any time since the.

ccording lo general belieefenw industry indave acce.it lo High-quality retourcet denied to iheecior. With the Urge growth in graduate education and the expanded aMorlmcnt of indutlnal production. UBi id "an tap' is let) thanecade ago. In any caie, the efficiency of military production It related to Hie ability lo command iciourcn -hen they are needed, not lo the command overet reJourcet-

ups and downs of defense outlaysistinct contrast within the rates of growth of GNP, GNP excluding agricultural outputand Industrial production (seend then the laicdecline in defense spending was associatedlump in rates ofmajor economic aggregates. On the other hand, the upward trendccurredackdrop of decline in the rates orGNP, GNP excluding agriculture and services, and industrial production.however, the growth of defense spending has generally moved inthe growth of the economy.

Tabic 3

Percent

Preliminary

USSR: Average Annual Growth In National Output and Defense (Factor Cost)

GNP*

NonapicuUuie. nonicrrvcc GXP.

learly, economic trendsih the USSR do not provide convincing evidence of the tradeoff between defense expenditures and economic growth. In this connection, regression analysis or other statistical techniques have not established strong connections oi tradeoffs between the growth of GNP and the growth of defense spending, between the growth of defense and the growth of investment or consumption, or even between the growth of production of military hardware and the growth of output of producer durables. To some extent, the lack of correlation could be expected:

year-to-year fluctuations in overall Soviet military spending have been relatively small;

whereas wc believe that our estimates of Soviet military spending reflect basic trends quite well, they are less successful in identifying annual variations;

the movement of other economic aggregates in the USSR has been relatively smooth;

the impacthange in military spending on the civilian economy involves lags of varying length; and

the Soviet practice of maintaining the military productionhe factories and equipment, managers, anduring periods of slack demand blurs the measurement of tradeoff over time.

01 < ! I i 1 ! 1 ' 1 ' 1 i ' ' i ' ' 1 i

n addition, important complementary ties between defense spending and civilian production must be taken into account. Military-space demands were mainly responsible for the development of many important sectors of Soviet industry -especially in electronics, nuclear power, and the production of higher quality materials. The unprecedented program of training scientists and engineers might not have been sustained atigorous pace were it not for the impetus supplied

by the military competition with the Unitedhus, given the emphasis on quantity rather than quality in civilian production and the tremendous needs of postwar reconstruction, the average level of Soviet technology might well be lower than it is today except for the indirect effects of military-space programs of the pastears.

Nonetheless, the main reason for the lack of correlation between defense spending and other economic aggregates is the intervention of other factors tending to curb Soviet economic growth. For example, the USSR carriedharp reduction in the length of the workweek. the extension of the cultivated area came to an end with the settling of the New Lands, and the postwar recovery characteristic of most European countries ran its course. Later on, the predominant influence on growtharked slowdown in the rate of increase of the productivity of labor and capitaL

Despite the difficulty of isolating the impact of military expenditures on the economy, program changes must have been important in certain periods. For example.

The military buildup in theccurred when returns on new investment in civilian programs were potentially Urge.esult of war and incomplete recovery, investment could have exploitedbacklog of uncxploited technological gains and cased structural bottlenecks.

The military demobilization of the middle andndoubtedly helped to ease critical shortages of grain and housing. More than one-fourth ofillion men demobilized went lo Ihe New Lands area while others went intp construction and into the remote regions of the USSR. The demobilization also eased the pressure generateder year) rare of growth of the labor forcetlio result of depressed wartimend byut in the length of the workweek.

In ihe. Khrushchev's drive to modernize the armed forces may have preempted an unusually large share of specialized manpower and electronics production capacity.

KOTO e' "

Simula lion of tho Burden

ecause direct measurement of the opportunity cost of military expenditures proved to be unreliable, wc tried to simulate the tradeoff. The simulation is based on an aggregate production function for the Soviet economy and an assumed pattern of cMlian uses for resources hypo the tically released from the military sector

In the simulation, defense spending was held tof GNP in al) years -about its presentnd the resources represented by the difference between estimated and hypothetical defense spending were put in economic sectors other than agriculture and services, mainly into industry and construction.13

This redistribution of resources increases the average annual rate of growth of GNP, excluding agriculture and services,%he corresponding powth of GNP increased% per year% per year. Although the hypothetical reduction in defense production does not raise the rate of growth of output much, the accumulated changes in GNP and in major end uses of GNP arc substantial:

4)6

139

-80

Billion Rubin

GNP

Consumption Investment Defense

Ihe production tuncomuni elaiticil) of lubiututren (CES) runcUon, em mated from data on outpul. manhotm worked, and fixed capital in the non-agriculturaleconomyompared with other runcUon.obb-Douglat or Ihe frequently uud inciemtnul output-capital ratio, the CCS function explain! mote o( theIn output.

II. For example, iff defena* outlay)t*e*f miliary oanpo.tr would be added lo tmployMml inmdtwa. oon-aemce aecorvumeni Mwmm aeetoo -oatd be ancrtaacd b* the .abacf procurement of aaufalaiy eaacbanertt of trd.ia:)

aaaabaEdm

n atiernatm cai.ulatiar,obbKtton (withbaaed on fattot aham) changed the avenge annual rate ol growth of CNrft lo ft.M. The auaegaie abwluuNPUlion

ecause of the assumptions of the simulation (the share of defense in GNP is held. most of the cuts in military outlays are concentrated in the early part. The gap between actual and hypothetical GNP peaks at aboutillion rubles in thend stays close to that levelIJ4 Tnc hypothetical GNP1illion% larger than the

strain is. il has probably eased over Ihe yearsistorical and analytical evidence suggests that the present rate of growth of military outlays can be sustained or accelerated withoutarger share of national product- These conclusions, however, are drawn from Western analyses conducted within the framework of Western economics. Soviet perceptions of the impact of defensehe "subjective"ould be shaped by quite different considerations. And, for the Western policymaker interested In the pressures on his counterparts in the USSR, these Soviet perceptions are all important.

Soviet Views of the Defense Burden

the most important perceptions of the Soviet defensethose of the Soviet government, these perceptions arc but dimly seenWest. Moreover, the range of perceptions of the defense burden in thesurely very wide. The population, party and government officialdom, andhave special interests that affect their outlook on military programs.

Popular Views

The Soviet leadership, while increasingly sensitive to living standards, tells its population almost nothing about defense outlays and consistently employs all media lo Justify the need for an ever stronger defense. The Soviet people,onsequence, perceive the burden of defense as extremelyor years they have been told that the need to strengthen the nation's defenses required sacrifices, and the veil of secrecy cast over defense matters has given the population an oaggerated idea of the scale of defense activtlies.

Actually, the defense burden in the USSR is larger from the consumer's point of view ihan from the planner's. For economic planning purposes, the government uses prices based on costs of production while the goods consumers buy are priced to clear the market and oftenarge tax. This meansillion rubles of resources, if shifted from defense uses to consumption, is likely toood deal more than this on the consumer market

Perceptions of MidJevel Officials

IS. Aeeotding lo luameioet rcporu. Ihe avertrn le-rlt that Ihe itl.tKci} small foratn aid piO0ami i" coiinititi lite Cuba impact Kctcwtlr on hit ounnmpiton.

parry and government officials below the very top levelnot know much more about the dimensions of Soviet military programs than

the general population does. Although we have little direct evidence of their views, they probably believe that the defense burden is fairly large. Indeed, the officials in responsible positions in enterprises and in government are likely to have day-to-day knowledge of how defense programs impinge on theirlant manager cannotpecial variety of steel because he has been bumped from the delivery scheduleefense plant,igh republic officiai is directed to ensure that the military facilities under his jurisdiction get the fuel and power they need when shortages occur. Nevertheless, we do not believeechanism exists by which midlevel officials can affect decisions on military policy and programs.

Attitudes of the Top Leadership

16. umrrmy of ihe avaiUbte evidence on teadctihip pttccptMni, aee Appendix C.

Thus, the perceptions that count in the USSR are those of the topn particular theen in the Politburo. They do notreat deal about defense burden, and what they say mostly follows the partye do not want to spend those large sums on defense, but we will do what isikita Khrushchevotable exception to this rule. In some of his public statements while he was in power and later in his memoirs, he described concretely how the drive to build up Soviet strategic forces in theurtailed consumer-oriented programs in housing and agriculture. Of course, the appeal to the demands of national security helped stave off criticism ofailure to make goodumber ofailures that can be traced mainly to factors other than military spending.

In the absence of convincing testimony on leadership perceptions of the defense burden, the views of the men who decide defense allocations must be inferred from their actions. And in general, the leadership has not acted as though the defense burdenajor influence on their decisions. Defense programs have been well-funded, and the followlhrough on new military programs has been strong even in the face of economic setbacks like the agricultural and chemical industry crises of thend the poor cropo the extent that the Politburo is worriedefense burden, the concern probably centers on the unknown costs of competition in future strategic program's beyond those registered in today's rough US-Soviet parity.

SOVIET DEFENSE BURDEN: THE INSTITUTIONAL SETTING

Manflflemeni of the Economy

Under the Soviet "commandhe Politburo of the Central Committee of the CPSU establishes priori tic* and guidelines for the annual and five-year plans. These policies arc fleshed out In the form of detailed plan documents by the Council of Ministersajor staff arm, the State Planning Committeearly draftslan are normally discussed with subordinate economic units and modified according to bureaucratic pressures and later developments. The Council of Ministers implements the final plan decisions and checks on results. It hat the responsibility for determining the output of all major commodities and for setting all important prices and wages.

Subordinate to the Council of Ministers arendustrial ministries.onindustrial ministries, andtate committees and other agencies with ministerial status. The ministries at the all-union level, such as the Ministry of the Defense Industry, are located in Moscow and directly supervise production facilities throughout the country. Union-republic ministries such as the Ministry of Agriculture have central headquarters in Moscow and subordinate ministries in the republics, with the central ministry directing major enterprises and subordinate ministries administering the remainder. Subordinate to the ministries are the thousands of individual economicnterprises, farms, and researchhat are responsible for production, supply, sales, and transportation in accordance with plan targets.

The Defense Economy

Organization and Management

Of thendustrialave primary roles in (he development and production of weapons and military equipment Four of these eight ministries appear to be prime developers of weapons systems; the remaining four are for the most part subsystem and component producers. Substantial support in the form of materials, equipment, components, and technology is furnished by other ministries and the USSR Academy of Sciences.

The dcfcnse-mdusixial ministries engageide spectrum of activity, from basic and applied research to series production and to ongoing monitoring and overhaul of existing weapon systems. In addition to military output, theyubstantial quantity and assortment of civilian goods.ong period of time they have integrated vertically in order to control many of theaw materials, machinery,eeded for the development and production of their military hardware lines. In many cases, the defense-mdustrial ministries themselves are the only suppliers of the capital equipment needed in their own production processes.s greatly aided by special prototype and other facilities not present in the civilian sector.

The Soviet defense establishment, including the defense production sector, is strongly represented at the highest political levels. The Politburo, assisted by the Defensen advisory body on militarys the locus of national defense policymaking. It determines the priority to be placed on defenseeneral economic activity and on specific defense programs. The views of the defense establishment find their most unequivocal expression in the Politburo in the person of Defense Ministerull membert the same time, the other members of the Politburo put defense requirements at the forefront of priorities, though not with equal vigor.

The de facto supermanagcr of all defense industrial matters is candidate member of the. Ustinov, also believed toember of the Defense Council. He is assisted by the Defense Industry Department of the Central Committee, which reports directly to him. His effectivenessupervisor is enhanced by his longstanding familiarity with many of the top defense-industrial managers, who began their careers under him and share his perspectives.

The formal administrative agency of the highest level fornd production programs is the Military Industrialaily working committee of the Council of Ministers, it contains representation from the Ministry of Defense and each of the defense- industrial ministries. The Commission combines into one unique organization wide supervisory, planning, and coordinating powers. Presumably, it is responsible for directing the defense-industrial ministries, coordinating defense-related industrial projects within other ministries, and providing interface between the Ministry of Defense and the industrial sector of the economy. In addition, the Commission probablyey role in the technical and economic evaluation of proposed new weapons programs.

n

The service branches of the Ministry of Defense are the customers for weapons developed and produced within the industrial sector. The technical directorates of each service are charged with the responsibility for originating weapons requirements and specifications, monitoring research and development, performing acceptance testing, and enforcing quality control during series production Military representative teams, the indispensiblc assets of the technical directorates, are present at every facility having substantialr production contracts. The chief military representativegh-ranking and specially trained technical officer whose responsibilities include the annual development of independent cost estimates of weapons and equipment produced by that facility.

The weapons development and acquisition process is initiated by the technical directorates of the individual branches of service. Requirements generated here are assembled by the General Staff of the Ministry of Defense and then forwarded to the Military Industrial Comrnission for review. The Commission coordinates the requirements with the industrial sector and arrives at some judgment regarding program feasibility. It is the likely forum for most technical discussions and debates and probably solicits expertise and adviceariety of sources.

Operating Oiaracteristics

Defense-related ministries function according to many of the same rules as do civilian industrial ministries. The principle of financial autonomy applies to all enterprises, and we believe that the Soviets intend that the costs of weapons in series production be fully defrayed by the procurement prices paid by the Ministry of Defense. Nevertheless, military production is different from civilian production. Military goods and components are manufactured to higher specifications and are subject to stringent quality control standards. Production schedules are also much more rigid. Higher prices are charged the Ministry of Defense in order to accommodate these factors, although cost accounting procedures may not be adequate, particularly in the case of joint military-civilian production, to fully reflect quality differences. Another salient characteristic of the defense sector is the existence of excess capacity, which has often been noted at major defense facilities The longstanding campaign to have defense enterprisespecified quota of consumer goods in part is an attempt to employ production and design teams temporarily idled by defense program phasing.

Soviet defense industries are mote technologically advanced than their countf rparls in the civilian sector. This situation is the natural outcomeistory of preferential investment for heavyithin which the defense sector

rivileged enclave. In addition, premium wages, salaries, and incentives haveighly qualified body of scientists, technicians, and production workers. Since high-level interest assures priority in obtaining scarce equipment and materials, some of the bureaucratic obstacles that plague the remainder of the economyess serious problem to the defense industries.

Another important source of rugh-level performance is that Soviet defensenlike civilianngages regularly in product competition with the West. The confrontation between the United States and the Soviet Union has long stimulated the defense industries to produce and apply the advanced technology necessary for the development of strategic weaponry. This pressure is greatly enhanced by the need to respond to the views and demands of the Soviet defenseearly sovereign consumer whose influence extends from the Politburo to the production line.

esult of these competitive pressures, the defense industries haveey role in the introduction into the Soviet economy of advanced capital equipment as well as an array of products whose assimulation would otherwise have been delayed. Specific examples include computers, automation equipment, and advanced metal-forming machine tools. Many of these goods were developed in, and continue to be produced only in, facilities subordinate to the defense-industrial ministries. The effectiveness of the defense-industrial sector in innovation must be understood as relative to the remainder of the Soviet economy; compared with the United States, Western Europe, and Japan, the USSR has great difficultyranslating products from the development stage into successful series productionotivating industrial managers to improve the quality and variety of their output and to modernize their production processes.

MEASURES OF THE DEFENSE BURDEN

This Appendix briefly treats the methods used to estimate (I) Soviethe defense shares of total industrial production and of the output of individual industries,he demands of the Soviet Ministry of Defense and the defense industries for uniformed and civilian personnel.

Estimates of Soviet GNP in Established Prices

The CIA estimates of Soviet gross national product are constructed according to Western definitions of GNP using Western accounting procedures. Official national income and "gross social product" statistics in the USSR are couched in terms of the Marxian concept of "materialhey exclude the value of services except for their "material"nd gross social product includes much double-counting of production.

Total Soviet GNP in ruble terms is estimated as the sum of values added by each producing sector of thehe wages, profits, depreciation allowances, and taxes less subsidies. Published Soviet data on retail trade, new fixed investment, and government outlays and specialized monographs on agricultural topics and household expenditures also provide the basis for reasonably reliable estimates of consumption and investment.

Information is inadequate, however, on expenditures for research and development and inventory changes. Estimates of total GNP arrived at by summing end use items are consequently less reliable than those detailed by summing the sectors of origin. The estimates of economic aggregates in this report agree fairly well with independent calculations made by several Western students of the Soviet economy.

Estimates of Soviet GNP at Factor Cost

The pattern of resource use in the Soviet economy is not accurately reflected when GNP is valued in Soviet "established" prices. Commodity prices do not fully reflect charges for primary factors ofand, labor, and capital -because of the liberal Soviet use of indirect taxes and subsidies and because of the exclusion of important production costs in arriving at prices (the state budget, for example, finances much investment, and Soviet capital charges are quite arbitrary).

CIA. (hcrcforc. adjusts Soviet GNPactor cost basist charge on capital for official profitxcluding indirect taxes (chiefly the turnoverncluding subsidies along with money income andind estimates,ubstituting the average blue-collar wage for the pay of conscripts in military services. Unlike the situation in the United States, where indirect taxes and subsidies are relatively minor, Soviet GNP at factor cost isess than GNP at established prices. The distributions ofstablished prices and at factor cost0 are compared in.

USSR:0

0 Ruble,

Pricci

Cot!

Conm

New fixed uiveurnem, capital lepair, and-

Detente and military ipacc

Other end uses and luminal

220

HQ

:<

28

J40

199

21

26

tit tor GNP.i toroncin,iedmtiolnrioii ipacc piofreli

Defense Demands on lnduslri.il Output

The defense expenditures were used in conjunction with the Soviet input-output tables to estimate detente demands on specific industrial sectorshe use of input output analysis permits the measurement of the indirect as well as the direct costs of military programs. For example, in the last two columns ofhe share ol oil and gas production used to satisfy military requirements reflects both (i) direct purchases of petroleumhe oil and gas used by Industry and other branches of the economy in producing goods for the Ministry of Defense.

The Sovietsruncated version of6 input-oulput table in purchasers' prices. The? Research Analysis Corporation (RAC) reconstructed the table, and the US Department of Commerce converted (he table to producers'

ihe rr*chinery, meUls. and chemical industries. The fuels and power, transportation and communications, and paper and pulp industries also contribute fairly% of total output) to defense programs.

Labor Force (sec)

SSR: DefenK-Rdiled Employment

0

Sect or

Pervoni

of Total

Penoni

of Total

Industry

Other branches of

3.8

3.9

production SetVKes (including

Military forcei Uniformed Civilian

0:

u

3.7

o.:

0

The intelligence community estimates the number of uniformed and civilian personnel directly employed by the Soviet Ministry of Defense from order-of-battle and table-of-organization information. Estimates of the number of civilians employed by the Ministry of Defense are based on US analog information.

Using the Soviet input-output tables6he share of defense-related employment in total employment has been higher than the defense share of GNP. Aside from the military forces themselves, the defense bite is particularly large in industry.

SOVIET STATEMENTS ON THE DEFENSE BURDEN

The brief and guarded statements by Soviet officials on the burden of defense indicate that differences exist on this sensitive question among individual leaders and organizations within the USSR.

The Politburo

Politburo members addressing the question admit routinely that spending for defenseurden that requires material sacrifices by the Soviet people. At the same time, they clearly state that the USSR will continue to spend all that is necessary for an adequateormulation that notably fails to provide us with any useful information about their force goals Among the leadership, Brezhnev, Kosygin, and Gromyko have most often alluded to the desirability of diverting military expenditures into other areas in order to make improvements in the economic life of the Soviet citizenry.

inner held at the Soviet Embassy in Washington during the3 US-USSR summit meetings. Brezhnev emphasized that further progress in strategic arms bmitations will allow "our countries to rcchannel greater assets for creative purposes, for improving the life ofhortly thereafter, Kosygin assessed the results of these talkspeech presented to the AustrianSovkt Society in Vienna. Further progress in arms control, he claimed, will serve to "alleviate the burden of military expenses" and will "liberate vast material resources for useful and creative aims."2

t Tat. uly Iff*

J. -lota* Role of ihe CTSUatmjeveloped Soctaaittopop tooe* XTSS. No. S.

In contrast. Minister of Defense Grechko has avoided any mention of eventually redirecting funds from the military to the avilian sector of the economy.4 article, Grechko suggested by useistorical example that "the sole correct Leninist road" is to continue to strengthen mditary defenses despite the burden this places on the nationale emphasized the need for economy and efficiency in the military sector and staled that Ihe maintenance

of the "high technical stale" of the military requiresefforts, huge capital investment" and "considerable labor by the Soviete cautioned that "miscalculations in this sphere could lead to unjustified expenditures of funds and resources."

The members of the top Soviet leadership have not clearlypecific set of conditions that, if attained, would commit them to reductions in defense expenditures.8 interview for Life magazine, Kosygin made the point that exemplary behavior by tbe United Stateseduction in international tension would be only one factor that might allow the Soviets to cut defense spending in favor ofetter lo the UN General Assemblyowever, Gromyko listed the renunciation of the use of force and the "banning" of nuclear weapons "for all time" as two of the prerequisitesossible reduction in military expenditures.5

The Maiiary

In line with decisions apparently made at the4 and5 Plenums of the CPSU Central Committee and atarty Congress inilitary authors began writing about the application of operations research methods to the weapons procurement process. An important consideration according to these writers was the need to apply economic criteria to military decisionmaking. They observed that the resources available to any state for the fulfillment of its military policy were limited. Achievement of the maximum possible results within these limits was the goal

In the8 edition of the semimonthly journal of the military's Main Political Administration, Majorroponent of the application of comprehensive planning and systems analysis in defense procurement, warned that Ihe sharp acceleration in weapons obsolescence and the reduced "life cycle" of modem weapons systems increase the potential cost ofonetheless, he insisted that the qualitative aspectseapon system, rather than cost, must always remain the determining criteria.

8

Tan.1

"Th* fceonnmy anil Kiitary-TechnicalvooryihtnnyHt Ml, No. IS.

War and the Economy."Kommunuto.

1 article in the same journal. CherednKhenko explained that the defense industry is in the forefront in developing advanced technology and thus provides an important contribution to general Soviet economic growth.'

He also declared that "an improved Internalional situation willortion of the capability of the defense industry to be diverted to nonmilitaryhe use of this formulationilitary writer is highly unusual. Of equal interest wastatement that "our state had to economize in the allocation of resources for satisfying defense requirements" because of the decision reached alh Party Congress to improve the people's Irving standards.

The issue of preferential treatment for the civilian sector of the economy, to which Chcrednickenko alluded, was explicitly dealt withumber of articles published in the military press during the same1 article in Red Star by Gosplan official F. Kotov claimed that the new investment priorities of the Ninth Five-Year Plan had not altered the traditional preference given producer's goods in the economyhrough his abstruse arguments. Kotov seemed to be telling his military readers that the "profound shift" in the direction of economic planning was little more than rhetoric. Kotov claimed that "preferential development is being accorded those sectors of heavy industry" which determine "technical progress."

The May and2 editions of Communiti of ihe Armed Forces carried articles dealing with the question of defense spending. The treatment accorded this subject, however, differed radically, thus suggesting that the theme of defense spendingontentious one. The fust article, coauthoredladkov and candidate of economic sciences B. Ivanov. exhibited concern over the impact ol defense spending and the efficiency with which resources areo buttress their arguments the authors cited Lenin.

i in theremat* imdt.

"The Rconomy and Mifauty-Technical PolRy."No.2

Lenin stated that under conditionshreat of imperialist aggression we must, for the sake of the army, be willing to make "certain severe sacrifices, of course, strictly defining the extent of these sacrifices" {Complete Works, Vol.nd that in peacetime the military organization must not be too burdensome lo the national economy. Economic work in the armed forces also assumes observance of the parly's general requirement concerning economic activities, or. precisely, concern for the needs of the consumer and for economy in social labor The proper handhng of this problem means the subordination of departmental interests to general state interests. lemphasis added.]

The second article,ieutenant Colonel D. Volkogonov, which was signed to press on the eve of President Nixon's visit to Moscow, emphasized the existence of "favorable opportunities for improving our country's defensiveolkogonov's brief treatment of the rektioriship of mUitary development to the national economy was designed to support his call for further strengthening of the armed forces.

The Economists

ighly critical assessment of Soviet economic performance was reportedly presented to the Central Committee by Abeloung Sovietewo-thirds decrease in the rate of growth (presumablyhich he blamed mainly on internal mismanagement and wastage of resources and,esser extent, on the heavy commitment of resources to defense. In this connection, Aganbegyan stated, "It is very difficult to compete with the United States since American expenditure on defence and ours arc approximately equal, while our economic potential is only half as big as that of the Americans."

Aganbcgyan's comments come to us secondhand in the form of incomplete notes purportedly haken at the lecture in which he reviewed his report to the Central Committee. Aganbegyan presumably did not expect his statements to be made public. Understandably, few statements by Soviet economists are available on the ticklish burden issue.

9 article appearing in the journal of the Ministry of. Semenov stated thai "exacerbation of the international situation has prevented our making the full quota of appropriations intended for agriculturale pointed out that appropriations for agriculture "by no means approximate the amounts stipulated for agriculturalhe tone of these statements suggests some dissatisfaction with the resource allocation policy at that time. Semenov is the head of the Agricultural Finance sector of the Ministry's scientific research institute.

Gosplan

QueiUotu Concerning Soviet MLutuv Oijsnliaiiorul Development in Light of theh CPSUommaaUa rooryihmnykh IB.

SotietUt Commentary,S.

UWe Economicflneiuy SSSR. No.

0 lecture, Nikolai Baryshnikov, Chief of an unidentified Gosplan office, was particularly gloomy about the social problems in the Soviet Union and

blamed them in part on the defense burden. Baryshnikov indicated that Soviet defense expenditures were "not less" than US defense expenditures and that, because of the lower Soviet national income. Soviet defense outlaysigger burden for the USSR than American defense spending did for the United States.

Inosplan official A. Dorovskikh referred to the existence of basic disagreements among economists over the new investment priorities of the Ninth Five-Yearhe author alluded to the existenceroup of economists who stressed that preferential treatment accorded light industry, at the expense of heavy industry, and implicitly to the detriment of defense-related industries, was dangerous and couldag in the production potential of the country.

Alsoumber of Gosplan officials complained that the escalating cost of new weapons systems and their tremendous demands for trained manpower and high-quality equipment presented major problems for Gosplan. The officials made it clear, however, that the needs of the defense sector were given first priority and that the defense establishment had no reason to complain about its share of the national pie during the coming five-year period.

The Think Tanks

Members of the USA Institute in Moscow have alruded on several occasions to the advantage that will accrue to the domestic economy from cutbacks in the military expenditures. Noting that the cost of armaments is rising "in truly geometric. Arbatov has pointedly warned that US military outlays have turned into "an enormous unproductive part of the economy."'4 Following Arbatov's.ivilian military policy analyst with the Institute, noted that limitation and reduction of strategic armaments would enable both the USSR and the United States "to dispose of bigger resources more freely in solving their own domestic problems."'s

Recent Election Speeches

On thr kalitiomhip of if- lit uxl Id Subdrntiom ol Socuiifcoiiwnw. No.1

H. "US Forttan Toiler and in* Seleniuic and TerhnicalSkA tionomOa.frohttya.

IS- "The USSR andUniwdu!*noe tt Ok Norm of Malta!ShA ttemomaM.o ebrMft

In the most recentound of Supreme Soviet election speeches. Kosygin made ihe only reference to the sensitive burden issue, staling

otcow Domestic Service,CMT.

thai those in the West who suggested increased defense expendituresime of detente condemned mankind to an unending wastage ofther Politburo members, while noting the desirability of detente and the need for continued progress in arms control, avoided any mention of the defense burden. Kosygin's statement possibly was an indirect challenge to some members of the Soviet leadership.

Original document.

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