Created: 7/1/1971

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Intelligence Report

Treatment Of Defense Outlays

In Soviet National Income Statistics



Copy No. 7


CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence1




5 the Soviet Central Statistical Adminislration has released an increasing volume of useful statistical information on economic activity in the USSR. Statistics on national income by sector of origin and by end use are now available for all yearsn addition, input-output tables, which are closely related to the national income data, have been published for the9he precise definitions and coverage of these data, however, have not yet been established or reconciled with each other or with independent Western estimates of Soviet GNP. Reconciliation has been hindered thus far by the lack of information on the treatment of defense expenditures in Soviet statistics, especially expenditures for military hardware.

Several theories have been advanced regarding the treatment of military hardware in Soviet statistics. The last exhaustive study of this subject carriedew years ago by the RAND Corporation concluded that outlays for military hardware might be covered by additions to staleomponent of national income by endore recent RAND study said the same but presented no new evidence. Another view is that all Soviet statistics simply omit defense-related information.ecent Research Analysis Corporation report suggests that military hardware is reflected in the input-output tables and in national income by sector of origin but may be excluded from Soviet national income by end use.

i. An accumulation ofome old and someupports the thesis that expenditures on military hardware arc included in additions

Note: This report was prepared by the Office of Economic Research and coordinated within the Directorate of Intelligence


to slateomponent of Soviet national income by end use -as well as in national income by sector of origin. This report discusses this evidence on the treatment of military hardware in Soviet national income statistics and considers its implications for intelligence.


Soviet National Income Accounts

The term national income in Soviet national accounting refers to the Marxist concept of "net material product" and not to national income as the term is understood in the West. Net material product by sector of origin includes only income arising in "productive"hose sectors which produce commoditieshysical content or which provide direct services suchransportation and communications to producers of physical output. Unlike Western national income, Soviet national income or net material product excludes income arising in production of consumer services, as well as depreciation of fixed capital. B.rominent Soviet specialist in national income accounting, lists the productive sectors as "industry, agriculture, forestry, construction, transportation and communications, trade and public dining, supply procurement, and other branches of materiallyshevskiy goes on to list the "nonproductive" sectors which are excluded from net material product by sector of origin as "economic branches serving the public, as well as those bearing on administration and defense."

National income by end use includes all expenditures on physical goods by final consumers, whether households, industrial enterprises, or government departments and also includes depreciation of non-productive fixed capital.hows the categories of Soviet national income by end use as they appear in the Soviet statistical handbook and the values of these categories0

According to the general Soviet definitions of national income, defense outlays should logically be allocated as follows. On the sector of origin side, income arising in the production of military hardware and Other defense items such as clothing, food. fuel, and spare parts should form part of income arising in industry. The wages paid to employees of the Ministry of Defense (including the armed forces andersonnel) would be excluded because the defense and science sectors belong to the nonproductive sphere of economic activity.

Table 1

Composition of Soviet National income by End use

Billion Rubles



Personal consumption of

Material outlays in 1

serving the population

Material outlays in

institutions and in administration

Accumulation Fund and Other 8

Increment in fixed 0

Increment in productive

Increment in nonproductive

Increment in material and reserves

income by end use. if if has the same coverage asby sector of origin, should include the expenditures byfor all physical goods, including military hardware.of this report tries to determine whether actual Sovietpractice conforms to theory, especially where militaryconcerned.

Military Hardware and National Income by Sector of Origin

Soviet texts on national income accounting do notincome arising in the production of military hardware is included

I. Tola/ military expenditures8 are estimated at2 billion rubles. Of this totalillion rubles would be excluded from Soviet national income statistics by dejinition because they represent retired pay. military pay. or outlays for "nonproductive" services (passenger transportation, medical care.leasing of communications facilities).

in national income by sector of origin, the output of the defense production sector almost certainly is included in official indexes of industrial production and in industrial employmentecent article on the Soviet economy during Worldor example, presents an index of total industrial productionhich covers output of the aircraft, tank, armament, and ammunition industries.9 statistical handbook presents the official index of industrial production for the0. The index numbers0re identical to those of the industrial production index which specifically includes military hardware.

he evidence regarding employment statistics is more indirect. National economic plans for labor are known to be formulated with employment data that include workers in defense production. Published employment data, moreover, contain no large unexplained residuals that might represent defense production workers. The published employment data alsolausible rate of participation by the population in the labor force, it is very unlikely that large numbers of workers have been excluded.

The evidence that military production is included in these other aggregate statistics published by the Central Statistical Administration does not prove that it is also included in national income. Nevertheless, it is hard to see why the USSR would want to purge military output from one set of statistics and not from the others.

Published employment statistics (which almost certainly include workers producing military hardware) can be used as the basis of an independent estimate of national income originating in industry. The sum of wages, social insurance deductions, profits, and turnover taxes, all of which can be derived from Soviet sources, should approximate national income originating in industry, including defense production. If military liardwarc production is excluded from published national income statistics, the reconstructed figure should consistently exceed the official figure for national income originating in industry. In fact, the reconstructed 3nd official figures for the net material product of industry are close enough to support the hypothesis that military hardware production is included in national income by sector of origin., the comparison goes as follows:

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F fl

Billion Rubles

6 7 8 9

Value added in industry from national income statistics)

Sum of wages, profits, 1 nd other components of value added in industry (as reported in statistical

Defense Outlays in Soviet National Income by End Use

A consideration of the available evidence also suggests that expenditures for military hardware arc included in Soviet national income by end use. First, since value added in the production of military hardware probably is counted as part of income originating in industry, expenditures by government for military hardware must be included on the end use side if the national accounts are torime goal of national accounting schemes the world over. In this connection, although the total for net material product by sector of origin exceeds the total for net material product by end use in published Soviet national accounts, the discrepancy is much smaller than the discrepancy that would exist if expenditures for military hardware were excluded from the end use side of net material product but included in the value by sector of origin. 21

The Soviet national accounts for World War II provide additional evidence that national income by end use contains sizable outlays on military goods. Ashows, during World War II very large unspecified military expenditures were shifted, primarily from accumulation,emporary national income category containing only military goods. After the military outlays evidently were reintegrated with

lie discrepancy occurs because pan of the national income produced is not distributed to the consumption or accumulation funds. Tlie discrepancyillion rubles per year. According to an article in the Central Statisticalournal, losses deducted from national income produced include losses of mature livestock, losses from abandoned capital construction, losses of agricultural products from spoilage, and losses from natural calamities.

USSR: Distribution of National Income, Selected Years



b/ Expenditures




The source states that consumption in0ncludes personal consumption of servicemen, b. Excluding personal consumption of servicemen.

consumption and accumulation, where they appear to remain. Expenditures on military hardware almost certainly were included in this special military category of national income duiing World War II. Outlays on food and clothing were not covered in the special category, and expenditures for petroleum and other operating needs alone would not account for one-fourth to one-third of national income. Furthermore, most of the military category originally was part of accumulation, so the accumulation fundlausible location for outlays on military hardware. Still, no one has established whether some component of the consumption fund may have contained some of the military procurement that was shifted into the military category of national income during World War II. In the following sections of this report, components of Ihe consumption and accumulation

fundi ire analyzed and reconstructed from independent data in an effort to uncover unexplained residuals large enough to represent outlays on military hardware.


V.F. Makr. Krylov say that consumption "refleets both personal and public consumption of the population and material expenditures of society in the development of science, administration andoviet economic literature contains an abundance of limilar references.

Some writers, moreover, describe the defense content of specific components of8 book published by the Miniitry of Trade states that "feeding and outfitting of servicemen belongs to personalhe scope of consumption by institutions serving the population is described. Petrov: "Consumption in institutions includes outlays of material wealth on current maintenance of these institutions (heat, light, office expenses, current repair, and other outlays) and also amortization of nonproductive fixed capital. Institutions of the nonproductive sphere are institutions providing everyday services to the population and institutions of administration and defense."

The personal consumption fund can be reconstructed08 using CIA national accounts which are based largely on Soviet data but which also include CIA estimates of expenditures by the military for food and clothing. Although the reconstructed totals do not match the Soviet figures for personal consumption, the differences arc not large enough to cover outlays for military hardware.hows official Soviet figures for personal consumption and the reconstructed totals0

Independent estimates of institutional consumption, including material purchases by scientific organizations (including those for military RA.I) but excluding purchases for defense) can he derived from state and enterprise outlays on health, education, social security, administration, science, and the like, and estimated depreciation of nonproductive fixed capital. These are also shown in Tablehe reconstructed figures arc also so close to official figures for public or institutional consumption that very little room is left in which to hide military outlays other than routine housekeeping expenses.


national income specialists have referred to defensea component of accumulation According Allakhverdyan.

"againsi ihe accumulation fund, material-technical supplies to the army arc. D'yachcnko says "expenditures on defense arc charged to that portion of national income intended for. Ryabushkin makes an isolated reference to military hardware when he says "the increase in military means, armaments, and so forth can be treated only undert is not clear, however, whether Ryabushkin is theorizing about correct accounting practice or whether he is discussing the method by which Soviet national accounts are constructed.

mong the components of accumulation listed in Table I, the increment in nonproductive fixed capital (fixed capital in housing and in the service sectors) is one possible location for purchases of military hardware. Nonproductive fixed capital stock is known to include military facilities, but this coverage does not necessarily extend to nonproductive accumulation in national income. With the information at hand, it is impossible to determine whether the increase in (he stocks of barracks military airfields, base facilities, and the like is included under the increment in nonproductive fixed capital in national income by end use.9 the value of machinery and equipment included in the increase of nonproductive capital stock belonging to stale enterprises and organizations wasilUon rubles. This value is clearly coo small io cover

procurement of military hardware as well as the increase in the value of machinery in housing and services.

Stale Reserves

Another component ofadditions to stateas long been suspected of concealing outlays for military hardware. "Additions to slate reserves* are included in the component of national income, "increment in material working capital and reserves" (seeoviet literature provides ample evidence that part of state reserves isilitary nature but is ambiguous as to whether these are outlays on weapons. The Bol'shava sovetskaya entstkhpediya says that "products intended for defense needs arc Included in stateccording. Bor. the "reserve fund" in national income contains, among other things, "reserves of the means of defensepecialor may be distinguishing militury hardware from other military goods such as food and clothing which are said to be included in consumption.

Increments in "working capital" can be estimated from information on inventories and unfinished construction in the state and cooperative sector. Hence, an estimate of additions to "state reserves" can be derived by subtracting increments in working capital from total increments in "working capital and reserves" as reported in national income statistics.he resulting series, given inhows that very Urge increments were the rule in thend again in.

Table 4

Average Annual Not Additions to State Reserves a/


a. Values for individual yearshovn in Appendix Table t.

T7ie uln ,alllc representing the changeagriwltural mtrntoriettrnate handi

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large increments such as these cannot be explained by stockpiling of grain, gold, or other commodities which would belong in state reserves. Indeed, in some years, the net change in these civilian stocks may well have been negative. Outlays on military hardware seem to be the only category of expenditures which could account for additions to state reserves on this scale. Other categories of material purchases have been identified elsewhere in the national income accounts or arc too small (miscellaneous military operations and maintenance expenditures, for example).

Treatment of Military Hardware in iSoviet Calculations ol US National Income

A quite different and convincing body of evidence is provided by the procedures adopted by Soviet statisticians when they attempt to make US GNP comparable to Soviet national income (net materialhe Soviet definition of US "net material product" definitely includes military hardware. US national income by sector of origin calculated according to the Soviet definition is reported annually in the Soviet statistical handbook. An analysis of US GNP data indicates that this series is derived by subtracting value added in government and service sectors from US national income. However, value added in manufacturing, which includes production of military hardware, clearly is included.

Calculations of US net material product by end use were presented. Kudiovook publishedf These calculations contain direct references to military goods. in conformity with Soviet definitions, Kudrov groups outlays for military food and clothing with personal consumption expenditures. Public consumption is presented in Kudrov's calculations onlyotal with no indication of its composition. However. Kudiov groups tin* following outlays in the "fund of accumulation";

udrovrominent specialist in national income accounts and the US economy in Caspian's Scientific Research Economic fnstitute (WEI).

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gross private domestic investment, less depreciation in the private sector

public construction

government purchases of equipment and military hardware

udrov's 'suite procurements of equipment toborudovantyjl and military equipment tvoyennnys the US GNP expenditure category, "government purchases of durableudrov could have lilted it ai such without mentioning its defense significance. Thus. Kudrov's data tend to confirm the hypothesis that procurement of military hardware is included in the accumulation fund of Soviet national income by end use. It seems very unlikely that Ihe USSR would understate the level of its output relative lo US output by including military hardware in its concept of US national income but not in Soviet national income.

Kudrov did not have sufficient data to placeinvestment outlays in individual Soviet accumulationcould not easily have been allocated between netproductive and nonproductive fixed capital, and he was unable topurchases of durable goods" between new fixedinventory changes. Thus Kudrov provides no evidence on theexpenditures on military hardware within the accumulation fund.

Implications for Intelligence

The treatment of military hardware in national income statistics hat never beer, clearly described in Soviet economic literature. Bookkeeping practices as well as ruble values for military hardware expenditures are well-kept secrets. By compiling information on Soviet defense outlays and by performing statistical checks on Soviet national income categories, however, considerable light has been shed on the bookkeeping conventions for defense outlays in national income statistics.

Present information rs nol sufficient, however, lo estimate ruble values for defense portions of national income In particular, the scries for additions to state reserves cannot be used toeliable residual for military hardware expenditure* In the first place, not enough is known about non-military component* of additions to slate reserve, such as grain and gold. Second, the treatment of retired military hardware is unclear. Retirements may be considered a* losses and excluded from gross investment in military* hardware in calculating additions to Male reserves.

Although the state reserves series is difficult to interpret, it is of intelligence interest because ilheck on other defense-related economic data. The input-output tables9or example, appear to have the same coverage as national income. Therefore. Ihe analysis of defense ouflays in national income may help to locate them in tbe input-output tables. Moreover, an additional indicatoruseful for evaluating estimates of military hardware which can be derived by comparing

data on machinery production with civilian machinery requirements.oint consideration of all data related to military hardware procurement should provide insights not obtainable from individual analyses of national income accounts, input-output tables, or machinery production figures.

5 See. farMichael Boretsky's estimates of machinery allocated

i" military and mgrams in US Cnngrea. Joint Economic Committee.

Economic Performance md the Military Burden in the Sovici. and Abraham Becker's calculationilitary machinery residual in HAND Corporation.oviet Military Outlays Since

19SS.he Becker and Borettky estimates are very different, but neither series resembles the additions to state reserves derived inelow


Tahle S

USSRi Estinates of Consumption in National Income


of the population

purchased in state and cooperative trade

fioods acquired in collective farm markets


Household outlays on utilities

Material services

Depreciation at housing

Purchases of food and clothing by defense organizations aj

Material outlays in Institutions serving the population





State entertainment organizations

Porsonal transportation

Social insurance adninistration

Depreciation of nonproductive fixed capital


08 represent retail trade turnover lees purchases' by institutions and purchases of capital equipment by fori households. Data are from CIA national account*0

Soviet data.

are from CIA national accounts0 ?hefigure derived by CIA corresponds to the sum of the followingthe Soviet definition of personal consumption.

1. Goods acquired by households from collective

farm in-village narkets. S. Products received from state and collective

nd from private plots.

front CIA national accounts0

avindividuals for privately-produced

figure0 is from official Soviet date, depreciationinto effectso the rate of depreciation implied by3 datato8 value for Houeing stock.

CIA ettinatee.

h. Derived from state budget data. The ehare of material outlay* in the union republio education budget 0 it applied to all-source education outlays0

i, Same methodology ae used for education. The ehare of material outlays is Sam,

j. An arbitrary SOX of total outlays ie aetumed to represent material purchases.

k, of houeehold outlays on recreation are aatuned to represent material purohaeee. Total outlays on recreation are taken from CIA national acoounte0

I. Same nethodology as ueed for entertainment.

offieial to"*'* ate of depreciation

anital to8 value for nonproductive fist.




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