THE SOVIET ECONOMY (S-3916)

Created: 11/11/1971

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MEMORANDUM FOR THE RECORD

SOBJECT: Briefing of Secretary Stans and Assistant Secretary Scott, Department of Commerce

1. On 10

ActingT,

briefed Secretary Stans and Assistant Secretary Scott on the economy of the Soviet Union. The formal presentation centeredhe trends in Soviet GNP, industry and agriculture, and the comparative performance with theomparative allocations of total product in the tworoduction and allocationol policies in the new Five Year; performance of the Soviet economyhe outlook for the economy for the balance of the plan period ;

Soviet efforts to close the technological gap by, (a) internal reforms in introducing newand (b) by importing Western technology; and

limitations on Soviet imports due to, (a) limited availability of foreign exchange andelatively high level of debt-

2. The briefing lasted aboutinutes with Secretary Stansand Scott frequentlyrelevant and penetratinij questions.

THE SOVIET ECONOMY

The economy has inhreefold to support an aggressive foreign policy and military posture, to close the production gap with the US, and to raise the level of consumption of the Soviet people. In recent years, the economy has not measured up to the regime's aspirations in these areas. Growth has slowed, and certain basic economic problems have become chronic and increasingly troublesome.

However, it is important to realize that the Soviet economy is not stagnating. It io continuing to expandespectable pace, and as it does so, the capacity to increase military and spaceas well as other expenditures for national policy purposeswill continue to increase along with the economy.

Chart 1

We can review recent comparative economic growth with the benefit of our first chart, which shows total output in tho US and USSR If you look at the rate of increase of Soviet GNP reflected

in the first three bars, you can see that the decade ofas ono of very rapid Soviet growth. The absolute size difference between the two economies actually narrowedew years.

Ass came to an end, thereignificant deceleration in Soviet growth. Wi,th growth rates in the two countries reasonably close inears, the absolute gap between the US and Soviet GNP's increased. However,S recession year, the USSR was able to make an appreciable dent in the gap.

0 spurt in Soviet growth ofercent and tho relative stagnation in tho US economyillion dollars from the American edge8 billion For the first time in the history of the Soviet attempt to catch up, the Soviet GNP amounted to more than half of the United States performance. Although the rate of increase in Soviet GNP1 will be somewhat greater than tho USercent vs.ercent absolute gap between the US and Soviet GNP's will again increase (by aboutillion).

Over the years, tho rapid growth of the Soviet economy has been sparked by sharp increases in industrial production, which more thanin volume overyear, in comparisonoubling in the US.

0ndustrial production in the US grew more rapidly than ins, while the opposite was true in the USSR. Over the last four years, however, US industrialhas increascflvery little. onsequence,USSR industrial output now stands atf that of the United States. Increasingly, the United States iservice economy, with most increases in employment coming in areas which probably contribute little to war-supporting capabilities.

A few words about Soviet agriculture. output has been moving ahead slowly over tho past two decades. Despite increased attention in the form of higher inputs of fertilizer and machinery, and higher farm prices, the response has been disappointing. The USSR still experiences embarrassing shortages, such as the needar to import large quantities of meat and "ogwg-graln from the West. In terms of efficiency, its record

oor one. With an agricultural labor force more thanimes the size of that in the US, Soviet agriculture produces commodities whose total value is only about three-quarters of US

agr^cuPtm-fll output. In the USSR, one person in the agricultural labor force feeds five others in the total population; in the US the ratio'

You can see that, while the share of tho labor force still on farms has been falling, aboutercent) remain in agriculture. One-thirdigher percentage by far than exists in any othor industrialized nation.

Despite relatively heavyercent of the total in the USSRercent in tho USthe withdrawal offrom Soviet farms is relatively slow,eon-ti-nu^ng-.

Soviet regimes have been plagued not only by management difficulties in agriculture but also by weather uncertainties. Annualions in output aro quite large. Located at high latitudesMoscow isNorth, on roughly the same parallel as the middle of Hudson's Baytho USSR has harsh winters and short growing seasons. This year, because of generally favorable weather, crop prospects are good and

grain output is likely to approach thereached Nevertheless, thealready contracted to purchase overof Free World grain indirectly tosupplies, especially livestock products.

Grain and meat importso be at0 million.

The Soviet diet is adequate init is heavily weighted with bread andof meat, fruits, milk, althoughnearly always inadequate to satisfy Consumers have to queue up forand they do not like it. This isSoviets areajor expansiveraise meat production and are spendingcurrency on meat imports.

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Soviet growth in the past has been fueled by continuing large and increasing outlays on investmentboth absolutely and when expressedhare of GNP. Chart

When investment growth In the two economics

is viewed in thiseadership must surely be disappointed in the Soviet economy's failure

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toutter performance in closing thetho twoand its two

primary components, industry andagriculturo.

As reflected in the chart showinginvestment shares of national product,allocates its total output muchdocs the

Allocation of Output^^Tl

" "rrn 10 1 l nut paJ h

riif strpnn thr err-wonto Out chart shows -.

Their outlays for new fixed capital are now aboutercent of the US figure in absolute terms. Thisthe continued growth-orientation of the Communist leaders.

As for consumption, or what the man in tho streetoviet population one-fifth larger than the American population gets perhapsercent of what is spent in the US.

Per capita, thisundle of goods and services about one-third of the US level and less than one-half of the West German level. 3. Finally, the Soviet defense and

spaceollar values

ie Jotry

tho United States spends on such programs. The economic blueprint of the new five-yearoes not calladical shift either in production or allocational policies. The average annual rates of increased planned for GNP and industry are somewhat above the average annual growth achieved, as shown in the chart. "Although the new output targetsS are relatively modest, the prospects forare not auspicious. ccj,mauhuuii.Llita "STPCfe uf-plonc -dOd. ipmewt orethan during ^lmHw Indeed, as indicated in the chart,he first year of the

Figures in Percent

plan period the economy got offlow start. Chart 7

There is no evidence of major changesin the interplay of the demandsin all major sectorsmilitarygrowth and consumption. As before,is to growlightly higher annualthan GNP and consumptionower The data do not permit precisedefense outlays, but it appears thatise in expenditures forspace programs at least as rapidly asnational y

l would like towordpriorities for the consumer. We-to jtotitinrt

gnc. that'om-JKW^-mii-iii,l l'lThere hasood deal of debate as to whether

the new five year planhift of priorities toward the consumers. Arguments both pro and con miss the message carried by past performance. There hasteady effort to

rs

Figures in Percent

raise the standard of livxng over the last decade or more. Investment in agriculture and consumers goods in industry in general have received an increasing share of investment. Chart 7fr

Consumer durables have grown more rapidly than producer durables. The difficulty springs not so much from lack of priority or effort, but from the extraordinary resistance tounder the Soviet system of meat production, housing construction/ retail trade, repair services, and variety and quality of goods in general. These are all areas in whichownership and management have worked far better in all countries. We expect consumption to continue to get rising allocations and the

^problems to yictld slowly and grudgingly.

We do not believe the long-run outlook for the Soviet economy has improved fundamentally. There are signs that from here on in, every percentage point of fugure growth will be "fiard'er i to achieve.

The Soviets aroharp decline in the return on investment in new plant and equipment, and we expect this trend to continue.

A tight labor situation has developed, and most of the excess rural workers have already been drawn to the cities.

The easiest technological gains have boon made. Technological progress as measured by the estimated annual increase in productivity has been slowing in rocent years.

Chart ^

Moreover, closing tho technological gapof which tho Soviet leadership is well awareis not an easy task. An appreciation of the size of that gap can be obtained by comparing the relative levels of technological development in the USSR with other industrialized nations. The chart shows that,iven input of capital and labor, output in the USSR is about one-third that of the United States. It is about equal to that of Italy, but significantly behind that of Western Europe. The Soviet Union's relative

position does not change very much if theis made on the basis of the amount of GNP generated per worker.

It ia clear that an improvement inperformance requiros nothange in priorities, but some kind of drastic shake-up of the moss-covered bureaucracies responsible for initiating, designing, and executing new

investraont projects.- In other words, itask of altering the institutional means whereby now technology moves from the research stage through development and test to fruition in the form of completed plant.

Many articles have bean written in Soviot journals on the kinds of organizational changes that could be made which would supposedly speed up the introduction of new technology. To date, however, the results of exhortation and suggestion have not beon visible.

Moreover, economic reforms introduceddesigned toapid decline inof productivity, havo beenby

opposition and half-hearted implementation. In fact, developments in the field of management havo been retrogressive rather thanse those terms in two senses. First, the Reform5 has not moved forward and in actual practice has moved back toward thaethods. Thus, much like Krushchev, Brezhnev is now emphasizing close supervision of enterprises, more detailed planning, socialist competition, and more participation in economic matters by the Party. Secondly, from the point of view of liberal hopes, thnro has been no progress toward decentralization or use of markets or even adaptation of Western economic theory. The Rolemports

One way to help overcome the technology problem is to increase imports of Westernot only plant and equipment but also process licensos and patents. The Soviets have been expanding their imports from the West for tho past decade. This helps in particular areas, but not across the board.

For example, as you know, the Soviets are

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now finishing constructionIAT-oquipped facility, which will raise the technological level of the Soviet automobile industry sharplyew years. They aro starting toery large truck plant on tho Kamaacility that will embody Western, including US, technology. They are trying to acquire computer technology. These are not inexpensive moves. The FIAT plant will cost roughlyillion, and the Kama truckollow-up project, will cost even more. ButTioejLta1^awvj^ tho ability to acquire technology from the West, in the form of complete plantsurn-key basis, is limited by tho availability of foreign exchange.

Moreover, thereard-currency deficit of several hundred millionear in trade with the West, because of chronic difficulty in providing anything the West wants to buy.ussia has used credit to cover this deficit, rather than selling gold. The Soviet debt to Western countries now exceeds onealf billion dollars.

three billion dollars5 to one billion They are now back up to aboutillion.

The USSR soldillion In gold earlyut no sales have been noted since March. In view of the Soviet's persistent hard-currency deficit and recent large grain purchases, additional sales are possibla, although probably not in excess of Soviet annual output. Thus, sales of up0 million are possible without drawing down Soviet reserves.

Let me close by reiterating that slower economic growth clearly can provide the resources for an increasing militaryising level of living, and an expanding industrial base. The Soviet economy is now so large that

a very small rate of increase in GNP2t

results in aboutillion more of product.

US and USSR:

or Reseajgfe-and Development and Space'

US and "USSR:

hnd Devilment and SjpKS'""

CumulativeBillion US Dollars).

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