SOVIET ECONOMIC GROWTH (S-3341)

Created: 8/24/1970

OCR scan of the original document, errors are possible

CIA HISTORICAL REVIEW PROGRAM RELEASE IN8

Proposed Presentation to the ffeval War College

Research

0

Soviet Economic Growth

Introduction

Wliy are we interested in the Soviet economy? First of all, because itilitary challenge to the United States. Secondly, because the Soviet model ofhas spread to many other nations. Today, over one billion two hundred million peopleor roughly one out of three on the earth's surfacelive under the economics of Karl Mine or some variant of this doctrine. More importantly, the doctrine is being hawked to the newly-emergent nationsevelopment model superior to anything the West can offer.

Yet afterears of Communist stewardship, the USSRixed economic picture. Overall, the economy continues to expand, supporting rapid industrialization and the maintenanceilitary-space sector that produces end products in sufficient quantity and quality toormidable challenge to the United States. Together with this success, however, we find:

n array of engineering industries turning outwhich, in quantity, is close to that of the United States but is generally far outdated in technology.

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civilian goods component whose output isand whose productsfrom automobiles tois unsurpassed among the advanced economies of

the world for shoddiness, bad design, limited variety and short service life.

finally, an agriculture which, instill resembles that of under-developedrecent improvements.

Doctrine

ropose to examine the growth of tho economy with special attention to those underlying factors which will determine in large measure its prospects In tho years ahead.

You are all familiar with the fundamental Soviet economic doctrine, namely, forced draft industrialization. It was put into effect with the start of the first Fivc-Ycar Plannd itasic tenet today. Priorityof heavy industry not only permitted rupld economic growth, but aloo provided the sinews of the Communist war machine. onsequence, consumption, or what the consumer received, was looked uponesidual. The centralized allocation of resources left the mass of the population with only enough food, clothing and shelter to permit the work process to continue. Up to the present, Soviot economic policy has achieved its goal of rapid growth. The USSR boasts the

second largest economy ln the world. But the Soviet people have paid dearly in terns of material well-being and political oppression.

Moreover, Soviet leaders arc discovering that the methods used for forced industrialization are increasingly ill suited for the managementomplex, modern economy. The highly skilled, technical labor force now required is more motivated by incentives than by coercion. This means, in turn, that consumers can be no longer treated as residual claimants. Furthermore, with tbe accelerating forward sweep of industrial technology planners must be increasingly flexible and adroit. Yet, Soviet response to these growing pains have been timid, half-measures that have brought aomc relief but have not attached basic ills. Even those measures have had tothe opposition of entrenched, vested interests among the various production ministries and the party. Planners tend to emphasize the same old thingsteel, heavy industry, general-purpose machine tools. To maintain the quality of growth, ronources need to bo increasingly diverted to new areasetrochemicals and plastics, electronics and computers.

Where has forced draft growth brought tbe USSR In Its self-Appointed task of becoming the world's strongest nation, in an economic sense? Let's looXew statistics on recent comparative performance, namely, the Soviet ond US records.

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Brieflug Aid

IE and USSR: Comparative Gross National Product

the slide, Soviet GNP expressed in dollarsin three steps, first, the ratio of SovietGKP's baaed on ruble prices is calculated. Secondly,ratio based on dollar prices is computed. GNP In dollars is multiplied by an average of the Tho valuations of the two countries' GNP'ssubstantially different if expressed in rubles or The difference arises from the wide variations in

the patterns of output and relative prices in the two countries.

valuation can be said to behere is nothing inherently "good" orthe price relationships of one or the other country.omparison based on an average of the ratiosIn rubles and in dollars. We believea better measure of the relative productionthe two economies than ia given by either valuation alone.

3- We can note that the size of Soviet GNP is about one-half that of fchc United States. But because of the much larger total size of the US GNP, the absolute gap between the US and Soviet GNP's has Increased ins. This has been true even though the Soviet economy has been growing aore rapidly than that of the United States.

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I should note that the USSR does not employ theof gross national product, so the comparisonsseen are reconstructions made by CIAthe Soviet concept of industrial production isto any Western series, so that we have hadup an aggregate measure of Industrial output,as close to the US Federal Reserve Boardpossible. This is what tha data

Briefing Aid

US and USSR: Industrial Production

slide is on an Index number basis,0 equaln both countries!.

Over the years, tho rapid growth of the Soviot economy has been sparked by sharp Increases In industrial production, which more than quadrupled in volume overyear, In comparisonoubling in the US.

owever, industrial production in the US lias been growing more rapidly than Ins, while the opposite Is true of the USSR. esult, the difference between US and Soviet industrial growth rates has narrowed. This deceleration of growth In Soviet industry hasatter of serious concern to the leadership.

Agrlcul ture

Notable, but much less spectacular, has been the growth of Soviet agricultural production, which nearly doubled from

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9 while that of the US Increased by UO percent. Iba US, of course, has not been trying to increase agricultural output very much, so the growth comparison is somewhat unfair. If we measure tho performance of Soviet agriculture in tents of relative costs and efficiency, its recordismal one. With an agricultural labor forceimes the size of that in the US, Soviet agricultureO produced commodities whose total value was onlyLabout three-quarters of US agricultural output. In the USSR, one person in the agricultural labor force feeds five others in the totalin the US the ratioraph to show you.

Briefing Aid

US and USSH: Percent of labor Force in Agriculture

You can soo that about one-third of the Soviot laborercent) remains on the farms. Although there has been significant improvementne-thirdigher percentage by far than exists In any other industrialized nation.

Despite relatively heavy capitalercent of the total in tho USSRercent in the UShe withdrawal of manpower from farms is now relatively slow.

From the time of the Revolution, Soviet regimes have been plagued by the problem of assuring an adequate supply of

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foodstuffs. Located at relatively high latitudesMoscow isNorth, on roughly the same parallel as tho middle of Hudson's IHyhe USSR lias harsh winters ond short growing seasons over vast areas. Moreover, onlyercent of this huge land mass is arable. Thereontinuing premium on efficient management in agriculture and on investaent program.'; that will make possible maximum exploitation of the country's marginal agricultural resources.

Where do they stand today? The Soviet diet is adequate in calorics, but It is heavily weighted to bread and potatoes. So-called quality foodseat, fruits,re always ln short supply by Western standards. Production of grains during the post decade has expanded at average annual rates ofear, but the increase has been attended by considerable annual fluctuations attributable in large measure to weather conditions. Infor example, the grain crop was plagued by bad weather throughout the crop season, but nevertheless turned out to be tho third largest on record. Because of very good weather, crop prospects0 are excellent. Indeed, grain output Is likely to surpass the6 harvest. Allocation of Output

Let's turn now from overall measures of output to its allocation.

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Briefing Aid

b. USSB: Consumption, Investment, Defense

This chart compares outlays for consumption,and defense in the US and USSR

At the left, you can see the priority given in the US to consumer welfare, and the huge margin of material superiority our citizens enjoy compared to those in the USSR.

Next, the investment comparison underscores the Soviet emphasis on growth; it is the most spectacularincrease on the part of the USSRfrom aboutercent of the US0 to nearlyercent of ours

li. Finally, Soviet defense outlays, shown on the far right, are now about three-fourths as large as ours. Soviet defence outlays, as you can see, have been high throughout this period.

What the Soviet allocation pattern shows is that personal consumption has fallen slightlyhare-of GNP. Consumers received somewhat more (Including better health and educational services) over the years measured ln absolute terms. Butoviet citizens were getting onlyercent of total output.

A major shift in allocation has occurred in defense. While military spending lias increased over the years, the military share of total output has been declining.

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when Soviet GNPines as-large asxpenditures on military and space programs were upercent. onsequence, the share of GNP devoted to defense andprograms has decreased from Hi percent0ercent

Where has tho lion's share of output increases been going? To investment. New fixed investment is up,liare of GUP, fromercent0 toercentnd industry has been receiving the largest slice of the investinent pie.

Despito the sharp increase in investment funds, growth rates in industry began to decline in thes. The primary reason for thisut in the manpower inputesult of the cut in the work weeko Ul hours. Total manhours worked actually declined6owever,0 the growth of manliours rose sharply, but the rate of growth of GNP has not regained its earlier vigor. The Slowdown ofQ's

We think one of the reasons for the slowdown ln6 has been the rise in those defense outlays whichigh technology content, particularly the demanddvanced military equipment and research and development in the military-space sector. ill return to the defense impact later. But let us note at thin juncture that these

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advanced military-space programs, growing rapidly, skimmed off the best available facilities, scientists and engineers, and almost certainlyualitative effect on civilian technology and investment programs.

But the fundamental problem, we believe, lies elsewhere. With investment and labor force increasing rapidly, why has not output responded ins as it did ins? What this means is that there hasharp decline in

gains attributed to factor productivity. In other words, itignificantly greater increase in capital and labor to bring about the same increase in industrial output ins than in Let's look at some figures.

Briefing Aid

USSR: Productivity

You will note from the left hand bar that1he annual rate of increase in Soviet industrial output wasercent. About half of this increase was due to inputs of capital and labor, and half to productivity increases.

The three bare to the rieht summarize the situation, respectively,, You can see that labor and capital inputs continued to grow at about

the same rate as, but that factor productivity declined very sharply. onsequence, annual growth of

industrial output wan cut fromercent toercentercent.

What are tho primary reasons for Increases in factor productivity? hart for you.

Briefinfl Aid

asoris for Increased Efficiency in Resource Use

Zrem>7

With respect to come of the key building blocks of productivity, such as the education and training of tho work force, the rate of advance in the USSR Ins was not very different from that ins. Also, trends in the quality of industrial materials have not altered significantly. Tho key to the low efficiency that wc noted in 3oviet industry lies in the lack of progress in the closely intertwined elements of economic management, improved production techniques and the introduction of new technology.

To Illustrate, wo can use machine tools"as an example. Tho central planners have deliberately continued toeavy volume of production of general-purpose machine tools Instead >of switching to smaller numbers of the more complex and expensivebut much more efficient and productivespecial-purpose machine tools. They also continue to emphasize the use of metal-cutting machine tools in many manufacturing operations where we have long switched to metal-forming machine tools that are faster in operation, generate less scrap, and

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arc capable of turnlne out functionally superior products. Numerically controlled machine tools account for only one percent of Soviet machine tool output, and their use is largely confined to the aerospace industry. In contrast, in the US such units account for PO percent of machine tool production; and they arc widely iised throughout industry. Of course, the more sophisticated units would require new design workigh orderomething that causes Soviet industry considerable grief. The road of least resistance has been continued production of general purpose units, many of them of mediocre quality.

"Wellou may ask, "if rapid increase in productivity occurred underolicy ins, why not insT" First, thereeneral tondency toward diminishing returns to additional inputs of capital and labor of given typo and quality. When production has been severely disrupted and much of the country's plant destroyed or damaged as during World War II, almost any Kind of equipment can be put to work and yield relatively large gains in output, later, as industry is more fully equipped and Is called on toider variety and higher quality of product, more of the same old-style equipment will contribute relatively little to raising output. Better planning, better management, and better technology are needed.

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The Role of KSi) ami Imports

One way to help overcome the technology problem Is to Increase imports of Western technologyot only plants and equipment but also process licenses and patents. The Soviets have been expanding their imports from the West for the past decade, and this helps in limited areas, but not acrosR the board.

For example, the Soviets are finishing construction of an automobile plant on the Volga. It isIAT-equipped facility, which willhe technological level of the Soviet automobile industry sharplyew years. But by the time the plant reaches maximum planned output, the car being produced will already be semi-obsolescent by Western standards, and5 it will be unmarketable in competition with Western automobiles. There will be no Soviet follow-through to keep the technology up-to-date; they will be turning out the same old FIAT.

A second attack on the problem of lagging technology is to beef up the domestic research and development effort. Despite the Soviet buildup, the USffortimes the size of the Soviet counterpart. Not Is the flow of home-grown BAD products from Soviet institutes impressive.

Where the Soviets stand in technology is shown on the

following slide.

Briefing; Aid Relative Levels of Technology In thes

This slideomparison based on total output, or GNP, using the United Statesorm. The first column shows that output per unit of capital and labor is about one-third that of tho US, and while about equal to that of Italy, is significantly behind that of Northwest Europe.

The Soviets' relative position doesn't change appreciably if the comparison is made on the basis of GNP generated per workertbo second column.

Finally, tbe capital stock available per workerong way to go before It rcacho3 the US level, and still lags well behind tho advanced Western European nations.

Soviet technology is probably ahead of the USew military related areas, such as rotor systems for large helicopters. It is in tho military areas that industrial technologyhole comes closest to the West, with heavy Industryiddle ground and civilian goods the bottom of tlx scale. The chart you have just seen includes agriculture, which pulls down the overall level of Soviet technology. The Burden of Defense

I turn nowrief comment on the burden of defense. The persistent military competition with the West has been

and continues toactor retarding Soviet growth. In an economy as taut as the USSR's where plant, equipment, and skilled manpower of all kinds arc in short supplyilitary programsirect drain of resources away from alternative uses. ew figures to show you.

Briefing Aid Soviet Expenditures for Defense and Space

1. llie top line on this charteconstruction, in

rubles, of what we believe the USSR actually spent on defense.

It Is substantially higher than tbe one line figure for

"defense" carried in the Soviet open budget.

?. After the Korean War, total defense expenditures in

the USSR declined somewhat, therebyoom inin the civilian sector in thes. 0 they Jumped sharply, only to level off again. Expenditures for defense and space spurted againnd now stand at an all-time high.

The impact of military and space programs falls predominai on Soviot Industry and in particular on the machinery sector of industry. 9 procurement of military machinery and equipment claimedercent of machinery output, and in certain key areas such as electronics, the share of output channelled into military and space programs was far greater.

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The Impact of the military and space programs is heightened by the fact that about three-fourths of the Soviet research and development establishment is engaged in military and space projects.

Although these are significant costs, the burden of the Soviet military and space programs should also be appraised against the backgroundapidly increasing national product. Current expenditures on military and defonse programs of aboutillion rublesery large diversion of resources from the civilian sectors of the economy, but the change in tbe overall share of GNP over time suggests that the.relative burden ls not as critical as it once was. The Soviet GNP is now co large that even moderate rates of growth should provide the leadershipair amount of leeway to increase defense outlays. ew figures.

Briefing Aid Declining Share of Defense and Since In GNP

This chart shows the declining share of defense in total Soviet GRP. You can coc that, in the aggregate, the military claim in total output is holding steady atercent, compared vithercent ineriod. The Soviet Consumerresent and Future

Beforeord or two about the future of the Soviet economy, ve need to review, very briefly, the lot of the consumer. We can start with the basic data.

Brieflnr. Aid

US vs. USSR: Major Consumption Categories

1. These two circles represent tho division of consump-

tion expenditures ln the US and the USSR. While they have been drawn equal In size, we should first remember that, in total, the Soviet consumer receives goods and services which equal one-third of those flowing to hin US counterpart.

As you can see, the pattern Of consumption in the USSR differs markedly from that in the US. Pood and clothing take the major shareU percent of the total, and food alone accounts for nearlyercent. Despite marked improvement In tlie post-Stalin period, the Soviet diet is still heavily loaded with bread and potatoes. Supplies of shoes, clothing, and other soft goods are increasing, but their quality and variety in no way match those ln the West.

Becausearge proportion of the Sovietruble Is al located to the basics of living, much less is left for durable goods anf for serviceshings that odd so much to our convenience and comfort. Note, for example, the contrast in consumer durables, where the Soviet share of total consumption is only one-quarter that in the US, and in housing, where the Soviet shareittle over half the share in the US pattern.

Probably the beat vay to review the consumer goods problem is to look at the comparative data on stocks, Bince annual production oddsmall fraction to available numbers. We hove this on our next slide.

BrieflnR Aid US vs. USSR: Stocks of Imrable Goods

1. These numbers reflect units of the various consumer durables showneople. You can see that, with one exception, sowing machines, the Soviet consumer has relatively little. The large stock of sewing machines in Soviet homes reflects the primitive nature of their ready-to-wear clothinghoddy, expensive, and often not available.

S. The pent-up demand for many durablesbut particularlyupply situation far worse than in tbe Communist countries of Eastern Europe. Even preferred classes of citizens such as scientists and engineers nave to wait literally for years, after getting on factory lists, toew automobile. The Future

Andew words on the future. egan theby saying that we are interested in the Soviet economy primarily for two reasons:

Its military challenge to the US; and

its attraction to developing countries.

Can tbe challenge continue? Looking forward to the years0e would expect the Soviet econocy to grow atear. Although this would be far below the rates achieved durings, it would beood rate of growth. This rate could be somewhat higher in very good agricultural years and less when crops are poor. Such variations must be expected, given the precarious nature of Soviet weather.

ercent rate of growth clearly can provide the resources for an increasing militaryising level of living, and an expanding industrial base. Despite the promise of continued growth, tho economy is not sufficiently developed to provide the various claimants with all they wont,as in our country, Soviot leaders debate on how the economic pie is to be divided. Except for agriculture, the results of the current debatethe five-year planhave not been announced. The agricultural goals, however, do givelue as to future priorities. in agriculture ls scheduled to growore modest pace than proposed for or even achieved in the current five-year period. It appears likely, however, that agriculture's share of total investment ic continuing its slow growth. The goals for agricultural machinery and farm chemical also are in line with recent trends, suggesting that, overall, there will be no major shift in resource allocation in favor of

agriculture. Thus, the plans for agriculture are in line with Brezhnev's bent for nuking changes at tlie margin rather than drastic changes in priorities. We, therefore, expect that5 the shares of GNP going to investment, the military, and the consumer will be about the same as they are today.

odel of development, the Soviet economy can nov be faulted seriously. In tho early stages of development, the marshalling of all resources by the communist state and the iron fist of control canackward economy forward. But what Soviet experience now seems to soy Is thattage of near-maturity io reached, communist dogma is of no appreciable help in achieving further meaningful growth.

In terms of quality, in percentage achievement. Soviet growth may be quite respectable by Western standards. But what about quality? Can the Soviet Union make substantial progress in accelerating the development and application of new technology? Wc think not. Cur studies show that, during the decade ofs, the technological, gap between the USSR and the West was not only large, but probably was widening as the pace of change quickened. Therein lies tho real economic challenge to communismill it overhaul its outmoded system of planning and economic administration to compete in the technological race?

Such an overhaul would require the loosening of the rein of central control. To date the political cost ofove has been unacceptable. In the future, however, as the USSK falls further behind tbo West, the pressure for change is bound to mount.

Table*

The Cap Between the United States and Soviet GKP'i has Increased ins

9 US$)

States

Difference

'

The Difference Between United States and Soviet Industrial Growth Bates has Harrowed

, numbers: CO

T>Lh

.0

A

.

The Share of the Total labor Force still on Soviet Farms Remains Large

Percent of total labor force

States

5

.

A Slowdown in Productivity Highlights the Lower Growth Rates in Soviet Industry

Are rage annual rates of growth (percent)"

Totalof Labor Factor

Productivity

5

* Ratio scale.

*

Some Reasons for Increased Efficiency in the Use of Resources. ,

conomies of scale resulting from specialization and division of labor

trained, more efficient labor resulting from

higher levels of education and improved general health

quality and supply of materials used by

industry

quality of plant and equipment (not already

accounted for as Input of capital)

ARB LAST BUT ROT LEAST,

Better economic management, improved production techniques, and introduction of new technology

Table 7

Relative Tievels of Technology in thee

Per Unit of Capital and labor

Per Worker

Stock Per Worker

States

Europe

Expenditures for Defense and Space Spurted again

Billion rubles

Year

Defens

50

The Share Of GNP Devoted to Defense and Space Programs has Decreased

Food and dothing Take the Major Share of Soviet Consumption Expenditures

{Percent of Total Consumption Expenditures)

United

Apparel and other

soft

Consumer

Stocks of Durables are Far Below US Levels

19^

(Units Per ICQ People)

States

machines

sets

cleaners

machines

a/ lectric only.

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