Created: 8/25/1970

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The Soviet Economy

Proposed Briefing

Office of Economic Research0



The Soviet Economy


A slowdown in Soviet economic growth durings has tarnished the image of Communism as the "Wave pf the Future." Soviet party leaders no longer confidently boast, as they did in Khrushchev's day, that the USSR's economy is on the brink of overtaking that of the US.

However, it is important to realize that the Soviet economy continues to expand, supporting rapida rising level of living, and maintenancetrong military and scientific establishment. Stages of Growth (Chart 1)

Wc can review recent comparative economic history vith the benefit of our first chart, which shows total output in the US and USSR If you look at the rate of increase of Soviet GNP reflected in the first three brown. you can see that the decade of5 was one of very rapid Soviet growth. The absolute size difference between the two economies actually narrowedew years .

USUSSR. Gross Njtie.iil Prduct,Selected

In thefollowing the deatn oi iitalin, Khrushchev resolved the resource allocation problem in favor of investment and consumer welfare.

Defense expenditures at the end of this decade were almost the same level an at the beginning.

Consumer programserious attention to improving the quality of the Soviet diet and housing in particularsaw consumption outlays moveear.

But the apple of Khrushchev's eye was investment, which he saw as the key to rapid economic growth and Soviet prestige. Investment outlays moved upear.

As6 come to an end, thereignificant deceleration in Soviet growth. The primary reasons for this are four ln number:

slowdown in agriculture followingexpansion period of the so-called new lands.

drop in the growth of labor and capitalforce additions at this time were adverselythe low birth rates of World War II. Moreover, thethe work week from h6 to Ul hours. The high rateformation could no longer be sustained.

3- Managerial problems grew rapidly as the highly centralized bureaucratic system of the USSR tried to shift gears to absorb the new technology.

Defense spending increased. Advanced weapons systems came intoosts rose sharply,

left tho scene, the marshalsigher budget priority all around.

The slowing trend of Soviet growth continued throughoutk. Indeed,9 Soviet CNP increasedercent, or less than half the rate maintained during the preceding several years. In the first six months of this year the Soviet economyood recovery from the poor performance But because economic activities were hampered by unusually bad weather in the first quarterhe subsequent increase in productionarge element of rebound. Production this year has been stimulated to some degree by campaigns to commemorate the Lenin centenary and to completeYO plan periodlourish.

In recent years, the Soviet Union has not been gaining on the US. Growth rates have been roughly the same in the two countries. esult, the Soviet economy remains about half the size of ours, and the absolute gap in size of GNP has been widening in our favor.

Allocation of GNP (Chart

To move along, the USSR allocates its total output much

differently than does the US. Their allocations stress the elements

of national power; our allocations stress consumer welfare. Our

chart shows:

1. As for consumption, or what the man in the streetoviet population one-sixth larger than ours gets perhaps 'i0 percent of what is spent here. Per capita, thisundle of goods and

US and USSR:

Gross National Product by End8

8 US Dollars



outlays for new fixed capital arepercent of the US figure in absolute terms. reflects tbe continued growthof the Communist leaders.

the Soviet defense and space outlaysdollar valuesequate to nearly three-fourths of

' what the United States spends on such programs. The current) indicates some marginal shifts in the allocation pattern.

Heavy industry investment is receiving a

significant boost in funds comparedear earlier. We do not expect this infusion will do ouch to spur output, forill go Into Weercent increase in" and space outlays, which wouldlower rate ofgrowth than

3. However, the pace of lnrprovaaent in consumer welfare will probably bo slightly less than that achievedew five-year plan is being drafted1 Delay in publishing the plan seems to be due. In part, to disagreement within the leadership on priorities. e^only the agricultural targets5 have been announced Nevertheless, it would be surprising if the presentnrise

leadership were to radically change course in the allocation pattern.

Finally, we are persuaded that tinkering with allocations at the marginost unpromising way to get the Soviet econoffry moving again at the growth rates achieved ins. Military Expendituresoot Problem or Bugaboo? (Chart 3)

' In looking for root causes of the slowdown in Soviet growth, the burden of defense outlays is often cited as the key factor. There is no doubt that in an economy as taut as the USSR's, where plant, equipment and ski lied manpower ore in short supply, that military programsirect drain on scarce resources.

Although these are significant costs, the burden of Soviet outlays for military and space programs roust be measured against the background of an increasing national product. Our chart shows the declining share of defense in Soviet GNP. You can 6ee that the military claim to totaleasured in rubles, has fallen from aboutercentercent in recent years.

This suggests that the defense burden is not as critical ae it once was. Wc also note that Soviet output is now so large that even moderate rates of growth should provide the leadership with some leeway to increase defense outlays if they so desire. Even if there were tourther slowdown

in economic growth, the USSR will have tuts capabilitya strong ana increasingly sophisticated


Within the defense spending category, the area which is undoubtedly- causing the greatest pinch on the civilian economy is research and development. 6 spending for military research and development has been growing' much faster than total defense spending. Furthermore,s much more oriented to military objectives than is the case in the US. In fact, durings about three-fourths of the Soviet research and development resources were engaged in military and space projects, and only one-quarter, in civilian projects.*

Soviet authorities are now more aware than ever of the adverse effects the lack ofpending has had on economic progress, and efforts are currently undor way to iotprovo the situation. The Soviets have identified three approaches: First, an increase In the expenditure level for civil RSD Is to take place during tho next Five-Year Plan

hange in emphasis from research to development is being called for. By Soviet admission, this

In this context, "space" includes both military and civil space outlays.


will novo the USSR closer to US practice, which the Soviets adroit is Bore efficient. Third, improvements are planned for the overall administration offforts to eliminate bottlenecks and speed cconoeac returnsxpenditures. Major changes are planned in every stage ofrocess, froa initial planning to final pricing of new; products.


I turn now to the subject of Soviet agriculture. Instgain pointed up the precarious nature of Soviet agricultural output and its dependence on good weather to"atisfactory level of output. We estimate that agricultural production9 declined by over Ji percent. This your wo expect toubstantial recovery. With very favorable weather thus far, prospects areecord grain harvest.

But there are core problems than Just weather for the Soviet agriculturalists to cope with. They have been hard pressed to Increase the supply of food to meet the needsoderately growing population for an adequate diet, For example, USSR foreign traders earlier this year bought neat in Australia, Kcw. Zealand, France and some other countries, showing clearly the inadequate nature of Soviet meat production.


Further, agriculture still ties down an inordinately large population of the labor force, with uO million people (one-third of the total) still engaged in tilling the soil. This isimes the number required in the US to feed our people adequately andarge flow of agricultural exports.

Agriculture was starved for investment funds under Stalin. Bit in recent years, Khrushchev and his successors have put in the rubles, to the point whereagriculture receives about one-sixth of total fixed investment. This substantial injection of investment is to continue, according to the new five-year planor agriculture. Although output has been raised and diets improved somewhat, the response of output to these measures has been discouraging to the Soviet planners. Gold (Chart 5)

One consequence of fluctuating agricultural outputeed for the USSR to mine, and to hoard, its high-cost gold. In the eventrop disaster, Soviet gold can buy the needed Western grainep the population fed. This happened most recently following the crop failures3hen, as the chart shows, Soviet gold reserves dropped from aboutillion2 to about


The USSR hut; sold almost.nout has slowly built up its reserves to6 billion at Iht-

end The USKK now produces'; million in gold each year, despite very high production costs. It has tried to balance imports with exports, andmall deficit appeared, the Soviets have preferred to increase their borrowings in the West rather than to sell gold. Soviet Trade with the West (Chart 6)

The USSR conducts about two-thirds of its foreign trade with Communist countries, but trade with the Industrial West has expanded rapidly; last year it was about double the levelr billion each way. Oil exports are the largest hard currency earner, accounting for one-quarter Of total exports to the West. However, Soviet oil exports dropped off9 and are not expected to increase this year- In order to boost hard currency earnings, the Soviets are increasing substantially exports of other items such as dian-Onds und platinum.

Heightened Soviet interest in trade with the Westeflection of the large technological gap which exists between the USSR and the West, particularly the United States. Thehows 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, and significantly behind that of Western Europe. The Soviet Union's relative position does not change .very much if the comparison is made on the basis of the amount of GNP generated per worker.

Imports from the West help in limited areas. For

example, the USSR is presently finishingew automobile plant on the Volga. Essentially, this facility .has been FIAT equipped, and when it operates, it will move the technological level of the Soviet automobile industry forward very sharply. But tbe plant will not reach maximum .outputnd by that time the car being turned out will bc semi-obsolescent by Western standards. In other words, there will be virtually no Soviet follow through to keep the technology up to date,5 they win still be turning out9 FIAT.

These are not inexpensive moves. The FIAT plant will cost roughlyillion,ollow-up truck plant will cost at least as much. As ycu knew, the USSR triedtooint venture with Ford for the truck plant.

Accelerated technological progress is an attractive way for the USSR to speed up economic growth. The magnitude of the Soviet lag is so great as to hold out great promise in merely copying developments that have been pioneered and proven in the West.

closing the Technological Gapopeless Chase?

Closing the technological, gapf which the Soviet leadership is wells not an easy task. Technological progress as measured by the estimated annual increase in productivity has been slowing in recent years. Since the ability to acquire technology from the West, in the form of complete plantsurn-key basis is United by the availability of foreign exchange, the problemif it is to be solvedevolves upon Soviet management. Itask of altering the institutional means whereby new technology moves from the research stage through development and test to fruition in the form of completed plant.

Many articles have been written in Soviet journals on tlie 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 been visible.

Diminishing Returns to Investment (Chart 7)

Our study of the changing relationships between inputs and output in the Soviet econorays to theat the country has been experiencing sharply diminishing returns on capital investment. The chart shows the plotted relationship over time.

In trying to achieve the highest possible volume of investment, Soviet economic policy has forced the capital-output

ratio continuously upward, una unanas accentuated tlie effect of diminishing returns*

If this calculated relationship holds true for the future, Wit- contimuiliun' of capital and tnan-hours growth at the rate ofs would resultrojected annual growth ofomparedercentndercentor the industrial sector. For any conceivable transfer of (capital) investment


resources from defense to industry, the additional returns would not be enough to overcome the slowdown.

We have tentatively concluded that the Soviet leadership in unlikelyat any time in the near futureto face upholesale' overhaul of the economy. Tinkering with investment flows and organizational changes can be expected, but they arc unlikely to restore fact growth.

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 Sovict'econoiry is now so largeery small rate of increase in GKPercentresults in aboutillion more of product.

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