RECENT TRENDS IN THE SOVIET ECONOMY

Created: 3/1/1970

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cia historical review program release in9

Recent Trends in the_Sovlet Eccr.cry A. Gross National Product

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For the Soviet9ear of slower growth and generally unsatisfactory economic performance. Nevertheless, the USSR easilyits second place position among the world's economic powers,only half as much as the United States but almostimes as much as third ranking Japan or fourth ranking Vest Germany. Measureder capita basis, however, Soviet gross national product (GKP) is only aboutpercent of the Americanf the northwest European and is comparable to the Italian or Japanese.

oviet ON? increasedercent, that is, at less than half the rate maintained during the preceding several years and the lowest rate posted since the disastrous agricultural year Over the years, the rapid growth of factorapital and labor) inputs has been largely responsible for the rapid growth of Soviet output. Increased more rapidly In the Soviet Union durings than In any other major industrial nation, largely because of demographic The Soviet capital stock also grew rapidly, thanks to rapid growth a

of investment and/lew rate of retirement of fixed assets. Another source of output growth has been rising Joint factor productivity, that Is,in the efficiency with which measured inputs are used. 1oint factor productivity in Soviet industry increased slcwly, however, andt apparentlylight decrease.

Year to year variations in weather conditions

been sufficient to cause sizable swings in the rate of change of Joint factor productivity in agriculture.

Dissatisfaction of the Soviet leaders with the performance of the economy is evident in their speeches andlood of press articles that urge better and more intensive work and announce new measures to alleviate specific difficulties. Basically, concern seems to be centered on the declining rate of growth of nonagricultural production, but chronicin agriculture draw attention as well. Measures aimed at Increasing the output obtained from given inputs have been widely publicized. Much attention has been given to measures for improving the distribution of labor and the organization of producing units or work tasks as well as to measures intended to speed tho development and introduction of new equipment. Enterprises and organizations of all sorts are being pressured to release unnceded workers for employment elsewhere. Nevertheless, large scalo transfers of labor from agriculture, which absorbs an anachronistically large portion of the labor force, are not being advocated publicly. To date, no satisfactory cure for decelerating output growth has been hit upon. B. Agricultural Production

Employing about one-third of the labor force, the agricultural sector accounts for over one-fifth of gross national product. Hence, poor results

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9 decline in the rate of growth of industrial Materials output was highlightederious deceleration of growth in the paper and paper-hoard and the ferrous and nonferroua metals industries. Production of only

increased

one majorindustrial material oal faster in

han The growth of nondurable consumer goods production was slowed primarilyharp deceleration in the growth of processed foods output. In the civilian machinery category, consumer durables production MOt the pace.

Observations on GN? End Uses D. Defense

Soviet defense expenditures increased intermittently throughouts. 7xplicit defense expenditures in the state budget increased aboutercent, but this figure was influenced by the enactment of sweeping price changes. urther increaseercent was registered More thanercent of OKP currently is being allocated to defense objectives,

The defense activities that account for mereenth of Soviet gross national product naturally absorb productive resources thatcould be used to produce goods for consumption and/or investment. The continuing trend toward progressively more sophisticated and more expensive weapons systems has led to considerable discussion in the United States of the hypothesis that defense isn intolerableor at least extremely onerousurden upon the Soviet economy.

In support of the onerous burden hypothesis, it sometimes is argued that the Soviet leaders axe finding it Increasingly difficult to reject or postpone tho satisfaction of consumers' wants. Revolutionary enthusiasm, it is said, no longer is sufficient to make sacrifices of consumer welfare acceptable either to the population at large or to many Communist Party members and leaders. The very sizable improvements that have been made in consumer welfare in recent years have not relieved universal dissatisfaction with living conditions, but rather may have whetted the general appetite for further gains. The conviction is said to be spreading that Communism must prove its superiority over capitalism by permitting the Soviet people to live even better than the people of advanced Western countries and do so in the very near future.

The defense burden also is thought to be growing more serious because

the portion of gross national product that is invested rather than allocated

to consumption or defense must be increased if output la to grow at the rates

achieved in the past. If the growth of GKP is permitted to slow, the satis-various

faction of future needs of / sorts will have to be postponed or sacrificed. for several reasons the Soviets are finding that each given amount of gross investment is becoming associatedrogressively smaller Increase in output. Growth of gross fixed investment was very rapid throughs and has been significantly slowerhoughit more rapid than growth of GJJPurings. Ihis deceleration hasarger portion of gross investment to be absorbed in the replacement of worn-out

t has resultedecline of net investment relative to gross Investment. Despite the slowing of investment growth, the capital stock continues to increase more rapidly than tho labor force, and the continuing substitution of capita! for labor that results from this growth disparity is encountering seriously diminishing returns. Conceivably, technological progress could boost joint factor productivity sufficiently to offset fully the forces tending to reduce the increment in output associatediven amount of gross investment. However, in recent years technological progress has been inadequate to this task.

It sometimes is emphasized that reducing the priority of defensewould stimulate GNP growth not only because it would facilitate an increase in investment but also because it would foster technologicaland increases in Joint factor productivity. Factor productivity would benefit from the shiftortion of the research and development effortnow predominantly directod toward defonaeortion of the most innovative peopleow generally occupied in defense related work to non-defense sectors. This argument is buttressed by allusion to the existence of an inverse correlation between growth of defense expenditures and growth of joint factor productivity during the late ly50's and the early lQoO's.

Perhaps the most noteworthy indication that the defense burden may not be becoming more onerous is the fact that defense objectives nowmaller portion of GNP than they did in the recent pastuch smaller

portion than they claimed in thes. Moreover, per capita GKP is much greater now than it was during thes, so the sacrificeiven portion of GNP to defense needs should be less painful now.

Gross national product has been growing much faster than population in the Sovietact that has permitted and would continue toper capita consumption to increase even while total consumption declinesortion of GNP. Continuing growth of per capita output would permit allocations to defense and investment to increase not only absolutely but also relative to GNP. Total consumption did in fact decline fromercent of GNP0 toercent0 and perhapsercenthile per capita consumption in absolute terms was increasing significantly. If total consumption continues to increase less rapidly thansay four-fifths as fast asGNP over the next half dozen years while the defense share in GNP remains constant, then GNP growth at an average annual rateercent would permit annual investment to rise more than U5 percent. Meanwhile, annual defense expenditures would increase by morehird, making possible major improvements in Soviet military capabilities. Moreover, it can be argued convincingly that there is little reason to believe that the Soviet leaders would not impose greater sacrifices on the Soviet consumer if they believed security needs demanded it.

The positive effecteduction of defense expenditures would have on Joint factor productivity might be less than first supposed. The inverse relationship between growth of defense expenditures and growth of Joint

factor productivity during thes ands may well have been unique to that time period. At least it is not observable in some other periods. Moreover, restriction of defense expenditure might not involve much, if any, reorientation of research and development activities from defense to non-defense objectives, especially if defense expenditures were held down because of an international agreement to limit theand deployment of certain types of weapons. Inituation, large amounts of defense oriented research and development still would be needed to keep the Soviet Union at the frontier of military technology, and this work would be complicated by the reduction of opportunities for testing and gaining field experlenco. Finally, it must be noted that the continue decline In investment yields probably would be aggravatedurther shift of resources into investment.

The Soviet Union now invests nearly one-third of its gross national product. Consequently, the absolute amount of annual investment in the Soviet economy is comparable to the American total, although American GHP is twice that of the Soviet Union. ross fixed investment in the Soviet economy increasedercent, that is, much less rapidly than in preceding years butit faster

The development and implementation of Soviet investment plans are hampered by problems of long standing. Among theseearth of criteria for choosing among various potentialendency to spread construction efforts among an excessive number ofhronic excess of uninstalled equipment,eneral Inability to coordinate assignments of construction services or deliveries of construction supplies. In an attempt to alleviate some of these difficulties, the number of newly initiated major construction projects recently was curtailed sharply, and administrative reforms were introduced.

ittle more than half of Soviet gross national product was channeled into consumption. Per capita consumption rose by some jj percent, buter capita basis Soviet consumption remains at only about one-third the US level.

Per capita consumption of foodcant one percents various constraints including reduced production of meat Interrupted

the trend of qualitative improvement in the Soviet diet. Perof soft goods, of durablo goods, of health andand of personal services increasedlower pace inin the preceding

The amount of housing put into service in89 was less than the amount completed inin turn was loss than the amount put into service nevertheless, enough dwellings were completedo increase the housing stock by some '3 percent. The program of building large numbers of vory small housing units now has been under way for moreecade. he amount of living space available per capita has been increased by someercent, but atquare feet it falls woefully short of the modest officially prescribed standard for health andquare feet. Moreover, many families still do cot have dwelling units to themselves, and even the new hoaslng is shoddy and pocrly appointed.

Disposable money incomes continued to increase faster than the supply of consumer goods and services In Moscow, prices rose someercent in the basically unregulated collective farx markets, where peasants sell produce from their private garden plots. The centrally established prices of goods sold in the state and cooperative stores

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changed little, however. For this reason and because producing units do not nccossarily adjust tholr activities in response to demand pressures, increases in disposable money incomosoor gauge of changes in the well-being of Soviet consumers. Vith many prices fixed and too little

toarge portion of9 increase in earnings simply found its way into personal savings accounts in the state bank. G. Trade and Aid

Quantitatively, the Soviet Union is not heavily dependent on Lessercent of GNP is exported each year. and exportsumber of items are important to the The value of Soviet trade turnover approximatelys, and9 an increase ofercentf Soviet trade is with other Communist countries,the countries of Eastern Europe. The share of total Sovietfor by commerce with Eastern Europe held constant inexports to Eastern Europe are dominated by industrial andmaterials, semifinished products, and fuels. ovietto the area hadubstantial portion of thehad occurred in thes following disappointing SovietSoviet Union also exports large and increasing quantities ofequipment to Eastern Europe, particularly to the less advancedthe area. Soviet imports from Eastern Europe have been dominatedand equipment and manufactured consumer goods. Imports ofdeclined since theof thes.

Trade with the industrial West increased more thanercenthe share of trade with developed Western countries in total Soviet trade turnover increased5 percent08 percent

Soviet cerasercc vith the industrial West is mainly trade with Western Europe and consists in large measure of an exchange of Soviet fuels, raw materials, and semifinished products for Western machinery and equipment and manufactured consumer goods. Large quantities of wheat and wheat flour were imported from Western countries during thes.

Trade with less developed countries (IIC's) accounts for less thanercent of Soviet trade turnover. It increased slightly89light decline Soviet exports to the LDC's consist largely of machinery and equipment. Textile fibers, natural rubber, and food are the principal Soviet imports from these countries.

he Soviet Union concluded agreementsillion worth of economic assistance. This is substantially more than the amount committed in the preceding year butraction of the amount committed in the peak year 9 agreements extend aid primarily to Turkey, Iraq, and Guinea. The Sudan, Pakistan, Uruguay, and Mali also were beneficiaries. The drawing of credits by Soviet clients lags an averageears behind formal extension. Annual drawings have been averaging0 million in recent years.

Soviet trade policies are shaped by political rather than economic or other considerations in many cases, but it probably is safe to say that Soviet programs of assistance to less developed countries are politically motivated in practically all cases. The occurrencehift in the political Importance of assistance programs in the eyes of Soviet leaders

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