DEVELOPMENTS IN THE SOVIET ECONOMY, 1968-69

Created: 8/7/1969

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79

' the soviet economy, igdH-fc!)

CIA HISTORICAL REVIEW PRQGRA^ RELEASE IN

Foreword

Throughout this report, the aggregativeor indexes which are presented have been, for the most part, calculated by agencies of. Government* Most of the official Soviet aggregate measures of growth in the economy (including growth of national income and of industrial andoutput) are not accepted by Western economists. Moreover, some official commodity data such as those relating to grain production have been rejected. Substitute measures constructed. Government economists and other Western economists almostindicate that there are substantial degrees of over-statement in the Soviet measures.

SECKii I

CONTENTS

Pa 90

I. General Trends8 and

First Half of

A. Agriculture

industry

Consumer Welfare

Foreign Trade

Hard Currency Trade

Problems

Policy Toward Agriculture

B

The Problem of New Technology

The Burden of Defense and Space Spending

APPENDIX

Statistical

Table 1USSR: indicators of Economic

Table 2USSR: Indicators of Capital

Table 3USSR: Production of Major Crops and LivestockS-68

Table 4USSR: Planned and Actual Flow of Resources to

Table 5USSR: Growth in

Table 6USSR: Recent Growth of Output of Important Products ofnd Plan

Statistical Tables (Cont.)

Table 7USSR: Gross Additions of Sew

Table 8USSR: Indicators of Changes in Consumer

Table 9USSR; Geographic Distribution of Soviet Trade

SSR: Soviet Trade in Selected Commodities

Tableoviet Hard Currency Account Balance, Imports of Wheat, and Sales of Gold

stimated Soviet Drawings and

Scheduled Repayments on Western *iediurn-Term and Long-Term Cr ?dits

oviet Orders for Machinery and Equipment from theWest

Table 14 USSR: Average Annual Rates

of Growth of Selected Inputs in Agriculture,

Tablepproximations of Relative

Lovels of Technologicalof the United States, western Europe, and the USSR in thes

omparison of Average Annual Rates of Growth of Factor Productivity of the United States, Western Europe, and the USSR

SSR: Average Annaul Rates of Growth in Defense and Space Outlays,

SSR: Shares of Major End Uses

in Total GKP at Factor

The Soviet economy expandedoderate pace GNPercent in real terms, compared with an average annual increase ofercent (see* In all of the major sectors the rates of growth were below thoseut, with the notable exception of industry, were well above the rates achieved. The rate of growth of industrial production was the lowest posted

* Tables appear in Appendix. Tho base year for the calculation is the year before the stated initial year of the period; that is, the average annual rate of increases computed by relating GNP7 to base

investment includes investment in agriculture, light and food industry, housing, and services.

The allocation of output among the principal end uses (consumption, investment, and defense)8 continued to some degree the policies, which favored the military and consumer at theof growth-oriented investment. The growth of outlays for both consumption and defense, while less rapid8 than, still was well above that. Although the rate of growth of total investment remained at the relatively high levelhe fragmentary data availablethat the share of consumer-oriented investment rose more rapidly than that of producer-oriented investment as* The swing in favor of consumption that has been in progress5 was designed to compensate for the neglect of housing, services, and consumer goods production, when relatively greater emphasis was placed on the growth of investment in the producer-oriented sectors of the economy (especially heavy industry, transportation, and communications).

QEORET

The chronic problems and inefficiencies in the management of investment programs continued8 and in some respects apparently grew worse. Asin Tableross additions of new fixed capital and the rate of growth in labor productivity in construction fell sharply. In addition, theof unfinished construction increased by nearlyercent. The recurrent campaigns launched during the year to reduce, or at least to stabilize, the vast amount of capital tied up in uncompletedprojects (equal in value toercent of the8 investment program) came to naught, as have similar campaigns in the past.

Present indications, based on published plans9 and results for the first six months, are that the Soviet economy will grow somewhat more slowly9 than. Perhaps overall growth will be lessercent Even with above average weather during the balance of the current crop season, agricultural outputwill grow loss rapidly than Thia will be due in part to the continuation9 of the relatively low rates of growth posted8 in allocations of fertilizer and otherinputs to the farms. Calculations based on Moscow's official mid-year report show anincrease ofercent in industrial output during9 over the corresponding period This is below the rote of the Soviet plan goal forincreaseercent foris one of the lowest on record. Although part of thein the growth rate in the first half was the result of disruptions in the first quarter caused by unusually severe winter weather, the outlook for resurgence in Soviet industrial growth during the rest of tho year is not good. The continued lag in the rates of growth of selected industrialferrous metals, fuels, and basiconstraint on the

growth of other industries for at least the third quarter. More important for the longer run is the continued poor performance posted in expenditures on new plant and equipment. The rate of increase in overall investment in the first half was the lowest in the post-Khrushchev era. Organizational and supply difficulties, shortages of resources, and the severe winter probably all contributed to this result.

Results for the first half indicate aof the general trends of the past several years/ Jin the distribution ofand consumption again havevoredjfchere is no indicationesurgence in growth-oriented investment. Comparison of the output of civilian machinery with the Soviet-announced growth for all machinery indicates that another sizeable increase in expenditures for military and space equipment took place.

The regime's intention to continue the recent high rates of improvement in consumer welfare is reflected in the planned rise ofercent in per capita real income9 (for tho yearhole). Although incomplete, the datafor the first half indicate that theplanned boost in disposable money income is being met. However, first half results alsourther increase in the gap between purchasing power and supply of real goods and services. The provision of personal services and consumer durables maintained the high rates of growth achieved previouslyecline in supplies of relatively high priced commodities such as meat, fresh fruit, and vegetables forced the consumption of cheaper and less desirable foods, especially the starchy staples (grain products and potatoes) in order to maintain the daily caloric intake. Hence, the amount of money in the Soviet citizen's pocketto increase faster than production of things he can spend it on. Savings deposits increased at an annual rate ofs consumers continue to set aside much of their nominal purchasing power.

Agricultural outputercenthe fifth year of increaseow. Output in the fiveveraged more than one-fifth above the level, when production nearly stagnated. The relatively good performance of Soviet agriculture8 was highlighted by an estimated increaseercent in crop production. Livestock production, however, was upercent (see

The increase in total crops was due mainlyumper grain harvest and record outputs of potatoes and sugar beets. The grain crop amountingillion tons was the second largest in history, ranking next to the record cropillion tons harvested The government purchasedillion tons of grain from producers of8 crop, one-fifth above average annual procurements. esult, supplies of grain will be ample to meet domestic needs for high-quality bread supplies They will, moreover,the USSR to export grain for the second year ih succession and to increase grain reserves. stocks of grain at the end of the current consumptionere probably on the order ofillion toillion tons,bout one-half of the annual consumption of grain for food. Thus the USSR iselatively good position tooderate decline in grain production9 without having to import grain.

Evon though weather and growing conditions were not uniformly favorable, relatively large yields for most crops were obtained Moisturefor crops in somo major regions werebut above-normal conditions prevailed in other areas. On balance, weather was slightly8 than7 and thus contributed to boosts in yields per acre of most crops; otherfactors were continued improvements in tillage practices and the use of better plant varieties and soil additives (fertilizer and lime).

Although crop prospects in the USSR as of early9 seemed relatively favorable, weatherduring the remainder of the crop season will be more decisive than usual in determining the final outcome. Production of grain currently is expected to be well below the near-record production8 but somewhat above the average level of output achieved.

The crop situation to date is characterizedoderate shift in the acreage pattern in favor of spring grains, the delayed sowing of spring crops, and an unevenness in the supply of soil moisture in the areas normally accounting for the major share of grain. Pall-sown grains were adversely affectedevere winter that caused higher-than-normal rates of winterkill. Moreover, prospects on the remaining acreage of winter wheat are unfavorableesultate spring accompanied by below-normal precipitation in much of the winter wheat belt.

On the other hand, the outlook for spring grains is relatively favorable in most areas. The supply of moisture in most of tho New Lands area of Siberia and Kazakhstan is exceptionally high,epeat performance of the6 yield in the New Lands is possible. Nevertheless, the tardiness in development of both winter-sown and spring-sown grains,horter-than-normal growing season make the weather during the next several months more thanecisive factor in the size of the harvest.

Because an abnormal workload during August and September is expectedesult of the compressed growing seasonhortened harvesting period, the Soviet government has recently taken special measures in an effort toood harvest. The provisionsid-June decree pertaining to the harvest imply an above-normal mobilization of the nonfarm population for harvest workreater-than-normal diversion of trucks from other sectors of the economy tospecial measures, in turn, will have an adverse effect on the rest of the economy.

SECRET

In contrast to the large increase in output of crops, the tonnage of major livestock8 increased at less than half the rate achieved. Meat production increased only one percent and milk output rose lessercent. Livestock output was hampered in partecline in farm supplies of feed carried over from the preceding harvest, by relatively poor grazing conditions during the spring months in areas affected by drought, and by the moderate reduction in hog numbers on collective and state farms that occurred The mostfactor in the sharp slowdown in the growth of livestock production, however, was the absolute decline in output in tho private sector. One of theand certainly the mostof the Brezhnev-Kosygin leadership5 was to relax Khrushchev's restrictions on private farming. Infirst year in which the more lenient policy was inlivestock holdings spurtednd6 the private sector contributed more than two-fifths of the total output of livestock owever, the size of private herds declined and by the end8 had returnedevelercent above that The reason for thia phenomenon is not apparent.

In conjunction with other factors, the striking success in boosting overall farm outputpparently has lederious weakening of the commitment in5 Brezhnev program todevelopment of agriculture. The allocation to agriculture of machinery, fertilizer, and other industrially produced materials8 eitherat unimpressive rates of growth or declined. Although the rate of growth of total agricultural investmentittleost of the increase represented construction activities, since the rates of growth in deliveries of tractors and trucks to farms fell sharply (see The supply of mineral fertilizer increasedut its rate of growth was the lowestnd againittle or no progress waa made toward the goal of expending the stock of reclaimed

(irrigated or drained) land. Annual gross additions to both irrigated and drained land remained at aboutevel and, cumulatively for the6re only slightly ovor one-third of the target foreriod. The actual stock of reclaimed land has remained unchangedof the withdrawal from uso of land previously reclaimed. Its average quality, however, is now higher.*

B. Industry

Soviot industrial growth slowed8 (see This slowdown was largely attributableharp drop-off in the rate of growth ofin the industrial materials sector. Growth of output in the machinery and nondurable consumer goods soctors continued at rates roughlythose achieved, but higher than those. Total output of tho machinerysource of producers' equipment,equipment, and consumerbyercentontinuing to grow significantly faster than cither of the other sectors.

* For further details concerning recent developments in allocational policies toward agriculture, seeII, A, below.

The various major branches of industry expanded at widely different ratesnd the rates of growth of many important industrial products fell off (see The growth ofhole dropped sharply Coal production failed to increase as the USSR continued to concentrate on modernizing producingon increasing current production. production of crude oil and natural gas grewercent, this rate was significantly bolow the rates posted. In ferrous metallurgy, the rate of growth for output of pig iron sagged and the rates for crude steel and rolled steel

dropped off sharplyevels. Moreover, plans to improve the assortment of steel products, largely through expanded production of flat rolled steel, remained well behind schedule. The lack of the engineering experience needed to movo ahead in cold rolling of steel, combined with delays innew capacity, is continuing toore economical use of the huge volume of crude7 million metric tonsvailable. Growth of output of constructionkey factor in Soviet investmentdropped sharply

The record of production of consumer nondurable goods was marked by mediocre performance in soft goods as well as in processed foods. The increase in output of processed foods was held downharp drop in the growth of production ofprocessed meat and vegetable oil, expecially in the second half of the year. Stagnation of output of these two basic food commoditieseveling off in the flows of raw materials from agriculture. In soft goods, the output of leather footwear increasedomewhat slower pace than. Reflecting the steady shift away from home-sewn clothing, the output of sewn garmentsbyercent, somewhat more rapidly than.

The slowdown in overall industrial growth8 was the resultlowdown in the growth of inputs of labor and capital and of thewith which they were used. Productivity growth8 was slightly below the low average. The near collapse of productivity growth in those yearsain reason for the launching of an economic reform by the Brezhnev-Kosygin leadership. Despite the fact that by the end8 overercent of industrial output was produced by enterprises working under the reform, annual productivity gains inere still less than half as large as ins. The economic reform has yet to prove its worth, and the prospects of its doing so are most unpromising.

A notablea harbinger cf problems for future industrial growth--was the continuation8 of the slackening off in the addition of new production capacities in many branches of industry (see The decreasesevels were particularly notable in coal, oil and gasrolled steel, chemical fibers,vehicles. Despite much fanfare and several docrees about expanding capacities in the light and food industries, meat and milk plants arc being built at the unspectacular rates of thas. Capacities to produce shoes, on the other hand, have increased spectacularly, perhaps because the regime would like to stop spending scarce foreign exchange to import shoes from the West. Some of the slowdown in additions of new plants, as well as their distribution among industries, apparently represents cutbacks in investment and shifts inrities. Another major factor is the apparentof tho chronic problems of construction in the Soviet economy, resulting in abnormally long construction times compared with experience in the

West and with the Soviet government's ownnorms.

Durings, when annual productivity gains in industry fell far below those ofs, the USSR directed more and more resources to civilian research and development. utlays for civilian research and development averaged nearlyear; in tho next eight, outlays soared to an average of S3ear. To the extent that the rate of growth in productivity refloots the rate of innovation or technical progress, the Soviet leadership could well wonder at thebetween tho behavior of productivity and the size of expenditures on research and development.*

ore detailed discussion of the problem of adapting new technology, see Section II, B, below.

SBeRET

V

The upward trend of recent years in the level of living of the Soviet population continued According to Soviet data, real income per capita (which includes wages, farm incomes-in-kind, and payments from the state budget) rose slightly moreercent, about the same rate assee Per capita consumption of goods and services, howovor, rose by slightly less thanercent average annual rate of the preceding two years. Some letdown in thc rate of growth of consumption was anticipated after an all-out effort by the regimeccasionod by the fiftieth anniversary jubilee year celebration, to give theetter shake. As in the past several years, consumers continued to salt away much of thoir excess purchasing power in savings banks. For the third yearow, savings deposits rose byercent. The riseh billion rubles, was equivalent toercent of the increase in personal income. At the endotal deposits amounted to one-fifth of the year's level of personal income, compared with one-eighth

The excess purchasing power was also reflected in rising prices in the collective farm market, the only organized freo market in the USSR. Prices for perishable foods in Moscow collective farm markets were upercent in the last halfwith the corresponding period earnings of wage and salary workers roseercontomparedercenthe main reason for the sharp rise in money wages8 was the implementationage reform that raised wage rates substantiallyillion machine tool operators, increased the generalwage byercent (fromoonth) and reintroduced longevity payments for workers in remote regions. Accelerated growth of publicfunds was in largeesult of pension reforms that provide broader coverage and higher benofits.

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The rates of improvement in por capita consumption differed considerably among the various categories. Per capita consumption of food, which comprises over half of personal consumption in the USSR, increased by nearlypercent esult of the boost in farm supplies of meat and milk7 andhe quality of the diet improved. In contrast, the rate of growth of per capita consumption of soft goods fell fromercent7 to slightlyercenthile the rate for consumer durables fell fromercentercent. Asmports of consumer goods from both Eastern and Westernreadymade clothing andto compensate for inadequate domestic production and provided goods of higher quality. The slower expansion of sales of consumernotably refrigerators and washinga fall-off in growth of production of some of these goods.

Improvement in housing conditions continued to be minuscule. Housing completions8 werethose These, however,orcent increase in the stock of available housing and madelight increase in per capita living space toquarefar short of tho official standard the Soviet authoritieshave setinimum for health andquare feet per capita).

onsumers also reaped some benefits from the accelerated efforts of the past several years to modernize the grossly inadequate domestic trade network, to expand educational and child care facilities, and to construct public buildings and municipal facilities to meet the needs of growing urbanization. Even more welcome to consumers,was tho substantialercent) in tho supply of state-provided "everyday" services (ranging from barber shops and public baths to shoe and clothing repair and cleaning). Thc backlog of neods in all of these long-neglected areas ofand communal services is still enormous,

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spppet

D- Foreign Trade

Over the past decade, Soviet foreign trade has grown at an annual rate of aboutevel6 billion8 to moreillion Growth has been9 and thes when^significant contraction in trade with China occurred. During thehe pace of Soviet foreign trade growth slowed, andt wasercent annually, largely because trade with Eastern Europe increasedercent for the two yoars. Trade has increased more rapidlyowever, rising by an average annual rateercent, led by an increase of almostercent annually in trade with Eastern Europe (see

Ten years ago the share of the Communist world in Soviet foreign trade was about three-fourths, but in recent years the Free World's share has risen to roughly one-third, largely as the result of the rapid growth in trade with the Industrial West. The decline in trade with China also was an important factor in the reduced share of the Communist world. Eastern Europe's share has not changed significantly over the decade, but such countries as Cuba and Yugoslavia have become more important in Soviet trade.

Soviet exports have been dominated by fuels, raw materials, and semifinished materialsthe postwar period, but exports of machinery and equipment haveillion8 to3 billion8 (see Most Soviet exports of machinery and equipment have gone to Eastern Europe, and this area has accounted for most of

* Detailed commodity data are available only for the period Some approximate figures are available

the recent increase in these exports. Host of the remainder is destined for the less developed countries of the Free World. Oil exports almost tripled in theut did notignificantly greater sharehen they were valued at3 billion, thanhe recent growth in exports of oil has resulted from sharply increased exports to the Industrial West, at least8 when such exportsincreased negligibly. Food exports have now regained their former importance after grain exports fell sharply. Grain exports valued0 million7 represented anof more0 million over6 level. The USSR is onceet exporter of grain,et surplusillion tons76 net deficitillion tons.* The USSR, however, has maintained with the Industrial West the net import position in grain that it has had.

Soviet imports for the past decade havemachinery and equipment as well as consumer goods. Imports of machinery andof which originate in Eastern Europe and most of the remainder in the Industrial west-increased1 billion8 to5 billion Imports of consumer goods, valued9 billionave grown little inyears becauseecline in food imports, particularly wheat Manufactured consumer goods have figured more importantly in Sovietin the last few years, rising1 billion5 to8 billionost of these products originate in Eastern Europe, but the Industrial West has provided substantial quantities

8 both exports and imports declined, but the USSR maintained its net surplus.

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SECRET

9EC7TET

Well over half of the USSR's trade with the Free World and more thanercent of its trade with the Industrial West is conducted in hard currencies. The USSR attaches special importance to this tradeof its need for Western equipment andand other materials which are in short supply in the USSR. Until recently the failure of the USSR to generate sufficient hard currency earnings through exports led to disequilibrium in the Soviet hard currency balance of payments, characterized byannual deficits and consequent reduction in the USSR's gold reserve.

The Soviet gold reserve had been husbandedduring Stalin's time, but Khrushchev did not believe in "sitting on sacks of gold" and used it freely to help finance growing imports of western equipment and technology. Gold sales averaged well0 million annually during thend increased to more0 million annually during theo help pay for7 billion in wheat from hard currency countries. Annual gold production was less than sales in every year during theonsequent reduction in the Soviet gold reserve. Reserves at the end3 were estimated to be less thanillion. Sales during theillion and production was0 million so that by the end5 reserves had fallen at least an0ince that, the USSR0 million but has sold onlyillion, and reserves have risen accordingly.

The hard currency deficits were considerably less than might have been expected, however, averaging0 million annually during

Domestic consumption is not considered.

eapite wheat imports of0 million annually (see. Thia result was realized by reducing imports of industrial goods, including machinery and equipment from Western Europe and Japan, and expanding exportsoil, cotton, logs, and food. Short-term credit facilities were also employed6 when the USSR sold very little goldsmallest amount since thes. The post-Khrushchev regime evidently believed thatgold reserves hadritical point and that no further reductions could be tolerated.

The USSRard currency surplus7 for the first time inecade. This surplus resulted from both expansion of exportseduction of imports of wheat rather than industrial goods. The returneficit position8 resultedarge increase in imports, particularly capital goods from Western Europe, but the deficit was small relative to those incurred in earlier years.

The USSR also responded to the financial crisis by reducing' its orders for plant and equipment from the west4 These orders had boon financed in part by Western medium-term credits, but3 mounting repayments had more or less offset new credits (see Known orders from the West were reduced from0 million3 to0 million This cut occurred despite the long-term credits madeto the USSR in place of medium-term credits. Soviet failure to take fuller advantage of these easier payment terms probably was due to thoof the Soviet leadership to mortgage future earningsime of considerableabout Soviet crop prospects and ability to expand exports. Orders declined even further

owever, the USSR increased its orders to an all-time high0 million, including the Fiat contract worth about half the total. Apparently buoyed by good crop prospects and improvement in its hard currency trade balance, the USSR took greater advantage of the long-term credits offered by the West and has since maintained the high level of orders from the West (see.

In retrospect the Soviet response to what ithreat to its financial position seems prudent or even conservative. The regimeecade-long drain on gold reserves and7 had managed the first hard currency surplusecade. The major cost of tho retrenchment was in the imports of Western capital goods forgone and, as aperhaps some slowdown in the growth of domestic output.

For the foreseeable future tho Eastern European countries will not be able to diminish significantly their dependence on the USSR for rawontinued dependence on thc USSRarket for their manufactures. The manufactures of Eastern European countries, like those of the USSR, generally are not competitive in the west. In the future, moreover, the outlook is dim for maintaining current export levels of agricultural products and raw materials to the West (on which Eastern Europe now depends to earn foreign exchange because of higher tariff barriers and quota restrictions in the Common Market countries.

Given these political and economicontinued expansion of Soviet trade with Eastern Europe is likely. rief period of slow growth, trade increased by aboutercent8 and is scheduled to grow at about the same rate9evel ofillion. Because the planned growth of trade with Eastern Europe isgreater than theercent growth of total Soviet trade, Eastern Europe's share in Soviet trade will be the highestboutercent.

Soviet policy toward CEMA and that organization's future role in Soviet economic relations with Eastern Europe are unclear. Soviet officials have called for economic integration without really defining the term. Bilateral relations have served Moscow's needs in the past, and the USSR may be unwilling to abandonas the principal means of conducting economic relations with CEMA membera in the future. Thero has been an increasing clamor among most CEMA members for some form of economic integration within theof CEMA to help modernize their economies. The USSR, however, clearly will not accept any formula which effectively diminishes its economic andcontrol over Eastern Europe or significantlythe costs of maintaining such control.

Trade with China has reached new lows, and,unforeseen developments, any upward movement in this trade is unlikely in the near future. Trade with North Korea has increased recently concomitant with the cooling off of North Korean-Chinese relations. For the near term, at least, this trade is likely to increase, the USSR having promised to provide some assistance in carrying out North Korea's long-term plan which ends Soviet trade with North Vietnam and Mongolia will also increase, the volume of trade reflecting the substantial economicbeing provided by thc USSR. The volume of trade with Cubaunction of Soviet assistance and Cuban sugar crops. Over the long term, this trade possibly will grow, but9 it may decline. Trade with Yugoslavia has risen rapidly in recent years, but some leveling off is probable for the next year or two.

Reaffirmation of tho primacy of Soviet trade with Eastern Europe and the more conservativeto trade with the Industrial West seem toomewhat slower growth in trade with the latter. The USSR probably will continue toand rebuild its gold reserves and,to limit its imports from the West largely to what can be paid for by export earnings. Unless

formulas not yet apparent can be found to increase exports more rapidly,olicy will exercise limitations on the growth of trade. The regime is unlikely to make extensive use of Western credits and may even make special efforts to reduceindebtedness,

Soviet efforts to increase imports of Western technical data are another indicatorlower growth of Soviet imports from the West. In this connection, the USSR hasumber of scientific and technical exchange agreements with Prance and the United Kingdom, Substantial amounts of US technical data have been imported. Theof Western technical data without the purchase of equipment is designed to save the USSR foreign exchange that otherwise would be spent for imports of equipment. Of course, given the uneven Soviet performance in transforming these technical data into prototypes comparable to the Western models, this policy may be "pennywise and pound foolish."

The USSR hasendency to emphasizefrom countries willing to accept increasing quantities of Soviet goods. Thus, trade with such countries as France, Italy, Japan, and the United Kingdom probably will increase relative to other countries.

pecial Problems

A. Policy Toward Agriculture

The threeere favorable ones for Soviet agriculture. And, as has occurred several times in the recentrandiose program for shoring up agriculture launchedime of) is being allowed to peter out. Theonce again is asking: Why spend scarceresources in agriculture when the granaries are full and other sectors are clamoring for

The program for improving the state of Soviet agriculture, popularly termed the Brezhnev Program, was first spelled outlenum of the CPSU in

It was elaborated upon at the Twenty-Third Party Congress and at another Plenum in the spring Although specific plans for several major inputs were not announced, the implied plan for additions to total inputsoost of nearlyercent over tho five,ercent per year. Thisubstantial rise over theercentear) increase. For inputs from industry (fixedand current purchases of materials) the planrowth of aboutercent for five years,ear, compared withercent orear. In addition to the resource plans forajor expansion of the food processing industry was to beto accommodate the anticipated surge in the availability of raw foodstuffs. Finally, capacity in selected branches of industry was to be expanded to provide tho flow of producer durables,materials, agricultural chemicals, and other producer goods necessary to support the higher levels of direct investment in agriculture and the food processing industry.

Important steps were takeno implement some parts of the original Brezhnevparticularly those that did not dependon industrially produced goods for These parts included putting into effect plans for improved cropping practices (such asfallowing and better weedor the introductionariety of incentives for farmers, and for the relaxation of restrictions on private agricultural activity.

On the other hand, there have been majorin delivery to farms of investment goods (producer durables and construction materials) and other industrially produced materials. As athe growth of the stock of fixed assets (buildings, machinery, and equipment) duringlowedate one-half that called for inlan directives and substantiallythat of the preceding five years (see Table

v_Jl Ifj !

Similarly, the average annual rates ofin the flows of industrially producedremained below those planneds well as those achieved in the first half of the decade. The rate of growth of total investmentercent, comparedlanned rateercent and the rate of US percent achievedsee.

Especially noteworthy were the differential rates of growth in the two major components of productive investment inand equipment, and construction. The average annual growth of investment in machinery and equipment was onlyercent duringless than one-third the averagend under one-quarter of tho rate originally planned. Investment in these produceraveraged lessillionear, comparedlanned average of moreillion rubles. In contrast, the average annual growth in construction (including livestock facilities and land reclamation) wasercentatehird above the average attained9 *ibut about three-quarters of the rateplannedercent) Also, the construction in rural areas of so-called "nonproductive" assets, such as municipal and communal facilities, schools, and auditoriums, has increased sharply. Such investment rose at an average annual rate of aboutercent during, twice the average posted, and equaled in size about one-fourth of total productive investment. Building of much-needed roads in rural areas has not been evident in this surge.

The growth of construction was relatively easy to achieve because most of the required materials are produced on the farms, and much of the labor is done by tho regular farm labor force during the slack 3eason. In addition, the requirod funds are in tlie hands of farm managersesult of increased procurement prices.

Deliveries of major types of machinery are far behind schedule. Deliveries of tractors and agricultural machineryereto be nearly two-thirds above the deliveries. Butctual deliveries were only slightly more than one-third above those of the first threef the previous five-year period. Similarly/ deliveries of trucksere up less than three-fourths from those,ercent increase was targeted. indications are that relatively low rates of growth will continue9 and perhaps

Under the Brezhnev Program, newly irrigated land and newly drained land was to provide nearly one-third of the increase in gross agricultural production and grain output planned. Although investment in land reclamation thus far has proceededomewhat brisker pace than other parts of the investment program, the total area reclaimed has not yot increased. Itsquality, however, is now higher. , investment in land amelioration wasbillion rubles, nearlyercent of the planned total. But annual gross additions ofand drained land remained at about5 level and cumulatively are only slightly more than one-third of tho overall target. Bocause of this lag and because of stepped-up retirements of land previouslythe total stock of drained andland has remained unchanged.

Tho lag in the roclamation program apparently stems largely from what Brezhnev has calledwhich now hold up the progress of land improvement." Criticism in the press centershortages of specialized machinery (canal

diggers, pumps, and special land clearingse of obsolescent machineryow capacity (for example, inefficient single-bucket excavatorsof continuous-action rotary excavators),hortage of operators for construction machinery, apid "write-off" of machinery due to poor quality and lack of spare parts, lagging construction of drainage-pipe plants.

Speedy removal of such "bottlenecks" is not likely. Although gross additions to irrigated and drainedare scheduled to increaseercenthe total stock will continue to stagnate ifretirement rates continue. Indeed, there arethat the costs of reclamation considerably exceed the benefits in many instances. The press has reported some incredible goofs in carrying out the program. For example, in an effort to hold down cost in draining vast tracts of bogs in Belorussia,canals were built without sluice gates to regulate the water flow. This resultedrastic lowering of ground-water lovels followed by such severe drying that "in summer the peat bogs turn into finetherereat number of peat-bog duststerms, which

carry away top soil along withRivers have

silted up and reservoirs have begun to dry up." of the planned differential in yieldsetween grain grown on drained and undrained land, the yield advantage actually obtained for drained land7 in Bolorussia was only ercent.

Brezhnev's program calledarge expansion in the use of agriculturaland line as soil additives, herbicides and pesticides as plant protectiona means of boosting crop yields. Annual deliveries of fertilizer to agriculture were to reachillion tonsouble5 level. The new plan also called for the liming ofillion hectares of croplandsoal that wouldoubling0 of output of lime forpurposes. Finally production of herbicides, pesticides, and other plant protection materials was toimes5

All of these programs are considerably behindsome more so than others. Fertilizer deliveries are nearest to schedule, having increased by about

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one-third. However, lessillion tons of new production capacity was added annually during the period, nearlyercent less than the average. In the past three years, lime was applied to onlyercent of the total area planned. Much of the blame for this lag ia officially placed on the lack of transport and spreading equipment. Although production of plant protection materials8 was one-third above the small outputhe rate of growth of outputemains far below that required to moot even one-half of the originally planned target. net imports of thesoajor source of supply for the farms, fell by two-thirds5

With respect to plansertilizerare toate that would result in an increase in total deliveries even less thanillion tons averaged annually. Anillion hectares are to be limedeavingillion hectares to be limed0 if the goal is to be attained. 9 target forof plant protection chemicals was not announced.

The current priorities for the fertilizer program are especially obscure. Inrandiose plan was announced for addingillion tons of newfortilizer production capacity9 and alsoore than three times the capacity added This goal was reaffirmed at the session of the Supreme Soviet in December. At the same time, alow goal for fertilizer output was set, and no special efforts apparently are being made to boostof the equipment required for the new fertilizer plants. The production of chemical equipment haa beon growing at less than one-quarter the rate called for inlan.

Ono aspect of the Brezhnev Program that has been overfulfilled is the decision to continue andthe revolution in rural incomes that has occurred arnings of collective farmers ercent annually compared toincreasesercent envisaged inlan. Similarly,5 wages of state farm workers have risen faster than the wages of workers in industry

and faster than planned. By relaxing' coercion and improving incentives Stalin's heirs have tried to break the vicious cycle of lowproductivityproduction and thus increase production, lower costs and release labor for work in other sectors of the economy.

Soviet leaders must be disappointed with theto date. 3et output of farm products nearly doubled, but most of the growth occurred. 8stagnated, and it actually declined3 Good resultsre largely the result of exceptionally good weather. Productivity gains in agriculture have been lower than planned and less than the growth of wages. esult, costs have risen and farm employment has declined slowly. Farm workers that have migrated to the cities have tended to bo youths and skilled workers, those most needed on the farms.

Tho failure of higher incomes to produce greater results is traceable to soveral factors. First, opportunities for farm workers to work at higher paying jobs, the source of much of the reluctance of farmers to put in moreinimal effort into state agriculture, still persist. Daily earnings for the collective farmer remain higher and more certain from work on his private plot than from work in the socialized sector. Machine operators and other skilled farm workers can still earn more in industry than on the farm, and thus farms havo been unable to recruit or rotain the skilled laborto boost efficiency. harpcontinues to exist between rural and urban working and living conditions. And, too, higher money incomes have not been matched by goods and services. Farmers have more money than earlier, but their level of living has not changed significantly. This tends to dilute tho incentive effect of the higher Incomes. Third, the farm wago system which,as capricious, inequitablo, uncertain, and complex, has not been markedly improved, workers cannot easily determine how to maximize theirnor do they tend to work toward the goals set by tho planners.

"Tift} TT'iPi

Agricultural policy for the near future stresses continued emphasis on incentives. Vet the factors that impaired the officacy of past pay raises seem likely to continue. Consequently, labor costs in agriculture will probably continue to rise and no sharp decline in farm employment is likely.

The priority to be accorded agriculture hasubject of some controversy among the leadership. Party Secretary Brezhnev has been closely identified with agriculture since his speeches announcing major new programs at the5 and6 plenums. Sinceowever, Brezhnev has projected for the moatautious, if not ambiguous, approach regarding implementation of the original programs. Although he continues to reaffirm tho general line that "we muat do more forhe tone andof his speeches in the past two years have lacked the earlier sense of urgency, and he, as well as other Politburo members who have hewed to his position, havemiddle-of-the-road" course.

In contrast, D. S. Polyanskiy, the Politburo member most closely associated with Soviet agricultural policy, has consistently argued in favor of carrying out the new programs as originally spelled out. He has strongly denounced those "comrades" and "elements of the planning and economic apparatus" who "do not seem to understand the importanceost rapid growth in agriculture" and who put forward "extremely dangerous" arguments for diverting funds from No member of the leadership has publicly taken issue with Polyanskiy or has openly urged ain the program plans promulgated. Kosygin, at least, seems to be satisfied with the de facto cutback implied in the slow rate ofof the program. In his public statements during the past two years, he has consistently dwelt on the successes in agriculture5 and has given no intimation that the tempo of the program should be stepped up. On the contrary, he has stressed the need for the allocation of increased resources to other areas ofsoft goods, and consumer durables.

The results of the most recent party plenum on agriculture, held inndicate that on

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the whole the leadership is content to emphasize the importance of agriculture's claim on resources, while not following up with specific plans for bailing out the lagging Brezhnev Program. At the plenum Brezhnev reaffirmed his commitment to the original programs and emphasized the need for "an increase in the rate of growth" of farm output "in the shortest possible time." He also asserted that "toigh level of agricultural production is possible only byore powerful material-technical base at theof collective and state farm production and branches servicing it." He even warned againstand against "balancing the figures at the expense of agriculture":

Frequently when planning agencies encounter difficulties in finding capital investment, theyay outsing fundsfor agriculture. There are cases, too, when material resources /that is, other than investment goods/ allocated toare switched to other purposes.

These pious words were not followed with action. The plenum's resolution merely emphasized Brezhnev's call for better utilization of all "resources" and repeated his demand for "long-range master plans" of one kind or another. Calling for "the mobilization of reserves" and for "long-range studies" are standard ploys often used to avoid hard decisions aboutallocations. Tho plenum did not call for specific remedial measures to overcome the lag inthe original Brezhnev Program. Moreover, the plans9 contain no such measures. Although differences of opinion as to agriculture's priority probably persist among the leaders, the official statements on agriculture following the plenum have displayed no sense of urgency about agriculture's problems and prospects.

B. The Problem of New Technology

From the outset of its industialization drivo the USSR has used ovory device available to keep abreast of world wide developments in technology, while simultaneouslyolicy of cultural and

political isolation.* In thes tha USSR borrowed technology from abroadassive scale via imports of machinery and equipment to further its goal of industrializing at breakneck speed. eriod of retrenchment that lasted from thes until thcs the USSR again went into the borrowing businessroad front. It did so primarily by sharply increasing its imports of machinery and equipment from the industrial West.

Soviet technology has been further boosted by the purchase of foreign patents and licenses, by theof scientific and technical agreements with Western firms, and by the exploitation of foreign scientific and technical literature. pecialunder tho Academy of Sciencesarge-scale program of abstracting and disseminating such literature;70ooks were abstracted. Over the past decade the USSR alao has actively participatedrogram of scientific and technical exchanges with the United States, from which it must have benefited in terms of technological advance in civilian fields.

Finally, the USSR, particularlyas builtarge domootic capability toassive research and development establishment, which has worked out its ownand adapted foreign technologies to Soviet use. esult, Soviet technology may be ahead of the Westew military-related areas, such as large helicopters. Nevertheless, although the USSR now sells patents and licenses on its own technologies to the West, the innovations emanating from itsand development establishment have been few.

No precise measure of international differenceslevels of technology has yet been devised, norrecise definition of technology gained general acceptance. An assortment of aggregative measures can be used, however, to give some quantitative content

* This report defines technology simply as thc methods of converting raw materials into semifabricanta and final products and the design of final products.

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to the impression obtained by all Western observers that the USSR is notar with tho West in ovor-all technology. The measures are: gross national product (GNP) per unit of labor and capital (factorNP per worker (labornd value of capital stock per worker. The measures aro summarized in The data for Western Europe relatend those for the USSR arehe estimate of factor productivity is based on an estimate0 made by Abram Bergoon*7 by moans of estimates of growth of inputs and output.

Each of these measures has serious limitations as an indicator of relative levels of technological development among countries. The measure "capital stock per worker" implies that all technology actually available for use is embodied in the capital stock, an assumption that would serve to define technology in an essentially physical and quite narrow way. the technological composition (proportion of the old compared with new) of the stock varies among countries, and in any event international comparisons of values of capital stock, to say nothing of domestic valuations of the stock, are especially tenuous. The other twoper worker and GNP per unit of capital andto relative productivity levels among countries. Obviously, productivityare attributable to many factors other than technology in the fairly narrow way defined in thisexample, differences in natural resource endowments, lovels of education, and managerial methods in the broad sense. Indeed, allowance for the effect of differences in the quality of the labor force (level of education and extent of female employment) reduces the "productivity gap" significantly, but the pattern is essentially the same. The USSR and Italy are at about two-fifths and Northwestern Europe is at about three-fifths of the US levol.

With all appropriate reservations, differences in tho technology actually being employed unquestionablyajor element in these international differences in productivity. They indicate clearly

Bergson, Planning and Productivity Under Soviet Socialism, Columbia University,7

SBCRIii1 1

chat the average level of technology in the Soviet economy is far below that of the United States and also well below that of Western Europe. Moreover, these measures make inadequate allowance for the quality of what the technology produces. Were full allowance to be made for product quality, the average level of Soviet technology would be, comparatively, even lower than the level indicated above.

Although no attempt to quantify has been made because of lack of data, the average level of technology in use in the industrial sector alone is probably somewhat higher in the USSR relative to the West than is that for the economyhole. There are, however, enormous variations among the branches of industry, and within individual branches, in the level of technologyis the West. Moreover, in all countries there are wide differences among individual plants in the age of the technology used, but the variation is much greater in the USSR than in the West. iven branch of industry some Soviet plants may use technologies equal to or even superior to the average for that industry in the United States or Wastern Europe, within each branch, also, the Soviet average level relative to the West will differ widely among product groups. In no major branch, however, is the average technological levelar with the average level in use in the United states or Western Europe. Roughly speaking, Soviet technology probably comes closest to Western levels in machinery (including electronics and military equipment) and in metallurgy, and it lags farthest behind in coal mining, forest products, textiles and clothing, and food processing. Chemicals, petroleum, electric power generation, and construction materials seem toiddle position.

Within the conceptual and other limitationsspecified, tha aggregative measures ofcan also be used to provide some notion of relative rates of technological progress. Thus they can reveal something about whether thegap between the USSR and the industrial West is widening or narrowing. Tableresentsof average annual rates of growth of GNP per unit of capital and labor combined (factor productivity) for the USSR, the United States, and Western Europe for various periods.

SECREI -

These data show that the rate of productivity growth in the USSR exceeded that of the United States duringa, but was well below that fors. The Soviet rates were far below those of Western Europe, and especially below those for Italy and Western Germany, throughout the period. Indeed, the Soviet rate of growth in productivity is woll below that for all major countries of Western Europe except the United Kingdom for thehole. he Soviet rate was less than half the rates achieved in all countries of Western Europe, including the United Kingdom.

Thus, assuming that trends in productivity reflect trends in technological dovelopment, the gap between the Soviet and US levels narrowed durings but has been widening durings. Compared with Western Europe, the relative position of the USSR has been worsening steadily The relative deterioration of the Soviet position waa greatest of all with respect to Italy, the country nearest to it in level of productivity in thes. In summary, the USSR apparently has not shared in the technological revolution of theperiod nearly to the extent that Western Europe has. The performance of Western Europe illustrates the catching up that could be expected of industrial countries which were temporarily behind in technology because of the war. The USSR, even further behind, has not caught up much, if any, military and space-related technology excepted.

The relative technological levels and trends among industrialized countries, at least in the manufacturing sector, are also reflected in the nature and extont of their trade with ono another in machinery and The machinery industries are probably the most "technologically intensive" of the manufacturing The industrialized countries of the Wost and Japan carryarge trade in machinery with one another; each country isubstantial exporter in this trade. Also, as industrialization proceeds, the large surplus of machinery imports over exports, characteristiceveloping country, tends to decrease as the country develops its own capability to produce and selland equipment abroad. The pattern of trade

for the USSR shows no such characteristics. Intrade with the Developed West therearge gap between the share of machinery in total imports and its share in total exportsi machinery makes up one-third or more of total imports from the Developed Wostercent of total exports to those countries. This large imbalance has remainodunchanged for the past docade. Itssuggests no significant improvement in the level of Soviet manufacturing technology relative to that of the West, including the ability to diversify and specialize production, and the ability to provide service for the machinery. This imbalance alsoalthoughesser extent, in Soviet trade in machinery with the industrialized countries of Eastern Europe--East Germany, Poland, and Czechoslovakia.

Since thes the USSR has been making great efforts to upgrade its industrial technology, both by substantially boosting expenditures onresearch and development and by importing machinery and equipment from abroad. The former was directed very largely toward the military-space sector. he USSR imported nearlyillion in production machinery and equipmentships and marine equipment) from the West. Nearlyercent represented imports of plant and equipment for the consumer goods industries, andercent represented imports of chemical equipment. The USSR, however, experienced considerable delay and difficulty in getting the imported plant and equipment installed and operating at capacity. The machinery and metalworking industryuch more rapid growth in productivity thanhole. The rate of growth of capital stock in that sector was more than twice the average for industry. Hence, the average age of capital stock was declining rapidly, and presumably the average technology embodied ln it was becoming more modern. The same above-average growth of capital stock in the petroleum and chemical industries, however, was not reflected in above-average growth in productivity.

The worsening of tho Soviet productivity position durings relative to the West couldelatively greater lagging behind in technology. It could, however, also indicate the following:

Divergent trends in the quality of tho labor force. Although tho educational attainment of the labor force and extent of female employment havesomewhat faster in the Soviet Union than in the United States ond Western Europe, availableindicates that the trends proceeded evenly throughout the period.

Disparate trends in management of economic resources in the broad sense. The Soviet Union has been considerably loss successful than the United States and Western Europe in shifting labor from agriculture to nonagrlcultural sectors, but the timing of the shift did not differ greatly among the countries.

Economies of scale. All of the countries compared evidently benefited from this factor, the USSR perhaps less so than Western Europe; but again there is no evidence that this factor was much more important ina than ins.

Inodgepodge of variables with divergent trends and effects is mixed up in the measure of productivity trends.* Management and technology are

, both Italy and the USSR reduced the share of agriculture in total employment byercentage points (fromoor Italy and fromoor the USSR). Edward F. Dennison attributesercentage point in the growth of Italy's GNP over this period to thia "improved" allocation of resources. imilar gain can be inferred for the USSR from the reallocation of labor, very little of the productivity residual remains to be explained by other factors. Indeed, it is possible that, ifallowance could be made for quality changes in the labor force, economies of scale, and misallocation of resources in the USSR, their total wouldexceed the productivity residual. If so, this would imply, not the absence of technological progress,ross mismanagement of the technical progress (investment programs) andorsening of the degree of mismanagomont.

important ones, however, and the ones that seem most likely to explain the worsening of the Soviet positionis the West durings. In particular, the Soviet ability to manage investment programs seems to have deteriorated; there is evidence that thoof investment rubles into plants in operation has been relatively more costly and has taken longer in the USSRhereas such evidontly was not the case in tho United States and Western Europe. The twoandclosely intertwined, and their respective effects cannot be separated.

Soviet leaders are fully aware of the USSR's great technological lag behind the West. Clearly, they must also be distressed about the small return that the USSR has been getting in recent years from the use of its traditional method of problem-solving--the injection of massive resource inputs. Ins the USSR has nearly tripled ts outlays onnd total employment in scientificand design organizations has nearly doubled. Gold reserves have been depleted to import plant and equipment from the West. Investment has continued to rise considerably faster than GNP, hence increasing its share in total output. Yet the return on new investment has declined sharply durings, in contrast to stabilityise in the United States and Western Europe. Although stepping up the rate of technological advance in the economy has been recognized as the koy need, how to achieve this has been far from clear. The voluminous press reporting ofs on the problems in developing and introducing new technologies echoes the voluminous reporting ofs on the same theme.

The current Soviet leadership is hoping toreakthrough in solving this chronic problemerios of major economic reforms, some of which have been introduced piocemeal during the past three years and others of which are still in the process of One explicit objective of theseis to raise efficiency, primarily by speeding

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up the introduction of new technologies. One ofrestoration of tho industrial ministries-was effectedith the declared intent of restoring unity and direction to policy on newthe diffusion of responsibilities in this fiold was alleged to havo been the major shortcoming of the system of regional economic councils (sovnarkhozy) introduced by Khrushchev According to Soviet testimony, the benefits of the reorganization in this area have yet to be realized, other reformsevision of planning and incentives, eform of the industrial price system,hanges in organization and the system of incentives in the research and development complex. Infinitelyin detail, these three reforms are fairly simple in intent and concept, and tentative conclusions can be drawn about their likely impact on the rate of technical advance in the Soviet economy. Theabout tho probable effects of the first two are based ln part on an assessment ofxperience thus far; the third one is still mainly on the drawing board.

The reform of planning and incentives, launched by Kosygin inas now been extended to most of the industrial sector. In brief, thebroaden the authority of enterprise managers with regard to plan formulation, establish sales or profits and return on invested capital as the main success criteria for enterprises and tho determinants of bonuses, and levy an interest charge on invested capital. Among other things, the new profit criteria and the interest charge are intended to leadto reduce costs by adopting new technologies and scrapping obsolescent equipment. The emphasis on sales and profits, in place of gross output, is supposed to spur the output of new and improved products-By all accounts, the new measures have had no such effect thus far, nor are they likely to have in the future. The reason is that the reform retains most of the features long characteristic of the Soviet system that have inhibited innovation in the past: centrally fixed plans for output, investment, and new technologyj central physical allocation of key materials and machinery; and establishment of success criteria for enterprises that are based on fulfillment of plans. Moreover, great emphasis continues to be

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put on "tight" plana, and enterprise plun assignments are boosted after technological improvements are adopted. Finally, the greater independence of action granted to enterprise managers on paper is already beingby the ministries, both through directand through issuanceost of detailed rules and regulations on how the new freedom is to be exercised.

With bonuses linked to plan fulfillment and with supply uncertainties undiminished, enterprise managers are unlikely to be any more eager to adopt new methods than before. Because of the perversities of Soviet prices, the charge on capital may lead them even to avoid thc purchase of new machinery, whose payoffas hard to determine as before. Indeed,at the enterprise level is made much more difficult under the reform, because the new success criteria are inconsistent and extremely complicated and because many of the old arrangements were retainedbonuses for introducing new technology, for adding new products, and for upgrading the quality of old ones. In short, the new so-calledlevers" will not automatically foster innovation; it willto require "introduction" by thc planners.

Along with these general reforms in planning and incentives, tho USSR hasew set ofpricesew price system. Tho new, higher prices include an allowance for interest on capital for the first time. The new price system consists of the establishment of an enlarged and unifiedwith broad price-fixing powers and the declared intent to use prices to influence enterprise behavior. The new Price Committees are explicitly charged with "raising the role of prices in promoting technological progress in all its many-sidod aspects."

Press discussion thus far indicates unmistakably that the committees have every intent of carrying out this mandate literally. They are attempting to set prices in great detail. Prices fixed formachines and equipment are to be those that will encourage enterprises to buy new machines and get rid of old ones. Similarly, prices on consumer goods and industrial materials are to bo juggled to accomplish the same objective. The prices on new products are to be set high enough to encourage their production, but not ao high as to discourage their purchase.

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All this is to be done product by product by tho new government price fixers, and changes are to be made as frequently as necessary. Already it has been announced that "to stimulate technical progress"will be informed that successive priceon their products will be made on specified dates. To sot prices that will really accomplish theseobjectives means, in effect, to set market prices without markets. The magnitude of the task defies description, but an army of government clerks seems determined to take it on. The result will be further complication of the decisionmaking process and further bureaucratization of the system.

The guidelines for far-reaching changes inand incentives in the research and development establishment ware set forth by government decree in The State Committee for Science and Technology is to coordinate the drafting of detailed instructions for implementing these policies, and experimental changes are to begin Tho program, in offect, extends the principles of thc economicin industry toector. Wages and bonuses for individual scientists and the profits of research institutes are to be based in part on calculations of the economic effectiveness of their work. changes will be made throughout the research establishment, aa required, to reduce the cost of the program and to link its work more closely with the needs of producing enterprises.

Although it is too early to evaluate the full significance of the new program, its possiblelong-term results may bo limited by bureaucratic inertia and resistance to some of the proposed new techniques. Delays, temporary confusion, and much dissatisfaction are likely to result from the numerous reorganizations and other changes to be brought about by the implementation of the resolution. It subjects academy and university research institutes to periodic review using tho same criteria of effectiveness applied to industrial research establishments. The research programs in those Institutions therefore can beto give more emphasis to applied research. The high status traditionally enjoyed by scientists and engineers in the USSR and the absence of economic success indicators and accountability have ledegree of independence of action for theommunity. The new program will tend to decrease this independence, which may or may not be beneficial.

C. Thc Burden of Defense and Space Spending

The persistent escalation of the militarywith the West has been and continues toactor retarding Soviet growth. In an economy as taut as thc USSR's, military programsirect and certain diversion of resources away from other programs. Indeed, to maintain military production often requires greater sacrifice than to carry on an equivalent value of civilian production. For example, investment in new plant and equipment for defense must be greater thanomparable segment of civilian industry simply to meet the enormous problem ofin military products and to provide fordefense capacity not found in civilian industry.

After the Korean War, total defense expenditures declined somewhat in the USSR, thereby helping the investment boom ofs. Expenditures jumped sharplyeveled offnd spurted againsee. owever, outlays for procurement of advanced militaryand for research and development in the military space sector rose far more rapidly than total defense expenditures. The work on the increasinglyaircraft, missile, and space equipment skimmed off the best of the available production facilities, designers, and scientists and certainly retardedprograms and technological progress in tho civilian soctor.

The impact of military-space programs fallson Soviet industry and particularly the machinery sector of industry. 8f the final output of industry was given over to defense and space needs, while procurement ofmachinery and equipment claimedercent of machinery output. In certain key areas such asthe share of output channeled into military-space programs is still largor. izable portion of current industrial production is being set aside for strategic purposes, about three-fourths of the research and development establishment works on military and space programs. The denial of these skilled resources to the civilian economy contributed to the Soviet failure to maintain rates of technological progress ins.

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In the years ahead the USSR might be faced with an acceleration of the arms race. Keeping pace with the Meet could easily raise Soviet defense spending by aboutercentillion rubles per year by thos. The resources represented by 5rubles are large. Forillion rubles:

nearly equals current annual expenditures for construction of weapons systems sites plusof all military weapons and equipment,

is about three times as much as current annual fixed investment in the iron and steel industry,

twice as much as currant investment inmanufacturing consumer goods, and

almost one-third of all currentin heavy industry.

A rise in military spending of this magnitude, then, would necessarily affect civilian investment programs adversely and restrain productivity gains by preventing the release to the civilian economyarger share of the better scientific and engineering manpower.

On the other hand, an arms control agreement wouldaster growth of capital stock and might have an even greater effect on productivity. Although under such an agreement, the USSR would presumably continue toigorous military research and development program, some of the managerial, engineering, and skilled production personnel that would otherwise be engaged in military production could bo released to the civilian sector.

Nonetheless, the burden of Soviet military (and space) programs should be appraised againstapidly increasing national product. Soviet GNP8imes as large as GNP in the Korean War yearhile expenditures on goods and services for defense and space were onlyercent greater. esult the share of GNP at factor cost devoted to defense and spaco activities dwindled fromercent2ercent8 (see. New fixeda favored claimant of Sovietan even larger share of GNP. This was due in partise in capital-output ratios and declining ratos of growth of GNP.

Although expenditures in defense and space of the order ofillion rubles8 level)ery large absolute waste for the Soviet economy, the change in overall shares of GNP over time suggests that the relative burden is not as critical as it once was.* The Soviet economy is now so large (half the size of current OS GNP and the same size as US GNP at the beginning of the Korean War) that even moderate rates of growth should provide the leadershipood deal of elbow room. Ins, decisions to raise expenditures on defenseiven amount of rublesar greater burden on capacity than they do today. esult, the USSR is not likely to be deflected from any future military program that it considers genuinely required for its security.

*"Estimated total expenditures for defense are derived by direct costing of known and estimated Sovietprograms, in5 prices. This includes an allowance for Soviet space programs and for, most of which are not financed through the Defense category of the Soviet budget. Whilend space cost estimates explain most of the divergence between the explicit budgot allocation for defenseillionestimated total expenditures, price effects and uncertainties about Soviet accountingto such things as military aid and militaryadditional problems of comparability. For example,8 figure foroutlays for defense includes the effects of7 price reforms.

Appendix

Statistical Tables

NOTE

Rates of growth and other statisticalin the tables which follow have been carried out numerically to the degree required to make valid comparisons. The presentation of the data to the first decimal point, however, does not necessarilyomparable degree of accuracy in either the absolute leveliven aggregate value or in the absolute difference between two values.

The base year used in deriving average annual rates of growth is the year preceding the given year

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Table 1

USSR: Indicators of Economic

Average Annual Rates of Growth (Percent)

national

Producing sectors

Agricultural sector a/ Nonagricultural sectors

6.0

6.5

6.0

Other

5.5

6.1

6.0

end uses

Consumption (per capita)

b/

to 5

ouipu! excludes

intra-agricultural use of farm products but does not make an adjuolment for purchases by agriculture from other eectore. Net output, of value added in agriculture, grew by an averageear inndar in nd in

b. Consumer-orten-ed investment comprises in agriculture, light and food industry, housing, and services.

4 Ths base year for ths calculations shown in each column ia the year before the stated initial year of the period; that io, the average annual rate of increases computed by relating the data in8 to the base year

St*.KM 1

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Table 2

USSR: Indicators of Capital

8

8.8

Average Annual Rates of Growth (Percent)

6

Gross additions of new

fixed capital

Backlog of unfinished

cons truction

Labor productivity

in

additions of new fixed capitalgroes fixed investment in that it ieoount only thoee investment projects whioh

equipment installed in unfinishedincluded in this category.

REGRET

USSR: Production of Major Crops and Livestock

Crops

crops andproducts b/

Grain

Potatoes

Sugar beets

Cotton

Vegetables

Meat

Milk

Eggs (billion)

100

ohangee in inventorieo of herdo. b. Eetimateo of production are lower than official olaima for grain, meat, and milk.

SECRirf

Table 4

USSR; Planned and Actual Flow of Resources to

Actual

Actual

Plan

Annual Rates of

deliveries

Tractors Trucks

Other agricultural machinery

Land reclamation a/

Mineral fertilizer deliveries

9% 7

9

4%

Acres

USSR; Growth in Industrial

Average Annual Rates of Growth (Percent)

trial

materials

and power Metals

Forest products

and paper Construction

materials Chemicals

8.1

3.9

9

8.9

3.0

7.8

6.5

5.4

4.2

consumer goods

goods Processed foods

6.7

2.6

5.8

4.8

0ECRET

USSR: Recent Growth of Output of Important Products ofnd Plan

Fuels and power Coal

Crude oil Gas

Electric power Ferrous ores and metals

Iron ore Pig iron Crude steel Rolled steel

Other basic materials

Commercial timber Cement

Rates of

8

y

.0

Chemical equipment

5.4

6 .0

Table 7

Gross

Mew Capacity a/

7

8 W

power

kilowatts

tons

and branch

kilcroeters

pipeline

oil and

kilometers

pipelines

tons

ferrous metal

tons

tons

tons

fertilizers

tons

fibers

tons

vehicles

kilowatts

year

(assemblies)

footwear

pairs

sugar

quintals

36

processed

per day

per shift

milk products

tons of

per shift

Capacities u timinary .

USSR: Indicators of Changes in Consumer Welfare

Average Annual Rates of Growth (Percent)

6 7 8

Per capita real income a/

Factors affecting the growth of real income

Average earnings of

3.6

and salary

workers a/ Public consumption

funds a/ b/

Per capita consumption Food

Soft goods Durable goods

Soviet official data.

b. Including the financing of items euoh aestipends, leave pay, eduoation, and medioal services.

i a a

5 1

HI I

i J3

MI 1

:

! 55

1

! M

B" 1 3

g< | J S3

l^lil I

jS

I Jii

Soviet Hard Currency Current Account Balance, Imports of Wheat, and Sales of Gold

Million US S

Current Account Imports of Sales of

Year

V

b/

104

c/

wheat flour; excludingtion ooats.

b. Minimum estimates. o. Preliminary.

Table 12

Estimated Soviet Drawings and Scheduled Repayments on Western Medium-Term and Long-Term Credits a/

Million US S

Repayments Interest Credits

a.Based on contractual and other information. Plus or minuseroent,

b. The first known drawings on long-term credits took place. Preliminary.

SBORET

Table 13

Soviet Orders for Machinery and Equipment from the Industrial West a/

S

and petrochemical

b

and wood processing

manufacturing

104

manufacturing facilities

1

and marine equipment

refining and pipeline equipment

and

processing

c/

Excluding Finland. Beaauai* of rounding, com-ponento may not add to totals shown, b. Including plant to manufacture rubber products valuedillion. Tho plant could aleo beunder the category "chemical and

o. ide variety of plants and equipment with consumer orientation for example, production of footwear, refrigerators, ballpoint pens, and the like. Also including printing equipment, telephone equipment, medical equipment, and epecial trucks.

Alp CRET

Table 15

f Relative Levels of Technological Advancement of the United States, Western Europe, and the USSR in thes a/

GNP perCapital GNP per Capital per Worker

United

a. All percentage comparisons of tevele of GNP, productivity, and expenditures for various purposes given in this report are the geometric means of two comparisonsne carried out in US prices and one carried out in the domestic prices of ths countries being compared.

Table 16

Comparison of Average Annual Rates of Growth

of Factor Productivity of the United States, Western Europe, and the USSR

United7

United States

Northwest Europe

1.0

Italy

SBCRE'r*

Table 17

DSSR: Average Annual Rates of Growth in Defense and Space

Total defense and space

Procurement of military

Table 18

P^fre%0fEndotal GNP at Factor Cost, Selected

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