Created: 1/9/1968

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Section on tha Bconoag, cog


Plregtor'p Briefing of Can^aB In January IQArt THE SOVIET ECONOMY '

I now would lileo to discuss the economy of the Soviet Onion, concentrating on developments67 and on the econonlc Implications of higher defense spending.

X. During theears the Soviet economy pickedittle momentum following the slowdown of the preceding

years. Grooa national product increased more than

percent annuallyomparedittleercent. Even bo, however, the Soviet ooonomy has not regained the high growth rates It had duringa.


A. The higher growth of theears was due in largo part to luck with the weather.

1. 6 the USSR harvested the largest grain crop in its history,llehtly better than average crop also was barvosted

Net agricultural output inears increased an avurago ofpercent annually, compared with} ptimont annual gain ever theears.

Greatly increased BUppliea of fertilizer plus higher prices paid to farmers also contributed to this surge in output, although above-averago weather was tho seat important factor.

B. Tho rato of growth of industrial production picked

up moderately. It averagedercent compared withpercentut is still far below theercent rale ofs.

A substantial partas duo to tho larger supplies of agricultural raw caterials that resulted from the good crops.

Also important was the fact that many of the plants hastily built and commissioned underegime finally started producing up to capacity,

The economic reform that tho Soviets are now carrying out also may havemall beneficial effect on industrial output

II. Soviet GNP grew faster than US GNP. Nevertheleoa the Soviet economy le etiU less than half the size of the US economy, ond the absolute gap botwcnn our GNP and theirs continues te widen. (CHART,T GROSS NATIONAL PRODUCT).

A. Aa you nay know, they allocate their total output differently from the way we do. Their allocations stress tho elements of national power.

In dollar values, Soviet spending for defense and for investment is about four-fifths of ours.

When it comes tooviet population that la almost one-fifth larger than ours gets'

only about one-third of what ia spent for consumption here.

III. Tha USSR mado somo significant changes in the allocation of its total output. (CHART, RATES OF GROWTH OF CONSUMPTION, DEFENSE AND. arger share of GNP went to the marshals. Defense expendituresercent annually lnimes as faat as in thoears. 1. Spending for advanced weapons and space systems and especially for research and development isrimes as faat as total defense

2. Thiaevere drag on tho whole economy. These programs siphon off the most highly skilled englneera and soientlsta. They have firet call on scarce strategic materials, sophisticated electronics and the most advanced industrial processes. These are the vory kind of resources that the roat of the economy need3 to modernize and to assure rapid technological development. B, Consumers fared much hotter than before.

An important reason was the improvement In agriculture.

Another reason was that the Soviet leadership wanted toood showing ioh Anniversary Year. The regis* oven used Its scarco hard currency to Import an0 million In clothing Trom the West

Investcent in Industry and agriculture was slighted.

The rate of erowth of invoslmunt in industry dropped by one-third from the already low rates.

Investment in agriculture also grew much more slowly than in the earlier period. Indeed, the rate was only half that scheduled in Brezhnev's moaecth program to get agriculture out of the doldnae.

diversion of resources sway fromup especially clearly when wo compare theof caohinsry production with these for weapons



1. roduction of weapons increasedUines as fast aa production of machinery and equipment for civilian purposes.

for the cement at least investment, the keygrowth of tbe economy, clearly hasto the marshals and to consucara.

IV. Recent Soviet announcements suggost that these general policies will continue.

A. The Soviets5 percent increase in the

defense budget8 and anercent increase in the budget for science, which includes substantial amounts ofxpenditures. 1. art of this increase reflect price increases and accounting chungoa.


The defense budget does not cover all outlays for defense and space.

ubstantial increase in defense programs is likely

of0 goals for importantbeen cut back.

Production targets for gas and electric power have been re duced by j,eroeat; for plastics and chemical fibers they have been cut even more.

On the other hand the goal for steel productiona military-related sectoris about the same as it was, and this sector is tohoppingercent increase in investment

the data are very meager indeed,industry and agriculture may not growhan it did.

have been promised continued

Large increases innLnimum wages and other welfare programs are to tako effect

Per capita real income is to go upercent

Goals for large increasos in production of automobiles, television sots, refrigerators and other consumer durables have been retained.

. 4. Not all of these golden promises are likely to be fulfilled.

5. Wa should noto, however, that even if they

are carried out, the lot of the Soviet consumer will still not be enviable by Western standards.

a trickle of automobiles will bofor private use. Even ifaro net, the USSR will have onlymany automobiles per capita as Greecezech or an East German now haa aofar thanoviet citizen.

average citizen will continuo tocrasped and crowded quarters. Perspace won't even have reachedthat the Soviets themselves havethe aininua for health and decency.

of such things asand refrigerators still will be in the US and Western Europe.

diet will still be loaded with broadinstead of tho meat and dairy products.1would L'" '" *

and shoddy goods still will be aand tribulation.


V, By favoring defense and being niggardly with Investment the Soviets are risking another slowdown ln economic

growth like that of theO1*. If these priorities


A. Expansion and modernization of tho industrial plant will have to slow down. The overall technological level of Soviet industry will ls| even farther behind the West than it already doos.

8. Agriculture will not bo getting as much machinery, quality fertilizer and funds for land inproveaent aa It needs. This will make future growth in output mora precarious.

You will recall thatoor harvests forced tha USSR to spendillion of its scarce gold reserves to iaport wheat.

Agriculture will remain grossly inefficient in comparison with Western countries. It now uses morehird of tho total labor force.

C. Consumers may not get the goods and services to match p.

the money incoEe &alns they have been promised,

Cutbacks in investment In industry nean that ultimately production of consuser goods will be af fee ted.

Cutbacks in investment allocations to agriculture Jeopardizes the chances for gains in supplies of

quality foods like moat and nilk. .


Looking ahead only over theoara, lhat la,hich io the last year of thoear plan, wo think that the overall growth of GNP ia likely to fall back somewhat froaercent achieved, perhaps toi "percent. 1. ritical factor will be the weathor. for agriculture.

Exceptional weathor cannot bo counted on to produce

good harvests every year.

The growth of Industrial production may hold uphilo. An important factor hero will be the Impact of the economic reform. Initially it seems to beemporary beneficial Impact on productivity. The reforms are not very far-reaching, however, and in our judgment they will not cure the long-standing Ills of the Soviet system of economic management.

Ultimately, however, the cutback in investment la bound to affect economic growth adversely. Some of tho Soviet leaders already recognize this. Indeed, how best to allocate tho USSR's limited resourcoB aaems toot issue in tho Kremlin at tho moment.

VI. Tho USSR's foreign trade continued to increasend ita hard currency position Improved considerably. (CHART, SOVIET FOREIGN TRADE).

two-thirds of Soviet forolgn trada lacountries and one-third with the Free World.

0 trade with Western industrialized countries has increased rapidly as the USSR has sought to upgrade tho quality of its industrial plant by importing equipment and technology.

The growth of trade with the less developed countries has been erratic and has depended lorgely on Soviet willingness to extend aid.

}. Tho USSR's trade with China continued to decline sharply in6hen it0 million, compared with ovorillion

USSR's hard currency position inproved inits gold reserves rose.

1. Because of chronic difficulties in finding products , that Western countriesy, the USSR has longard currency deficit with the West. To pay for the imports it uo ouch needed the USSR has had to sell gold and also aeok credits. In


t had better success in expanding exports and cheeking imports, and its hard currency deficit dropped to less0 million.

he USSR was forced to sell largo

amounts of gold to pay for omorgency imports of wheat and also for machinery. esult its gold reserve dropped from overillion2 to aboutillion


The USSR sold almost no goldnd gold reserves are now upittle2 billion.

Tha USSR now produces0 million in gold each year. Despite very high production ooBts the Soviets are now carryingrogram of expanding tho industry atercent annually.

VII. There are a3 yet no signs that the preoccupation with

resource allocation problems at home is leadingto curtail the program of economic and military


A. 6 the USSRconomic uid. 0 million of this

a commitment to supportear plan. Large .credits were also granted to Iran, Syria, and Brazil. B. Extensions of economic all dropped sharply. This dramatic fall apparentlyack

of suitable opportunities ratherhange ln


G. However, the Soviets do seem to beit tougher with their aid.

are being more selective with the kindsundertaken, so as to ensure aof success.


of the credits/becoming Boreoften areears forof the customarynd an interest rate

J- percent instead oforcent. Occasionally down payments are required, and repayments sometimes must be made partly in hard currency. D. There was no dramatic change in the level of military old.

1. More than half of tha aid extended6 is

accounted for by an important new agreement with Iraqtho fifth and largest one to date. The


USSR also committed itself to supply India0 million in fighter bombers and tralnore. B, ollowing the Arab-Israeli war in Juno, tho USSR concluded new aras agreements with Iraq, Syria and tho UAR. Tho amounts ranged0 million. Earlier in tho year an aras agreement was signed with Iran, the first one Irmi; had signedommunist country. Agreements also were concluded with Nigeria and Yemen, and allltary goods wore airlifted to these countries. Actual deliveries of military equipmentittle higherhan in earlier years. 1. In? the USSR alrliftod large

quantities of jet fighters and possibly somoguns to the Arabs after their defeat by tho Israelis. The pace of deliveries has now slowed to near pre-war levels. 2. Wo estimate that the USSR has replaced at loaat half of tbeillion dollars of military equipment that tho Arabs lost In tho war. Wo expect the flow of aid to continue.


Graphics Tor Inclusion in PCI grlofing Package

Rates of Growth of ONP, Industry and Agriculture

US and Soviet Grooa National Product

Rates of Growth of Consuiaptlon, Defense and Investment

Production of Machinery and Voapons


Soviet Foreign Trudo

Soviet Gold Re servos

Soviet Foreign Aid Activity in the Free World


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