Created: 10/1/1967

OCR scan of the original document, errors are possible

CIA historicalp>?ofirap release as sanitized'8


Intelligence Memorandum

Economic and Military Implications of the New Soviet Plan


uopy No. R07 TS No. 1



central intelligence agency Directorate of Intelligence

intelligence; memorandum

Military and Economic Implications of the New Soviet Plan


Recent Soviet plan and budget announcements, which calliseillion rubles in defense expenditureslmost certainly reflect an inportant change in economic priorities in favor of the military establishment. An analysis of the available evidence suggests that military and space outlays will grow by aamount in real termsesult of increases in many programs. However, accounting changos, higher prices for military goods, and perhaps military pay increases could alsoole; in combination these mightillion rubles but are judged likely to fall short of one-half billion rubles Tha diversion of additional funds to military purposes willlowdown in agricultural and industrial investment. Thereby, the USSR is risking the long-term technological quality of its industrial plant and making future agricultural gains more precarious (see Figure 1J.

No single Soviet military program isexcept under extraordinary crash conditionso changes in magnitudo that would accountajor portion of theillion rubles. The largest military programs

Mote: Thia memorandum was produced by CIA. It vas prepared by the Office of Eoonomic Research with contributions from the Office of Strategic Research and the Office of Current Intelligence. Thia memorandum waa coordinated with theofficea of the Directorate of Intelligence and represent* the beet judgment of theas of

USSR: Estimated Defense and Space Expenditures

under way in the USSR7 are those"forof thendCBM's, which are at an estimated combined annual spending levelillion rubles. All other individual Soviet military programs require much smaller However, improvements in the readiness and mobility of general-purpose forces couldthe expenditure of one-half billion rubles or more in the next year. If actual military spending8 were to rise by theillion rubles, it would almost certainlyompound of increases in several major programs.

The present political, military, and economic climate in the USSR is favorableurther shift in resource allocation priorities. The

Estimates for7 outlays on the ABM system being deployed at Moscow are at a level ofillion rubles; the deployment program for the Tallinn defensive system, illion rubles; nuclear ballistic-missile submarines, aboutillion rubles; and air defense fighter aircraft procurement, aboutillion rubles.

top ouctnrr

rc-equipping of Arab nations in the Middle East, the desire to increase aid to North Vietnam and the uncertainties created by that conflict, and the plan to strengthen defenses because of the Chinese problem are all developments that bolster the arguments of the Soviet military leadershiparger share of the budget. The recent announcement of US intentions tohin ABM screen, we believe, has not yet been fully digested in the thinking of top Soviet policymakers, norin the budget announcement, but thisalso strengthens the hand of the military spending advocates.

As for the economic climate, recentin both agriculture and industry appear to have strengthened the Soviet economy. Two favorable harvest years have reduced the urgency for doubling agricultural investment along the lines of the Brezhnev program and have eliminated for the time being the necessity of large imports of wheat. Industrial production, bolstered by gains in military output and productivity, continues to growear in spite of continued difficulties in commissioning new plants and getting operations up to rated capacity (see Finally, in terms of both real andincome, the consumer has enjoyed very good years, with the notable exception of housing.

An examination of available data indicates that the rise in Soviet military spending will have its largest immediate impact on (a) investment in modern industrial facilities, (b) production of aonmilitary industrial goods, and (c) investment in agriculture. No data were announced on plans for the production of industrial equipment and military equipment, but the data- when military spending was also rising rapidlyare illuminating. Production offor investment increased at an average rate ofercent, compared withercent. Deliveries of militaryrose an average ofercent, comparedercent. in the case of nonmilitary goods, the0 goals are being either trimmed (natural gas, electric power.


plastics and resins, and chemical fibers) or aot at the low end of the range announced by Kosygin6 (steal, motor vehicles, andhe planoubling of agricultural investment is being cut back, especially the plans formachinery.

The slowdown in the flow of new industrial investment will force the USSR to operate an industrial plant that is growing older and more obsolescent. Therefore (a) technology will lag, (b) repair bills will mount, androwing fraction of output will be below Western standards. In agriculture, the lackustained investment program probably will mean the failure to meet the ambitious goalshich, if realized, would have permitted the USSR to once more export grain in quantity. The consumer also will feel the effect of the change in economic priorities. The promised increases in wages, pensions, and other bonefits will mean sizable increases in money income but these increases arc not likely to be paralleled by similar increases in real goods. Housing and construction of new capacity in consumer goods industries are especiallywhen the pressure on resources mounts.

USSR: Growth ol Industrial Outpul, Capital and Labor, and

(llttljl IIMll fill! il M'ttltl

ii iwittui mn Oi.cimiii Mowctmrr



i 1



MI-tf INt-U ih4-ii IHI.U HI tl ItMH 1is1-h MM)


On ctober Nikolay K. Baybakov, the Deputy Chairman of the Soviet Council of Ministers and Chairman of Gosplan, addressed tho Supreme Soviot on the state economic plan8 and on preliminary plans. On the same date the Minister of Finance, Vasiliy F. Garbuzov, reported on the USSR State Budget8 and the implementation of th* budget It is believed that these plan and budget announcements, although lacking detail, signaled an important change in Soviet economic priorities in favor of the nilitary establishment. The most important single figure to appearlanned increase in defense expenditures8illion rubles.

The annual plan and budget speechesoffer the roost authoritative description of Soviet economic policy. Indeed, in many key areas, very little is published later to supplement the information contained in these two basic statements. The uncertainty surrounding military programs in the plan and budget speeches is always great. It is known that the overt defense budget does not cover all Soviet military outlays; it is also known that the dogree of coverage has varied over time because of shifts in accounting practices.

J. Inould I

n for example. Premier Khrushchev announced that expenditures for defense increased4 billion rublesnstead of theillion rubles announced the December before. His statement followed hard on the announcement by President Kennedy of aboost in the US military budget. Much of yjc announced Soviet increase1 appears to nave been spuriousctual outlays were later reported as6 billion rubles, and there was strong evidenceransfer to the defense category of defense-related expenditures from other categories of the budget. Nevertheless whenever the USSPubstantial jump in military spending in an atmosphere of military and political tension, as it did this October, the announcementlear political signal and almost certainly means that some shift in resources in favor of military programs is actually planned.


important political factorsthe plan and budget announcements. Two of

the factors involve the image that the USSR wishes to present to the world at this point in time, and they exist quite apart from the actual relationship between the announcements and the ultimateof resources. The third factor concerns the hard political realities at the pinnacle of the leadership which determine the way in which economic (and all other) decisions are made.

Recent international developments have very likely increased the Soviet leaders' concern for the USSR's national security and hence the need toosture of strength and readiness. Some leaders may see the US ABM announcementign that the arms race is about toew and enormously more expensive phase which will tax Soviet resources but which the Soviet Union cannot avoid; however, there has not been sufficient time to digest the full impact of the US announcement.

Other leaders may be more concerned that the trend in "localuch as the war in Vietnam and the war between Israel and the Arab states, means that the United States has gone beyond "containment" and is trying to roll back revolutionary and socialist regimes. Finally, some may view the rapid development of Communist China's military might as carrying with it the prospect that the near future will see the USSR confrontedostile well-armed neighbor.

Individual Soviet leaders may differ on the nature and degree of the threat posed by these developments and on the best way of countering it. Some leadersar bleaker view of the world scene than others and would prefer toilitant international stance and match the United States step-for-step on all of the arms fronts. Even those who would give higher priority to buildine up the USSR's internal strength and searching out areas of agreementotential enemy, however, would not wish to negotiate from apparent weakness. The result this summer and fall has been not only

the announced increases in military spending but also such well-publicized activities as support for North Vietnam and the Arab states and the large-scale "Dnepr" military exercise. Moscow apparently has believed it to be necessary to add to the "strength" side of its desired image of "strength and reasonableness."

Another political factor influencing the shape of the recently announced economic plans and budgetary measures is the desire of the regime to draw attention, especially duringhto its ability to provide for thewelfare whileigh rate of economic growth. In part, this factor stems from the need to stimulate the enthusiasm of the populace for "building Communism" and thus obtaining its willing participation in economic development. It also stems from the need to prove to those who are determining the path of development in the emerging nations that "socialism"ore progressive means by which toation's economy and improve its standard of living.

As in dealing with the international situation, individual leaders may differ over the emphasis they put on satisfying the immediate wants of the population as distinguished from investing for further economic growth. They may differ over prioritiesurban development orh-century amenities to the rural areas, expanding facilities for education or for recreation. They may also differ over what methods will prove most successfulincreasing the purchasing power of the population or expanding the state-run welfare' programs and facilities, spurring the growth of productivity by increasing investment in production facilities or by increasing the workers' pay,more and/or better goods or improving the means by which they are processed en route to the final consumer. Regardless of their individual motives and priority preferences, however, the USSR's political leaders do seem to agree that it

is expedient from time to time to undertake measures and programs designedt t thof iho Soviet citi2enry.

10. The Soviet leaders thus appear to be in general agreement about these two broad problemsthe need to polish thc image of the regimeesolute defender of international "progress" andapable provider for the wants of its people. f& noted, however, beneath this agreement ongoals lie sharp differences about specific points which in turn necessitate the making of hard choices among tho competing demands for Soviet resources. These demands are still resolved by compromise, not only between those leaders favoring more guns and those favoring more butter but also between those favoring different types of guns and between those preferring different brands of butter. This year the butter advocates did well, particularly those advocating an increase in disposable income and the stepped-up production of consumer goods to prevent inflation. However, the guns advocates alsoizable increase, as the regime continues to show that it is more responsive than was Khrushchev to thc views of the military hierarchy..

11. The provision of more guns and butter in the short run means that needed long-run investment in future capacity to produce guns and butter may be jeopardized. Thus present decisions on.resource allocation may come back to haunt the leadership if long-term growth rates decline or if agricultural production stagnates. As the product, of compromise acceptable Lo the collective leadership, the decisions probably fully satisfy none of the individual leaders; for this reason also it may be expected that if these decisions backfire they willubject of acrimonious disagreement.


Potential inflation ol the Military

Several factors may lead to an exaggeration of the increase in the real flow of goods andto military uses The one with the greatest potential effect is the general change in prices for military equipment and other commodities used directly or indirectly by the military, although in any event it is believed that this would be lessillion rubles. This change was part of an overall revision in Soviet wholesale prices that was completed

Shifts in accounting practices probablyignific*Ol portionII iiim.l1 defense budgets1 The opportunities for major bookkeeping adjustments arc believed to

be smaller today. One possible exception is the treatment of military assistance. It is not known whether military assistance is incorporated in the explicit defense budget. If military assistance previously has been carried outside the explicit defenseeclassification of military assistance to North Vietnam and the Arab World might add as muchillion rubles to the budget.

road military pay increase8 to parallel the wage increases for civilian workers couldillionillion rubles to the budget. Although there is no evidence of such an increase, military pay has not been raised for many yearsay hike would appear to be long overdue. Moreover, the reduction interms would intensify the problem of retaining skills in the military services and thus would increase the pressuresay raise and other incentives to reenlistment.

ln summary, the total effects of higher prices, accounting shifts, and military pay increases potentially couldillion rubles but are likely to fall shortalf-billion rubles -


Recent Trends in Military Expenditures

Total Soviet spending for military and space programs will have increased? by almost rjfbillion rublesS levelsa marked change from the more stable level of spending under Khrushchevsee Estimated expendituresboutillion rublesare approximatelyercent higher than5 level andercent above6 level. Expenditures for TCBM's will have doubled in the two years, and expenditures for SAM's and the ABM program will have increasedercent. On the basis of present estimates, expenditures for ICBM programs should peak7 and thereafter) decline somewhat.

The factors most likely to affect these projections would appear more likely to increase rather than to reduce them. The factors include the possibility that ICBM deployment, including qualitative improvements in present systems, would move to higher levels than now estimated. Similarly, in the case of the Moscow ABMore rapid national deployment might occur than is now.

The trend of expenditures for the general-purpose forces and for command and general support has held atillion rubles2 Current projections show little or no change in the level of these expenditureslthough developments in7 could have led the Soviet loaders to decisions for broad imorovements ines .

le Areas of increased Spending

increases announced8 arerubles for the defense budget and aboutrubles estimated as the share ofscience funds that is allocated toand space. After allowinq for someand accounting effects that would not callprograms or activities (discussedwould still seem to beillioncould create real changes in military forces

and upillion-ruble real increase for military research and development and space efforts. The total amountapproximately equivalent to S4 billion to S5 billion in military goods and services purchased in the United Statesis especially large when viewedurther increment to the cost of the already expanded strategic system.

20. Direct evidence of new military programs or extensions of existing programs to higher levels than now estimated can neither strongly support nor convincingly argue against the prospect ofreal increases in defense spending to these levels. Discussions of possible programs are extremely speculative under such circumstances. The various alternatives discussed below should be

-to pg ec rut

. TOP:

considered only as illustrative examples of programs that the USSR could pursue which would place demands on the economy for the general magnitude of resources implied by this increase.

Strategic Programs

are relatively few militaryway in the USSR which are big enough into have major implications for overallexpenditures. The programs havingexpenditures7 were the SS-9ICBM deployment programs, which combineda level ofillion rubles. these programs had been expected to peak into decline byillion rubles inuncertainty still exists aboutof these programs, however, and thein expenditures referred to above either

may not occur or may be much more moderate.

Each of the other programs requiredsmaller levels of expenditures. For example, estimated expenditures for the ABM system being deployed at Moscow were at a level ofillion rubles; the deployment program for the Tallinn system wasevelillion rubles; nuclear ballistic-missile submarines wereillion rubles; and fighter aircraft procurement for air defense wasevel ofillion rubles. No one of these smaller programs isto changes that would makeajor part of the increase in announced defense expenditures, although several, such as the ABM, are expected to grow substantially It is probable,that an overall increase of the magnitude which was announced would consist of increases in many programs.

Because all of these systems are now well along in their production cycle, they arecandidates for either expansion or continuation of deployment rates beyond currently estimated levels. The ICBM programs alone, for example, could drive estimated total military outlays8 upward byillion rubles if, instead of reduced expenditures impliedalling off of deployment rates, the estimated rate of deployment

of the past two years is maintained for another year or so. In contrast, the pace of deployment of the Tallinn system is believed to be already rapid and would have to be sharply acceleratedr the Moscow ABM system expanded into ff broader deployment program, for these systems to8 expenditures significantly. Either of the above two programs could require as much as an additional one-quarter billion rubles in such Circumstances.

General-Purpose Forces and Command and General-Support Programs

Pressures have existedumber of years for upgrading the capabilities of the general-purpose forces and the command and general-support establishment to enable the USSR to exploit its strategic position more fully through the exercise or show of force at substrategic combat levels. These pressures appear to have been held carefully in check up to nowesult of the costs of developing and expanding the deployment of strategic systems.

Any general loosening of the restraints on military spending would release pent-up demands of several years standing. The requirements would extend throughout many program areas and in the aggregate could generate substantial expenditures in the relatively short run. The increasing conflicts of interest in the Middle East and the growing Soviet apprehension about Asia related to the Vietnam War and the Sino-Soviet dispute are probably, strengthening the arguments of the proponents of jigproved general-purpose forces.

Total annual expenditures for the general-purpose forces were relatively stable atillion rubles durings. There has, been considerable fluctuation in the levels of the force elements and weapons systems programs that has tended to be offsetting. etermination to upgrade general-purpose force capabilitiesand rapidlyfor example, to improve force mobility or limited war potentialcould alter the pattern of general stability andtotal expenditures by some one-half billion

- 13 -

top sr-f r

illion rubles, depending on the intenui of the effort.

are several different types ofthat could contribute to such anforen were added to the

ground forces, expenditures would be raised byillion rubles. An increase ofillion rubles could be generatedecision that the mobility, fire-power, and tactical airof thc ground troops should beringing expenditures for these programs toillion rubles. peedup in the introduction of new transport aircraft could raiso outlays8 byillion rubles aboveevel ofillion rubles. Combined improvements in the surface fleet, the naval air arm, and the submarine attack forces would requireillion rubles more8 than

Increased Operational Activity

top Soviet leadership this summerincreasing concern for the level ofof tho armed forces. This concern alreadyincreased operating and maintenancea speech to military graduates in Julystressed the need for increasedthis was followedonference ofcommanders which stressed preparedness.

In the same month, thereajor strategic exercise that involved combined forces. Inhuro was another massive military exercise Jnepr) in the western USSR. Some troop units have Been moved toward the Chinese border, and naval units have been moved into the Mediterranean. Other indications of increased alert status andreadiness suggest that POL and logistics consumption have been increasing. It is calculated thatillion rubles might be required per year for these operational support activities.

Mill tary Kei,earch and Development and Space

expenditures for science inof military weapons and space have climbed


steadily over the years, roughly paralleling trends in the United States. Since thes, there has been evidence of increased concern for the large annual increments for science, and efforts have been pushed for greater cost-effectivenessmore research per ruble. Some decline in the rate of growth has occurred recentlya trend which was reversed by the announced increases. Because of the diffused nature of science in the Soviet economy and because of the lag between program initiation and intelligence detection of programs/of specific new scientific projects willong time.



General Developments6 7

30. Before considering the effects of theeconomic plan and the effect of the shift in priorities in favor of the militarysome discussion of the performance of the Soviet economy over the past few years is Soviet gross national product (GNP) grew at an annual rate ofercent, somewhat faster than the average of nearly 5achievedlthough still below the average fors (see Most of the moderate acceleration in the rate of economic growths attributable to the above-average performance of agriculture. The Soviet

Table 1

USSR: Average Annual Hale of Growth In Groan National Product and ItB




national product

output industrial output other d/



vnless othe rwisell data are cta ostirttfitcs. h. preliminary.

of soviet official plan range.

transportation, communications, arel services.

Unionumper crop innd also benefited from better than average weatherhe rote of growth of industrial production increased moderately in both years, spurred by sharp increases in raw materials from agriculture. The improved performance of the Soviet economyharp increase in productivity

because inputs of labor and capital continued to increase at about past rates.

rising share of the increase in GNPto defense. Consumption also may have

(increased somewhat faster than GHP. Investment, the touchstone for future economic growth, seems to have been the residual claimant in these two years.

Agriculture Yields Priority to Defense

Planned agricultural investment is likely to be one of the first victims of increasedspending. Net agricultural output increased an averageercent per year, largely because of favorable weather. Although this rate was better than the annual averageercent, it was well below the rate of growth achieved durings as well as the rate set in thc plan. Total grain production is estimated atillion metric tons6 andillionillion metric tons in Average yields of grain per acre increased sharply6 and fell back The above-average grain crops permitted rapid growth in the output of meat, milk, and other livestock products, whichercent per year6hree times as fast as, and also allowed grain stocks to be rebuilt. the USSR did not have to use its scarce reserves of gold and hard currency to purchase large emergency wheat imports, as.

The success in agriculture apparently hasignificant cutback in prior planso allocate large additional investment resources to that sector. Shaken by the grim necessity to import large quantities of wheat in thes, the regime had incorporated in the Plan Directivesarge increases in machinery deliveries above thoseoubling of thc output of mineral fertilizer, and the irrigating and draining of more thanillion acres of land. These plans arc far behind schedule (see Deliveries of tractors and trucks to the farms increased7

percent andercent, respectively,he number of new tractors scarcely increased at allnd the number of trucks actually declined byercent. Even more significant, however,of agricultural machinery increased slightly6 but not at all

of mineralnd this contributedthe growth in agricultural output. Theprogram is more nearly on schedule thanagricultural programs, but8 planan increase in mineral fertilizer of onlythe average rate achieved. of land is proceeding at less thanof the rate required to meet the Five million acres of land were reclaimed

, but half that amount of land wasfrom use6 and additional amounts probably were withdrawn

Two other elements of the agricultural programa greater role for private activity and greatly increased monetary incentives ave been carried out in varying degrees and probablyto the agricultural success. Following the lifting of Khrushchev's restrictions private holdings of land and livestock increased arkedly5 and also slightly in. Private plots and livestock holdings accountarge percentage of the output of meat, milk, eggs, and vegetables, which grew particularly rapidly. in view of the small expansion in the private sector, however, the regime aypapntly does not intend to rely on the private secfTor for additional food supplies.

With respect to incentives, special bonuses of jQ percent were provided for above-olan deliveries of grain, wages were raised on state farmsnd other benefits were provided. esult, cash and in-kind earnings of collective farmers iron the socialized sector roseercent

6 andercent Wages of workers on state farms roseercent6 and again The percentage increase in incomes of farmers in these two years was more than double that of non-agricultural employees.

USSR: Planned and Actual Plow oV Sesourccs to

lan Actual Plan Actual 0/ Plsn Plan

Machinery deliveries

Average Annual Rate ofr cent)





reclamation DToftra.

Million Acres

additions to Irrigated and drained area



2.8 o 23

Annual Rate of Growth (ftrcent)

fertilizer dt'llverieii

a. Prrrlimlnnry,

37. The agricultural successes ofpparently have resulted in major foot-dragging and large cutbacks in Brezhnev's many-faceted pro-gran "to got agriculture noving again." investment conmitiaents to agriculture haveeady source of cutbacks when crops ^happen to be large, for other claims on resources alwayn seem urgent. Another cycle of complacency may be in the offing. In any event, the regime

cannot count exclusively on above-average weather plus rubles in the hands of the peasants to cure the chronic ills of Soviet agriculture.

ace in Industry

productionrewannual rateercent,ercent average annual rate forwell below the average ofs. electric power, iron ore, pig iron, and

some chemicals, output of major industrialwas approximately on schedule.

to hallowed Sovietthe primacy of heavy industry,consumer goodsoth durables andincreased at approximately theas the output of producer goods, andthe former is actually planned to exceed The only previous similarollowing the death of Stalin earlyand was abruptly reversed with Malenkov'spower The especially rapid riseoutput of the light and food industries was

made possible by the sharply increased availabilities of agricultural raw materials resulting from the bumper harvest Indeed, the growth of these industries accounts for almost one-half of the acceleration in overall industrial growth.

notable developmentsoutput. First, unlikepast, the rate of growth ofmachinery in these years was muchthan that of civilian machinery3). Second, also in sharp contrastpractice, the consumer durablescivilian machinery increased far more the producer durables component. Outputdurables rose aboutercent whereas producer durables grew onlyper year. These two developments meangreatly increased share of machinery outputwas diverted from investment purposesand consumption purposes.

Tho moderate acceleration in industrial growth in the past two years reflects increased productivity. Inputs of labor and capital (plant and equipment)it slower than, but their productivity doubled. The annual gainercent, however, is still far below the rate plannednd that actually achieved durings.

Several factors account for the sharp rise in the growth of productivity. Possibly the most important factor was the much greater availability of agricultural raw materials, permitting the fuller use of available plant capacity in consumer Another factor was the bringing.of actual operating capacities nearer to those plannedumber of major industrial plants. Many plants producing civilian goods were hastily built and prematurely commissioned during the lattor years of Khrushchev's regime. Finally, the economic reform currently being carried out in industry probably also mado some contribution to The reform, which gears monetary incentives more closely than before to enterprise efficiency, affected onlylantsut by7 itlants, which accountedhird of total industrial output. Plants under the reform are reported to have done better than industryhole in increasing sales, profits, and productivity. Soviet sources, however, repeatedly attribute the initial successes tofactors, such as the using up of excess stocks of products and materials.

fhortfalls in Agricultural and Industrial Investment

data are meager andgrowth rate of aggregate investment in was higher than thatbelow the rate ofs. in the two key sectors ofindustry is well behind plan. Inin agriculture increased at onlyof the planned rate, and all ofwas devoted to land improvement andinvestment in machinery and equipment didat all. Investment in industryercent6 and

USSR: Average Annual Rate of Growth in the Allocation of Machinery a/


Total machinery

Of which:

Military Civilian

Of which:




o 11

o 12

for Investment

Consumer durables



Data on performancere CIA estimates.Figures forlan are CIA calculations based on Soviet pjan.

44. The slowdown in the rate of growth of industrial investment resultedrop in the rate of growth of capital stock (plantrom an average ofercentercent6 and to probably an even lower rate Agricultural plant and equipment increasedercent per yearercent In bath sectors tho rate of growth of capital stock probably achievedalls far short of the rates projected inlan. In the faceeclining rate of investment, the previous rate of growth of capital stock wasby deferring tho retirement of obsolete plant and equipment. Tho so opportunities clearly are nearing exhaustion.


Improvements in Consumer Welfare

Soviet consumers fared exceptionally well. Real income per capita, which includes wages, farm incomes in kind, and payments from the state budget, roseercent per year,withercent. Thanks primarily to the good crop years, per capitaof goods and servicesose almost as fast as realercent annually, double the rate. Much larger supplies of meat, dairy products, and vegetables were available, significantly improving the quality of the diet, which has long consisted mainly of bread and potatoes.

Clothing supplies also increased markedly, and their quality was better, thanks in part to unpreccdentedly large imports from the west, which are estimated to amount0 millionuch imports were insignificant in the past. Consumer durables, particularly television sets, refrigerators, and washing machines, were alsoin much greater quantities; production ofdurables rose aboutercent per year, double the rate of increase. On the other hand, services improved only slightly. Plans for housing construction were greatly under-fulfilled as usual, and per capita housing space increasedeter.

Despite the increased flow of consumer goods, inflationary pressures grew stronger. considerable inflationary potential already existed in the economyesult of past policies which provided large quantities of rubles unmatched by goods and services. Per capitamoney income rose moreercent per year, much faster thanercent called for inlan and considerably faster than consumption of goods and services. As in the recentubstantial part of the excess purchasing power was absorbed in voluntary savings; savings bank deposits increased aboutercent per year

. This means, however, that the people expect housing and durable goods to be made in the future.



Adjustments in Overall Targets

48. Although the increaseillion rubles in the announced defense8 has drawn the most attention, the plan and budget fcnfiouncements contain other indications of increased emphasis on military programs. First, Baybakov reaffirmed the original goalsajor increase in national income and. At the sameumber of the0 goals in key nonmilitary areas were pared back (see Either the original

Table h

USSR: Revision0 Plan Goals

National income sf Industrial production Individual products Oi:

Natural gas Electric power

Steel Fertilizer Plastics and resins Chemical fibers

Motor vehicles



Million metric tons Billion cubic meters Billion kllovatt-hours Million metric Million metric


o lUl IU7

o 2U0

2 to


0 Goal

U9 b/




concept, which excludes services, b. CTA calculation from Soviet announcements.

goals are reduced (natural gas, electric power, plastics and resins, and chemical fibers) or the new0 goals are set at the lower limits of the ranges originally set out by Kosygin6 (steel, motor vehicles, and fertilizer).

Not only have production goals been cut back in certain major sectors of industry, but also investment goals for those sectors are lower than those originally set The concentration of the cutbacks outside of the military-oriented machinery industry, coupled with the reaffirmation of tho target for industrial productionhole,lan revision that wouldoost in military expenditures above levelsplanned.

The Soviet planners seem to have sketchedattern of industrial developmentn which production of some key industrial commodities and investment goodssuch as steel, electric power, and syntheticsgrow at slower rates than originally planned, permitting the military-oriented sectors of industry to grow at more rapid rates. Information availableoes not permit the separating out of planned rates of growth for producer durables and military ualitative judgment can be made that the patternill continue.

Brezhnev Agriculturalasualty

6 ambitious plansbeen announced for the production ormajor categories of equipment toof the lackluster record in this areait is believed that8 targetnot be mot. The rate of increase offertilizer to the farms is set8 atthe rate achieved. Theinvestment in agricultural machinery andin thelan may be as muchloss than in the original plan. Inunless there are unexpected andin the allocation of resourceshe initial targets foragricultural equipment and land reclamationas for deliveries of fertilizer willunderfulfilled.


-TOP skcr-ifr


sag in the Brezhnev program forin agriculture may have been agreed on the good-to-excellent harvests of6 and monetary incentives to farm workers hadin these successes, and the Soviethave believed that these incentives weresubstitute for the commitment of It is easy to imagine that theagricultural situationallowingof some grain stocksprovidedleaders with an excellent talking pointplanarger defense budget; at theit is doubtful that agriculturalharp battle at the highest In any case,oals forproduction cannot be met cheaply;real resources will have to be revived ifare to be realized.

Plans for Consumer Welfare

The single clear feature of8lans in the area of consumption is the announced rise in money incomes of the population. Measures to be carried out8 are toillion rubles to cash incomes. Per capita real income is scheduled to increaseercent per year.

In part, the increases in incomes stemage creep associated with rising labor productivity and normal higher growth in welfare payments in the form of pensions and other transfer payments. Nevertheless, the planners are carryingeries of wage and welfare reforms which could nave been postponed. For example, in8 (a) minimum wages of the state labor force will increase toonth, fromubles in rural areas andubles in urban areas; (b) geographicin earnings for workers in remote areas will rise; (c) collective farmers will be allowed

to retire five years earlier; (d) one-third of the state labor force will receive longer vacations; (e) workers makingoonth will pay less income tax; and (f) veterans' disability pensions and sick pay allowances will increase. Over and above these measures, which benefit primarily the most distressed parts of theillion

machine tool operators willpercent hike in pay.

What the new planso not say is how goods and services are to grow to meet the swelling consumer demand. As incomes increase, the demand for more and better quality goods is bound to become more insistent. 8 plan suggests, however, that the regime does not intend to make any appreciable adjustments in the original five-year-plan directives in the area of 0 goals for consumer durables were given in thelan, they stayed at the levels set out in the original planespite the publicity given to plans forof passenger cars, the USSR is barely at the threshold of the automobile age. Nor will the consumer demand be accommodatedong-desired increase in the supply of housing. The new goal for housing constructionercent less than the target carried in the original plan.

The output of consumer goods in industry8 is to growigher rate than other industrialercent, comparedercent. It must be remembered that previous attempts to close the gap between rates of growth of consumer goods and producer goods foundered. The same elements that contributed to previous failures are present now (a) plans depend on an unreasonably high assumption about the receipts by consumer industry of agricultural raw materials, and (b) with investment being pressed down, plans for expanding and renovating consumer industry will be the first to be jettisoned.

Economic Perspective: Two Risks

increased allocation of resourcesmilitary will accentuate the currentthe flow of new industrial investment andthe USSR to operate an industrial plantgrowing older and more obsolescent. technology will lag, (b) repair billsandrowing fraction of output will

be below world standards. The leadership isajor risk in diverting investment resources to military use when these resources may be vital to

maintaining the long-term quality of tho industrial plant.

58. In similar fashion, Soviet agriculture in most years carries out its basic task of providing sufficient calories for the population but needs to moveigher level of organization, technology, and diversity of output. Greatly increased production of meats and other quality foodsarge sustained investment in agriculture. This investment, whichecessary butufficient condition for growth, was provided for in the Brezhnev program. Thecuts in this program represent the second major risk taken by the leadershipnamely, that future gains in agricultural production are made more precarious.

Original document.

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