SOVIET ECONOMIC PROBLEMS AND PROSPECTS (NIE 11-5-67)

Created: 5/25/1967

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CIA HISTORICAL REVIEW PROGRAM RELEASE IN FULL

NATIONAL INTELLIGENCE ESTIMATE

7

Soviet Economic Problems and Prospects

OF CENTRAL INTELLIGENCE

Concurred in by (he UNITED STATES INTELLIGENCE BOARD Ai indicated overleaf7

Authenticated;

olv-im. i

ihe (allowing i' telliuemehe piepaialian of this estimate:

Ine Cer.iroi hnciiigor.ee Agency ond 'ha inlanir.aloni o' 'he Depo'i. merit of Slate ond De'entc. ono Iho NSA

Concurring:

Adm. Ribs I Taylw. Dep-jiy Director o' Conirol frtielltgeri* Mr. Ihomai I. Hbgkev fhe Olrcc'or ot Mull gonce ond Research. Deparimeni of Stole

o'-oll, Direcor,eo. Morvioli S. Curls',octor. Nolionol Sflctf'iij Agency

Abstaining*

Mr. Howardhi* Af.olunl General Manager, A'omit Energy Can', minion end Mr. Williom C. Sirllivon. the Aii-iiani Pi'ec'or. federal Rttcav cl Inveiliga'oi. lhc subject being ovl-.idc or their priidkiio-v

lot releaseth*EVIEW PROJ.W. Ji th* Central Intelligmc* Ayarxy.

CONTENTS

1

3

GENERAL PERFORMANCE

3

PROBLEMS AND PROSPECTS

5

Reform

5

.. fi

7

and Space Spending

7

Standards

8

and Prospects

10

FOREIGN ECONOMIC RELATIONS

12

wiih the litdustria! West

18

Relations with Eastern Europe

13

and Trade wiih Ihc Third World

14

POLITICAL IMPLICATIONS

16

SEjRET

SOVIET ECONOMIC PROBLEMS AND PROSPECTS

SUMMARY

some years of slowdown iu its rate of growth,ood yearross national productanercent. Though much of this gain wasfavorable weatherecord harvest, the leadership canfor some of the improvement. Hut last year'snotarbingerurable upward trend.problems remain in on economy which uses resourcesand is still backward in many sectors.

leadership has been trying toeturn to theof growth which prevailed ineform ofstructures, planning procedures, and incentive programs.of enterprise managers has been strengthened, andon the use of capital and new success indicatorsand profitability) have been introduced. While suchimprovements, the reform programhole is antimid responsearge problem; the leadership isore thoroughgoing reform might Jeopardize its

share of GNP devoted to defense and space spendingin recent years, but the burden on the economy hasresource demands arising from research and developmentproduction of advanced weapons systems have used highand top-grade materials faster than the growth ofcan comfortably support. We foresee no real casingstrains. Moreover, total military and space spending willincrease through at0 al about the same rale asin total output.

SI

artly us it consequence, living sUtiulmilsikely to rise only veryMuch nf the planned growth in per capita real income is dependent on Imosts in productivity winch may notFurther, as in the past, consumer program* arc likelymong the lust to suffer if plans go awry in higher priority sectors.

goals of the current Five-Yearillaverage annual growth rates comparable to those ofercent in industrial production, amiercentoutput. We estimate thai industrial output will lieshort of its target, and that thc annual growth ofwill fall somewhereencil! (assumingOverall growth (CNP) may achieve mi animalercent.

Soviels view trade with lhe industrial West as anmeans toovercome backwardness in certain sectorseconomy. They arc likely lo continue their drive for anof this trade, which has more than doubled over the pastTrade with the West will almost certainly not climb atrapid pace characteristic of thehough it willincrease atercent per annum.

steins doubtful that economic issues will soonmajor unsettling of the political scene. The currentappears to recognize lhat the USSR's economic problemscomplex and not susceptible to quick and easyShould the round of reform and adjustment which hason for tbc lasl two years or so ultimately fail, however, aof lcadeiship struggle over economic policy is entirely possible.

condition of the economy does not at present cam-marked implications for Soviet foreign policy; amplecontinue to Ik- available for supportarge arms effort,and other instruments of external policy. The Soviethowever, to be preoccupied with (heireneral .sense wish to avoid involvements abroad whichnew economic burdens.

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DISCUSSION

L After some years of slowdown in its rate of growth, ihe Soviet economyood yearor several years lhe Soviet leaders have been struggling, sometimes with each other, to devise ways of overcoming the slow-down, since their plans both at home and abroad dependontinuing high rate of advance. In part, their problems are those of success. The economy has grown so large and complex that lhe traditional command methods of planning and direction arc no-longer adequate. The improved performance0 probably owes something to measures thc leadership has taken, but it owes more to record cropsnusually favorable weather. Thefor the future is whether the leadership will be able to devise policies which would rctum the economyigh rate of advanceustained basis.

I. GENERAL PERFORMANCE1

During theears of this decade, the average annual growth rate of the Soviet economy fell toercent, down fromercent in tho lasl hall of. This significant decline can be attributed pii-inarily to the sharp drop in the rate of growth of productivity. In, the growth in thc productivity of labor and capital (plant and equipment) averaged moreercent each year, and this alone accounted for about two-fifths of the growth in total output! In the first half ofs, however, gains in total output were attributable almost entirely to the growlli of labor and capital. of actual manhours, plant, and equipment. (See

'lhc precipitous decline in growth ot* produclivity was the consequence of several important developments:arked slowdown in the pace at which new and more modern plant and equipment was introduced;elays and difficulties in the utilization of newdesign and assembly work, shortages of educated and trained operating personnel, organizational shortcomings; (c) Ihe continuing drain of highly skilled men and top grade materials by Ihc defense effort; (d) Ihe increased cosls ofmodernizBtion and innovation as lhe economy advanced; and (ei

'Although wc accept most of the Soviets' official commodity Malijifcs, wc do not accept Ihcir aggregate imiuw of growthor notional income and industrial ouipui I. or ibeir tlaliitiw on agricultural output, which we believe are lubstantially overslaled. The aggregates and thc agricultural figures used in thu eMimatn were calculated by CIA and accepted by the intelligence community.

lUtei ol growth and other Itatfatkal coiupinsocis io tltc ultimate lucetarried oul numcJlcally to the degree required to main- valid wrupoiiioiu. The present* tfcm of the data to tlie first decimal point, however, does nirt neceisanlyomiJiirable degree of nccurncy in either the absolute leveliven value or in tlw absolute dJfleicrKc between iwo values.

'Die base year used in deriving average annual rate* of growthllie yoar umcding the given year or period.

3

USSIfe Avenge Annual RrttsGrowth of SI

growing confusion. iiieaficiciKV, nnd unw teldiness of industrial and agri-cultural administrativecouibwwd with continued shc*tcoaungs msyslnns and in f evaluating economic progress.

utlculitiom indicate lhal lhe growth of productivity xceeding somewhat thc high rate characteristic of.

and markedly advancing ovrr tliat ol the first half of tins decade. This was reflected iii an impressive gam ofXTcent in industrial productionecord output in agriculture Tlir resultise in GNP ofercent compared lo lesscicent5 (and an estimatedercent in the US. Much of this gain was undoubtedly due simply to fortunatewctihrt and nn unusually good harvest. It does not necessarily follow that tlie lHfifi performanceaihingerurante upward trend in the economy: many wqious problems remain.

II. PROBLEMS AND PROSPECTS Economic Roform

dissatisfaction with the peiformauoe of the Soviet5 to anremier Kosyginomprehensiveof reform.eriod of sever.il years, the administrativethe economy is to be revamped at both the national and enterprisesystem ofo bed. and the methods of gaugingproviding incentive* are to be recast.

6 Within thii broad framework ol reform, several specific rneasorei arc bemg put into effect: (a) the old Khroshche*lan system of management through regional ecooomic councilihas been abolished and replacedentral structure consisting ofndustrial ministriesowerful planning commissionb) the authonty of

enterprise managers

over the use of their labor and working capital has baen strcngtlienod. and some can now develop limited contiaetual relationships with customers; (c) the number of centrally determined plan assignments and the detailed specifications accompanying them have been Milrstai it tally reduced; (d) the old successgross value of output and unitencouraged managers to stress sheer quantity al the expense of quality andbeenby mote meaningful Indicators, including sales and profitability (return on fixed plus workingow Interest chargeercent on thc use of capital lias MOB introduced; and (f) prices, particularly industrial wholesale prices, are beinglo review and arc scheduled to be brought into line wiih average costs of production, which, for the first time, arc to reflect charges for the use of capital.

he Soviet press has devoted considerable attention to the progress ol the economic reform, reporting both the victresses and problems of irnpiernenla-tlon. Enterprises which now function under tbe new system (somefor aboutercent of total industrial output) are said to have scored gains in sales. proSls, and labor productivity considerably greater than ihow

5

foi industryhole. (Most ol These enterprises, however, performed better than ind us tryhole even before theirn the other hand,publicly discussed have included bureaucratic foofdragging and meddling, the inefficiency of thc banking system, thc nonfulfillment of contracts by suppliers and customers, and inability to spend accumulated funds for capital improvements becauseack of plans and shortages of manpower and materials. On the whole, Ihe -Soviel leaders have appearedatisfied with the initial results of Ihe reform, though they remain committedautious and piecemealof many of its features.

Thc economic reform contains some measures which may representimprovements over past practices, and clearly some progress is being made in its implementation. Rut tin; new program is less liberal and less ambitious than some now underway in Eastern Europe and Ls, in fad, antimid responsearge problem. The Soviet leaders are clearlyabout economic dislocations resulting from reform and, more important, thc possible loss of political controls.aint but audible theme of the reform Isouch of Ihe marketnew system remains tightly circumscribed by thc old. Indeed, thc principal attributesommanddirection and planning of production and centrally determined priceand are intended to remain, fundamentally unaltered.

In thc long run, as die current reform proves to be inadequate, as gains in efficiency turn Out to be marginal or temporary, dissatisfaction (already voiced by some academic economists) willew round ol reform proposals would tben probably become lhe subject of controversy within thc leadership.

Industry

LO.ercent average annual rate of growth of industrial output during the first half of this decade was considerably lower than the rate maintained inronounced decline in thc growth ofin industry seems to have been primarily responsible. But Soviet industrial production rose by anercent last year. Productivity was up, perhaps largely as thc result of thc assimilation of new capacityaster pace anil more efficient maimer than has generally been thc case in the past.

hc current Five-Yearalls for0 percent rise in both industrial output and investment. Tlie investment target for industry is aboutercent rise per year, and thc planned annual increase inIs lessercent. Priorities are assigned to the development of lhe chemical, metallurgical, machinery, oil and gas, and electric power industries. The output of many consumer durables ii to be boosted substantially; theof automobiles, for example, is to be5c believe that industrial productivity and output will grow at faster rates than in the first half of, but will fall somewhat short of plan goals.

6

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Agriculture

gricultural production in ibe USSH in theveraged someercentllwI. But during thc first half of ihuer kid tn which both incomes and expectations grew appreciably, the average annual output wasercent above thai ofeceding Eve-year period and.er capita bub, was only aboulercent highei.. the average annual net imports of grain equallederceni of domestic output, a* against net exports of anercentncreases in crop and livestock production6 have, of course, al least temporar'ly reversed lhe tientl Inward agricultural stagnation. Overall im'I output grew hy an estimatedercent and both (he grain harvest and tho output of meat and milk reached record highs- (Grain production totaled anillion metric tons, upillion5illion)

current Five-Year Plan calls for agriculture to receive twice lheit didrowing share of total investment;ercentviercent5 (comparedercent In the 1'Sf farm machinery are sclietlulcd lo increaseaster rale,is lo double, the area of reclaimedo espandhird,are lo be iwovidrd with additional financialhaih somewhat behind schedule; both investment growth and thefarm machinery are running liehind rates necessary lo meetonsiderable progress has beenost areas of theweatherB was no doubt ptunariry responsible for the bumperlhe greater avauabdily of fertilizers and the introductionarietyfor the farmer probably coatrilxited in an important way to lheoutput. Assuming normal weather and no slackening In the determinationregime, we estimate lhal agricultural production willo 5during lheloseercent average annualis required lo meet plan targets.

Defense ond Spoco Spending

several years of relatively modest Increases, total Sovietand space expenditures rose sharply6 and will probably showincreaseore thanillion rublesomeercenithe figurehough lhe share of CNP devoted to defensespending has actually declined in0 lo Ireurden on the economy has notcased. There hasignificant shift in the composition ofexpenditure, away from emphasis on lhe rrlatrvery simple wants ofpurpose forces and toward the complex requirements ofD) and lhe strategic forces. Thus eapendilum forand space rose fromercent of total military ando aboutercentnd thc share devoted lo strategicstrategic defi'iiw increased Iromerceni each louring the tamo period. Thc volume of resources devoted lo general

SnEl

' lorces lia* rcmauied rooglily couslani for lhc past six ycais, althoughhare of lota! expenditures gisrn lo these forces lias ileclined from aboiHeicent1 to an estimated 2ft7 (See

he military has been preemptingtility manpower and top-gradeiffv and materialsaster ratr than the general growth of economy can comfortably support. Tin- resources needed by advanced mill-tary and sjMce programs aie also those most wanted by live civilian economy. Soviet industry and agriculture, for rumple, aie In urgent needro-grams, Iml military and space requirements draw off the best scientificami Ihc bulk ol the hinds allocated for such puqioscs Similarly, civilian industry is in great need of modem, technologically advanced productionbul (Ik- machine building industry, which ii responsible for satislylng such needs, also bears ihe hrunt ol Ihc production ol advanced weapons systems The sagging rotes ol growth of output, investment, and productivity In industry as aiiartly restored inin part be attributed to the impact of military and space-.

iliiary expenditures through WAS9 arc already fairly wellby progiams in progress. Expenditures will continue to reflect the rapid pace and huge number of advanced programs being pursued simultaneously and the mainien.init:trong KM) effort. Trends9 will reflect in part decisions no! yet made. Then' will reflect the Soviets' appraisal of US policies, then- view of tbeorul climatehole, and in particular any US military involvements at thai time, and to some extent, iheir evaluation of the impact of military spending on the remainder of the economy. Our best judgment al this time is that Soviet military .ind spaceillionill grow to someillion rublesn general, these increases in military expenditures will be more or less in line with the rise in total Soviet output, but will continue to take resources badly needed in other sectors of tlie economy.

Living Standords

he standard of living ol thc Soviet peoplehole has br-cn growinglow paceSeeer capita consumption of goods and services nearly doubled0fi but almost two thirds of that increase occurredonsumer-oriented investmentin agriculture housing, consumer goods industries, and services) grew onlyercent annually in the; it grew aboutercent'ams were registeredspecially in thc consumption ol both solt and durable goods, but the completion ol new housing was up byercent (comparrdlan goalevelopment in income distribution which may have important long-term social and economic eilccts is the marked improvement which is occurring In earnings of thc rural population. The regime believes that removal of thc vast disparity in living standards between city and country will help to promote productivity inon which so much in current economic plans depends.

SE#ET

iving standards are likely to improve only gradually over the next several years. The leaders have promised lheeller deal, and have made some moves in this direction, but Ihey have also bluntly stated Ihnt gains in consumer welfare schcdulrtl in (he Five-Year Plan are contingentesumptionhigh growthroductisity. Mudi of thc phnned. fairly substantial growth in per capita real uirome is scheduled to come from increases in bonus payments and is thus abo dependent on boost. In productivity. Moreover, .is in thc past, consumer programs are likely to be among the first lo sillier from short-tails elsewhere in the economy.

Plans and Prospects

1ft The draft directive of the Five-Year Planhow- lhal the present leaders have set thrir sights on regaining the economic rnorifentum of. Tlse current Five-Year Plan has not been formally approved and may yot be extensively revived, but, as initially outlined, calls for or implies average annual growth rates comparable In those of thepercent inercent in industrial production, nndercent inoutput. These goals, while scaling down those0 first put forward by Khrushchevrc nonetheless ambitious andtbe planned rales of increase in investment and in employment are relativelywillapid resurgence in lhe growth of productivity, they Jumped from the average annual rate ofhe first half ofoercent in the last lwlf.

n general, the outlook for the progress nf thc Soviet economyhole will depend on how successful the Soviets aie In modem ning both their means (their work force, their plantipment, and thc enksency of their invest-mcDt) and Iheir methods (their allocation of priorities, structuring ofand provision ofs indicated. Ihere are as yet few signs Ihat the Soviet economic system is about to be transformed into an efficient. Ilexihlc, and responsive instrument. Moreover, some of the element! responsible lor thc rapid growth rale ins can no longer provide as much stimulus to growth al lhe present stage of the economy's development.

n those areas, generally the basic industries, where Soviet technology has been approaching the more advancedthese areas account lor much of manufacturedis no longur possible (as it was ins) tu greatly increase output simply through thc introduction of Western technology. Moreover, it Is no longer possible to effect rapid Improvement in the average age of capital stock and in Ihe skills of the working lorce. Finally. In thc years ahead, the USSH will find it difficult lo maintain lhe rate of growth of Iota] inpuls lo thc economyercent)hc pattern of growth of these inputs suggests, inise on thc order ofercent per yearroductivity, on lhe other hand, should improve over the*ange of from moreercentercent annually appears reasonable. Together, this productivity rate and the postu-

hied growth of inputs would permit an average yearly rise in CNP ofercent.

III. FOREIGN ECONOMIC RELATIONS Trade with the Industrial West

One partial answer the Soviet leaders have soen to the economicwith which they have been coping in recent years lies in the development of their external trade, especially with the industrial West. Thc economic and technological backwardness of certain sectors of the economy results in part trom its relative .isolation from thc more dynamic Western economies. The push the Soviets have tried to give to their trade with Western Europe in recent years, as well as to scientific and technical exchanges of all sorts, reflectsof this fact. This emphasis seems likely to continue as pressiues mount for modernizing the unevenly developed Soviet economy.

Trade between the industrial West and the Soviet Union has more than doubled over the pastears. This development reflects notoviet interest hut also more generous credit terms provided by West European states as their inlerest in this market grew, partly lor political reasons.his trade amounted toillion, aboutercent ofillion total of Soviet foreign trade turnover. Tlie USSR's hard currency deficit, someillioneclined to0 millionales of gold to Offset these deficits dropped by comparable amounts,0 million4illionith thc improvement in Ihe USSR's balance ofposition, orders for Western machinery were greatly increasedhese orders, which had fallen off sharply4ecord high of0 million, nearly half of which was involved in Ihe purchase oi an automobile plant from Italy's Fiat. Payments on most of these orders will not beginumber of years.

The USs share of Soviet trade with the industrial West is small; It amounted toillionercent of total Soviet foreign trade turnoverercent of US trade. The USSR would probably like to sec trade with Ihe US increase, particularly if there wore some relaxation in US embargoes on such strategically useful items as computers, advancedtools, and microelectronics. But most Soviet raw materials exports are not very attractive to US importers. Moieover, much of the machinery and equipment the Soviets are interested in is normally available from Weslern Europe and Japan at lower costs and more favorable terms than from thc US. There thus soems to be little likelihood of any significant increase in US-Soviet trade.

Lack of suitable export goods will also continue to limit the growth of Soviet trade elsewhere within the industrial West. Thc West European market lor Soviet coal, oil, cotton, and timber products Is limited, as are world markets tor Soviet ores and metals. Soviet manufacturedbadly made and poorlycompete with domestic manufacturers in Western

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Europe. Even Soviet agriculturaln succ union ol good crop years make the USSHetncounter protedionut barriers in Western Europe. Accordingly, Soviet trude with (he industrial West will almost certainly not climb at llie very rapid pace characterisite of the, though II will probably increase at about 6nt per annum. Given their present trade policies, and assuming no new irwnei ui grain production, the Soviets should be able to keep their hard currency deficit withinproportions over the nest few years. In tliH case, thru goldwhich sank to an estimatedillion Ingradually rise.

Economic Relations wiih Eastern Europe

Although tin- absolute value of East European trade with the industrial West has uicreasod greatly over the pastears9 billion5$ billion. il lias not done so al thc expense nf the Soviet Union, whose share uf KaM European loielgn trade has remained relatively stable.6 Soviet tinde witb Eastern Europe amounted2 billion, abouterceni of total Soviet Imeignurnover. Moscow's attitude toward the expansion of Eastern European trade with the Weslen equivocal; tbe Soviet leadership has seen lwnefits in expanded trade and has done little to discourage il But lhe dangers of political entanglement and economicwithui CEMA have also been apparent to Soviet leaders, and they have cautioned their allies not to go too far loo fast.

Under Brezhnev and Kosygin. the Soviet Government lias itself stimulated Eastern European interest In trade svith lhe West by harder bargaining with its Eastern European partners Moscow has come to lealire that the rising cost of extracting and transporting many of the raw materials it has traditionally exchanged lor Easi European manufactured goods has outstripped lhe cost of producing such goods in Ihr Soviet Union. One eoiisrqiience of Ihishas been Soviet Insistence on new pricing standards in Soviet-East European commodity trade, substituting prices based on high Soviet production andcosts for the system of world markoi prices used earlier. They have also sought Eastern European investment lunds for tho expansion of Soviet raw materials industries. Tlie net effect of ihis new approach, if il comes into force, will probably be to make trade wiih non-Bloc partners still moreto thc East Euiopeam lhan it now is. particularly in lhc areas of com-modifies and raw materials imports.

Nevertlieless. in thus pursuing its own interests, the USSH runs no serious risi of losing its predominant economic position in Eastern Eorope. The price couccssiom demanded by thc Soviet Government areat lhe expense of Czechoslovakia and East Cermany. Three-quarters of Soviet net exports of raw materials and semimanufactures lo Eastern Europe go to these Iwo countries. They arc so dependent economically on lhe USSR lhal Ihey have only bmited leverage in resisting Soviet lerms. Thc other four countries are not greatly affected by the new Soviet priceulgaria and Rumania, in fact,them because their Own trade would benefit. Moreover, the USSH has

Wealed Itnlgana. Hungary, nnd Pokmd quite generously in the tumnit tmdc agreement, in part surely In discourage them Irom following in tlte footstep* of Itumanii.

Tw Soviet leadership appears tohat the trend toward looser economic and political ties wKliin the Soviet Bloc will not be reversed. It hopes, however, to be able to slow the process and to set limits to il. The Soviets also recognize that an extensive development of Eastern Europe's rclnlium with the West might stimulate more independence in the policies of these Mutes than Moscow wants to sec. They lire .ilrcidy concerned, (or example, hy Rumania's growing trade and political ties in Western Euiope. and the asserii veriest toward Moscow which lias accompanied them. On balance, however, we do not think tbc Soviets will find some further growth of Eastern Europe's trade with the West fundamentally Intompahblc with their Own long-term intcicvlv. though tbcy will remain concerned to preserve their own political and economicin the area.

Aid ond Trode with lhe Third World

be USSK lias extended aboul ir, billion in economic aid to someountries oi the underdeveloped world In Ihc same period, Soviet military aid extensions have totaled an3 btflion, (Seehile most ol the military aid extensions have liecti drawn5nly shout one-third of economic aid extensions had been drawn by the closend the net costs to the USSR arc being steadily reduced bv debtor repayments0 million lias lieen scheduled for repayment souch of this cost. however, may never beexample, liy Indonesia, tlie UAR. and Ghana.

Brezhnev and Kosygin hase maintained the essential features of the foreign economic assistance program pursued under Khrushchev. Extensions of new aid reached their highest annual total (mora llumillion)4 uuder Khrushchev, but did not dccllno substantially56wo-year total oi7 billion was committed The new leaders did, however, make sonve changes in their appioach to the program. Specifically, ihey began to handle foreign assistanceore deliberate fashion, abaridoning die practice of extending large umbrella type iredlts before specific projects went negotiated. They also began to take advantageore receptive attitude toward Soviet aid in certain countries peripheral to the USSK (Turkey. Iran, andithout, however, neglecting Interests in such other favored recipients as thc UAH and India.

In point of fact, lhe Soviet aid program represents no significant but den on tbe Soviet economy. From lime to lime, specific industries. Ihe heavyluiomcnt industry) in the USSR may fed the pressure of loreign aid deliveries, but al no lime have lhe costs of these deltvenex amounted to moreercent ol the Soviet CNP,ore typical annual figure would halve thai. Extensions ol aid in lhc next few years will probably

SBpftET

iollow pastuduating hem year to year with political circumstances and the demands of certainrawings on aid are likely to rise from0 million average of recent years lo0 millionhe schedule of repayments rises from5 million50 million0 anil is expected to almost double in Iheears. At thc -same time, the Soviet aid program has stimulated Soviet trade with aid recipients. This now Accounts for nearlyercent of all Soviet foreign trade, and it will probably conlinuc to increaseate of aboutear over the next few years.

IV. POLITICAL IMPLICATIONS

All Soviet leaders are inclined to look on the USSR's economy in terms of its political assets and liabilities, ils strengths and weaknesses as the nltunatc source of thc state's power, and its capacity to sustain high national purpose and ambition. But such questions as how best to insure the economy's vigor, how much emphasis to attach to one or another economic program, and how to proceed with the allocation Of investment priorities have long been abrasive issues in leadership politics. Khrushchev often faced opposition born in part of conflicting attitudes toward precisely these questions. His economicwere opposedariety of vested interests in thc military and heavy industry bureaucracy and among economic managers and party ideologues, not to mention among his own immediate colleagues. This opposition figured strongly in the coup that brought his downfall.

After Khrushchev's fall4 there appeared toonsensus within the top leadership on economic policy, at least on the point that no quick and dramatic solutions to thc problems that had arisen were possible. This has apparenUy reduced controversy andendency to make bureaucratic compromises which sidestep contentious decisions. Thus the leaders appearto try lo appease Ihc appetites of the miliiary and lhe steelmakers, hut so far they have been unable to agree even on the final version of the Five-Year Plan, and haveumber of painful decisions simply by assigning high prioritiesroad variety of competingnational defense, developing heavy industry, raising agricultural production, modernizing Industry, and improving thc lot of the consumer.

ndividual members of the leadership, cither because of particularinterests or because of special political considerations, Or both, haveidentified wiih particular attitudes and programs. Brezhnev, for example, has associated himself most closely with agriculture, defense, and heavy industry. Kosygin, on the other hand, is certainly the most ardent exponent of the need for industrial reform, for which some party and central governmenthave shown little enthusiasm. Politburo meml>er and First Deputy Premieronsistent champion of agriculture, has recently hintedajor area of contention by assailing as "extremely dangerous- the notions of "some comrades" who believe that last year's successes in agriculture nowiversion of resources to other areas of the economy.

hile economic issues willtrnuc loentral plan' in tlie preoccupations and debate* of the leadership, tl seems doubtful that they will soon produce another major unsettling of the political scene. There are several lactam which may he working In limit thc polilical Impact of economic contra-versy. llie economy has recovered fiom Ihe near-crisisnd It* jirob-lems, though still serious, aie no longer so acute Moreover, the leadership appears lo have learned fiom Itswith Khrushchev lhat many of the USSR's economic problems are trenrasdoush/ complex, tbat official doctrines may obstruct the search for lohjtiom. and thai impulse and demagogucty are likely to create additional difficulties. Finally, the increased involvement of institutional elements in the decision-makinghe growing role of nonparty vested interests, may haw thc effect of broadening the nature of high-level discussion, widening the circle of those influencing policy, and removing Irom the debates some of the element* ol purely party infighting.

evertheless, should tbe round of reform and adjustment which has been going on over the last two years or so fail ullimately to achieve the results hopedenewal of leadership struggle over ecooomic policy is entirely possihle. The ambitious aims which Soviet policy pursues externally and the extensive array of unmet needs In the internal society will impose severe sua ins on available resourcesood many years to come. Ifproblems should lakerisis character again, more radical solutions, carrying implications of change tor political institutions as well, mighto be entertained. In suchhe struggles within the party and the competition of power at the top, always present in the Soviet system, could become much more acute than Ihey have been in recent years.

3S. Thc condition of the economy does not at present carry any very marked implications for Soviet external policy. Thc Soviet leaders appear to bewith Iheir economic problems, however, andeneral sense they apparently wish to avoid Involvements abroad which would bring newurdens Nevertheless. IKe economy prohabiy does not imposeon loreign policy ui Ibe sense that tbe Soviets are foregoing particular initiatives in that field primarily for economic reasons. Ample resources will coniinue lo be available lor supportargo arm* efiort, foreign military and economic aid, and other instruments of loreign policy.

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ol NSA, for -he Nolionol Secb.it, Agv-.K,

i'oitot of Central -Vo'cue.or any other Dc-narlmonig*rcy

document moy be returned, or destroyed h, burning us accordancesecurily regulations, or returned to the Central Intel Ho* rue Asjs.ic,with Ihe Office of Ceoiro! Reference. CIA.

3 When Ihis doeunent is di;sevhatod oveneos.rsea* recipients moy reloirt ileriod <io'ear. Al theof Ihis period, the document should either boelumed to tl* rorwaiding agency, or pvr-mission should be requested of Ihc forwarding agency to retain it in oeconJonio wiih1

A The 'ills oi thisn usvd sapoiaiely fron the text shouldt 'e"HMi'H tiia.aiiw

OtSIWBUTION.

While House

Nolionol Securily Council

Deporiment of State

Deportment of Defense

Atomk Energy Commission

Federal Bureau ol Invest tgoriou

Original document.

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