SOVIET ECONOMIC PROBLEMS AND PROSPECTS (NIE 11-5-65)

Created: 1/22/1965

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NATIONAL INTELLIGENCE ESTIMATE

)

CIA HISTORICAL REVIEW PROGRAM RELEASE IN FULL

Soviel Economic Problems and Prospects

ihe

DIRECTOR OF CENTRAL INTEUIGENCE

Concurred In by lhe UNITED STATES INTEUIGENCE BOARD Ai indicated avwltal5

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NATIONAL INTELLIGENCE ESTIMATE

Soviet Economic Problems and Prospects

mis dcciaenx has been aopiovcd for release through the" HISTORICAL REVIEW PROGRAM of. the Central Intelligence Agmcy.

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SE^ftET TABLE OF CONTENTS

Page

SUMMARY AND CONCLUSIONS 1

DISCUSSION 4

I. GENERAL 4

II. PROBLEMS OF THE 6

Background and Policies 6

and Performance in Key Sectors of tlie 7

Agriculture

Industry and Indushrial

The Chernlcfll

Military and Space

Foreign Trade

Foreign Aid

Organization and Management

IH. THE CURRENT ECONOMIC SCENE AND SHORT-TERM12

Policies of the New13

14

Performance 15

IV. LONG TERM OUTLOOK IS

Long Term ProblemsIS

Spending and Economic Crowth17

and Economic Growth .. 18

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ANNEX A

Page

Tabic 1 USSB: Indicators of Economic

Tabic 2 USSR: Average Annual Bates of Growth in Industrial Production,

by' Branch of2

SSR: Production and Annual Rates of Growth ofod Plans3

Table 4 Soviel Defense Expenditures, by Category of Expenditures for

Selected 24

Tabic 5 USSR: Method of Financing the Soviet Hard Currency Deficit-.

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SSR: Estimated Medium-Term Credits Furnished by theWest.25

Table 7 USSR: Production, Disposition, and Reserves of. 26

SSR: Average Annual Percentage Growth in Pernd

ANNEX B

Follows page

Figure 1 USSR: Growth in Cross National Product. Product In Industry.

and in

Figure 2 USSR: Indexes of Net Agricultural Production, Population, aad

Production of Bread Grains (Wheal and

SOVIET ECONOMIC PROBLEMS AND PROSPECTS

SUMMARY AND CONCLUSIONS

USSRowerful economic base and thefor further development. Its GNP has grown bypercent in the past decade and is now about half that of theachieves rapid growth in industrial production especially inandostly modern military establishmentto that of. )

in terms of annual growth, the Sovietbeen slowing down across the board for thc past six years.key sectors, such as industrial production, the decline inhas been appreciable. In others, such as investment, it hasand in still others, mcluding agriculture, there has beenno growth at all. (Para. 4)

general slowdown in growth rates, in part the resultexpenditures on defense and space programs, has ledyearsomewhat more sober official appraisal of bothcapabilities and prospects. It has also been accompaniedcontroversy within the leadership and by intensefor resources among various civilian and militaryof this nature were greatly complicated3 by awheat harvest and were at least partly responsible inthe decision to remove Khrushchev. )

the new Soviet leadership has come out publicly ina more consumer-oriented economic plane expectchanges in economic policy in the coming year, in partthe collective leadership is likely to temporize over hard choices.

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More rational attention may be devoted to the feasibility of various goals, however, and some further organizational changes are almost certain.

production5 could increase by asseven percent, compared to about six percentweather, agricultural production5 might exceedthe very poor3 by up toercent.

fundamental problems as the overcommitment ofinadequate agricultural production, and slower growthbe dodged over thc longer term. One of the principalmust sooner or later be faced is the question of defenseand its effects on other sectors of the economy. Wc believenew regime desires to restrain the growth of defensethat the new budgetontinuing tendency towardoff. Wc estimate lhat. barring imporlant changes in thesituation, major changes in Soviet defense spending inare unlikely, but that such spending will edge upwardyears ahead. )

Soviet military and space programs throughgreater requirements for highly skilled engineerscomplex machinery, and high-cost materials. This isof defense spending which hampers efforts lo raisethe civil economy. Even if defense spending were to increasemuch as one fifth during this period, however, thc Sovietshoulder the burden and al thc same time gradually Improveand lechnology of industry and thc standard of living.the other hand, defense spending were to decrease slightly,requirement for these scarce resources would he littlefrom thatn these circumstances, with anof these resources, made available by general growth, thethc civil economy would be eased.

marked decline in thc rate of return on Investment9 strongly suggests that notajorresources and thorough-going economic reform would be likelythc high growth rates of. The range offor Soviet CNP which seem realistically possible throughfrom four to six percent annually. .The Soviet leaders will be dis-

appointed byate. As problems continue and even mulliply. and as shifts in domestic politics and on thc world scene occur,may grow and one or another leader may come to advocate new and far-reaching programs calculated to attract support from other leaders and interest groups. Whatever the shape of future political contention, or its outcome, economic policy willey issue.

I. The picture is different if Soviet economic prospects are viewed, not againsi the ambitions of thc leadership, but against the performance of other developed economies. An overall growth of four to sixannually during the remainder of the decade would stillespectable achievement. Under any likely scale of priorities, the USSR will be able to strengthen an already formidableigorous space program, and provide resourcesoreign aid program which can help to maintain and extend Soviet influence abroad.

DISCUSSION

I. GENERAL TRENDS

he USSRowerful economy and the necessary resources for further development. Its CNP has grown by someercent in thc past decade and is now nearly half as large as that of tlie US. Itostly modern military establishment second only lo that of the US, and achievesin Industrial production and technology. Over the past decade industrial production has doubled and is now nearly half that of the US. By US standards tlie lot of the Soviet consumer isper capita consumption is less than one-third that of theby his own past standards, and by the standards of allew nations of the world, his lot is tolerable.

% In some areas of economic effort, thc USSR has made particularly notable progress over the past decade or so, especially where the leadership has chosen to concentrate resources and effort. Traditionally, heavy industry and thesupporting thc military establishment have been given priority emphasis, and they have achieved some excellent lesulis. For example, steel production has grown rapidly, reaching someillion tons4 or aboutillion mote tons thanimilarly, oil production reachedruwoo tons4 orillion more tons thanhese records have been attained concurrently with impressive programs In thc military and space fields which have also required the use of great quantities of resources and ofiderable technological skill. Thus, though it has fallen short of many ambitious goals, the Soviet economy has done quite well In many sectors of greatest concern to the leadership.

Nothing on thc domestic scene, however, has so consistently agitated tbe Soviet leadership as the question of how besr and for what purpose to use the economic resources at its disposal. This problem,road array of sensitive political Issues and touching on the prerogatives and aspirations of all the major interest groupings in the society, has become the subjectreat and widening controversy. In this situation, Khrushchev sought at times tooordinator and compromiser of disputes, at other times toeader and an innovator of policy, but he was frequently unable to resolve the controversy or to proceed resolutelyrogram of his own.

Thc removal of Khrushchev, however, docs not in itself resolve theor provide his successors with ready solutions to their principal economic problems. The rate of growth of the Soviet economy has been slowing down across thc board for the past six years. (Seen some key sectors, such as consumption and Industrial production, this decline has been appreciable. In others, such as investment, it has been sleep, and in still others, including agriculture, there has been virtually no growth at all. At thc same time, there

hasairly consistent and impressive rise in defense expenditures and this has contributed substantially to the slowdown in thc advance of thc economyhole'

his general slowdown in growth has comeime when the country's resources have been asked to meet an unprecedented array of ambitious and competing objectives. In the optimistic spirit of thc times. Khrushchev8 issued his call for economic competition with the West, promised his own people dramatic advances in living standards, further committed himself toarge-scale foreign aid program,egan to increase thc allocation of scarce resources to thc USSR's modem weapons and space programs. The difficulties since encountered in the effort to fulfill Khrushchev's grand design for thc economy have had an Impactroad range of Soviet policies, both foreign

Internationally, the USSR's inability to meet its well-publicized goalsits prestige. These difficulties have also contributed to the relative restraint of its foreign policy toward the industrial West, thc potential supplier of advanced machinery and credits. Within the Communist movemeni, Soviet economic policies have been attacked from both left and right; attempts to gain greater managerial efficiency and to increase the quantity and quality of benefits for consumers have been challenged by the Chinese as manifestations ofcapitalism,'* and derided by some Western Communist parties as vacillating and insufficient. Internally, the economic situation has led to considerable disagreement among politicians, planners, and military figures, and fosteredeconomic discontent and political skepticism among tbe people at large.

As time went by. Khrushchev became increasingly concerned about the progress of thc Soviet economy, and the impact on It of rising military costs. For the most part, however, the Soviet leadership was unwilhng or unable to face up to its economic difficulties in an effective way; it relied, Instead,on political exhortation, patchwork programs of administrativecompromises between contending points of view aboul resource allocations, and demands for ttie exploitation of what it calls "hiddennly in thc past year or so have there been some signs that thc leadership, especially Khrushchev, was prepared to deal more decisively with some of its problems. Khrushchev, in the period immediately preceding his removal, may finally have tired of debate and delay. His remarks to farm audiences In August advocated Individual responsibility for specific crop areas, and his last appeal in Septemberonsumer-oriented long-term plan suggested that hc had decided tothe doubters and dissenters in order to push ahead with plans of his own.

In anyhe problems of Ihe Soviet economy and Khrushchev's erratic efforts to deal with them contributed to his downfall. Surely, the indictment against his leadership would include:ong series of agricultural schemes

'This ind all other references lo defense expenditures Include boih mHitarY and spaoe spending.

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whfch tampered wiih doctrine, interfered wiih production, and Attempted to play game* withb peculiar faith in the magic of reorganization, which led himariety of party and state shuffles that first gave, then took away, decentralized, then reccntraltzed;ost important, his ebullient optimism, which led him repeatedly to over-estimate the ability of available resources to satisfy the demands of his various programs. The recordhole, revealing shortcomings of both slyle and content, dearly provided Khrushchev's colleagues with hoth reason and pretext for this ouster.

II. PROBLEMS OF THE ECONOMY '

A. Recent Background and Policies

USSR's ecooomic problems were greatly aggravated3 by awheat harvest. The situation clearly called for both short-termmeasures, to compensnte for agricultural failures, and longerestructuring of investment prioritieseneraleconomic goals.

Thc leadership responded to the immediate emergency by rejectingto introduce food rationing, apparently fearing the reactions of increasingly disgruntled consumers; It elected, Instead, to use its already depleted gold stocks for thc purchase of0 million worth of wheal and flour from thc West. The response to longer term problems has been less clear cut.igorous now program for thc chemical industry3 did indicate some revisions in investment peiorities, hut, during the first halfoth the leadership and the planners seemed to behaveannerconfusion and uncertainty. Ia any case, while awaiting the results of4 harvest, the regime was understandably reluctant to draft new programs and commit resources.

The situation did. however, force tbc leadership during tho past yearalf to wrestle somewhat moro realistically wllh ihe root causes of long-term weaknesses in the economy. In launching the new chemical programor example. It acknowledged the necessity of seeking help for these programs from the West, in the form of plant, equipment, technology, and credit. And, in this same period, it wu compelled to consider ways and means of curbing the serious drain on high quality resources imposed by defense expenditures. In the second halfhe regime was occupied with the question of ways of improving consumer welfare, and Khrushchev In September designated this as the chinf task of long-term planning. It was also led to reopen public discussion of how best to manage and plan tlie economy in the yearswas at least (and at last) willing to listen carefully to the Ideas of the economists who were critical of the inefficiencies and inadequacies of the existing system

The success of4 harvest has relieved the economy of its most pressing Immediatergely because of tho contrast between the last two harvests, CNP,ose by perhaps as much as six percent, twice the

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average rate of tho two preceding years. But, thisprimarily from favorablenot in and of itself promise relief from the main problems besetting thc economy. Moreover, official statistics concerningperformance during Ihe first nine months4urther decline in the rate of growth of both industrial production and labor productivity.

B. Problems ond Performance in Key Sectors of lhe Economy1 Agriculture

In the five years following thc death of Stalin, Soviet agricultural production grew by more thanercent. largely on the basis of this record and its unjustified optimism about thc productivity of new programs, the leadershipeven-yearhich implied an increase in netof someoercent. Production did subsequentlyew peakut fellotal of some six percent during thc next two years,because of poor weather. Total output3 was below thatnd was less by someercenter capita basis (see

Crop production4 should at least equal that of thc very good yearrain production4 is estimated tentativelyillion metric tons, contrasted with3 total ol aboutillion. This will permit some replenishment of the state's depleted grain reserves, eliminate the need for imports of wheat and flour, and assure that last year's bread shortages will not be repeated. But the sorry state of livestock will limit the gains in diet;er capita4 crop and meat production was below the highs of the.

Tha Soviet leadership has recognized that the USSR's food problem is basic and long-term. Investment in agriculture0 has grown at ahigher rate than investment in any other sector of the economy except chemicals. Ambitious plans for increases in the production of fertilizers,herbicides, and appropriate farm machinery, reiterated by Khrushchev in the springave been stepped up. and programs for large-scale irrigation, extensive application of lime, and combating wind erosion have been announced. In the area of incentives, thc regime has raised the prices paidumber of commodities,ension program (or collective farmers,Khrushchev'scertain restrictions on private holdings of land and livestock.

1 Throughout this estimate the aggregative statistics or Indexes which are presented have been calculated by CIA. Soviet official statistics arc not used unless otherwise Indicated. Most of the official Soviet aggregate measures of growth In the economy (such as national income. Industrial and agricultural output) ere not accepted by Western economists.some official commodity data such as those relating to grain production bare been re-lected. Substitute measure) constructed by ui and other Western economists almost invariably indicate that there are substantial degrees of over-suteroeni In the Soviet measures.

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hough port-Stalin efforts lo rescue Soviel agriculture from years of neglect did succeed in Improving the lot of the peasant and boosting production, many problems have been ignored, dealt wllh inadequately, or aggravated by Ill-conceived solutions. The general malaise of Soviet agriculture is theof party, state, and local mismanagement, backward technology,supplies of chemical products and farm machinery, shortages of trained agricultural specialists, insufficient incentives for the peasantry, officialof private (and more productive) agricultural activity, and in general, insufficient ami misdirected investment.

Industry ond Industrial investment

Unlike the situation in agriculture, Soviet Industrial output has continued to growoderate rale in recent years and has made vigorous advancesumber of specific areas. Nonetheless, there has been an appreciablein the annual rate of industrial growth; we estimate lhat tlte average annual growth rate fell from ahoutSVz percent for the9 to aboutercent* Thc'growth of industrial production4 is tentatively estimated atercent.

This slowdown Is associatedevere decline In the rate of growth of investment In new plant and equipment. Investment In Industry, which rose by aboutercent annually8ncreased by onlypercent annually2reliminary indications do notubstantial improvementhe amount of investment In construction andmaterials, which grewateeclined absolutely in2espite these trends, thc Soviets have managed toairly steady increase in the accumulation of industrial plant and equipment. They have done so principally by greatly reducing thc rate of retirement of older facilities and by stepping up expenditures for their repair. Thesecompensate for tho falling rate of investment but do soigh cost in terms of productivity. Thus the average annual rale of growth in plant and equipmenlame to4 percent und was associated with an average annual rale of growth in industrial output of aboutpercent By contrast,n average annual rate of increase of aboutercent in Industrial plant and equipment sustained an increase In output of less than Q'A percent per year.

Among the factors contributing to this lag In productivity gains Is the difficulty in getting new plants into Operation and in keeping old plants in full operationeriod of rapid technological change. But perhaps the single most important factor is the demand of tbe defense program8 for scarce resources and highly trained manpower. Thc concentration of these

'Seeor avarar* annual rate* ot, by branch of ioduitry. Se*or eitinutnd production figures ot major induitr.il ii'im (Iron, ileal, fuel, power,nd planned figure* for oW items,

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specialized nrvourccs on research, development, production, space activiUes. and deployment nf advanced weapons has mterfeired seriously with the introduction of new technology in industryutomation and new chemical processes).

The Chemicc' Industry

SO. Tbe big increase in output of chemicaley part of thc Soviet effort to step up the rate of economic growth. Tho program Is intended toide range of objectives; to support an upsurge in agriculturalto provide tbc consumer sector with Urge quantities of synthetic fibers, and to supply industryariety of substitutes for more costly metals. In HUM, thc performance of thc chemical industry was impressive, although not all the goals were met. Investment rose sharply, and overall production grew by about IS percent, with particularly high rates of growth in fertilizers and pesti-ctdes. Despite thisumber of ma for shortcomings continue to plague lhe industry, Including planning errors, construction delays, lack of skilledand slow rales of achieving capacity operations at new plants.esult, increases in output have been achieved at high cost

IL The new leaders are making significant short-term adjustments fn this program,hey are stressing thc completion of unfinished plants, and, more important, tbe bringing of new plants up to designed rates of output In order to concentrate resources on these tasks, they apparently intend to start (ewer construction projects5 than Khrushchev had intended to launch. This decision Is reflectedlower rate of increase lit now investmento-slow policy on imports of Western chemical equipment

e believe that these modifications ate intended only to divest theprogram of its "crash" nature, and thai the new leaders continue to regard it as critical to the tasks of economic modernization and growth. In framing the Five-Year, tltey may sole down some of Khrushchev's rnore0 chemical targets, hut thc new goals almost certainly willigh priority for Ihis industry. The setting of new targets willareful consideration of crodtt and repayment possibilities for Western rquipment and technology. Il will alsolose scrutiny of those scarceequipment, complci construction techniques, and highly skilledwhich chemistry will be competing with other key sectors in the corning period

Military ond Space Programs

e estimate thateclineeakoviet military and space expenditures began to rise9 and2 were aboutercent greater thanc further estimate that these expenditure* continued to grow3hough atmuch slower rate than in the previous four yean. The impact of tliesc programs on Ihe machinery and equipment sector of thc economy has been particularly great; tixpenditurca oo military machinery4 rose faster than total defense expendilurcs.

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pattern of growth was due principally to thc development andof complex new military equipment and space hardware. Forestimate that expenditures3 for the procurement of advanced(missiles, ground-based electronics, and nuclearordevelopment, and for space programs were twice8e believe that these expenditures increased slightlyusurped specialized skills and resources critically needed foreconomic objectives.

Foreign Trade

The total value of Soviet trade4 amounted toillion. About two-thirds of this was with Communist countries; aboutwas with the industrial West. For the past decade, purchases from thc Wesl have consistendy exceeded exports and resulting convertible currency deficits have been financed largely through medium-term credits andSoviet gold sales.onsequence, estimated Soviet gold reserves have dwindled fromillion at the end4 to5 billion at the endhc convertible currency deficit,0 millioneached an0 million (See Tables,

Soviet imports of Western machinery grew from0 million8 Io about WOO millionf3 total about one-fourth was equipment for the chemical industry.4 these Imports have not yet strongly reflected the impact of the new chemical program announcedontracts for chemical plants and equipment let since3 now total only0 million, although discussion with Westernhas offered the prospectuch larger program. Because repayments on past, medium-term credits arc increasingly offsetting new drawings on such credits, large net additions to Soviet capital equipment imports would likely require substantial long-term financing.

The USSR has scriedy curtailed imports of industrial raw materials and new orders of industrial equipment from the Free World throughout the pastonths. Soviet reluctance toubstantial expansion ofImports over the past year, despite Western offers of at0 million In long-term credit, probably indicates both heightened concern for the Soviet international reserve position and greater official uncertainty about thcof investment funds than we had previously postulated. It is possible that Signing of credit-financed contracts may increase after the new Five-Year Plan has been darified. However, the Soviet regime is aware that Its past rate of growth of exports (of both gold and commodities) will be more difficult toin the future. The recent caution in accepting the commitments for future repayments that large credits entail suggests that the regime Is delaying decision until its export prospects become clearer.

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foreign Aid

be hiatus io Soviet extension of ecoctonuc aid to less developed countries of the Free World was ended as new credits rose fromillion2 to0 million3 and0 million (most of it to India, lhe UAH. and Algeria)umulative Soviet commitments In credits and grants to non Communist countries nowillion. While only4 billion of ihis has as yet Wen drawn, thc rale of expenditures has been rising rapidly, reaching an0 millionepayment rates have also been increasing and should total0 million this year. Credit extensions underyear-old Soviet military aid program to non-Communist countries now loial8 billion, most of whichillion) has been drawn upon. Since these Soviet programs do not involve either gold or convertible currencies, and do not ordinarily require goods readily exportable to tbc West, they do not materially affecl Ihe Soviet gold or hard currency position.

Consumption

he hopes aroused by extravagant promises, and by fairly substantialin both the quantity and quality of consumer goods and foodstuffs during, have been sorely disappointed0harp decline In lhe growth of per capita consumption. (Seendeed actual setbacks to th- consumer such as the mafoi price ktantaMI bsjad blNMl Ir. ISM Md the shortages of bread and flourave led to sporadic demonstrations of discontent.

be economy also suffers from inflationary pressures. Disposable money income and consumer expendituresoughly equal proportionul thereafter the growth of income, though it slackened, outranThe effects of agricultural difficultieslump in the output of soft goods were soon felt in the retail market. Prices on the free (collective farm)good barometer of inflationary pressures in theto rise and3 the official index of these prices watercent above0 level. Tbe regime responded2 by raising certain food prices,scheduled increases In minimum wages, and halting the program for the abolition of the income tax. But, inhrushchev2 In partesult of economic problems and defensewill further stimulate inflationary pressures. As reaffirmed by his successors, someillion workers In service Industries are scheduled to1 percent wage rise, the basic rnirumum wage is to be raisedublesuble* per month, and tho state Is to contributeension fund for collective farm workers.

Organitotion and Monagemeni

he economic planning and administrative system in the USSR works, but not well. Enterprise managers are harassed by detailed requirements and by poor coordination of plans for production and supply and are frequently en-

couraged to produce the wrong assortment of Roods by the regimes standards lot measuring success. Authority and responsibility at levels above theenterprise are diffusedariety of local party and state organ*ast number of central organizations. Thc top planners themselves face an ever mounting volume of detail and must maki! decisions partly on the basis of an artificial price system which, among other things, does not reflect relative scarcities. The various reorganizations of the administrative apparatus which have taken place sincethe strengthening of the party's role Innot seem to have helped mailers and. indeed, may merely have added to the confusion and duplication.

liberal" Soviet economists, including Professor Uherrrian. haveumber of reforms which, while not advocating an eaithshakirig transformation of the Soviet economy, would in some ways tend to give theast of "market socialism' They reflect, in thereoccupation with methods of evaluating the performance and rewarding the success ofenterprises on the basis of profitability Some also suggest the establish -ment of pricing systems which would more nearly reflect supply and demand and which wouldational atscasmrnt of costs (including interest charges onn general, these proposal* would also involve thcof planning systems so a* to retain overall central control but to relieve enterprise managers from detailed and nullifying plans from the center.

In the springimited experimentationew system ofpayments for the directors ami other top officials was introduced at somenterprises. At the same lime, thc rcglnwore far-reachingat two clothing plants which involved tho scheduling of output by typo, quality, and, within limits, price. In response to orders from retailers. The new leadership has decided to extend this system tohird of all clothing plants and shoe factories, and Kosygin has advocated the extensionimilar system to heavy industry.

III. THE CURRENT ECONOMIC SCENE ANO SHORT-TERM OUTIOOK

Tbe economy which Stalin left lo hisentered as it was on thc manufacture of steel and machinery, proved to be poorly suited todemands and opportunities. Over the pastears, the Soviet leadership has been striving to adjust production, technology, and thestructure to meet these demand* and opportunities.ariety of circumstances made it difficult lo achieve the necessary reallocation of resources. These included the Inertia produced by thc existence of powerful industrial, military, and bureaucratic vested interests, ideological prejudices wliich inflated the importance of certain economic sectors and organizations,olitical environ incut which bred unrealistic goals.

To be sure, there hasrowing awareness in recent years that the economy was, in fact, lagging and that step* to revivify it were badly needed. During the latter half3 and partumber of signs pointed to

a more sober official appraisal of Soviel economic capabilities and prospects. Thc relative modesty of economic goals. tho actual Implementation of some new programs, as in thc chemical industry, and recent publicKhrushchev's procomumer pronouncements in latehintseorientation of economic policies for the future. Generally speaking, there was some reason to believe that the Soviet economy waseriod of clianging relationships among the mafor dvilian sectors, and perhaps between these sectors and the military space complex as well.

onetheless, nearly every recent economic program has stumbled and fallen short. At least some of this failure was due to Khrushchev's own peculiar approach to problems: his over-optimism, search for panaceas, sweepingand periodic reorganizations which led to confusion and waste. The few oblique statements on the reasons for Khrushchev's removal have highlighted the dissatisfaction of his successors with such matters as Khrushchev's style, his harebrained schemes, command ism, and armchair decisions. In this however, we think his successors exaggerate the costs of his leadership and overstate the benefits of htv removal.

A. The Policies of the New Leodership

Khrushchev's successors have reaffirmed his broad goals for the Soviet economy, and we believe that they do not intend at present any major changes in the pattern of resource allocation. It is likely, however, that there will be fairly substantial changes in organization and methods of operation; these could produce some changes in the allocation of resources, even though broadremain unaltered. One of the new regime's first moves was to eliminate the division of the party into industrial aod agriculturaligorous discussion continues in the press on ways to stimulate better economic decisions, suggesting that gradual reforms in this area areumored change may strenghten central ministries responsible for single industriesational scale, at the expense of the regional economic councils, which were designed to improve economic administration in individual areas of the country.

Thc new regime has indicated that it would liko to proceed with thetask of allocating scarce resources without the jarring clatter of controversy over heavy industry versus light industry. Brezhnev's statement that heavy industry must serve the needs of defense, re-equipment of the economy, and consumers goodsragmaticIntent to base plans for heavy industrial production on concrete objectives rather than making such production an end In itself. In addition, the new leadership has increased emphasis on modernization and quality of output, and will probably rely more on economic incentives and careful planning to introduce new technology and less on exhortation. Physical goab may be scaled down, but in the end more may be achieved than under Khrushchev.

The new regime has chosen to come out In favoronsumer-oriented programt has promised immediate and large gains in consumer welfareoost In planned money Incomes und communal services and

a step-up in housing construction. These measures are reminiscent of those promulgated after Stalin's death and again shortly after Khrushchev's ascendency to supreme powernd are probably calculated, in part, to enhance the appeal of the regime. But the regime has also indicated that this emphasis on the consumer will be continued in the coming Five-Year.

leadership alsomall cut In the explicithich is associatedS intention to reduce Its ownAlthough thc military activities financed through this account maysomewhathe elements of defense spending wliich havemost rapidly in recentand development andthose which arc not included in thc defense account assmall reduction in the overt defense budget planned5 couldoffset by increases in other defense-related accounts In the budget.that no important cutback in defense spending has, in fact, beenit is probable that thc new regime desires to restrain the growth ofexpenditures and that the new budget doesontinuingleveling off.

In agriculture, the compelling question is the long-run food supply. Efforts to intensify and modernize agriculture are bound to continue, but manner and method will almost certainly undergo great change. The new emphasis isrational" and "scientific" approach, as opposed to Khrushchev's crash programs and predilection for panaceas. Thc costly modernization of animal husbandry recently advocated by Khrushchev is likely to be shelved ia favoress-precipitous development In the same direction. The New Lands will not be abandoned, but their importance will no longer be stressed, and the longIntroduction of good fanning practices is likelye pushed energetically. Efforts to increase incentives will figure prcmincntly.

There is. ofimit on what the leadership can do In thc coming year concerning the reallocation of resources to thc benefit of the consumer, andS plan does not, in fact. Indicate any major shuffling of resources. But if the regime holds down military spemchng, and makes improvements inand managerial efficiency, it could lay thc groundwork for morechanges in thc coining Five-Year Plan.

B. Economic Controversy

ultiplicity of issuesrofusion of Interest groupsSoviet command structure. Certainly many military leaders andof the older branches of heavy industry would welcome thcthe kinds of pressures Klirushchcv exposed them to, including force cutsagainst "metalany in the party apparatus would favorto old doctrines, mduding the ideological insistence on priorityof heavy industry, and regularfzation of the chain of coinmand.in thc central bureaucratic organs would also resist anyin the direction of decentralization. Even those functionaries most

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closely associated with thc agricultural and chemical programs might applaud an end to helter-skelter managementetup in the drive for fast results.

There are also contrary interests and ideas represented at the upper and middle levels of the political and economic hierarchy. There arc probably numbers of officials who recognize the desirability of adjusting the economy to meet new requirements and the demands of consumers and who wouldthe dire consequences for their own areas of interest if further resources were diverted to defense programs. There are also influential economists who recognize many of the ills of the Soviet system and who have campaigned for structural and allocational reforms. And there are middle-level functionaries in both party and state organs who have developed vested interests in one orof Khrushchev's pet programs and who would thus resist any efforts to tamper with the status quo.

We believe that controversy over economic policy is likely to continue and perhaps even grow. But. politically, thc safest immediate course is one of compromises, and Khrushchev's successors are likely to move cautiously in most areas of economic policy. Thc charges of erratic and irrational behavior against Khrushchev no doubt reflected, among other things, genuine dismay among his colleagues; in any case, each of them will now seek to avoid anwhich could leadimilar indictment. The collective nature of the present leadership will also probably restrain for the time being any impulses toward either forward leaps or major retreats.

C. Economic Performance

growth of industrial production4 was about sixrate could improve somewhaterhaps to seven percent,result of improvements in agricultural raw materials supply, somecapacity brought in by the completion of various construction projects,diminution of the confusion occasioned by shifting targets andorganization. Assuming normal weather, agricultural production inexceed that of the very poor3 by up toercentevelthan that8er capitaarger amounts ofbe available for grain crops and could produce an increase in theto the amount of grata which bad to be importedhechemicals could approach the planned increase ofercent for the

IV. LONG TERM OUTLOOK

A. Basic Long Term Problems

development of the Soviet economy has failed to keep pace withof ihe men who control it. This lag has led to many-sidedwithin thc Soviet leadership over how best to accomplishand just what the priorities among various objectives should be. These

ET

have centered in the main on two issues, the proper allocation ofand the best methods and institution; for planning and administration. An essential problem for Khnishchevs successors, then, is to find some way of fashioning policies which can somehow both resolve the disputes and restore momentum to the economy.

In the matter of resource allocation as it affects economic growth, the traditional argument of heavy industry versus light industry and agriculture in effect missed tbe main issue. This way of putting the question obscured the fact that heavy industry serves the need_of defense, of consumer-oriented sectors, and of investment for further growth. The key problem really was what kinds of heavy industry should beor missiles or chemicals, and in what proportions. Khrushchev was on the right track in characterizing thc task as one of investing in the newer industries which could make the most effective use of capital and which could better meet the emerging demands of an economy striving to modernize. Aware of the competition of the miliiary, he sought to limit its allocation. But he clironically underestimated costs, first of missiles, then of chemicals, and probably of irrigation and the mechanization ofas well. His characteristic over-optimism brought him into conflicts not only with those who disliked his objectives but also with those who shared them but gravely doubted the feasibility of his programs.

In order to nclueve high rates of growth, it is necessary forhence heavygrow faster than other areas of output. The growth of plant and equipment (maintainedorresponding growth of investment) must beignificantly faster pace than the rate of growth of GNP; in, plant and equipment in the entire economy grew at an annual rate of nine percent, sufficient to maintain an average increase of some seven percent in CNP.his relationship has become morenow appears that an annual growth of nine percent in plant and equipment might sustain an annual CNP increase of only five percent. This decline In theofhe increase in output associatedivenn plant and equipment, has come about largely because the Soviels havemany of thc easily available opportunities for applying new technology. Prospective increases in the size of the labor force are not adequate to offset this trend.

This trend strongly suggests that notajor reallocation of resources and thoroughgoing economic reforms would be likely to restore the high growth rates of. Tbe Soviet leaders, however, will be loath to accept this conclusion, and in their search for ways to overcome the lag, they seem inclined to consider new methods of planning and administration. In the process, it has become clear tbat, at the present stage, Marxism-Leninism offers little guidance. In fact, it Is notable that all current proposals draw inspiration from Western practice or from "markethe direction of current thought suggests that the Soviets, like the Cast Europeans before them, are perceiving theof Communist doctrine as appliedodern economy and that, at least in this field, they recognize that need far <

16

ET

thc collective leadership, as long as it lasts, Ls likely toforeign and domestic issues cannot forever be avoided and thcthc economy is likely to be among the mosl pressing. As problemseven multiply, and as shifts in domestic politics and changes on thcoccur, one or another leader may come to advocate new andcalculated to attract support from other leaders and otherWhatever the shape of future political contention or itspolicy will almost certainlyey issue.

B. Military Spending and Economic Growth

A central problem facing the new leadership is the question of defense spending and its effect on economic growth. Thc range of growth rates for Soviet CNP that seem realistically possible in Ihes from four to six percent annually, if the relative priorities given to various non-military programs retain roughly their recent pattern and if the weather conditions for agricultural production are normal. The actual growth rate attained within this range will depend in large part upon future levels of defense spending.

Current National Intelligence Estimates of Soviet military andange of future defense spending: on thc high end,0 might be aboutercent greater thannd on the low side they might be aboutercent below4 level. The high end of thc range would imply that expenditures for the procurement of advanced weapon systems, for research and development, and for space0 would be someercent greater thann the low end,0 level of expenditures for these weapon systems and programs would not be significantly different from thatonsidering these and other factors, we believe that if Soviet defense expenditures0 wereercent greateroviet GNP could grow someoercent over this period, or between four percent and five percent per year. On the other hand, if defense expenditures were to decrease toercent of4 level, Soviet CNP might grow about six percent per year and be someercent greater

We estimate that, barring important changes in the international situation, major changes in Soviet defense spending in either direction are unlikely, but that such spending will edge upward in the years ahead. If and when one man achieves primacy in thc leadership, however, tbe chances of wider change will Increase.

Given the uncertainties of both the estimates of civilian economicand the size and composition of the defense program, conclusions about the "burden* on the economy of defense expenditures can be stated only in general terms. Probable Soviet military and space programs0 foreshadow an increase In the requirement for highly skilled engineers and scientists, complex machinery, and high-cost materials. Even If defensewere to increase at thc rate implied by the high side of the range, tbe Soviet

economy could should" thw burden and at thc same time gradually improve (hc equipment and technology of Soviet industry and the standard of Living. If, on the other hand, defense spending decreased as implied by the low end of the range, thc absolute requirement for these scarce resources would be little different from thatn these circumstances, with an increasing supply of these resources, the strain on the civil economy would be eased.

C Agriculture ond Economic Growth

The future course of the Soviet economy will also depend on developments in agriculture. The essential feature" oi the long-term program for agriculture which Khrushchev formulated over the last yearalfubstantial increase in grain Outputeduction of its annual fluctuations. This was to be accomplishedajor expansion of irrigation, and largo increases in the applicaUon of fertilizer, particulaily in areas of dependable rainfall.

It remains lo be seen how much thc new leadership will modifyambitious program. Though we do not know how long it will last, the present partial relaxation of restraints on the size of private holdings of kitchen gardens and livestock .suggests that theearching forways to Increase output. But the major increment to output during the balance of thc decade must come from improvements in the socialized sector. It is almost certain that resources allocated to this sector will be increased over present levels. With the implementation of large-scale fertilizer and irrigation programs, we estimate that0 agricultural output can be raised as much as two-fifths above the abnormally low levelhird above tbe nearly normal weather yearhis would imply an average annual increase of three and one-half percentnd would permit an average annual increase of GNPange ol four to six percent.

In sum, the Soviet economyariety of fundamental problems:growth in rates ofeclining return onhortage of high quality resources and skilled manpower,enerallysystem of management, ln addition, the economy will bo crucially affected by political decisions respecting thc allocation of resources, which in turn will bo influenced by changes in the world situation unforeseen andby the USSH. In general, the Soviet leaders will almost cettainfy be disappoined by the performance of the economy throughout thc remainder of this decade. They will be tempted to experiment, perhapsadical way. with the management and even with the basic organizational structure of theu economic system. Tbc whole situation will, in our view, be aa Important source of dissension within the top leadership,actor in the struggles for power which are virtually certain to occur.

Thc picture Is different if Soviet economic prospects are viewed, not against the ambitions of the leadership, but against the performance of oilier developed economics. An overall growth during tho remainder of the decade

SEJftET

ANNEX A

NOTE

Rales of growth aod other statistical comparisons in the tables which follow have been carried out numerically to tlie degree required to make validThe presentation of the data to the first decimal point, however, does not necessarilyomparable degree of accuracy fn either tho absolute leveliven value or in thc absolute difference betweeen two values.

Tbc base year used in deriving average annual rates of growth is tbe year preceding tbe given year.

SEaVET

TABLE 1

USSR: IKDICAT0B8 OP ECONOMIC

Industrial

Total investment (new

Productive inv^tmeot .

Nonproductive

Agricultural production

Moving average for 31

Straight annual

Grow national

* Base year

7

8

1

0

Aiiuvialf Growth (Ptrreot)

TABLE 2

USSR: AVERAGE ANNUAL RATES OF GROWTH IN INDUSTRIAL PRODUCTION, BY BRANCH OF

PERCENT

materials

2

5

consumer goods

foods.

gooda

1

industrial production...

2

SEHFET

PRODUCTION AND ANNUAL RATES OF GROWTH OF IMPORTANT INDUSTRIALND PLANS5

r.

prodwUoa fpereenl)

produrtwo (pwcenl) .

mtulluntr

mtiU-le Ions

1

i

utael

ituUic torn

and pew

mMrlc lone

LI

i;--

ruble maters

|

1

all

tarx.lt lone

V 1 f _ * k mm T

wn

production {percent)

frrull-rni, groas weight

metric looa.-

metric tone

aodreaina

mcliie ions

'

goods (percool)

maters

foot-nr

palra

arUclee

untie

23

-

T

Cortlinued)

fSnjUTNAJlT PLA N

T. Processed foods

Sugar {beet snd cane granulated)

Million metdc

'

1

Million metric

Meat-

Million metric "

on reported performance ot the Drat nine months1 and estimatednee during the last Ihree months of* the year.

fc Reported in Percent changes are relative to4 productMO'

re baaed on CIA indexes.

4 Baaed on the assumption that the goal given by Kosygin sraa expressed in linear meters.

Based on performance during the first half of tbexcluding kolkhos producUon.

Excludes kolkhoz and household production.

TABLE 4

SOVIET DEFENSE EXPENDITURES, BY CATEOORY OF

Expenditures

Operating*

Investment

Including: Procurement of mlastte systems, ground electronics, aad nuclear

warheads

Research, Devdnproeat,and Space

7.9

)M

Because of rounding, components may not add to tbe totals shown. Tbe upper end co* tbe range ofwas used In calculating rates of change presented in paragraphs

Operating expenditures include all expenditures for personnel and operation and maintenance.

Investment Includes all expenditures for procurement of military equipment and construction of facilities.

SEpfET

sarffEr

TABLE S

USSR: METHOD OF FINANCING THE SOVIET HARD CURRENCY

Million CWtrolkUBMBM-

TBB*

CBEDrra

(

it mo

TBE

0

0

'

esult of trade with total non-Comrounlgt world.

b Minimum estimates.

' Tbe USSR almost certainly obtained oocreditt from the Wentigures In this column Include an allowance for interest al an annual raleercent.

' Preliminary estimate.

TABLE 6

USSR:EDIUM-TERM CREDITS FURNISHED BY THE INDUSTRIAL

Million Current UB 8

OOT-

Dsn

at THE

ChXDITH

HEWTS

.

or

1KB TKAB

623

only those credits obtained from Westernsuppliers In connection with purchases of machinery and equipment. The average length of credit I* five years.abort-terraonth* or lees).

Interest computed at an annual rate of five percent.

estimate.

TABLE 7

USSR: PRODUCTION, DISPOSITION, AND RESERVES OF COLD

Current US t

IM

"ISO

)

THE

TBAS.

to Uie bearcat hundred million.

Minimum estimates.

Preliminary estimate.

TABLB 8

USSR: AVERAGE ANNUAL PERCENTAGE GROWTH IN PERND

PEKCICNT

Total consumption

Nonfood.

Soft

Durable

Food

Animal

Proceeted foods

Basic

Health

-

.*

Rased oo Soviet plans for nonfood* aod services and esUmate of trend in food cooaump-

tlOJL

26

ET

ANNKX B

seoRii

USSR

INDEXES OF NET AGRICULTURAL PRODUCTION, POPULATION. AND PRODUCTION OF BREAD GRAINS (WHEAT AND

PrOflU

i Dim (tini(WhMt tod

|

i !

1

/

t it

J

/

. . j*

inot)

ft 1

fl

= ion

/

!

2 4 6 8 0 2

55

THE CENTRAL INTELUGENCE AGENCY1

DISSEMINATION NOTICE

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