SOVIET ECONOMIC PROBLEMS AND OUTLOOK (SNIE 11-5-64)

Created: 1/8/1964

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January4

SPECIAL

NATIONAL INTELLIGENCE ESTIMATE

CIA HISTORICAL REVIEW PROGRAM RELEASE IN FULL

Soviet Economic Problems and Outlook

Submitted by Ih* DIRECTOR OF CENTRAL INTELUGENCE

Concrred in by Ihe UNITED STATES INTELUGENCE BOARD Aj indicated4

ECRET*

COHTROLiee DIG04TM

lhe fc.Mow.ng inteUrgenct, organitahom participatedhe preparation o' "in estimate;

The CeMro! Hlell^encf Ageny ond;

orgon-cation* of the Depof menu ote. Defe-M. Ihe Army, the Nary, ihn Air force, ord NSA

Concurring.

Direcior ol Iri'etligenre and ftetcarch. Dupot'msnl olclor. Defeni* Intelligence Agency

AMMonr Chief of S'oH lor imeNigence. Oeoarlmerrt of ihe Arm.

anr Chief of Noval.eporiment of lh,

i SfotT. ImeH-gerce. USA* Iho Atomic Energy Commavonr* lo the USiS Dveoor of rh- Ncmonol Security Agency

Abi'dinirtg:

the Aiomi; Energyto rhe JVS. end the Aommmlfederal Bureaure-.ligation, the wbjcti beingol their prediction.

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Data

SPECIAL

NATIONAL INTELLIGENCE ESTIMATE

Soviet Economic Problems and Outlook

SOVIET ECONOMIC PROBLEMS AND OUTLOOK

THE PROBLEM

To review, briefly and In genera) terms, curienl Soviet economic policies and problems, and to assess the course, implications, and overall outlook of the Soviet economic scene over the next few years.

SUMMARY ANO CONCLUSIONS

number of serious long-run problems in thehave recently reached an acute stage Overalllagging, various sectors of the economy are intensifyingfor scarce resources, agricultural production isshort of needs, large wheat purchases3 havethe hard-currency deficit, and gold stocks arecritically low level. This situation is due in part tomismanagement, but mainly to the burdens imposedeconomyeries of programs too ambitious forThe demands of defense and space have greatlyeconomic growthecently, industryadversely affected, as well as agriculture and theconsumer goods. )

leaders have nowew effort to copemost intractable economicstagnationarge expansion of the chemicalfor the production of fertilizer They apparentlyto finance this program from the expansion theythe economy, from cutbacks in some nondefensefrom large and long-term Western credits But we also

that thc Soviets will make every effort lo hold down defense and space expenditures so as to release scarce resources forin the civilian economy.

defense expenditures may decline, wc think itthat they will continue to grow, thoughlower pacethe recent past. In the short term, the Soviet leadersoption of reducing force levels, but in thc long termconsider the advisability of curtailing or stretchingor more programs for advanced weapons

Soviets will make sustained efforts to expandthe West, and particularly to obtain large andcredits. This will help foster continued restraint inof Soviet foreign policy, though not major concessions )

E Over the next few years, investment in agriculture and the chemical industry will greatly increase, partlyesult of the policies above outlined, partly from the natural growth of the total Soviel economy However, chances of restoringhigh levels of industrial growth are slim, and the innate rigidities of Soviet planning and administration will continue to hamper the economy. Many of the chemical program'stargets will almost certainly not be met. agriculturalwill fall far short of projected goals, and significant benefits to the consumer will be several years in the making

2

DISCUSSION

I. PECcNT DEVELOPMENTS

USSR is noweriod of increasingly severe competition (or resources among various sectors of its economy. The decline in recent years of both the overall and the industrial rates of growth, the disastrous agricultural yearhe consequent purchases of wheat from Western nations, and the further drain this has imposed on the USSli's limited gold stock are the dramatic highlightsroublesome situation which has been developinghese economicare beginning toajor impact on the domestic, foreign, and military policies of the USSR.

The annual growth of the Soviet Gross National Producthich had averaged anercent in ihe decade of, has averaged only about anercent over the last four years and has been below the US rate for the past two. The annual growth of new fixed investment, which had been aboutercent, dropped to anercentnd has since hoveredercent. Estimated defense and space expenditures, which hadin6egan to grow againnd3 were aboutercent higher than8 Agricultural production actually declinedercent2ercentt now stands slightly8 levels and as much asercent belower capita basis

3 It appeared to us last year that the problems of the Soviet economy had reached an acutencreased defense expenditures, which were largely responsible for the squeeze on resources, also restricted the kinds of expenditures which might have increased growth rates. The Sovietsumber of moves to increase growth, particularly In agriculture, but they were short range expedients and largelythey relied on maccessible or nonexistent "hidden reserves" or on solutions which were self defeating. It seemed to us tnat thc time had clearly come for the Soviet policy makers to make some difficult new decisions concerning priorities In the allocation of resources.

ut, because emphasis on heavy industry and neglect of consumer interests has long been the pattern, powerful vested interests have had the ability to resist efforts to alter thc status quo. There hasontinuing struggle between those who believe lhal the national interest requires greater attention to an invigorated agriculture and those who

' See. "Soviet Economic Problems/dated3 SECRET

3

j

USSR: Estimated Annual Rates of Growth in GNP,

Industry, and

Hal

10%

GNP

a'

t.6

,7

7 8 9 0 1 2 )

bia'it si'>

7 8 9 1 2 J

Pirlia

II I

Agriculture

USSR: ANNUAL RATES OF GROWTH8 IN INVESTMENT AND

7 8 9 0 1 2 3

any weakening of Ihe priority accorded the development of heavy industryre-eminent defense establbhment Attitudes toward military doctrine have evolved which are appropriate to those positions. Khrushchev,tout advocate of great military power, has placed stress on advanced weapons and deterrence, whereas others have sought toore traditional (and more expensive) balance of forces and to provide the armed forces with broader war righting capabilities. Thus, recent Soviet economic policy has been characterized by pulling and hauling, contention and compromise, and an unrealistic attempt to advance on all fronts simultaneously.

5 Khrushchev has king sought to identify himself with Iheof the Soviet peopleetter life and. over the years, hasthe Importance of agricultural production and material Incentives His speech ofn which he called attention to theburdens of military spending and gave scant hope for any marked improvement In living standards In the immediate future, thus seemed to many observers to have been out of character Since last spring, however. Khrushchev's statements concerning lhe economy no longer echo the extreme pessimism of his February address On the olher hand, his sober assessment of the import of this year's poor harvest reflects an increasing awareness of the need for effectixc remedial measures

B. The Competition for Resources

S. The Soviet leaders are now callingajor modernization of the economy through thc expansion of the chemical arid relatedand with increased emphasis on agriculture and consumer goods. They appear determined lo commit the very substantial resourcesAs formally presented by Khrushchevecember at the Central Committee plenum, the new program callsotal outlay of someillion rublesf actually carried out. this means thai annual invcsiment In ihe chemical industry will rise from the presentercent of total industrial investment toercent. Among the specific goals of the program are production increases in fertilizers (fromillion tonslastics and synthetic resinsonsillionnd chemical fibersons5 million tons!hemical plants are to bexisting plants expanded Of rebuilt, and lhc output of the chemical machine building industry is to Increase fourfold.

ppropriate ruolo-dollar conversion ratio lot [hid program ia unknown. However, the quantity ot domestic resources thai ihc USSH would have to Invest lo accomplish these goals would amount to ihc equivalent of much moreillion given by the official exchange aa'e.

6

has cast this program largely within the context of its anticipated benefits to thc consumer, though its military significance has also bren stressed.

Khrushchev apparenUy recognises that the needs of this newwill clash with those of other claimants. He has implied that the resources earmarked for the expansion of the chemical industry will come In part from the overall growth of the economy, from Imports, and from thc diversion of funds from communal services and housing construction. He has referred to the necessity of temporary slowdowns in certain other sectors of the economy. And. along with thcof his chemical program, he also noted thc need to study possible reduction* in the strength of the armed forces andefenseailing for modest reductions In expenditures during 1M4

This announcementercent reduction in the military budget is not conclusive, since jn receni years only an estimated two-thirds of defense expenditures have been included publicly within the appropriate category. But Its Implicationseduced rate of militaiy expenditures seem to be borne out by announced plans for the machine buildingIn Soviet statistical data. Ihe total output of lhat Industrynut only equipment for the civilian economy, but also finished military hardware. One way of analysing how fast military procurement is growing is to compare the rate of increase in lota! output of thebuilding industry with the rate of increase of its non-military output For the past several years, non-military production of the industryIncreasedlower isle than total output, tefiectlng the growing share of military procurement. Current plans, however,an oppositehat non-military procurement willrowing share and militaryeclining share of theoutput This year, while total machine-building output Isto rue byercent, the non-military portion Is to growercent. If this in fact transpires, then while production of weapons will continue to increase, the rate of increase will be less than in Uie past That the effects of the new program on defense are wellby Khrushchev has been suggested by his moves in other areas of policy, particularly those affecting the international climate.

C. Foreign Economic Policies

he problems of thc domestic Soviet economy have of necessity spilled over into the area of the USSR's foreign economic activities-Trade with Western states has been stepped up in order to compensate for the inferior technological level of certain Soviet industries, to secure advanced equipment not available at home, and most recently, to obtain great quantities of grain to make up for the bad harvesthe newly expanded chemical industries program will requite substantial

7

Irom both Eastern Europe and the West. Khrushchev has stated that the USSR Is in the market for Western equipment and whole plants "if credit isnd no political conditions areOur preliminary estimate is that the USSR might need in the neighborhood of S2 billion of Western chemical equipment between nowf they decided to rely extensively on the West forequipment and engineering, and were able to finance it. Imports could be substantially higher. The Soviet leaders almost certainly see little chanceubstantial increase in their own export earnings and consequently hopeajor part of their expanded needs can be supplied on the basis of long-term credits from the West.'

Trade Deficits with the West. Imbalance of trade withnations of the West has become acute in recent years. The USSR imported0 million in machinery from the West8 and0 millionhe hard-currency deficit jumped from0 million90 millioncheduled imports of grain from the West (excluding any grain purchases from the US) could bring thc total trade deficit to more0 million. deficits were financed largely through sa'.es of goldreater share of the deficit has been financed through medium-term credits, whichotal5 million outstanding at thc endhis, in turn, hasising level ofor example, the USSR may have obtained0 million in new credits, but repayments plus interest amounted to0 million.

Gold Soles Wc estimate with some confidence,esultecent comprehensive review, that the USSRotal gold stock of some S3 billion5 and that this had been reducedigure8 billion at the close' The Soviets arc now drawing heavily on gold stocks to finance grain imports; gold sales totalled0 million2 and may have run as high0 millionomestic production may have5 million3 but this wouldew high. Gold reserves may sink to3 billionven with no grain purchases from the US If this is so, the Soviets could significantly expand their imports from the West only by obtaining long-term credits.

on-Bloc Economic Aid. New extensions of Soviet economictoon-Communlst countries increased sharply4 to

Soviets have been receivine substantialcreditsears)e Wesl. but now need long-teim credits MO or more ycarsi because ot thc current high level o! interest charges and repay merits.

'This figure does not include Soviet holdings ol foreicn currency which fluctuate0 million.

could be deterred somewhat by short-term borrowings

S

I

1

USSK: Method of Financing the Trade

MillionUSI

Medium-

or

Credits

with the

Surplus

the Indus-

West'

Deficit

Gold-

West iNet)'

to 85

5

to 50

0

0

to

Adusted Tor estimated net freight costs.

'esult ot trade with the total nonr!d.

Minimum estimates

' Thc USSR almost certainly obtained no niediuinicrm credits from the Westigures in this column include an allowance for interest at an annual rateercent

TABLE 2

USSR; Production, Disposition, and Reserves of

Million

DISPOSITION

at the

Nell '

Reserves

of thc Year

50*

troy ounce ol gold Is valued atinimum estimates

' Excess of consumption and other dispositione:reliminary.

SEtWET

0 million being committed tn theear. Following some retrenchment0ew extensions fellowillion2 and did not0 million3 as the USSR applied stricter criteria for the extension of newhis marked decline cannot, of course, be attributed solelyesource squeeze within the USSR; the rapid growth of aid to Cuba, continued assistance for Communist countries other than China, growing emphasis onaid. and questions of opportunity and political benefits arecontributory factors. Nevertheless, the reluctance of the Soviet leaders to extend aid to countries which offer but small hope of quick political gains, has almost certainly been reinforced by the domesticfor increasingly scarce resources and by the overall slowdown in Soviet economic growth.

II. OUTLOOK

Khrushchev's new programs will almost certainly yield someresults, but it is questionable that the readership will move fast enough, efficiently enough, und drastically enough to put the USSRath of resumed rapid economic growth in all the vital sectors of the economy. Commitments to certain programs and to theof existing establishments, particularly Ln the area of defense, will continue to retard progress in other areas. And there remain the twin hindrances of Marxist ideology and parly mismanagement. Finally, favorable weather is of crucial importance, one more year of drought would have very serious consequences.

The Soviet economy is too large, too cumbeisomely managed, and too complex to change gears overnight. There will befooldragging and resistance to innovationast scale.has called attention to the tendency of planners to depend almost entirely on the patterns of previous years and to ignore newVarious other factors, such as thc relative lack of materialfor the workers, may also inhibit change and improvement. But, just as important as any ot these, the determination of the party apparatus and Its leaders to Interfere in and to exercise control over all aspects of economic planning and production will greatly hamper thc efforts of lhc professional managers and economists to rationalize structure and improve output.

The most serious problem for the Soviet leaders as they seek to implement their new economic program will be the requirements of their large and expensive military eslablishmcnt. The newer, more complex weapons systems account for most of the increase In miliiary

otal olillion has been extended, of which moie thanillion has as yet to be withdrawn,0 million was used by recipient countries.

Sf#tET

expendituresndeed, we estimate that the procurementfor missiles, nuclear warheads, and ground electronics3 were as large as the total of all military procurementhese weapons systems consume increasing amounts of many of the criticalneeded for the fulfillment of the civilian investment programs. In particular, the burgeoning needs of the chemical industry willhigh quality and scarce material and human resources, and will compete directly with the military for both equipment and engineers

he Soviet leaders will find it extremely difficult in the short term to get lhe necessary resources by tinnsfers from miliiaryodest reduction In thc conventional ground forces would betoignificant proportion of :he contemplatedIn the chemical industry over lhe next several years Even if large reductions were made In the ground forces, savings in theand skilled manpower needed in the chemical industries would be relatively minor.

o meet such needs through cutbacks in modem weapons systems would be extremely difficult. The leaders could cancel variousmilitary and space projects now only in thc planning andstages, but this would provide little relief in the short term They could noi expect lo make additional critical resources available in large quantities at any early date without substantially reducing investments in expensive current projects, such as production and deployment of nuclear warheads and advanced missiles. Quite apart from overall concern about the etlect on the So*:el defense posture, such cuts would be highly uneconomical, and would encounter strongfrom the miliiary.

ome reductions in civilian investment programs are almostThe steelavorite target of Khrushchev's, has already had its rale of growth reduced to about six percent per year45 and it may be cut even further In housing and civilthere have already been reductions In plans, and signs are that the pace is to remain moderate.

estrictions on Soviet space activities might, over the longImportant Investment sources and skilled manpowerof the planned scope of lhe Soviet spare program issome restrictions have been suggested by the USSR'sIntention not to orbit space weapons, together withiii.uii; . o-ilii

not compete with the USace toanned iunar landing during this decade Any major and obvious curtailment of spacehowever, would cost the USSR some measure of international prestige, and might, in addition,etrimental effect on certain military or military-related projects. M

Wc think that the Soviets will make every effort to hold downand space expenditures so as to release scarce resources forin the civilian economy. While defense expenditures may decline, we think it more likely they will growlower pace than In the recent past. In the short lerm, the Soviet leaders have the option of reducing force levels, but In the long term they must consider the advisability of curtailing or stretching out one or more programs for advanced weapons.

Thc campaign lo gain greater and longer term Western credits will certainly be stepped up over the next few years Failure to gain the desired credits would force cutbacks In civilian goals, particularly those In thc chemical industry, or further restrictions on defense spending.

The new program cannot approach its announced goals without eventual diversion of domestic resources fiom other claimants,military. Nor can it succeed without substantial improvement in the Soviet position with respect to foreign trade and credit. Both these necessities argueoreign policy of relative restraint, designed at least to keep international tension from rising and perhaps even lo diminish it Wc do not. however, believe that the Soviets would make major concessions in exchange for expanded Western credits or reduced Western defense expenditures.

Economic aid to non-Bloc countries Is unlikely to recover thc momentum of earlier years. We attribute this more to psychological and polilical factors than to any real shortages of available resources. It is difficult for the leaders to justify, even In their own minds,of Soviet goods abroad when they arc not plentiful at home and whensuch shipments remains uncertain or remote. But. while the Soviets may become even more selective when extending new credits, they stIU view the program as potentially rewarding, and commitments already made will keep them active in this field for the next several years.

Despite indications In the recent Central Committee plenum and4 budget that Ihe Soviet leaders have at last faced up to the hard choices. It would be wholly in character If Ihey continue partly to rely on "hidden reserves" and various administrative reorganizations. To achieve all their currently projected 3ims. an In agriculture, would require precisely the sort of radical changes they are least likely to make in the foreseeable future, as. for example, allowing considerable private initiative on the farms and decentralizing the economy

ver lhc next few years, investment in agriculture and theindustry will greatly increase, partlyesult of the policies above outlined, partly from the natural growth of the total Soviet economy. However, chances of restoring prevloiufthigh levels of industrial growth

4

Economic and Military Assistance

to Non-Communist

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201

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