SOVIET ECONOMIC PROBLEMS MULTIPLY

Created: 1/9/1964

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CIA HISTORICAL REVIEW PROGRAM RELEASE IN9

THE CENTRAL INTELLIGENCE AGENCY

SOVIET ECONOMIC PROBLEMS MULTIPLY

In the past few years, Moscow's aggressive foreign policy has been accompanied by boasts of overtaking and surpassing US production by

hus in Khrushchev's words, defeating capitalism without war. However, an analytical review of recent Soviet economic performance

compared with that of the US supports just the opposite conclusionnamely, that the Soviet Union is falling behind in the economic race.

The first years of Khrushchev's leadership were markederies of successes. The expansion of planted acreage through the New Lands program gave agriculture its first real lift Economic growth was rapidrobably betterear foreriodhole, aided by cuts in armed forces personnel and in military spending which took place6

While housing continued to be very tight, there weremprovements in living standards, particularly in foodstuffs but also in consumer goods as compared with the late Stalin years.

owever, economic growth began to slow appreciably. The rate of expansion of fixed investment, upon which growth depends, was not maintained. With annual increases in investment cut inalling toercentharp curtailment in economic growth was inevitable. oviet gross national product was0 billion, orercent of that of the US- Because the differences in the rate of growth have narrowed, little change in this proportion is expected over the next few years.

reat extent Soviet economic difficulties stemeries of programs too ambitious for available resources. ross national product less than half thai of the US, the Soviet leadership has invested in new plant and equipment amounts nearly as large as investment in the US and hasilitary-space program approaching in real cost that of the US.

Much of the blame for recent reductions in the rate of growth falls On the sharp increase in Soviet defense spending, which93 increased by about one-third. However, the problem centers less on the total sire of defense outlays than on the diversion of scarce, critical resourcesoth manpower and materials. The military "bite" was particularly severe on the best scientific and engineering talent, on the most skilled construction specialists, and on the associated high-quality materials and components. The costs of increased military efforts showed up in shortfalls in industrial investment, especially in the chemicals industry, and in the gross underfulfillmcnt of the Soviet plan for automation and modernization in industry.

Although the slowdown in industrial output has had its effect, the serious decline in economic growth23 is largely due to the failures in agriculture.

A necessary corollary of the headlong rush to develop heavy industry was the neglect of agriculture. Starved for investment funds, agriculture was faltering badly by the time Stalin died. Khrushchev succeeded, at very small cost, in temporarily reversing the downward trend. The New Lands put more grain into Soviet stomachs, into livestock, and into foreign marketserhaps most importantly from the standpoint of political stability, into the European Satellite countries to make up deficits in their own laggard farm output. But the returns from the vast new acreage plowed uproved to be temporary. Once the original soil moisture and fertility were used up, output fell off. evere drought in the traditional farming areas, as well as in Kazakhstan and Siberia, resultedear disaster. Outputer capita basis3 was aboutercent below that Total agricultural output declinedercent2 and probably moreercent

The plight of Soviet agriculture is further illustrated by theof the Soviet diet. In total calories, the average Russian citizen is not far behind his American counterpart. Butercent of the Soviet diet consists of grain and potatoes, compared toercent in the US. Onlyercent of the Soviet diet consists of quality foodsivestock products, vegetables, and fruits.

The impacthort grain crop on this pattern of diet is obvious. Bread for human consumption must be curtailed. Livestock herds must be reduced. There is plenty of recent evidence on the disappearance of

flour from stores, of distress slaughtering of livestock, and of the elimination of free bread from factory cafeterias.

The revolution of rising expectations applies in the Soviet Union as wall as in other parts of the world and Khrushchev recognizes thisore serious problem for his regime than it was in Stalin's day. Rising food prices, shortages of meat andecline in housing construction, and small gain* in the output of consumer durables are sources of growing consumer dissatisfaction.

The Soviet leaders are now callingolution to the agricultural problem andaster increase in certain consumer goods through the expansion of the chemical and related industries. They appear determined to commit the very substantial resources required. As formally presented by Khrushchevecember at the Centralplenum, the new program calls for tripling production of chemicals Among the specific goals of the program are production increases in fertilizers fromillion tons toillion toillion tons

Khrushchev apparently recognizes that the needs of this new program will 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 the diversion of funds from communaland housing construction. He has also noted the need to study possible reductions in the strength of the armed forces.

Although the Soviet economy, given more favorable agricultural weather, may be able to rebound from last year's growth ofthe prospects for recoveryustained growth rate equal to that ofs are not bright.

In an attempt to maximize industrial investment, the Soviet Union is turning to the West for greatly expanded credits and far more liberal repayment terms than theears. Moscow's gold position today is viewed as little better than minimal, with reserves of less thanillion.

A chronic inability to generate enough exports to the West to cover rising imports has resultedontinuous drain on gold Soviet gold sales3 amounted0 million0

million, compared with recent annual production of0 million5 millionroduction which incidentally is very high cost even by Soviet standards.

The accelerated outflow of goldirect response to the payment requirements generated by purchasing nearlyillion tons of grain in the Free World. The import requirements for chemical machinery and equipment, largely to produce fertilizers, will exceed several hundred millionear, and could beillion in total.

Hence, the current Soviet push for new foreign credits and extended repayment terms is directly related to Moscow's desire to prevent the chemical program from impinging too directly on the production of military end items. . new medium-term credits from the industrial West amounted to0 million annually. .However, payments on principal and interest for past loans leftmall net balance With the growth of traditional Russian exports slowing down or declining in virtually all major categories petroleum, timber, grainncreased credits represent the only promising means of financing substantially larger imports of machinery.

While the Soviets have been seeking larger credits from the West, the cost of their own economic aid program to the less developedalso has been steadily rising. New extensions of credit3 did not0 million, compared with more0 millionowever, drawings against Soviet credits have continued0 million3 (exclusive of drawings against military credits).

In summary, the Kremlin leadership for several years has been trying to do too much with too few resources. This living on borrowed capital, improvising cheap but temporary solutions to basic problems auch as agriculture, and chronically neglecting balanced development to push ahead spectacularlyarrow range of goals has finally caught up with the Soviet Union. early disastrous crop failure3 was not the root cause of Moscow's current economic difficulties; what it did was to bringead the many underlying problems of the Soviet economy and force reconsideration of the pattern of resource

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