Created: 7/26/1963

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1. Introduction

Tela mcrorandun la Intended prlnartly aa an elaboration and fuller explanation of tbe main Idea* that were contained In, Soviet Eeonrclc Probleaa, SO, and ln our contribution to thla fOfc,rends In tbe Soviet> line baa passed and nev information baa appeared. Hence the aeacamndum also refleeta to some degree the re-aaaeaaaent of the Soviet econony as ofhat was summarized in the CIA Memorandumoviet Policies endPrcfelens on the Eve of the Moscow negotiations.

P. Recent Strain on Itssqorces and JJlfflcultyofialon

A basic thema of2 is that the recent slowdown of growth combined with growing commitments In defense, space, and inreatsaat progress has resultedtate of "strain" ia the Soviet econasy end that in the vords of tha KSt "This suggests that some very difficult allocation choices bars yet to be made or are being made new. Choices soist be aade on the one hand between current consumption. Investment, and defense (includingand on the other hand between investment In consumer sector* and Investment in basic industry."

Ths difficulty referred to is not the chronic problem of the allocation of scarce resourcestautut rather the political problem arising from frustrated hopes and unfulfilled promises. Khrushchev and bis colleagues have the same difficulties aa other political leaders in postponing aabitlons and reneging on premises. The demands which are competing vith defense and space were described ins follows.

Demand for rapid economic growth: "Rapid economic grovth aimed at catching up vithundamental long-run Soviet policy, which the leadership will be reluctant to sacrifice to anmilitary buildup for vary long." (p. 3)

Demand for better supply of consumer goods 1 The Soviet people are chafing Increasingly under the Inability of their government to provide better quality food, decent bousing, and more consumer durables." (p. 3)


wo oade tn the ER to docvmentM^

rices are discussed la th*' published paper, ggjfljgfrg Inflationaryg SQgT^

The goal of catching up with tha OSong established ccnaoaUat goal, it hna not dlaunlahad with timeT Cn^oSrarv, it baa flourished aad has takan on mora body and precision aat^l

wlWtran^been narroweT St^LT* was oapbatic aa to tho ijapconanes of catching up vith capitalist countries but vague aa to tiaung. 9 he -aid,

Warve surpass the principal capitalist countries eccactilcally can ve count on our country being fully abundant ccflroSLVt^ tne occaaa stage of. But lt should take tiaa.

des, the estimates of our planning atsff show thatcan in the nextears not only catch up !fOalted State* production volumeentlll Products, but outstrip it.

Inlouder end clearer 1

m ashed, atr. luiruahchev, what do yon thlnkT In what

year will you catch up withreply lai -you

can write down in your little notebook that ve vlll orertsi you in per capita industrial reduction.

There ere mnsrooi other Soviet statement* to the same effect going back to lealn in lojo. .yearly all ardent* efttsTufflRbS' rocognlred the lapca-tanos of this goal. ProfessorKeoTeaid in ChalUngeBut in the economicureuS staa^puTthe imperative that he inherited fro. QUI in, by ou^aSng the USA eeceicoacally, the USSR must eventually supplant us jL^ST^ World '* first industrial power."

3* gfTfct of Dofooee on Growth

lligrwth continued2 ond, ao far as vafron. ocancolc Intelligence lnforcntlon, continues ln IQo^ exaaple,ercentompared to an91 and an average of 7elxwdownwaa attributed to (l) the defease bullduu in

ullhe shortoncdloos favorable weather and adown ln tho rate ofla agriculture, rhe experiencef <l)lues the effect ofoverotal aannours worked In indrertrypercentoying conatent during

to the analysis, naaely, that lave*idsignificantlya percentage? can bert be answeredfroaCbsllengeoy a

tfdil.bedad that the Soviet stocki. growing at an extraoralaary rate: in the fifties by soaeercent per year. Even mlatalzilm thia high teopo, to aay nothing of iiwrcaalna lt vlll bTT^ difficult task. This could not be accoGpUahcd merely bythe present ahare of national income devoted to the nev


w yhne li-portant fact ia atUl not alwayscoace obvious when one considers that capital atoek has been growing orach aore rapidly than output and that this la the chief reason that it has been possible to increase outputapid pace to begin with. As we caw, the grovth in the enploycont of labor boa only been Bodest".*

Finally, therejies^onoof time lag. investnent isto capital stock, and Uaeoeaof

capitolatock. Although luvestaaat boa not grownhare of OHP for three years, this factor could not bare sieved up the growth at capital stock aach yet. Tbe auantitative measures/ therefore do not fully explain the slowdown In grovth of output.

* Bee *hunjpOn and Kutnets, Econmlc Trends In tho Soviet Onion. Barvard capital stock and output.

For example, if capital stock and net Investment bad been growingercent annually, and if net invcaUaent elovedrowthrcent annually, then the growth of capital atoek In the third^ear^ulaercent.

'Ilic other factors In the alowuown which arc discussed In are qualitativend Lack of flexibility of the system, inuo the diversion of resources to suMltory and space uses haa been asIn quality as In quantity. Military and space have provided Increasing ccapetltlon for spec tall ted. high-grade ro sourcescomplex machinery, new alloys, and highly skilled labor and lBsnagenent.

") The second factordifficulty of the Sovietadjusting to sudden changels elaborated in the discuss IanIn invesasent, in industry, and In planning andby Soviet leadersicture of

hange and Inability of the economy to adjust smoothly to Khrushchev, for instance, in bis speech before thc Central Committee Plenum last month, once again berated tbe planners andfor starting nev investment projects Instead cd* finishing old ones. Our assumption is that the rather aanll percentage stringency imposed by added cons option of materials and equipment in the defense and space program quickly resulted la bottlenecks vhlch the Soviet lnvesbnent system vas unable to solve expeditiously and economleally.

Tbe current re vis Ion of the planh$ is support for thc above argumenta. In order to get the sdjusbnents vanned by Knruahchevnotably the ran id expansion of production of fertilisers and plastics and the concentrationalted number of lnveatnent projects of the highest priorityIt has proved necessary to completely rework the lost two years of the seven-year plan.

1.. CpBiparatlve llffccba of the Area Ituce on the US and tbj USSR

2 assert* that "The Soviet leaders must bc acutely aware, however, that tbe arms and space races are penalising Soviet economic growth more than these races penalise IE growth." 5othing particularly subtle vas meat by this statement. Thc us today has idle capacity in the economyhole and in almost every major branch of heavy industry in particular, in contrast to the strained condition of the Soviet economy. Further arm and space escpendltures In tbe US aljaaat certainly would lead to substantial increases In QKP, investment, and consumption, whereas ln the USSR further expenditures would lead to additional shuffling of eccnxnic plans and resources and vould cause further delays In finishing non-cilitary construction projects and in improving tho lot of the consumer. Furthermore, the arm and space race, which has been steppedotch or two, in tho past two yeoro, has caused almost no problems of adjustment or friction in tbe market economy of the VIS, whereas in tbe DSSR the transitional coats of getting from one product mix to another appear to have been high.

5- Facias the Problem

The general economic picturealid

appraisal cu" the situation ln the Soviet econoay tooay. However,of the leadership to its problems may have changed. Atwoe written the Soviet leader* appeared undecided about

if any, should be reduced. In February of thia

year, they seemed to be leaningontinued eapbaaio on defense at the expense of consumption (Bee. Bow, however, toruahebe appears to have given the green light to the productionrtilixero, eyutbetlc fibers, snd plastics, in apparent support of consumption. Whet other decisions (far example, the trend in defense expenditures) may have been made ve do not yet know, but the current process oftha plans5 suggests that tbe general outline of these decisions has been laid down by the leadership.

Original document.

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