CW HISTORICAL REVIEW PRORRaiu
2
Shift Id Allocation of Sovlot Resources to Military Suaaory aad Conclusions
onhrCCKnbafiByosnentod frequently f the Soviet economyl.lT
PrVl0US yettrB- ^bLay has estLnated
that these reduced rates of Increase in economic activity probably
utHiversion of reaources ti military
Uan Increase ofillion ln Soriet defense expenditures for the latter half1 end the2
f Research aad Reports (ORR) hasPlan shortfalls with-
is" enl? f We agree vith tbe conclusion that their econonylovdovn In the previous high rate of growth. Severer, in our opinion, the lessened tempo of expansion
reexamination of current
oovietprograms viU supportodest increase in military
nabsorbable booet^-
on the order2 billion
ln recent
eraluate' the discussion vhich
follows, ve hare sunnarized our vievs on each of thendicators put forward by the Rnbassy to support the likelihoodubstantial cnirt of resources to defense purposes. Despite the risk of being, too succinct in our consents and appearing overly confident in our jneaouremeatariety of snail changed in military expenditure between the tvo years, tbe following conclusions have been drawn:
(1) It la believed that an increasebe order2 billion in Soviet solitary expendituresI2ownward revision of our present- ceems consistent with the evidence to dote. Moreover, ve believe
represents the views of the Office of Research and Reports, Central Intelligence Agency, as of
*, dated
** "Present estimates" refer to the calculations Included into holders ofnd B, January
there is aw additional evidence to support the previously expressed viewarge portion of tbe Soviot announced change in the explicit budgetsan increase ofbillionas atransfer fron previously "hidden" accounts.
There is no firm indication that the Soviets have recentlyignificant portion of the capacity ofaine building industry to the production of military equipment;
It is not believed that the construction component of military expenditures Is large enough toignificant Impact on the other areas of the econony, even if sizable increases related to construction for military purposes bad occurred;
CO The slowdown in the rate of increase in per capita consumption of food, bousing, and clothing, is basically related to the failure of the agricultural sector to maintain growth rates during the Seven rear Plan of the order experienced between the death of Stalinnd to the ideological penchant of the Government to restrict private housing construction.
In sunrmry, while recognizing that: (l) the Soviet Onion has probably now budgeted more funds for defense than it originally had plannednd (a) that changes in levels of expenditures for defense programs could cause temporary dislocations in certain segments for the economy, vo cannot at the sane time support the Embassy's proposition of the magnitude of the military Increase, or that it has been the principal cause of the recent difficulties experienced by the Soviet economy.
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Discussion
8hlft in Allocation of Soviet Resources to Military Uses?
Over the past three months Embassy Moscow has commented frequently on the poor performance of the Soviet economy1 relative to previous years, and the prospects of further deteriorationn recent weeks the Embassy has further suggested that theseof reduced rates of increase in economic activity are primarily related to the diversion of resources to military uses.
More specifically, two themes are prominent in Eabassy reports:
The economy lo currently under increased strain due to an overcannitment of resourceslowdown in rates of growth
One of the important causes of this setback1 is the shift in resources from the civilian economy to the military sector.
ORR concurs with the notion that the economy is currentlysignsoderate slowdown in the usual high rates of increase in output. However, we would differ with the Embassy evaluations in three Important respects:
1 industrial performance, as distinct from that of agriculture, was relatively satisfactory as measured by Soviet standards of growth, and quite high when measured by Western yardsticks.
Our views1 performance are necessarily somewhat preliminary because the relevant dataeaningful analysis of events remain incomplete. For example, the level of total investment activity is unknown. ormal pattern of publication of official data prevails this and other "missing pieces" will be available shortly;*
Ve believe the Embassy has misinterpreted some of the statistics released to date. Examples of this
* The -short" statistical abstract for the previous year has been published at the end of March for the past tvo years, the larger edition in the fall-
misinterpretation will be discussed below io connection with the coonnent on the diversion of resources to military use. In arriving at this conclusion, we do not wrap ourselves in the cloak of omnipotence, but realize that tbe datao Washington analysts compared to thoee in Moscow are nore complete.
ORR does not concur in the Enbassy's belief that there probably hasarge diversion of resources to the military sector. The Embassy suggest an increase of billion dollars in defensefor tbe Utter halfI and again ln tbe2 We feel that the ORR estimate of an increase of about one billion dollars is more consistent with the evidence. Tbe Enbassy's views and supporting evidence are set forthecent Alrgramated Because of the Implications for US policy it Is Important to consider in some detail the evidenceossible shift in resources.
The above referenced Alrgram lists lo indicators of athe allocations of resources to defense. In supporting ourthere probably has not been nearly asiversionas suggested by the Eubossy ve will comment on eachIndicators. This exercise will also provide background foragreement with tbe Embassy that the econony is
Taking the items underscored in the Embassy's Airgrom in order: Indicator A:
Unexpected appearances of defense goals In majorsuch as Khrushchev's Octoberpeech, thr-and theljjbg Budget; the change in eaphasls duringexemplified hy Party directives, quoted In defenseof1a budgettonation's defense capacityroper level"l). "to
gTe lD ^tbe dcfens'i csPacltYTfourTountry"
Comment: We have found fron experience that such official statements are often ambiguous and arc not reliable Indicatorsbift of emphasis within the econony.
Indicator B:
Notable failure of tbe Soviet economyI to cone close to plrinned capital investment growth In key Hectorsj sizable reductions in growth of capital investment scheduled for
Comment: This Is the indicator most suggestive that competitiveperhapsinvestment goods have significantly reduced the availability of resources to the latter. Tbe available data appear in Table 1. It is difficult to generalize about the performance of total investmentI because the data for the agricultural sector remain incomplete. Tbe latter series when included could significantly modify tbe direction of trend ofinvestments. 0 the agricultural sector invested nearlyercent of all equipment used for Investments. In any case, from the limited data wo have available tbe nost important underwill be ln tbe construction component; equipment investments only slightly below the rste of Increase for the previous year.
Table 1
inAnnual Percentage ChangeJ
19J2
Total Actual
(excluding
10 .
9
Of which:
Investment in selected industries
Oil and
Machine
materials &
construction
Pood and light
12
3 -
With respect to the construction component, an important alternative explanation to diversion is that the rate of increase in the output of building materials has dropped significantly over the past three yeara as follows:
Annual Percentage Increase
He
st.)
Thus the relative lack of materials plus inadequate planning and management of investments (reflected in official complaints) may be the relevant factor in shortfalls rather than diversion of resources to military uses. Also, account should be taken of tbe very ambitious rates of increase planned in someercent in chemicals and bo percent in machine building, for example. With such targets, short-falls in achievement are not unexpectedormal consequence of over ambition.
Indicator C:
Notable success ln mchine building (including armaments) industry despite uadcrfulfillrent in key sectors, suggesting offsetting increases In military production;
Comment: The aboverecisore detailed analysis forwarded by the Embassy (Alrgram,. In that report the Embassy cited two types of evidence to support the notionossible significant diversion of resources to military uses:
The underfulfillment of1 targets for the output of certain commodities included in machine building end metal working (MBMW);
The large difference between the percentage increase in the gross value of output for MBfeVhole and the Increases for individual categories so far announced whether output was below or above tho goals.
With regard to the underfulfillment of certain categories, the Embassy cited seven items in the machine building industry as having underfulfiUed their production plan These seven categories accounted for less thanercent of the total gross value of output
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for machine building
Too Embassy is on firmer ground when it takes note of the high rate of growth for machine building and metal working (MBMW)ranch ofercentcompared to the lower rates of increase for the individual categories under MBMW. However, thereonsistent differential over timevarying in sizebetween the official gross output for MBMtf and ORR indexes of machinery computed by aggregating output of the various types of machinery within KBKW. Comparing ORR's civilian machinery index to the overall official indicatorW clearly shows this discrepancy:
Annual PercentQ" 1H2 0 1
Gross value ofMBM? 15 l6 16
ORR's civilian ii
However, ORR's index is believed to be biased downward for the following reasons:
types of equipment are not included ln the sample;
ln quality (including complexity changes) ofthose categories of equipment included in the sample arereflected in the valuation process;
of spare partsapidly growing categoryequipment) is limited in the sample.
In any case the direction in change In the differential between the two series (shown above) suggest that the military equipment component of HEM* has not significantly changed
Indicator
Failure to1 plan goals in certain majornig iron, steel, rolled metal, steel tubing;in industry
coameot: Toe latter reference to "eeriouB deficiencies" in Industry supports tbe econonic sloudovn" proposition put forward by tbe Embassy but would not necessarily support the hypothesis that military spending hasignificant shift in resource allocation.
With reference to tbe output of ferrous metallurgy the foUowinp should be noted:
1 of three of the four items listedpigand rolledere lessercent belov thewhich had been significantly adjusted upward;illion net tons:
of these three items was significantly aboveproposed1 in the seven year planand 7 above, respectively.
Indicator E:
Failure1 to rain tain "no less than0 percent annual
increase In Industrialnnounced by Khrushchev as late as
1 for the next tventy years: cutback2 lndustrualo.l
Comment: Twenty year plan goals ore irrelevant for the purpose at handdetecting current shifts in resource use.
With respect to2 goal we have two comments:
the beginning of the seven year plan the annualbeen consistently below the actual achievements. had the following trend:
(Percent Increase-official)
8.1
order to fulfill the Seven Tear Plan goal an averageincrease ofercent is required.
Indicator F:
Failure to meet retail and forgIks trade plan poolslowdown in conaercial over the past threeshortage of liquid
Ccamcnt:
Retail Trade: Retail tradeIercent comparedlanercent, primarilyisappointing year in agriculture, particularly livestock. In2 retail trade picked up and is currentlyercent above last year.
Foreign Trade: Turnoverercent comparedlanercent. It is believed that the exacerbation of Sino-Soviet relations (unplanned) is responsible for most of the underfulfillment.
Indicator G:
APP&reat reversal of trend towards consumerspoodsoaauaara' goods product?^
Cocacnt:
Policy: The prlaary reasons for the abort-fall In consumers good, wre (IJ the failure of agriculture to reach planned output goals, and
e y Kbrushchcv to cut sharply the construction of private dwellings. From tho data at hand the annual plan goals for consuoer goods were met except for certain consumer durablesrefrigerators, washing sachlnes, sewing machines. Although there were significant underfulfUlmentsoercent) below tbe revised (upward) plan for these three items, increases in output wereercent, respectively.
Indicator H:
Bbtable failure to met labor productivityhich couldto uneconomic [military) utilization of resources":
e^ miXm to meet labor productivity
goals ls evidencehift to ailitary production. Other factors appear to explain this phenomenon. Pirst, labor productivity goals
traditionally have been underfulfllled ln industry and construction Second, some undorfulfillnent of productivity goals (output per person working) was to be expected as the shorter work week was adopted in the low priority industries where reserves of labor probably did not exist.
Indicator 1:
Partial coratorlun of new capital construction because of "dieoersal
Of resources.
CoEoent: as on ambiguous interpretation. Although it could suggest diversion of construction irate rials to the military sector it could also neon nothing more than what Khrushchev indicated It wasan attempt to reduce tbe rapidly increasing volume of unfinished construction.
Indicator J:
Rotable failure In housing construction.
Comment: Housing construction fell eight percent1 end is considerably below the Seven Tear Plan. It Is believed that the most Important cause was the drop in output of building materialsnd the curtailed construction of private housing.
Indicator K:
Onesual reduction In "national economy" category ofillion rubles) and extraordinary increase in tbeillion
Comment: The reduction in the budget expenditure Item of "financing the national economy"illion rubles is believed to be explained by a surfacing" of hidden defense expenditures. In other words, part of the Increaseillion rubles in the explicit defense budget is offsetnot supplementedby the decrease in this item compared to1 budget. illion rubles believed to be diverted
to the explicit defense budget from the "hidden" categoryunder
"financing the nationalillion rubles in defense funds was believed to have been "surfaced" from the overall Budgetary Expenditure Residual. This latter residual was known to have been moreillion rubles io the previous year. (See tbe appended note on Soviet Military2.
Indicator L:
The k5 Percent Increase (oyer1 Plan) In thestrength of tlie armed forces, reported by Washington.
Comment: Our current estimate of the change in the level of the armed forces is an increase In the numbersillion or an increase ofoercent.
Indicator M:
The extraordinary nuclear test program inl, vhlch car have
been followed by increased investments in bomb production faeiTTIT^
and vhlch night not have been included ln1 budget.
Comment: The recent tests could veil be followed by further investment in weapons production facilities. Bbwever, it is doubtful that such investment would exceedillion rubles.
Indicator N:
Unprecedented Warsaw Pact maneuvers which eight not havein1 budget: internal military aovengntu rcnn^ri^Berlin
Coroent: We are inclined to feel that the Warsaw Pact maneuvers and other Internal movements last year even If unanticipated would be relatively Insignificant ln terms of effect on expenditures.
Indicator 0:
The overall financial problem of East Germany and East Berlin as
increased drain on the Soviet treasury, unanticipated in the
budget.
Comment: It is not clear how this provides evidence on the diversion of resources to military purposes.
Indicator P:
Increased production of traditional weapons suggested by the notable success of the machine buildjnp Industry.
COCTDi-nt: iscussion of the problem of using. Um overall official Index for machine building van discussedbove. Incidentally more than the production of "traditional weapons" are included inthe official output of machineissiles arc also included.
Indicator Q:
Possibly increased Soviet efforts In research and development, science, space, missiles, nuclear-poured nubairines, new weapons.
Comment: With one exception (anti-missile-missile systems) there is no evidence of any sharp change in the rate of activity.
Indicator B;
Increased wage bill resuiting from the "voluntary" return today moored in defense plants.
Coment: Aside from the original public offery "workers voluntary" return toour day ln defense plants and Khrushchev's statement onugust we have no Informationeturnonger workweek in these Industries. Khrushchev's answer to the original offer "permit us to avail ourselves of Its depending on the situation. Leave it to your government and the Central Committee of tho Party." To date, we have been interpreting the original interplay as staged sabre-rattling.
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Append!x
Soviet Military21
. ompares the changesn Soviet militaryas previously estimated and attempts to appraise in general termf what these relationships probably would be If revisions were made tSSv and some of the major uncertainities were taken into account
Whereas the Rational Estimateillion2 as comparedl, lt now seems
the increase viU beillion rubles. If reasonableIs
ainltles about relatlvfuble expenditures (such as land armaments, and research and deveSSnO
II!could occur. For this reason, amon* others
siderable-degree) Soviet budgetary accounting practices, pcesiblyfor disarmament^ n
reasons we are also inclined to regardillion
ruble increase in the explicit defense budget announcedTat least generally Indicative of the real change1 snd^fe
Tbe rational* for the revisions indicated in the Table are as follows:
1- In the area of expenditures related to personneland maintenance and the procurement of organizations?previously estimated increase van reduced by half because"
ThereforrthTforcein the '
Table 2
Increaoeo ln Soviet Military Expenditures from2 Baaed on Present Estimates and on Poosible Revisions (Billion
Estimatebc/
0
Personnel
Facilities ofwhich;
Ground
0 30
Guided
Ruclesr
Research
in this table represent estimates originally prepared in terms
5 (old) rubles and converted to now rubles at the rate of ten old rubles for one new ruble.
ln tola column were obtained by subtracting1 estimate
from2 estimate for each category, using the material which was prepared in support of the National Estimate last year.
accompanying text for explanation of the revisions.
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2. Estimates of the procurement of land armaments may be regarded as subjectonsiderable uncertainty. It is conceivable that the estimate1 le too high, especially if one coneldere that demobilisation was the order of the day0 and, probably, initially with respect POr these reasons It may bo considered as within the realm of poselbllity2 viU ehov an actual lncreaae of SOO million rubles as compared1 end this possibility ls reflected as an upper limit for the category In Table 2.
3- Tbe aircraft estimates2 were revised downward because the estimated advent of the nuclear propelled bomber scorns unlikely In sddition, the Blinder program ls building up slowly and the aggregate of the fighter aircraft programs will show little increase.
4. Tho slight adjustment in the estimate for ground electronic equipment is the resulteview and revision of previous estimates.
5- The estimate for Soviet research and development Is another of our estimates that is surrounded with considerable uncertainty. Moreover, this estimate Is admittedly conservative and ia certainly insensitive to year to year changes such as are In issue here. Therefore it is feltossible increaseillion rublesikely magnitude. (Because of the uncertainty, however,e conceded that an lncreaaeillion rublesot shown in Tabicealistic upper Malt).
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Original document.
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