KHRUSHCHEV'S CHALLENGE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP62S00545A000100090081-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 17
• Document Creation Date: December 9, 2016
• Document Release Date: July 17, 1998
• Sequence Number: 81
• Content Type: REPORT

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Khrushchev's Challenge
The theme of today's meeting, "Dimensions of the International
Peril Facing Us," is
a & iz the Chamber of Commerce of the United States. With
its membership of two and a half million American businessmen,
your organization occupies a hey position in our nation's approach
to international as well as to domestic affairs.
We all know that the Communist drive fo domination. met
with considerable success i~'early postwar years. It swept
over a substa part of the Eurasian land mass. Over one
ozc3pe`"dre''row`'ru"
The weapons employed by the Soviet leaders during this period
were the traditional ones -- military action and political sub-
version. Their techniques had been forged and tested in the take-
i
over of tin 5,;4"lf . These methods were sufficient to bring
the European Satellite nations and China behind the iron curtain.
More recently, a new weapon, massive economic penetration,
was forged. Under the banner of trade and aid Soviet influence
has been aggresively pushed outward since 1953, particularly in
the Middle East and in Southeast Asia. We must admit that it
has helped to achieve Soviets aims. As Khrushchev said in his
Kalinin speech last month, "The Soviet Union can be pleased with
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the development of the international situation during the past
four years."
Most recently, Khrushchev has challenged the United States
to peaceful competition. Our own grandsons, he recently predicted
to an American correspondent, "would live under Socialism in
America, too." In a February Moscow speech he said, "Let us
compete to see who builds the most housing, the most schools and
hospitals, who produces the most (food), and other consumer
goods. To the slogan that says 'let us arm,' we reply with
the slogan 'let us trade'." Finally, in his visit to Hungary
earlier this month, Khrushchev saw a vision of the United States
as a second rate power.
The challenge, then, is total. It is not only in the
scientific and technical fields on which advanced weapons
systems depend. It extends to the underdeveloped nations where
the ideological battle for the minds of men has been joined. Trade
competition, whether in Djakarta for jeeps or in London for
aluminum, has become deadly serious.
In broadest perspective, it is the American way of life, of
doing business, that is on trial. We are confronted by a formidable
adversary, who means business.
I do not mean to discount the seriousness of the Soviet
military threat. As I see it, the USSR does not now intend to
use its military power in such a way as to risk general war.
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They have a healthy respect for our reta .iatory capability.
Further, their sputniks have alerted iS,, to the military
danger poised by the ICBM in Soviet hands. Thy President has
moved quickly; our own missile programs are now uif.er maximum
development speeds. of coursdt
Soviet emphasis on the military applications of science and
technology w l result in a break-through which will upset
the balance of military power. Barring such a possibility, it
is most probable that the fateful battles of the cold war will
be fought in the economic and subversive arenas.
In this connection, the Soviet leaders are constantly
repeating in their press interviews, in radio broadcats, and
in their speeches, a desire to reduce international tensions.
They repeat ad nausttt, that they seek peace, not war. Yet
they throw a heavy veil of secrecy over all military activities.
If their objectives are truly peaceful, why is all the secrecy
necessary?
Virtually everything about the military capabilities and
production programs of the United States is open information.
The details of our defense expenditures are available to anyone
interested enough to read the newspapers. In contrast, the
Soviets release only a total figure, which we know can cover
little more than half of what their military is actually receiving.
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Our bomber production rates can be found in aviation
magazines. Our plans for nuclear submarine production are
fully available. The Soviets know this. In fact, the last issue
of their magazine, Shipbuilding, carried a complete story of
our nuclear submarines. This was not the result of Soviet cloak
and dagger espionage, but merely of reading the press. -
Yet the Soviets, with trivial exceptions, tell us nothing
openly about their military. The Free World is concerned, as
it must be, to protect itself against surprise attack. Vast
areas of the USSR are closed to foreign visitors at all times.
In August 1957, 120,000 sq. miles were added to the closed territory,
making a total of 2 million square miles that are of f limits
to foreigners. From time to time foreign travel to additional
areas are forbidden. On Itihrch 31st, for example, the Ukraine,
the Caucasus and Central Asia were temporarily sealed off.
Why do the Soviets want to keep such areas secret? What are they
hiding from the West? Certainly not "peaceful intentions!'"
The military field is not the only one where there is a
complete divergence between Soviet words and deeds. While main-
taining the largest colonial empire in the world, they are the
champions of nationalism in the underdeveloped areas. By pro-
claiming themselves to be anti-colonial, the Soviet emissaries
have gained the admission of their trade and aid programs in
many underdeveloped areas.
In this penetration, the Soviets are now greatly helped
by the years of effort devoted to subversion. This is particularly
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true where they have succeeded in spreading Marxist doctrine
among students and intellectuals in underdeveloped countries.
It makes most difficult our job of convincing the new leader-
ship in emerging nations that accommodating to conmiunism is
accommodating to disaster.
Consider for example, the speech of President Sukarno of
Indonesia given a few weeks ago. He said, "In the political
field I am a follower of Karl Marx. But on the other hand,
I am a religious man. I can understand the entire scope between
Marxism and religion. Possibly because of my Gemini star I have
made myself the meeting place for all trends and all ideologies."
Sukarno Is youthful association with socialist and communist
political leaders has influenced him deeply. We face the harsh
fact that Soviet arms, under Sukarno's leadership, are now being
poured into Indonesia to shoot dorm anti-communists. It is not
a comforting picture.
But Soviet credits and grants are not limited to those
countries where there is a prospect of short-term acceptance
of communist philosophy. Of the $2 billions of development
and military aid extended by the Sino-Soviet Bloc over the past
three years, substantial sums have gone to countries which
clearly are not in the Soviet camp. Let's get down to cases:
In Egypt the communist party was outlawed at the time of the
Bloc's original military aid offers in 1955. Despite repeated
crackdowns on communist elements within the country since that
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time the USSR concluded a major $175,000,000 economic aid program
with Egypt in 1957?
Cormiunist influence in Syria has been reduced following
its membership in the UAR in February of this year --- even. to
the point where Khalid Bakdash, the leading Arab commLaiist
sz? .,Qs t fleeAthe country. Communist-oriented General
Afif Bizri, former Chief of Staff of the Syrian army, has been
placed under house arrest in Cairo. But the USSR is going
ahead with its $170,000,000 economic aid program and continues
to supply arms under agreements worth $100,000,000.
The list of examples can be extended. Afghanistan is
a constitutional monarchy. The Imam of Yemen is an absolute
ruler. ~rnrtirm,,, i Z1.
Bloc credits Co not only where the Conununist leaders believe
assistance will advance communism, but also where such aid helps
to divide the west or curtail western influence.
The Communists have no money market problems. They have
no legislative restrictions. The USSR has developed an attractive
package credit deal -- long term loans, generally for 12 years;
22 per cent interest rates; repayment in surplus commodities,
and room for bargaining on prices. They have devoted much effort
to the native language training of the technicians they send
to the newly developing nations.
They have valuable assets in the Free World which are used
to push the trade offensive.
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One of the most important of these is the Bank of China.
It is the primary source of funds to the 12,000,000 Chinese
in Southeast Asia. These loans, controlled from Peiping,
often require appropriate gestures of support to the Communist
regime in China.
Branches of the Bank are in Calcutta, Rangoon, Karachi,
Bombay, Penang, Djakarta, Medan, Surabaya and other important
cities in Southeast Asia. The Bank promotes the export and
sale of Chinese Communist goods over this area. It also
collects a vast array of facts of economic and political
information, both openly and by clandestine means.
In Latin America we see a different type of asset. There
are a number of communist front or Bloc associated organizations
actively campaigning for closer commercial ties with the Bloc.
For example, in Brazil, the firm of TORGBRAS has been
prominent. It offered to import and sell Russian automobiles at
ridiculously low prices. When this fell through, TORGBRA.S offered
to import a complete auto factory from the USSR. While neither
offer may have been serious, they had considerable propaganda
value. The Soviet Union is pictured as a respectable member of
the world community, eager to do business.
We must not leave the field open to thise of penetration.
We cannot afford to be second to the Sovie in responding to
the legitimate economic development need of the newly created
nations.
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Our own interests dictate such a policy. Forestalling
coi,uiuunist subversion is an obvious necessity to maintain a
world political balance of power. But our own economic needs
for industrial raw materials are growing every year. We are
becoming more and more a "have-not" nation as our high grade
domestic reserves of such essentials as iron ore and aetroletun
are used up. We are turning; increasingly to imports of such
mmaterials, largely from the underdeveloped nations. Ordinary
prudence dictates that we bend every effort to keep these reserves,
so essential for our future growth, from falling into communist
hands.
Can the Soviets afford to keep up their present level of
assistance to free world nations? Is their increased` trade
with the West the result of a completely artificial phenomenon,
which must soon disappear under the pressure of harsh domestic
realities? Are Khrushchev's promises to Improve sharply the
living standards in the Soviet Union hollow? Is the boast to
outproduce the United States made up of whole cloth?
To answer these questions we must examine the Soviet
economy in the perspective of history.
Since 1928 the Soviet Union has developed rapidly from a
predominantly agricultural, industrially underdeveloped country
to the second largest economy in the world. Forced draft industri-
lization, emphasizing heavy industry, was carried out by Stalin
to prevent (in his words) another beating of backward Russia
by the more economically advanced capitalist countries. Forced
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draft industrialization continues, and now the emphasis is
more positive: to meet Khrushchev's goal of catching up and
surpassing the United States in per capita production within
the shortest possible historical period of time. This theme
has been used not only as internal propaganda but also to
propagate the Soviet faith abroad.
Conrparison of the two economies of the US and the USSR
in terms of total production of goods and services (or gross
national product) will indicate the USSR's prog}NesA Whereas
Soviet GNP was about 33 percent the size of the US in 1950,
by 1956 it had increased to about 40 percent, and by 1962 it
should be about 47 percent the size of the US. This means that
the Soviet economy has been growing, and is expected to continue
to grow through 1962, at a rate roughly twice that of the economy
of the United States. Annual growth overall has been running
between six and seven percent, annual growth of industry between
10 and 12 percent. These rates of growth are exceedingly high.
They have rarely been matched in capitalistic states except during
limited period of postwar rebuilding.
A dollar comparison of USSR and US GNP in 1956 reveals that
consumption -- or what the Soviet consumer receives -- was less
than half of total production, while it was over two-thirds
of the total in the US. Investment, on the other hand, as a
proportion of GNP in the USSR was significantly higher than in
the US. Further, investment funds in the USSR were plowed
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back primarily into expansion of electric power, the metallurgical
base, and into the producer goods industries. In these fields,
it was between 80-90 percent of actual US investment in 1956.
Defense expenditures, as a proportion of GNP in the USSR was
significantly higher than in the US, in fact about double.
Soviet industrial production in 1956 was about 40 percent
as large as that of the US. However, Soviet heavy industry
is proportionately larger than this overall average, and in
some instances the output of specific industries already
appreached that of the US. Output of coal in the USSR was
about 70 percent of that of the US, output of machine tools
about double our own and steel output about half.
Since 1956, Soviet output has continued its rapid
expansion, while in the United States ours has not.
In the first quarter of 1958, Soviet industrial production
was 11 percent higher than a year ago. In comparison, the
Federal Reserve Board index shows a decline of 11 percent
in the United States. ~ 4 r
For the first time in history, the Sino-Soviet Bloc.has
surpassed the United States in steel production. The three
months figures show that the USSR alone turned out over/75 percent
of the steel tonnage of the US.
A recession is an expensive luxury. Its effect are
not confined to our oini shores. To be sure, none q'f us likes
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the Tess of production, of employment, and of dividends. But
the international impact is even more serious. Soviet propagandists
LkA, o T
have had a field day = ^r +~19 ~' ~? months, pounding away at
American free enterprise.
Every Soviet speech, magazine article, or radio broadcast
beamed to the underdeveloped nations plays up our economic
difficulties. The uncommitted millions are being told -- "see,
we told you so. Crises and unemployment are inevitable under
capitalism. Communism is the only true road to social progress.
Our recession has given the Communists a propaganda weapon.
ss.
damaging to US prestige,
Continued Soviet industrial growth has had a counterpart
in increased trade with the free world. Over the past two years,
their trade with the west has been moving ahead more rapidly than
it has within the Bloc itself. About 70 percent of the USSR's
increase in non-Bloc trade in 1957 was with the industrial nations
of Western Europe.
Recent speeches by Soviet leaders -- Khrushchev, Mikoyan,
and Zahkarov -- contained many statements indicating that the
USSR desires to expand trade with the Free World. Mikoyan, for
example, said that the USSR is "confident that with the establish-
anent of normal trade relations a significant forward step will
be taken along the road leading to the establishment of cooperative
relations between the Soviet Union and the United States, and
will help establish confidence between the two countries."
This month, Zahkarov told the United Nations Economic Commission
that the trade i '
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bringing about a long-run increase in East-West trade.
An essential bar to normal commercial relations is the
aura of secrecy surrounding the economic activities of the
USSR and its Satellites. I do not mean only their activities
in the nuclear, missile, and military weapons field. I mean
their day-to-day activities involving the production of such
basic necessities as tin cans, aluminum pots, and copper kettles.
The USSR withholds from the world harmless facts of its pro-
duction of such goods. It withholds information even on the
production of the basic raw raterials -- tin, aluminum, and
copper -- out of which these goods are made. The Soviets have
not given out a production figure on a non-ferrous metal for 20
years.
Secretive behavior does not create a favorable atmosphere
in which the spirit of friendly exchange of goods and materials
can grow. This lack of information about reserves, production
capacity, processes used, and prices breeds suspicion, doubts,
and tensions. The past year saw the Soviet place on the world
market quantities of gold, aluminum, tin, and platinum that
were without precedent. These sales were not only unexpected,
but some of them were made at lower than market prices. Such
behavior cannot help the Free World, to become more receptive
to Soviet goods and materials. In fact, some Free World producers
immediately charged that the Soviets were deliberately trying to
disrupt the Free World market.
The evidence does not support the interpretation that the
Soviets have deliberately embarked on a campaign to disorganize
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Western metal markets. Rather, the proceeds have been used to
pay for increased imports of machinery. A few years ago, in
fact, limited metal exports from the USSR were able to command
a premium price in Western markets, due to the tight supply
situation. However, the unnatural secrecy surrounding Soviet
metals industries breeds suspicion. It makes more difficult
the accomplishment of the Soviets on trade objectives.
As we forecast the future, we expect Soviet metal exports
to increase. This trend should be reinforced by the continued
growth in metal production within the USSR. It is already the
second largest producer in the world of pig iron and steel, and
the third largest producer of aluminum. Increased competition
from Communist producers in these traditional western markets
is an economic fact of life.
Let's return to the main stream of Soviet economic develop-
ment. The new look on the face of the Soviet economy is, of
course, the serious attention being paid to the consumer. KhruAhchev
has become identified in the minds of the Soviet people as the
great proponent of raising living standards, of sharp improvements,
in diet, in housing, and in clothing.
It is one of the ironies of Soviet politics that Malenkov
first proposed this course, and because of this, was deposed by
ithrushchev and other party leaders. Addressing the Supreme Soviet
on August 9, 1953, Malenkov said, The urgent task lies in raising
sharply ....... the population's supply of foodstuffs and manufactured
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goods, meat, butter ..... textiles and footwear." In the
same speech, he said, "Comrades, in the cause of the improved well-
being of the nation an important part is played by the further
improvement of housing."
The historic parallel is in the 1925-27 struggle between
Trotsky and Stalin. Stalin vigorously opposed Trotsky's insistence
on collectivizing agriculture and on forced draft industrialization.
But having disposed of Trotsky, Stalin immediately adopted the
same policies. In bloody operations, he liquidated private farm-
ing. The first five year plan, with all other objectives sub-
ordinated to the development of rapid heavy industry, began in
1926.
Itirushchev innaugurated his campaign to Americanize
the Soviet diet by the early 1960's with a prediction. he said,
"We have dared to challenge America to peaceful competition in
a most important economic field ... If we catch up to the
United States level of per capita output of meat, milk and butter,
we shall have shot a highly powerful torpedo at the underpinnings
of capitalism."
Agriculture is no longer a Soviet stepchild. Investment
has increased sharply. Prices paid to farmers have been raised
and peasant incomes increased. These efforts have lead to con-
siderable improvement -- agricultural output has been raised nearly
one-third over the past four years. It is still far below I0irushchev's
goals, particularly in meat.
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Growth considerations, in addition to consideration for the
Soviet consumer, help to explain the current ambitious
housing program as well as that for agriculture. Allocations
of some key goods and services, such as housing, through the
employing enterprise will promote the desired allocation of
labor resources and increase labor productivity.
The housing program is aimed at wiping out the housing shortage
in the USS.H in the next 10-12 years. The decree was issued in
mid-l:-157 and reaffirmed the Sixth Five Year Plan housing targets
at a time .fLien the plan as a whole Sias being abandoned as too
ambitious. The housing program is not one where the Soviets
expect to "catch up to the United States" by 1970.
These ambitious consumer welfare programs will require the
diversion of some resources at the expense of heavy industry.
We anticipate a moderate reduction of growth, from the 7 per cent
a year achieved in 1950-55 to about 6 percent.
In assessing the future, the striking flexibility of the
present Soviet leaders must be considered. Khrushchev, especially,
has demonstrated a willingness to abandon dogma and drastically
modify established institutions as lie continues the reexamination
of the Soviet economy in a search for economic efficiency. His
his
reorganization of industrial management last year and/decision
this year to transform agricultural institutions are the major
examples of this flexibility.
A continuing high rate of growth for the Soviet Union can
be anticipated because rapid growth remains a major national
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objective. Khrushchev's goals for 1972 shows a plan for Soviet
steel output to double -- to between 100 and 120 million
tons. The energy base would about triple with electric power
output up to between 800 and 900 kilowatt hours and petroleum to
between 350 and 400 million tons. These levels of output would
be about equal to US production in 1957.
For certain other commodities, such as coal and cement,
the Soviets plan to reach by 1972 a level of output some 50 to
100 percent higher than our own in 1957. Viewed in the light
of past Soviet performance, the annual rates of growth required
seem relatively modest.
But what these goals imply is that somewhere in the 19601s,
the absolute gap between total United States production and total
Soviet production will begin to narrow. Once the gap does start
to narrow, and if Soviet expansion continues at roughly double
the long-term US rate, the gap could close rapidly. L few decades
more would do the trick.
Some such timetable, I think, is what Khrushchev had. in
mind when he said on April 7th, that the Soviet Union in a short
time will take the lead away from the United States. After
all, a generation is, in his words, "a short historical period
of. time."
Also, with no reapportionment of priorities among industrial
objectives, living standards for the estimated 260 million Soviet
citizens in 1972 would have increased, on a per capita basis, by
more than 60 percent. The diet would be greatly improved and
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the housing for the average family of four would be raised
to at least a two room apartment with kitchen and bath.
Finally, the by then no-so-bac1ward nations of Asia and
Africa could be receiving a billion dollars worth of Soviet
aid annually.
In summary, the Soviet challenges are serious ones. Forty
years of Soviet development have lifted the USSR to an economic
position far ahead of England, France, and Gerrmany. To me,
it is entirely possible, and perhaps probable, that in 30 years
more the USSR could move into first place.
As Director of Central Intelligence it is not ray task to
recommend policies. It is rather to analyze as 'accurately as
possible and present the facts as a basis for determining policy.
The countermeasures, gentlemen, are up to you.
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