SOVIET ECONOMIC PROBLEMS MULTIPLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP66B00403R000500080004-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 4
• Document Creation Date: December 20, 2016
• Sequence Number: 4
• Content Type: REPORT

Approved For Release 2006/04/17 CIA-RDP66B00403R000500080004-3
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 b r
1970, thus 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 conclu.ston --?~
namely, that the Soviet Union is falling behind in the economic race.
The first years of Khrushchev's leadership were. marked by a series
of successes. The expansion of planted acreage through the New Lands
program gave agriculture its first real lift since 1937. Economic growth
was rapid -- probably better than 6 percent a year for the 1950-59 period
as a whole, aided by cuts in armed forces personnel and in military
spending which took place in 1956 and 1957.
While housing continued to be very tight, there were noticeable
improvements in living standards, particularly in foodstuffs but also
in consumer goods as compared with the late Stalin years.
After 1959, however, 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 in half,
falling to between 4 and 5 percent in 1962-63, a sharp curtailment in
economic growth was inevitable. In 1962, Soviet gross national product
was about $260 billion, or 47 percent 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.
To a great extent Soviet economic difficulties stem from a series
of programs too ambitious for available resources. With a gross
national product less than half that of the US, the Soviet leadership
has invested in new plant and equipment amounts nearly as large as
investment in the US and has maintained a military-space program
approaching in real cost that of the US.
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Much of the blame for recent reductions in the rate of growth falls
on the sharp increase in Soviet defense spending, which between 1959
and 1963 increased by about one-third. However, the problem centers
less on the total size of defense outlays than on the diversion of scarce,
critical resources -- both 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 under fulfillment 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 growth in 1962 and 1963 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 markets -- perhaps 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 up in 1955-58 proved to be temporary. Once the
original soil moisture and fertility were used up, output fell off. In
1963, a severe drought in the traditional farming areas, as well as in
Kazakhstan and Siberia, resulted in a near disaster. Output on a per
capita basis in 1963 was about 10 percent below that of 1958. Total
agricultural output declined some 4 percent in 1962 and probably more
than 4 percent in 1963.
The plight of Soviet agriculture is further illustrated by the compo-
sition of the Soviet diet. In total calories, the average Russian citizen
is not far behind his American counterpart. But 70 percent of the Soviet
diet consists of grain and potatoes, compared to 28 percent in the US.
Only 25 percent of the Soviet diet consists of quality foods -- livestock
products, vegetables, and fruits.
The impact of a short 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
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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 well as in other parts of the wrregime d and Khans ~was in Stalin's.
is a more serious problem for his
Rising food prices, shortages in the meat
output durablesuareg
construction, and small gains i put of consumer sources of growing consumer dissatisfaction.
The Soviet leaders are now calling rtain consulmerogothe ods ghrough.ral
problem and for a faster increase in
the expansion of the chemical and related industries. They appear uire determined to commit the very b9tDecembex at thegC ntrral Com-
formally presented by Khrushchev on
production of
mittee plenum, the new program calls 'for- . tripling p
chemicals by 1970. Among the specific goals of the program are
production increases in fertilizers from 20 million tons to 70 million
to 80 million tons in 1970.
Khrushchev apparently recognizes that the needs of this new
implied
program will clash with those other r expansion of the chemical
that the resources earmarked fo
industry will come in part from the overall growth of the economy,
ser-
from imports, and from te He hasf funds
noted the need tolstudy
vices and housing construction.
possible reductions in the strength of the armed forces.
Although the Soviet economy, given more favorable agricultural
from last year' s growth of 2. 5 ustain d growth rate equal
weather, may be able to rebound
to
sustained
cent, the prospects for recovery to a
that of the 1950's are not bright.
In an attempt to maximize industrial investment, the Soviet Union d
m
e is turning to the West for greatly e5xpande s~ crMoeditscs
gold pos tioneral
repayment terms than the present year.
today is viewed as little better than minimal, with reserves of less
than $2 billion.
A chronic inability to generate enough exports to the West to old cover rising imports has resulted
to $400 million to $500bal-
ances. Soviet gold sales in 1963 amounted
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million, compared with recent annual production of about $150 million
to $175 million -- production which incidentally is very high cost even
by Soviet standards.
The accelerated outflow of gold in 196364 is a direct response to
the payment requirements generated by purchasing nearly 10 million
tons of grain in the Free World. The import requirements for chemical
machinery and equipment, largely to produce fertilizers, will exceed
several hundred million dollars a year, and could be $2 billion 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. In 1962-63, new medium-term credits from the
industrial West amounted to about $300 million annually. However,
payments on principal and interest for past loans left only a small
net balance in 1963. With the growth of traditional Russian exports
slowing down or declining in virtually all major categories -.. petroleum,
timber, grain -- increased 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 developed coun-
tries also has been steadily rising. New extensions of credit in 1963
did not exceed $200 million, compared with more than $800 million in
1959; however, drawings against Soviet credits have continued to in-
crease, approaching $400 million in 1963 (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
such as agriculture, and chronically neglecting balanced development to
push ahead spectacularly on a narrow range of goals has finally caught
up with the Soviet Union. A nearly disastrous crop failure in 1963 was
not the root cause of Moscow's current economic difficulties; what it
did was to bring to a head the many underlying problems of the Soviet
economy and force a reconsideration of the pattern of resource alloca-
tion.
9 January 1964
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