USSR FALTERS IN ECONOMIC GROWTH RACE WITH THE US

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP67B00446R000100340012-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 15, 2016
• Document Release Date: December 17, 2003
• Sequence Number: 12
• Publication Date: September 1, 1965
• Content Type: REPORT

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USSR FALTERS IN ECONOMIC GROWTH RACE
WITH THE US
September 1965
State Department review completed
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CONTENTS
Page
Summary and Conclusions. . .
1. Introduction . . . . . . . . . . . . . . . . . . . . . .
II. Slowdown in the Soviet Growth Rate . . . . . , . . . . . 5
III. Rise in the US Growth Rate . . . . . . . . . . . . . . . 1
IV. Prospects for Soviet Gross National Product in 1965 . .
V. Prospects for US Gross National Product in 1965 . . . . 8 7
VI. Prospects for Soviet and US Gross National Product,
1966-70 . . . . . . . . . . . . . . . . . . . . . . . 9
Charts
Figure 1. USSR and US: Rates of Growth of Gross National
Product, 1951-65 . . . . . . . . . . . . . . . . . 1
Figure 2. TJSSR: Rates of Growth of Gross National Product,
Industrial Production, and Agricultural Produc-
tion, 1956-65 Following page . . . . . . . . . . . 5
State Department review completed
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USSR FALTERS IN ECONOMIC GROWTH RACE WITH THE US
Summary and Conclusions
Since 1960 the USSR has made no progress toward its fundamental
economic goal of catching up with the US in total and per capita out-
put. The. rate of growth in the USSR -- which in the decade of the
1950's was double that in the US -- has been slowing down in the 1960's,
whereas US growth has been picking up in an era of unprecedented pros-
perity and. orderly expansion. Thus in the period 1961-65 the average
annual rate of growth in the two economies has been the same, but,.
because the US economy is twice as large,'the absolute gap in output
has widened by approximately $60 billion.* Rates of growth in the
gross national product (GNP) for both countries are shown in Figure 1.
1961 `263 965
s9tyl
Rates of growth in this memorandum have been calculated,from data
corrected. for price changes. Dollar values are gi-Ven in 196 Uw .
dollars unless otherwise indicated.
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Soviet growth, which in the 1950's averaged an impressive 6-1/2
percent a year, has slowed down to a yearly average of about 4-1/2
percent. This lower rate of growth is still respectable by the
standards of modern industrial nations but is below both what the Soviet
leadership has come to expect and what is necessary to support the
leadership's worldwide ambitions. The slowdown is attributable es-
pecially to three fundamental developments: (1) the expansion of Soviet
military programs that have taken high-quality men, machinery, and
materials needed for modernizing the economy; (2) the failure of Soviet
agriculture to provide a rapidly expanding and reliable supply of food
and industrial raw materials; and (3) the using up of most of the
possibilities for low-cost exploitation of Western advances in science
and in manufacturing techniques. Furthermore, Soviet economic institu-
tions are inherently sluggish in absorbing modern technology and turning
out the complex products of present-day economic life. On the other
side of the equation, the rise in US growth in the 1960's is the result
of a combination of favorable factors, including vigorous and sustained
spending by business firms on new capital plant, the success cf govern-
ment fiscal measures, and steady advances in consumer income and
spending.
Comparing a market economy valued in dollars to a planned economy
valued in rubles is a notoriously uncertain business. The present
comparisons are biased in favor of the USSR in that the poor quality
of Soviet production and the failure of the system to respond to the
demands of industry and consumers have not been fully taken into account.
But a caution in the opposite direction is even more important: in
spite of the slowdown in growth, the Soviet economy is still growing
rapidly, and its very considerable energies are still being concentrated
on uses that seriously challenge US national security interests.
As shown in Figure 1, year-to-year rates of growth differ widely
within both the Soviet and US economies, but for entirely different
reasons. In the USSR, agriculture accounts for a large part of GNP,
and changes in weather conditions result in great fluctuations in
agricultural production and hence in GNP. In the US, in contrast
fluctuations in annual growth are tied to changes in nonagricultural
business inventories, in business needs for additional plant capacity,-
in consumer spending on durable goods, and in government fiscal policy.
For the year 1965 a forecast of economic performance can be made
with much greater assurance in the case of the US than the USSR, where
final agricultural results are still uncertain. In the US the pattern
of business conditions for the past 6 months foreshadows business con-
ditions for the next 6 months, especially in a period of sustained and
balanced prosperity. The forecast for 1965 of the President's Council
of Economic Advisers, for a 4-percent increase in GNP in real terms, is
used in this memorandum. In the USSR the overall rate of growth
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in 1965 will be much less than the 7 percent achieved in 1964 because
the 12-percent increase in agricultural production in 1964 makes that
year hard. to improve on. in. 1965, crops will show a drop from 1964 --
a drop that may be only partly offset by gains in livestock which is
benefiting from the large feed crops of 1964. Drought in the new
lands" has damaged the wheat crop, and on the basis of current evidence,
Soviet agricultural output as a whole is estimated to drop 4 percent in
1965. Soviet industrial production in 1965 will grow at a rate of
roughly 6 percent -- up from 5 percent in 1964 becr:.use of the improved
supply of agricultural raw materials carried over from 194. Because of
the current agricultural difficulties, Soviet GNP probably will increase
only about 3 percent in 1965.
The long-run slowdown in Soviet growth is the result of persistent
underlying economic forces and is not likely to be reversed over the
next five years. In 1966-70, Soviet growth possibly will be greater
than in the US -- but this is not assured. Suppose that over the next
five years the USSR is able to halt the declining trend in the rate of
growth which has developed in recent years and maintains for example a
rate of 4 1/2 %, while the US economy continues to grow at a rate of
4%. Then Soviet GNP in 1970 would still be about 50% of US GNP, and
the absolute gap between US and Soviet GNP would have widened by $60
billion more. I
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1. Introduction
From the beginning the leaders of the USSR have made the growth race
with the West the heart and soul of Soviet economic policy:
1919 -- Lenin
... either perish or overtake the advanced countries
... and surpass them economically.
1931 -- Stalin
We are fifty to a hundred years behind the advanced
countries. We must make good this distance in ten
years. Either we do it or they will crush us.
1961 -- Khrushchev
Some people in foreign countries used to ask,
"Mr. Khrushchev, do you really expect to catch
up with America economically?" Today no one
raises this question in this way; instead I am
asked, "Mr. Khrushchev, ... in what year will
you catch up with America? My reply is,
"You can write down in your little notebook
that we will overtake you in per capita industrial
production by 1970."
These three quotations are only a sample of the many statements by
Khruschchev and his predecessors of the importance -- and the inevita-
bility -- of catching up with the US economically. First the US would
be overtaken in the production of major commodities, then in total out-
put, and finally in per capita output. Sheer physical growth was to be
the criterion of success, and here the Soviet leaders seemed to be
loading the dice in their own favor, for in spite of its rough edges the
Soviet economy appeared to be a powerful engine of growth, However, as
Khrushchev found out, other major requirements besides growth -- the
military and space programs are the most dramatic examples-- had to
be accommodated, and the economy became overloaded. Economic commitments
grew faster than productive capacity. Khrushchev's erratic and un-
successful attempts to out the suit to fit the cloth were an important
element in the events leading to his downfall last October. Even before
he was deposed, less and less was heard of the claim that the USSR would
soon overhaul the US economically. Khrushchev's successors have been
quite cautious in dealing with this theme. Thus, Premier Kosygin has
spoken of the general strength of the Socialist system in the economic
competition with capitalism, but he has not referred specifically to
catching up with the US.
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 II. SlowdownApRr%yd Eeffoe ggik4/A,?W : CIA-RDP67B00446R000100340012-1
The rate of growth of Soviet GNP has slowed down from about 6-1/2
i.n examining
percent in the 1950's to about 4-1f2 percent in the 19601"s .,
the. causes of the slowdown, three components of Soviet GNP:may be
identified: (1) industrial production, which has declined fairly
steadily from an average annual rate of growth of 3 percent in .195.66o*
down to 6 percent in 1961-65; (2) agricultural production, which has
been subject to wide year-to-year fluctuations and has grown at an
average annual rate of about 3 percent in 1956-65; and (3) trade,
transportation, and other services, whose combined rate of growth
normally lies somewhere between the rate for industry and the rate for
agriculture but closer to industry. The fairly steady. long-term
decline in industry's rate of growth gives a long-term downward trend.
to GNP growth, whereas the erratic performance in agriculture leads to
short-term fluctuations in GNP, as shown in Figure 2.
The slowdown in Soviet economic growth is the result of many
factors, but from the vantage point of mid-1965 a few key points may
be singled out for attention:
(1) The expansion of defense expenditures after 195?3 preempted
a large share of the high-quality resources most needed to modernize
industry and agriculture. The new military programs proved to'be
voracious consumers of the best scientific
fic newest talent, the
most costly and complex machinery, and
high-cost materials.
(2) Linked with the first factor was the failure of agriculture
to provide a reliable domestic source of food and raw materials for
industry. Growth in agriculture had always trailed growth in industry,
and indeed the backwardness of Soviet agriculture was part of the price
paid for rapid industrial growth. Under Khrushchev, large investments
were made in agriculture, yet time and again agriculture failed to meet
the goals set by the central planners. The near-disastrous harvest of
1963 dramatized the failure of the Soviet leadership in dealing with
agricultural problems; on this occasion about 11 million metric tons (nit)
of wheat and flour had to be imported from the capitalistic West at
a cost of almost $1 billion. And again in 1965, agricultural failures
are resulting in large-scale imports of grain and are dimming what hopes
the Soviet leaders still cherish of restoring the old rates of economic
growth.
T o u ~ ` ` u ~ ' this memorandum, when a rate of growth I s given for a
period of years (say, 1961-65), the base period for the calculation
is the preceding year (in this case, 1960.
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Fa~'~ .v .may 5 (4 ~f Y e 1f.
Orr
;956 t~ I //19 j7 I> 1 79 7 d 96 1961 i 962 63 i ;764 19&i xt
GROSS NA(iONt4,:. J,DUC 7
!INDUS i i'iAL Y-RODUC? cic -
AG121CULT u IAL PROD u _' :'
JQ,3
12.T
* projected
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(3) The soviet economy in the 1950's benefited greatly by adopt-
ing new technology and manufacturing processes from the West at relatively
little cost. But when the Soviet leaders had to solve their own problems
---for, example, in the space field--they could no longer bypass the costly
research stage by leaning on the West, and when imported Western tech-
nology became more difficult to absorb :in the Soviet economy--for example,
in the chemical industry--large gains in output were no longer easy to
achieve without incurring normal "start-up" costs.
(4) Investment in new fixed plant and equipment in the USSR
in the l9~50's increased at the amazingly rapid pace of 12 to 13 percent
a year, while GNP increased at 6-1/2 percent a year. These rates meant
that fixed investment was rapidly increasing as a share of Soviet GNP,
from 1'7 percent of GNP In 1955 to 24 precent in 1960. After 1860, how-
ever, when other corrnnitrrrentu grew, investment increased at less than
half its former pace and no longer grew as a precent of GNP, Thus the
growth in the Soviet economy in the 1950's was powered by a rapid step-up
in investment, whereas in the 1960's the planners have had. to settle for
smaller percentage increases in investment--and in overall economic growth.
Moreover, the Soviet leaders have tried to compensate for the decreased
rate of growth In investment by keeping old capacity in operation. Con-
sequently, the inability to sustain the extraordinarily high rates of
growth in investment has carried. with it a general obsolescing of produc-
tive capacity and production. methods.
A number of other forces are intertwined in this tangle of causes
of the Soviet slowdown--for example, the problems of management in a
"command" economy and the problems of coping with more sophisticated
consumer tastes and of designing and producing a more complex output mix
in both consumer and capital goods. As an Illustration of these diffi-
culties, a number of expedients adopted under Khrushchev attacked certain
of these problems while making others worse--when construction projects
fell behind schedule, for example, housing was almost invariably the
sector that suffered In the resulting reshuffle of resources.*
Even though the Soviet economy is faltering in its growth race with
the US, a reminder is needed about the basic economic strength of the
USSR. The present rate of growth is quite respectable for a modern indus-
trial nation. At the current average rate of growth of 4-1/2 percent,
Soviet GNP would double in 16 years. The USSR is maintaining a military
and space establishment that in dollar terms costs about 80 percent of the
' "'"""'T-Ti-e re- a?c` on1-n he workweek in industry from 46 to 41 hours in
1956-61 perhaps could be cited as a factor in the slowdown in Soviet
economic growth. This, reduction, however, was made contingent on there
being no reduction in output per man and in any case is a nonrecurring
factor whose effect on economic growth rates would be felt for a few
years only.
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US military and space establishment. Furthermore, the USSR continues to
score spectacular space successes. In short, the Soviet leadership may
command only half the economic firepower of the US, but this power is
concentrated in. support of worldwide activities of serious consequence
to US security Interest,,.
III. Rise in the US Growth Rate
As the Soviet Growth rate has moved down In the last few years,
the US growth rate has moved up to meet it. In mid-1965 the US is enjoy-
ing an unparalleled stretch of orderly peacetime prosperity, now well
into its fifth year. Gross national product, industrial production,
employment, investment in new plant, consumption--all the major indica-
tors of? economic performance--are at new heights. This memorandum does
not purport to analyze the US speedup in the same detail as the Soviet
slowdown, but the following factors may be noted:
the new plant and equipment has
Grown rapidly landuhasnkept abreasts of In
capacity.
(2) Consumption by household units has risen steadily in concert
with rapidly rising consumer income,
(3) Government expenditures and taxes have been dovetailed with
the private economy in such a way that total spending has moved up
parallel to rising productive capacity.
An Interesting aspect of US performance in the growth race is that
even in industrial production the US has matched the USSR stride for
,tride in percentage growth since 1961. Of course, in absolute terms
US industrial production i.s growing much more rapidly--more than double
the Soviet growth.
IV. Prospects for Soviet Gross National Product in 1965
Growth of Soviet GNP in 1965 is likely to be mediocre when judged
by past Soviet standards and, disappointir; when compared with the hopes
of' the new regime. The growth in the industrial component of Soviet
GNP can be fairly well estimated on the basis of information available
at midyear, whereat, the course of agricultural output still cannot be
ascertained within wide limits. In industry, production should be
approximately 6 percent above the 1964 level, a rate of growth slightly
above the 5 percent rate achieved in 1961. In heavy Industry, expansion
in 1965 continues in the same pattern as last year and is based on the
continuing and more-or-less-synchronized expansion of (1) capital plant;
(2) supplies of fuels, construction materials, and other industrial raw
materials; and (3) technical skill, as reflected in increased output
per man and machine. In consumer goods industry, the picture in 1965
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is dominated by the increased supply of livestock products and other
agricultural raw materials for the food-processing branches, a result
of the excellent crops in 1964.
In agriculture, crop production in 1965 is well below the record
level of 1964. Wheat cutput has been particularly affected by drought
in the "new lands" regions of Western Siberia, Northern Kazakhstan,
and the Urals, which are the main spring wheat areas of the USSR.
Since 1 July the USSR has purchased about 7 million mt of wheat and
flour from Canada and Argentina for delivery in 1965-66. At present
the yield from grain crops as a whole, however, does not appear to
be as bad as in 1963. In contrast to crops, output of livestock
products has risen in 1965 because of the large supplies of feeds
provided by the bumper crops of 1964. A further favorable factor in
Soviet agriculture in 1965 stems from the lifting of restrictions
imposed by Khrushchev on the size of private farm plots and on the
number of private livestock. Suppliescf food products, especially in
local markets, received a fillip under the new, more permissive
regulations. As for the massive investment program for agriculture,
announced by Brezhnev in March, these plans for the revitalization
of Soviet agriculture are mainly long run, and results were not ex-
pected to show up in 1965 except perhaps in the case of some of the new
higher procurement prices. On the basis of current evidence, a 4-percent
drop in total agricultural production is estimated for 1965.
Agriculture accounts for something less than one-third of Soviet
GNP and industry for somewhat more than one-third. The remaining one-
third is a diverse group of products and services which includes con-
struction, transportation, trade, communications, education, health,
and government administration. A large segment of this miscellaneous
third rises or falls according to the fortunes of agriculture and
industry. For example, the transport system carries the products of
industry and agriculture and the trade network distributes them. Thus
the increase of activity in this miscellaneous third, taken as a whole,
typically falls between the rate of growth in industrial output and
the rate of growth in agriculture but is closer to the industrial rate.
In 1965, if industrial output advances 6 percent and agricultural output
falls 4 percent, GNP as a whole will grow at about 3 percent, or less
than in any year in the last decade with the exception of 1963.
V. Prospects for US Gross National Product in 1965
The GNP of the US for 1965 can be predicted on a much firmer basis
from the vantage point of September 1965 than can that of the USSR
because (1) fluctuations in US agricultural output have relatively
little effect on GNP; (2) the present sustained period of prosperity
in the US has a forward momentum of at least six months; and (3) US
data are published openly and promptly. At the beginning of 1965
the President's Council of Economic Advisers forecast a GNP in 1965
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in current dollars of $660 billion plus or minus $5 billion. In real
terms this represents a 4-percent increase plus or minus three-fourths
of a percentage point. As of September the economy is on course (per-
haps even a little ahead of schedule), and the result for the whole
year probably will be at least a 4-percent gain.
VI. Prospects for Soviet and US Gross National Product, 1966-70
During the new five-year period, 1966-70, the factors that have
dictated a slowdown in Soviet economic growth are likely to persist.
Attempts to-restore rates of growth in industry would be largely at
the expense of agriculture and perhaps defense, and in turn new large-
scale investment in agriculture would reduce the extent to which
industry could be modernized. In summary, the prospects for growth
in GNP have not improved, and a matching of recent performance is the
most likely prospect. Agricultural production will continue to
fluctuate greatly year to year because of weather, and in individual
years growth In GNP will reflect this erratic movement.
Developments in the first three quarters of 1965 reinforce the
estimate of a continuation of recent growth trends in 1966-70 as
opposed to the 6 to 7 percent level of the 1950's. Premier Kosygin
has been speaking almost wistfully of how nice it would be to reduce
the amount of resources going for military purposes as opposed to
consumer use but how impossible such a transfer is at this time in
world affairs. Beyond the effect of military programs on growth
rates, however, there have been other signs pointing toward a continua-
tion of the more moderate pace of growth as likely for the Soviet
economy: (1) There is increasing evidence that the Soviet leadership
is being pushed by a diversity of forces toward a more generous future
allocation of resources to consumers -- for example, the large increase
in planned investment in agriculture, more manufactured goods for rural
areas, higher real incomes for pensioners, and even private automobiles
for the upper middle class. (2) There is evidence that the difficulties
-- both political and economic -- in reforming administrative systems and
practices thoughout the economy are a great deal tougher than the
reformers had bargained for. (3) Furthermore, the present economic
system of the USSR is being revealed as even less suited than was former-
ly believed to meeting the complex tasks of modern economic life -- for
instance, the system shows up as very clumsy in distributing workers
among geographical areas, among industries, and among occupations.
(4) Difficulties in agriculture persist -- with a resulting need for
food imports instead of the traditional food exports -- and the inputs
that Brezhnev talked about for agriculture in his speech last March may
not be available in the quantities or at the time specified; consequently,
foreign machinery needed to modernize Soviet industry cannot be imported
in the amounts hoped for by the Soviet planner because large food imports
are necessary from time to time.
As for US GNP, the estimate of the President's Council of Economic
Advisers is for a growth rate averaging "about 4 percent a year,"
Suppose that over the next five years the USSR is able to halt the de-
clining trend in the rate of growth which has developed in recent years
and maintains for example a rate of 4 1/2%, while the US economy con-
tinues to grow at a rate of 4%. Soviet GNP in 1970 would still be about
half that of the US, and Soviet per capital GNP would be about 43% of
the US level. Moreover, since the Soviet consumer's share in GNP is un-
likely to rise, Soviet per capita consumption would remain little better
than 30% of US per capita. consumption.
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