THE SOVIET ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP71T00730R000200020006-3
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: November 9, 2016
• Document Release Date: September 9, 1998
• Sequence Number: 6
• Content Type: BRIEF

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DRAFT DCI BRIEFING FOR
SENATE FOREIGN RELATIONS COMMITTEE
THE SOVIET ECONOMY
I. The Soviet economy is large, and it continues
to grow.
A. Since 1958 its Gross National Product has
been about one-half that the United States.
B. The Soviets, however, allocate their out-
put by standards which differ greatly from
ours.
C. Their allocations stress the elements of
national power. They give high priority
to the continuing modernization of their
military forces, to space programs, and
to modernization of industrial capacity.
(CHART, US and Soviet GNP by end use)
1. Thus, as this chart shows, in dollar
values Soviet spending for defense
and for investment approaches our own.
The portion of their investment al-
located to industry, in fact, ex-
ceeds our own.
2. When it comes to consumption, however,
a Soviet population which is almost
one-fifth larger than ours gets less
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than one-third of what is spent for
consumption here.
3. The consumer's welfare is further re-
duced by the poor quality and assort-
ment of goods, and by his lack of
choice; for example, the consumer would
prefer additional housing, but he can-
not get more housing by voting with
his rubles in the market place.
II. While the Soviet economy continues to grow, a
general slowdown has become evident in recent
years.
(CHART, US and Soviet Annual GNP growth rates)
A. The Soviet GNP growth rate, which was
averaging about seven percent a year in
the late 1950's, works out to about four
percent a year for the early 1960's.
1. The 1964 increase was a healthy five
to six percent, but a substantial part
of this apparent growth is merely the
recovery from the poor performance in
1963, when a near-disaster in agricul-
ture kept GNP growth down to less than
two percent.
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(CHART, Industrial Production, US vs. USSR)
2. In industry, 1964 saw the continua-
tion of the slow decline in rates of
growth from eight-and-one-half- percent
annually in the period 1956-59 to
seven percent in 1960-62 and now to
six percent. Official Soviet statis-
tics, incidentally, confirm this de-
cline in industrial growth, although
the Soviet index of industrial produc-
tion typically runs about two percentage
points above our own calculations.
3. In contrast, US industrial growth was
relatively slow from 1957 to 1961,
but since 1961 has been about as fast
as that of the USSR.
4. The pattern of growth in Soviet GNP in
the present period, in summary, is a
composite of:
(a) erractically fluctuating agricul-
tural production with small long-
term growth, and
(b) slowly declining growth rates in
industry.
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B. Two major causes of the decline in the rate
of growth of Soviet industrial production
are, first, the inability of the Soviets
to maintain the rate of growth of invest-
ment in new productive capacity, and second,
the competition of defense spending for
high-quality resources needed to support
the modernization of industry.
1. The Soviet economy chronically runs at
full throttle. When one activity is
accelerated something else must slow
down.
(CHART, Annual growth rates in investment and defense)
C. Thus, investments, which this chart shows
growing at an impressive annual rate in
the years when defense spending was curbed,
declined after defense expenditures began
to increase again,
1. It is interst.ing to note that when de-
fense expenditures level off, as they
did in 1963 and 1964, this halts the
drop in the rate of investment growth.
2. The failure to maintain the growth of
investment has caused the Soviet leader-
ship to keep in service old factories
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and equipment that ordinarily would be
scrapped. This "solution," of course,
is only temporary and has had predictable
effects in damping the growth of output
per worker in industry.
III. Defense spending--in which we include the So-
viet space program--is growing less rapidly in
total right now, but it remains a problem for
the whole economy.
(CHART, total defense expenditures and proportion
devoted to exotics--R & D, adv. wpn. procure-
ment, etc.)
A. This is primarily because advanced weapons
and space programs require the best and
scarcest inputs of skilled scientists and
engineers, new alloys and other high-cost
materials, and the most advanced industrial
processes.
B. These are the very inputs which are also
needed to carry through the modernization
of the civilian economy, and in this key area
the competition for critical resources re-
mains intense.
C. In this competition, the civilian economy
fares rather badly. Our best measure of
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this is our estimate of the increases in So-
viet spending on military research and de-
velopment, the space program, and the pro-
curement of advanced hardware for missiles,
radars, and nuclear weapons.
(CHART, Spending for R&D, etc.)
1. As can be seen quite clearly in this
chart, these expenditures are growing
much faster than total military spend-
ing. They have just about doubled
since 1958.
2. Within this trend, the procurement has
tended to level off, but Research and
Development spending continues to rise.
This supports the point I made earlier
that the Soviets are putting great
stress on achievement of qualitative
improvements.
D. Mr. Kosygin in his economic report last month
announced a cut in the defense budget of
500 million rubles (about 550 million dol-
lars); however, other items in the budget--
such as scientific research--conceal addi-
tional spending on defense programs. These
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concealed items are more likely to rise
than those in the announced budget. In
general, we believe that there will be a
slow increase in Soviet defense spending
over the next few years.
IV. Another basic difficulty of the Soviet economy,
of course, is agriculture, which exerts a drag
on the whole economy.
A. The problems here are chronic--a long history
of neglect, the inherent deficiencies of
the collective farm system, some real limi-
tations in soil and rainfall, and the dif-
ficulty of training enough skilled farm
managers and mechanics and of keeping them
down on the farm. We believe that a num-
ber of programs for more fertilizer and
more mechanization will fall short of de-
sired results for lack of enough skilled
people and the motivation for carrying out
the programs.
(CHART, Total and per capita agricultural production)
B. Crop production made a considerable recovery
in 1964, but livestock did not, so that
total agricultural production last year was
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about at the level of 1961. On a per capita
basis, of course, with the constant in-
crease in population, it was lower than
either 1961 or 1958, the two relatively
good years on the chart.
C. In mid-1963, Khrushchev sponsored a large
crash program for the "chemicalization" of
the economy. This chemical program was
aimed at aiding agriculture by raising the
annual production of chemical fertilizers
from 20 million metric tons in 1962 to 35
million in 1965 and to 70 million metric
tons by 1970; in addition, large increases
in plastics and man-made fibers were sched-
uled. The new leadership has already modi-
fied this program in important particulars--
softening the "crash" elements in the pro-
gram, reducing sharply the increase of in-
vestment scheduled for 1965, and acting
very cautiously in taking up the long-term
credits available for importing equipment
from the West.
V. There is also a more general reason for this
slowdown with which the Soviet economic planners
have to contend.
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A. The Soviet economy is becoming more developed
and mature. It has already drawn from the
land to the cities most of the excess rural
workers agriculture could spare. By and
large, the easiest technological gains have
been made, including those gains taken over
lock-stock-and-barrel from the US and West-
ern Europe. Further technological gains
will require more domestic R&D--and more
resources.
B. As a result, every percent of future growth
is a little harder to achieve. To put it
another way, each unit of new capital and
additional man hours produces an increase
in production, but each year the gain from
these extra inputs is a little smaller.
(CHART, Direction of Soviet foreign trade)
VI. One of the consequences of all this can be seen
in what has happened in the area of Soviet for-
eign trade.
A. The Soviets have been trying to increase
their industrial imports from the West--
everything from large diameter pipe to
entire industrial complexes--as you are
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well aware, and as you can see from the
bottom segment of each of these bars.
(CHART, Soviet financing of hard currency deficits)
B. For these industrial imports from the West,
the Soviets have had to depend on medium-
term credits. Their exports have not
been generating enough hard currency to
cover imports. This last year, payments
of interest and principal just about
matched new extensions of medium-term
credits, so there was no net gain in
ability to import.
C. The medium-term debt piled up in this way
has grown rapidly since 1959. Last year
it reached some 620 million dollars.
(CHART, Soviet gold production, sales,and reserves)
D. Another way the Soviets have paid for their
imports is with gold. This has led to an
almost precipitous drop in their gold re-
serves. By the end of 1964, these were
down to only about one and a half billion
dollars.
E. When Khrushchev started to push hard with
his program for the chemical industry in
the middle of 1963, he knew he would have
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to get machinery from the West, and that
he would have to get it on credit--long-term
credit.
F. The new leaders are cutting back the chem-
ical program somewhat, and are not pushing
very hard at present for long-term credits.
1. We think they will probably not resume
the drive for long-term credits until
they are more sure of their needs for
the period of the next Five Year Plan--
from 1966 through 1970--and have a better
idea of their export potential.
G. The Soviet "trade drive" in the underdeveloped
countries has also slacked off. Trade be-
tween the USSR and a selected group of
developing nations rose substantially dur-
ing the past decade, but there are no major
new initiatives at present.
H. Exchanges of important raw materials and
manufactured goods with other Communist
countries still account for more than 70
percent of Soviet trade. The sharp reduc-
tion in trade with Communist China has
been offset by increased exchanges with
Eastern European countries.
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(CHART, Soviet aid to Free World countries)
VII. While Soviet trade with the developing coun-
tries has fallen off, Soviet aid--which is more
responsive to long-term policy considerations--
is a vigorous and active program. This chart
shows the scope of Soviet military and economic
aid to Free World countries over the ten years
that the Soviet Union has been engaged in the
program.
A. The blue bars represent extensions of eco-
nomic aid, and the blue line linking them
shows the extent to which these commitments
have been fulfilled by deliveries. The red
bars represent military aid agreements,
under which delivery has generally been
completed with little delay.
B. As the USSR enters its eleventh year of aid
activity in the Free World, the program is
becoming increasingly complex, the immediate
returns less discernible, and Moscow has
learned by experience that a foreign aid
investment does not guarantee a return in
the currency of political influence.
1. Moscow is, however, committed to main-
tain its old programs, and remains ready
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to consider aid for newly emerging states.
Assistance to non-Communist countries
was favorably reviewed by Soviet leaders
in 1962 and 1963, and Khrushchev's fall
is not expected to cause any modifica-
tion of the foreign aid program.
2. After two years of relatively low ex-
tensions of new economic aid, the Soviet
Union in 1964 again topped $1 billion--
largely due to sums offered to under-
write new five-year plans which start
this year, such as Egypt's. Aid extended
in 1964 amounted to $860 million for
Communist countries and $820 million
for Free World countries.
C. The bulk of Soviet economic aid to the free
world is focused on relatively few underde-
veloped countries--those which Moscow
believes are the most promising economically,
and whose political policies are most com-
patible with long range Soviet aspirations.
However, new programs are initiated when
exploitable circumstances occur, as in
Africa today. The Soviets are also now
competing with Communist China in Africa.
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D. While deliveries under the aid program grow,
repayments are beginning to reduce the im-
pact on the economy and the burden of cur-
rent exports on credit. (Almost all Soviet
economic and military aid is extended under
loans that are to be repaid).
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VIII. Soviet military aid frequently is given with less
restraint that economic credits. It places less
burden on the economy and it serves immediate polit-
ical objectives more rapidly.
A. One-half of all military aid to non-Communist
nations has gone to two pivotal countries--
Egypt and Indonesia--whose political policies,
while not necessarily consonant with those of
Moscow, have discomfited the West.
1. The Middle East is generally committed to
bloc arms. The development of the United
Arab Command---dominated by Egypt--probably
assures Moscow of preeminence in Middle
East military programs. For example, Nasir
is pressing Jordan and Lebanon to obtain
MIG jet fighters.
2. Current military assistance to Indonesia
continues to maintain a toe hold for the
Soviets in Asia.
3. The USSR, learning by experience, is
proceeding cautiously with military aid
for new, unsophisticated, and politically
volatile African states.
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The Soviet military aid program continues,
however, to grow in scope and content. Advanced
weapons systems now are a standard export item.
The USSR continues to supply advisory missions,
and to expand the training of free world military
officers at its institutes, and is now supplying
arms production facilities, for instance, a
MIG jet fighter factory for India.
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IX. Economic problems certainly had something to do
with Khrushchev's fall.
A. We have no evidence, however, that his successors
are planning any major changes for this year in
the pattern of economic allocations.
B. We are highly skeptical of the announced cut
in defense expenditures for 1965.
C. In his speech last month, Mr. Kosygin promised
an expansion of housing construction in 1965 by
some 10 percent over 1964. Such promises have
usually been underfulfilled in recent years.
D. There are two areas, however, where some changes
have been in motion--economic organization, and
economic thought.
1. Organizationally, the new leaders are
already busy trying to undo some of what
they have referred to as Khrushchevts
"hare-brained schemes"--for example, the
division of the Communist party into
separate industrial and agricultural
organizations.
2. They are also experimenting with the ideas
of Professor Liberman and others who would
like to see profits and the market play
a much greater role in guiding production.
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3. Recently it was announced that four hundred
plants in the garment and footwear industry
are to operate under a system giving the
plant manager much greater freedom in deter-
mining the quality, the assortment, and
even the prices of the factory's output.
D. Obviously, Marxism-Leninism is not going to
tell the Soviets how to solve their problems.
On the contrary, they are now in fact rifling
the storehouse of Western ideas for ways and
means of coping with their economic difficulties.
VIII. While the Soviet economy has slowed down pretty
much across the board in recent years, the growth
has by no means come to an end.
A. Western, and Yugoslav, ideas will help to
the extent that the Soviet Union actually adopt
them. (Czechoslovakia and other East European
countries, incidentally, show signs of putting
more Westernized concepts into practice in
their economies.
B_ Some of the things the Soviets are trying in
agriculture are intelligent. Barring bad weather,
agricultural production should rise--perhaps an
average of three to four percent a year over the
next five years or so.
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C. Our analysis by no means suggests that the
Soviet economy will be unable to sustain a
vigorous military and space program.
1. These expenditures may level off, or even
shade down a little, between now and 1970.
On the other hand, they might continue
to rise by as much as 20 percent. In
either event, the strain on scarce resources
is going to remain, and perhaps even grow.
2. In short, we are not prepared to forecast
that economic pressures are driving the
Soviet Union into a corner where it will
be willing to accept new arms control
measures.
IX. Our best guess is that the growth of Soviet Gross
National Product for the rest of this decade will
average between four and six percent a year. Just
where it falls within this range will be determined
to a considerable degree by weather and its effect
on agriculture, and by future trends in defense
spending.
A. In any case, the more general problems of
industrial maturity and backward agriculture
are going to make it difficult to sustain a six
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percent rate of growth, and the rate is very
unlikely to regain the seven percent level
characteristic of the mid-1950ts.
B. The performance we envisage by the Soviet
economy is not going to satisfy the Soviet
leaders, and it will help stimulate renewed
conflict within the Kremlin.
C. At the same time, however, it will not really
provide much comfort for us, because whatever
the difficulties, it will continue to furnish
the Soviets the necessary wherewithal for
their challenge to the Free World.
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