IMPLICATIONS OF THE NEW SOVIET ECONOMIC PLAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A006100040002-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 20, 2016
• Document Release Date: April 27, 2006
• Sequence Number: 2
• Publication Date: November 3, 1967
• Content Type: SUMMARY

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Secret
No Foreign Dissent
DIRECTORATE OF
INTELLIGENCE
WEEKLY SUMMARY
Special Report
Implications of the New Soviet Economic Plan
Secret
3 November 1967
No. 0314/67A
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REPORTS are supplements to the Current Intelli-
Weeklies issued by the Office of Current Intelligence.
ial Reports are published separately to permit more
nsive treatment of a subject. They are prepared by
of Current Intelligence, the Office of Economic Re-
fice of Strategic Research. and the Directorate of
rid Technology. Special Reports are coordinated as
nong the Directorates of CIA but, except for the
ostantive exchange with other agencies at the working
not been coordinated outside CIA unless specifically
I defense of the United States. within the mean-
sections 793 and 794, of the US Code, as
thoriaed person is prohibited by law.
SPECIAL REPORT MUST NOT BE RELEASED TO
;iN GOVERNMENTS and must be handled within the
work- of specific dissemination control provisions of
GROUP i
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The USSR's economic plan and budget for 1968
and planned goals for 1969-70 reflect an apparent
acceleration of the trend in economic priorities
that began in 1966 in favor of the military estab-
lishment. Pressures for greater defense spending
have increased during 1967 due to the USSR's con-
cern over North Vietnam, the Middle East conflict,
and the problem of China. The US decision to de-
ploy a thin antiballistic missile (ABM) screen
also strengthens the hand of the military spend-
ing advocates. The recent performance of both
Soviet industry and agriculture has strengthened
the USSR's economic base. In these circumstances,
the Soviet regime apparently has decided that it
can and will satisfy during the coming year at
least some of the increased demands placed upon
it by the military.
The state budget for 1968 provides for an in-
crease of 2.2 billion rubles in defense expendi-
tures above this year's planned total of 14.5 bil-
lion rubles. Although it is possible that actual
military spending could rise by 2.2 billion rubles,
this probably overstates the actual increase that
will be expended for defense next year. Of this
amount, some 1.5 billion rubles may represent
planned real increases, with the remainder accounted
for by price changes on military equipment, possible
shifts in budgetary accounting practices, and the
added funds required to finance a possible military
pay raise.
In addition to the need to strengthen its de-
fense posture, the Soviet leadership apparently
also wants to at least imply that it can increas-
ingly improve the living standards of its people.
This is reflected in the 1968 plan's provision to
expand the consumer goods industry at a faster rate
than that of traditionally favored heavy industry.
The provision of more butter as well as more guns in
1968, however, is to be accomplished by cutting back
in investment in both new industrial facilities and
in agriculture. The regime is thus taking a calcu-
lated risk inasmuch as serious problems will result
if agricultural production stagnates and long-term
growth rates decline.
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Back round
The annual plan and budget
speeches traditionally offer
the most authoritative descrip-
tion of Soviet economic policy.
Indeed, in many key areas, very
little is published later to sup-
plement the information contained
in these two basic statements.
Although the uncertainty sur-
rounding military programs in the
plan and budget speeches is al-
ways great, it is known that the
overt: defense budget does not
cover all Soviet military out-
lays.. Moreover, the degree of
coverage has varied from time to
time because of changes in ac-
counting practices.
Nevertheless, when the USSR
announces a substantial jump in
military spending in an atmos-
phere of military and political
tension, as it did this Octo-
ber, the announcement is a clear
political signal that some
shift in resources to military
programs is almost certainly
planned.
Political Considerations
Recent international devel-
opments have very likely in-
creased the Soviet leaders' con-
cern about the country's security,
dictating the need to demonstrate
a posture of strength and readi-
ness. Some leaders may have in-
terpreted the US announcement of
its intention to deploy a thin
ABM screen as a sign that the arms
race is about to enter a new and
enormously more expensive phase,
which will tax Soviet resources
but which the Soviet Union cannot
avoid. Other leaders may be more
concerned that the trend in "local
wars," such as in Vietnam and be-
tween Israel and the Arab states,
means that the US has gone beyond
"containment" and is trying to
roll back revolutionary and so-
cialist regimes. Finally, some
may believe that in the rela-
tively near future neighboring
China is destined to become well-
armed and potentially more hos-
tile to the USSR.
In addition to these stra-
tegic considerations affecting
its economic plans and budgetary
measures, the regime also wishes
to draw attention--especially
during its 50th anniversary--to
its ability to provide for the
population's welfare while main-
taining a high rate of economic
growth. The Soviet leadership
perennially is under pressure to
stimulate the enthusiasm of the
populace for "building communism"
and thus obtaining willing
participation from the people.
in the same vein, the regime is
seeking to prove to leaders in
the emerging nations that "so-
cialism" is a better way to de-
velop national economies and im-
prove standards of living than.
is capitalism.
The. Soviet leaders thus ap-
pear to be in general agreement
on the need to appear as resolute
defenders of international prog-
ress and as capable providers
for the wants of the Soviet people.
The practical question of how
these goals are to be reached,
however, provokes sharp differ-
ences--some of long standing.
This is essentially a question
of making hard choices among the
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competing demands for Soviet re-
sources. These demands are still
resolved by compromise, not only
between those leaders favoring more
guns and those favoring more but-
ter, but also among those favor-
ing different types of guns and
among those preferring different
brands of butter.
The decision to provide more
guns as well as more butter dur-
ing the coming year means that
investment in future capacity
may not be forthcoming in suf-
ficient quantity to provide for
future needs. The present de-
cisions on resource allocation
could therefore lead to a decline
in long-term growth rates and to
stagnation in agricultural pro-
duction. The political conse-
quences of such developments
could be serious, inasmuch as the
recent compromises probably do
not fully satisfy any of the in-
dividual leaders and any future
shortcomings probably would be-
come the subject of acrimonious
disagreement.
Adjustments in 1968-70 Goals
Although the increase in the
announced defense budget for
1968 has drawn the most atten-
tion, the plan and budget an-
nouncements contain other
USSR: Revision of 1970 Plan Goals
Table 1
Unit
National income a/
Industrial production
Individual products
Oil
Natural gas
Electric power
Steel
Fertilizer
Plastics and resins
Chemical fibers
Original New
1970 Goal 1970 Goal
1955 = 100 (index) 138 to 141 139
1965 = 100 (index) 147 to 150 149 b/
Million metric tons 345 to 355 350
Billion cubic meters 225 to 240 215
Billion kilowatt-
hours 830 to 850 807
Million metric tons 124 to 129, 124
Million metric tons 62 to 65 62
Million metric tons 2.1 to 2.3= 1.8
Thousand metric
tons 780 to 830, 707
Million units 1.36 to 1.51 1.36
a. Soviet concept, which excu d es services.
b CIA calculation from Soviet announcements.
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indications of increased emphasis
on military programs in 1968-70.
The original goals for a major
increase in national income and
industrial production in 1966-70
have been reaffirmed, but a num-
ber of the original 1970 goals
in key nonmilitary areas were
pared back. Either the original
goals are actually reduced or
the new 1970 goals are now set
at the lower limits of the ranges
originally set out by Kosygin
in 1966.
Not only have production
goals been cut back in certain
major sectors of industry, but
also investment goals for those
sectors are lower than those
originally set for 1970. The
concentration of the cutbacks
1951-60
Gross national product a/ 6.7%
Agricultural output
Industrial output
Other d/
4.1
9.7
7.2
1951-70
].966.70
1961-65
1966
1967 b/
Plan
4.8%
7.8%
3.8%
6.0%
3.0
10.9
-3.4
4.7
6.5
7..5
8.5
8.3
c/
5.4
5.9
6.3
6.3
-
a. Unless otherwise note.l, all data are CIA estimates.
b. Preliminary.
c. Mid-point of Soviet official plan range.
d. Construction, transportation, communications, and services.
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Page 4 SPECIAL, REPORT
outside of the military-oriented
machinery industry, coupled with
the reaffirmation of the target
for industrial production as a
whole, suggests a plan revision
that would accommodate a boost
in military expenditures above
levels previously planned.
Economic Implications
Soviet gross national prod-
uct (GNP) grew at an estimated
annual rate of nearly six percent
during 1966-67, which was somewhat
faster than during 1961-65 but
still below the average for the
1950s. During 1966-67, a rising
share of GNP was allocated to de-
fense. Consumption also may have
increased somewhat faster than
GNP. Investment, essential
USSR: Average Annual Rate of Growth
in Gross National Product and Its Components
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for future economic growth ap-
pears to have been only the re-
sidual claimant in these two
years.
Agriculture
Planned agricultural in-
vestment is likely to have been
one of the first victims of in-
creased military spending. Net
USSR: Planned and Actual Flow
of Resources to Agriculture
1966-70
agricultural output increased
an average of 3.5 percent per
year in 1966-67, largely be-
cause of favorable weather.
Total grain production is esti-
mated at about 140 million metric
tons in 1966, and at 115-120 mil-
lion metric tons in 1967. This
allowed grain stocks to be re-
built, with the result that the
USSR did not have to use its
1966 1967
1968
1966-70
Plan
Actual Plan Actual a/
Plan
Plan
Machinery deliveries
Average Annual Rate
(Percent)
Tractors 9.8
15.7 3.6 0.4
10.4
13.7
Trucks 85
51 41.5 -13.2
79.3
40.9
Other agricul-
tural machinery n.a.
3.6
Mineral fertilizer
deliveries 9
12.8 9.4
5.4
15.2
Land reclamation
og am
Gross additions to
irrigated and
drained area 2.5 2.8
2.4 2.4 2.8 21 to 23
a. Preliminary.
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scarce reserves of gold and hard
currency to purchase large
emergency wheat imports either
this year or last as it did in
1963-65.
The success in agriculture
apparently has led to a signifi-
cant cutback in prior plans
for 1966-70 to allocate large
additional investment resources
to that sector. Shaken by the
grim necessity to import large
quantities of wheat in the early
1960s, the regime incorporated
in plan directives for 1966-70
large increases in machinery de-
liveries above those of 1961-65,
a doubling of the output of
mineral fertilizer, and the ir-
rigating and draining of more
than 20 million acres of land.
These plans are far behind
schedule.
Two other elements of the
1966-70 agriculture programs--
a greater role for private ac-
tivity and greatly increased
monetary incentives--have been
carried out in varying degrees
and probably contributed to the
agricultural success in 1966-67.
The agricultural successes
of 1966-67 apparently have re-
sulted in large cutbacks in Brezh-
nev's many-faceted program "to get
agriculture moving again." Histor-
ically, commitments to agriculture
have provided a convenient invest-
ment to cut when crops happened to
be large and other claims on re-
sources seemed more urgent. This
seems to be happening again, but
the regime cannot count exclusively
on above.-average weather plus
rubles in the hands of the peas-
ants to cure the chronic ills of
Soviet agriculture.
A recent article by polit-
buro member Polyansky, published
after the 1968-70 plans were ap-
proved., asserts that agricul-
tural investment is indeed being
slighted in the new guidelines.
In any case, the 1966-70 goals
for agricultural production can-
not be met cheaply; investment in
real resources will have to be
revived if the goals are to be
realized.
IndustL
Industrial production in
1966-67 grew at an annual rate
of 8 percent, somewhat above the
6.5 percent average annual rate
for. 1961-65 but below the aver-
age of the 1950s. The output of
most major industrial commodi-
ties is approximately on schedule.
Contrary to long-standing So-
viet doctrine about the primacy
of heavy industry, production of
consumer goods--both durable and
nondurable--increased at approxi-
mately the same rate as the out-
put of producers' goods. In 1968
the growth rate of consumer goods is
planned to exceed that of producer
goods. The especially rapid rise
in the output of the food and
light industries was made possi-
ble by the sharply increased
availability of agricultural raw
materials from the bumper harves
in 1966. Indeed, the growth of
these industries accounts for
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almost one half of the accelera-
tion in over-all industrial
growth.
Two notable developments
characterized machinery output
in 1966-67. First, unlike the
recent past, the rate of growth
of military-oriented machinery
3.5
10.3
10.1
7.2 6.2 6.7 11
a. Data on performance in 1961-67are CIA estimates. Figures
based on Soviet plan announcements.
1961-70
Table 4
1961-65
a/ 7.4%
the 1966-70 plan are CIA calculations
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Page 7 SPECIAL REPORT 3 Nov 67
was much more rapid than that
of civilian machinery. Second,
also in contrast to past prac-
tice, the consumer-durables
component of civilian machinery
increased far more rapidly than
the producer-durables component.
These two developments indicate
a significant diversion of
USSR: Average Annual Rate of Growth
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figure 1
USSR: indexes of Production of Civilian and Military Machinery
195$ 1959 1960 1961 1962 1963 1964 1965 1966 196?
Pnl'a teary
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USSR: Growth of Industrial Output, Capital and labor, and Productivity 1951-1910
(Average anltleal vales in percent)
t ~AL GROWTH IN INPUTS Of CAPITAL GAINS IN PRODUCTIVITY
t T ANDo (CAPITAL AND LABORCOMBINED
1951-60 1961-65 1966-67 1966-70 1951-60 1961-65 1966.61 1966-70 1951-60 1961-65 1966-61 1966-70
Preliminary Planned Ptdimina,6 Planned Preliminary Planned
68493 11-67 CIA
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machinery output in 1966-67 away
from investment purposes to mil-
itary and consumption purposes.
The moderate acceleration
in industrial growth in the past
two years reflects increased
productivity. Combined inputs
of labor and capital (plant and
equipment) grew a bit slower
than in 1961-65, but the growth
in their productivity doubled.
The annual gain of three percent
during 1966-67, however, is
still far below the rate planned
for 1966-70 and that actually
achieved during the 1950s.
Several factors account for
the large rise in the growth of
productivity: a much greater
availability of agricultural raw
materials; actual operating capac-
ities in a number of major in-
dustrial plants were brought nearer
to planned levels; and the economic
reform currently being carried
out in industry. Soviet sources,
however, repeatedly attribute the
initial successes of economic re-
form to one-time factors, such as
the using up of excess stocks of
products and materials.
Consumer Welfare
Soviet consumers fared
exceptionally well in 1966-67.
Real income per capita--which
includes wages, farm incomes in
kind, and payments from the
state budget--rose nearly 6 per-
cent per year, compared with
about 3.5 percent in 1961-65.
Thanks primarily to the good
crop years, per capita consump-
tion of goods and services in
1966-67 rose almost as fast as
real incomes and double the
rate in 1961-65.
Despite the increased flow
of consumer goods, inflationary
pressures grew stronger in 1966-
67. Considerable inflationary po-
tential already existed in the
economy as a result of past pol-
icies that provided large quan-
tities of rubles unmatched by
foods and services. Per capita
disposable money income rose much
faster than called for in the
1966-70 plan and considerably
faster than the consumption of
goods and services. As in the
recent past, a substantial part
of the excess purchasing power
was absorbed in voluntary savings;
savings bank deposits increased
about 20 percent per year in 1966-
67. This means, however, that
the people expect housing and dur-
able goods to be made available
in the future.
The single clear feature of
the 1968 and 1969-70 plans in the
area of consumer welfare is the
announced rise in money incomes
of the population. In part, the
increases in incomes stem from
a wage creep associated with ris-
ing labor productivity and normal
higher growth in welfare payments
in the form of pensions and other
transfer payments. Nevertheless,
the planners are carrying out a
series of wage and welfare re-
forms that could have been post-
poned--a higher minimum wage, in-
creased disability pensions, a
lower retirement eligibility age
for collective farmers, and other
lesser benefits.
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What the new plans for 1968--
70 do not say is how goods and
services are to be provided to
meet: the swelling consumer de-
mand. As incomes increase, the
demand for more and better quality
goods is bound to become more
insistent. The 1968 plan sug-
gests, however, that the regime
does; not intend to make any major
adjustments in the original five-
year plan directives in the area
of consumption.
The output of consumer goods
in 1.968 is to grow at a higher
rate than other industrial pro-
duction--8.6 percent, compared
with. 7.9 percent. However, previ-
ous attempts to close the gap be-
tween rates of growth of consumer
goods and producer goods foundered.
The same elements that contributed
to previous failures are present
now: plans depend on an unreason-
ably high assumption about the re-
ceipts of consumer industry of
agricultural raw materials; and,
with. investment being pressed
down., plans for expanding and
renovating consumer industry will
be the first to be jettisoned.
Outlook: Two Risks
The increased allocation of
resources to the military will
accentuate the current slowdown
in the flow of new industrial in-
vestment and may force the USSR
to operate an increasingly obso-
lescent industrial plant. This
fall in the rate of introduction
of new technology will affect ad-
versely the potential for increas-
ing industrial output and improv-
ing its quality. Thus, the lead-
ership is taking a major risk in
diverting investment resources
to military use when these re-
sources may be vital to improv-
ing the long-term quality of the
industrial plant.
In similar fashion, Soviet
agriculture in most years carries
out its basic task of providing
sufficient calories for the pop-
ulation, but needs to move to a
higher level of organization,
technology, and diversity of out.-
put. Greatly increased produc-
tion of meats and other quality
foods requires a large, sustained
investment. This investment,
which is one major prerequisite
for sustained growth, was pro-
vided for in the Brezhnev pro-
gram. The substantial cuts in
this program represent the second
major risk taken by the leader-
ship--namely, that future gains
in agricultural production are
made more precarious. (SECRET)
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