TRENDS IN THE SOVIET ECONOMY 1950-63

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• Document Creation Date: December 23, 2016
• Document Release Date: March 14, 2013
• Sequence Number: 1
• Publication Date: February 1, 1963
• Content Type: REPORT

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SECRET FEB 1C.1'
Economic Intelligence Report
TRENDS IN THE SOVIET ECONOMY
1950-63
CIA/RR ER 63-2
February 1963
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
N? 43
SECRET
GROUP I
Excluded from automatic
downgrading and
declassification
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SECRET
Economic Intelligence Report
TRENDS IN THE SOVIET ECONOMY
1950-63
CIA/RR ER 63-2
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
SECRET
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FOREWORD
This report provides the detailed analysis and the basic statistics
used in the preparation of CIA/RR EM 62-23, Recent Trends in Soviet
Economic Policy, December 1962, SECRET. For the most part, data are
derived from Soviet official announcements, technical journals, and
statistical handbooks. A complete,list of source references is avail-
able in the files of this Office.
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CONTENTS
Summary and Conclusions
I. General Trends, 1950-61
Page
1
5
II.
Economic Policy and the Leadership
13
A. Summary of the Period Before 1959
13
B. Current Issues and Policy Discussions, 1959-62 ? ?
?
14
III.
Economic Problems
19
A. Problems in Investment
19
B. Problems in Industry
25
C. Organizational Problems of Industry and Investment
.
27
D. Agriculture
31
E. Consumption
35
F. Official Attitudes Toward Private Activity
37
IV.
Military Expenditures and Policy . . ** 0 ? ?
?
41
A. Trends in Expenditures
41
B. Implication of New Military Doctrine
43
C. Future Trends
44
V.
Foreign Trade and Aid
47
A. Trade -- General
47
B. Trade -- European Satellites
47
C. Trade -- Industrial West
48
D. Trade and Aid -- Underdeveloped Countries
48
VI.
Outlook .
51
A. Problems and Responses
51
B. Prospects
54
Tables
1. USSR: Indicators of Economic Growth, 1951-61 9
2. USSR: Distribution of Gross National Product (Adjusted
Factor Cost), by End Use, 1950 and 1955-62 10
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Page
3. USSR: Average Annual Rates of Growth in Indus-
trial Production, by Branch of Industry,
1951-61 11
4. USSR: Trends in Growth of the Labor Force,
1950, 1953, and 1955-62 12
5. USSR: Average Annual Rates of Growth of New
Fixed Productive Investment, by Sector,
1951-61 and 1962 Plan 20
6. USSR: Output of Construction Materials and
Changes in Construction Activity, 1951-61 . 22
7. USSR: Average Annual Rates of Growth in New
Fixed Investment, by Function, 1951-61 . . .
8. USSR: Industrial Growth and Changes in Re-
source Use and Productivity, 1951-61 . . . 26
9, USSR: Average Annual Rates of Growth in Real
Per Capita Consumption, 1951-61 36
10. USSR: Allocation of Mission-Related Military
Expenditures, 1958 and 1962 42
11. USSR: Indexes of Resource Productivity in
Industry, Selected Periods, 1950-61, and 1965
Plan 55
12. USSR: Indexes of Industrial Production, by
Branch of Industry, 1950-61 56
Charts
Figure 1. USSR: Growth of Gross National Product,
Industry, and Agriculture, 1950-61 . .
Figure 2. USSR: Growth of Consumption, Investment,
and Defense, 1950 and 1955-62
Figure 3. USSR: Growth of Machinery Output,
1950-62
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12
12
12
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TRENDS IN THE SOVIET ECONOMY*
1950-63
Summary and Conclusions
Although the conomy of the USSR still is characterized by rapid
growth of production, rates of growth have declined recently, in
industry since 1955 and in agriculture since 1958. Meanwhile, com-
petition for resources for use in the three main areas of economic
activity -- defense and space, growth, and consumption -- has become
intensified, particularly competition for specialized high-grade
resources.
The acceleration of the arms and space races, especially in 1961
and 1962, has had an appreciable retarding effect on the growth of
the civilian economy of the USSR. Continuation for the next 2 or 3
years of the recent accelerated rate of growth of expenditures for de-
fense and space would perpetuate the present stagnation in agriculture
and would cause considerable underfulfillment of production goals for
industry. The Soviet leadership faces some difficult decisions re-
garding allocations to defense and within the defense sector itself.
In particular, the leadership must decide how rapidly resources are
to be directed to such expensive ventures as the antiballistic missile
program or the program for landing a man on the moon. There are
tentative indications in the 1963 budget and economic plan that al-
locations to the defense sector may increase less in 1963 than in
1962, thus reducing to some extent the pressures on rates of growth
and on consumption.
Almost all indicators of Soviet economic growth show a moderate
slowdown in 1960, 1961, and 1962. Growth in industrial production
averaged about 7 percent per year in 1960 and 1961 compared with an
average of about 9 percent per year from 1955 to 1959. Preliminary
evidence for 1962 does not suggest a strong reacceleration in industry.
Agricultural output in 1961 was 5 percent above that in 1960 but only
3 percent above that in 1958. In 1962, even with the campaign to plow
up millions of acres of grasslands, there appears to be no increase
above 1961 and possibly even a decrease. The increase in gross na-
tional product (GNP) averaged about 5 percent annually for the 3 years
1959-61, decidedly ,less than the average of 7 percent for the preceding
* The estimates and conclusions in this report represent the best
judgment of this Office as of 15 January 1963.
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8 years. These lower rates of growth are still quite respectable by
the standards of modern industrial countries, although below what the
Soviet leadership has come to expect and what is necessary to accom-
plish the ambitious objectives of the USSR.
A number of factors have contributed to this slowdown in growth.
One has been the introduction of the 41-hour workweek (down from 47
hours), with the result that the total man-hours supplied to industry
in 1961 was practically the same as in 1958. A more important factor,
however, appears to be the reversal of the trend in defense spending
from a decline during 1955-57 to a rise starting in 1958 and accelerat-
ing in 1961 and 1962. Defense spending declined as a share of GNP
from 12.7 percent in 1955 to 9.2 percent in 1960 and declined ab-
solutely by perhaps as much as 2 billion (new) rubles* from 1955 to
1957. In the period 1955-58 a sharp reduction in the number of
servicemen and a reduction in the procurement of arms made feasible
(1) the large allocation of capital and labor required by the "new
lands" and "corn" programs, (2) a rapid growth of investment in
industry, and (3) a large increase in the housing construction pro-
gram. These trends have been reversed since 1958. Total defense
spending has been increasing since 1957, and demobilization of the
armed forces was halted in 1961. In 1962 the estimated increase
in spending for defense and space was about 10 percent, about double
the rate of increase in GNP, and the increase in arms procurement
was greater than the increase in the total production of machinery
and equipment.
In 1961 and 1962 the interplay of the demands for large increases
in all major sectors -- defense and space, growth, and consumption --
resulted in an overcommitment of resources beyond the normal degree of
tautness in the Soviet economy. In 1962 the leadership reacted to the
overcommitment by adopting policies of restraint which bear directly on
the consumer. For example, meat prices were raised by 30 percent,
private housing construction suffered another cut, and a scheduled
reduction in the personal income tax was "postponed." Furthermore,
the continued stagnation in agriculture in 1962 reflected the funda-
mental unwillingness of the leadership to give agriculture the ma-
chinery and skilled manpower necessary to raise the level of output
and technology.
* Ruble values in this report are given in new rubles established
by the Soviet currency reform of 1 January 1961. A nominal rate of
exchange based on the gold content of the respective currencies is
0.90 ruble to US $1. This rate, however, should not be interpreted as
an estimate of the equivalent dollar value of similar US goods or
services.
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Under Khrushchev's restless and vacillating leadership, yet an-
other comprehensive reorganization of the administration of industry
and agriculture was proposed in November 1962. The proposed changes
call for somewhat more centralization of the government apparatus
along with a more active participation by the Party in economic affairs.
Although the full details of the change have not yet been published, it
appears to be essentially an administrative reshuffling that does not
tackle the basic weaknesses of the economic system.
The strains on the domestic economy are increased -- but only to
a small degree -- by the use of resources in the Soviet trade and aid
program. The net use of resources involved is only a fraction of
1 percent, although the skilled technicians, modern machinery, and,
in some instances, weapons sent abroad are the same high-quality
resources for which competition is so keen at home. It is believed
that the potential political and military gains from the trade and
aid program will continue to be quite large relative to the cost in
resources and that the USSR will assign high priority to this activity
when exploitable soft spots appear in the non-Communist world.
In the aftermath of Cuba it is difficult to judge what allocation
policies will emerge in the next few years. There is strong incentive
for the Soviet leadership (and strong pressure from military advisers)
to keep up or catch up in the arms and space races. The Soviet leaders
must be acutely aware, however, that the arms and space races are
penalizing Soviet economic growth more than these races penalize US
growth. Rapid economic growth aimed at catching up with the US is a
fundamental long-run Soviet policy, which the leadership will be re-
luctant to sacrifice to an inconclusive military buildup for very
long. Furthermore, the Soviet people are chafing increasingly under
the inability of their government to provide better quality food,
decent housing, and more consumer durables. Although the most
sensible economic policy in this situation might seem to be a firm
restraint on expenditures for current buildup of weapons, it is im-
possible to judge precisely either the way in which the leadership
will weigh its alternative opportunities or the degree of rationality
that it will bring to the making of the major allocation decisions.
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I. General Trends, 1950-61
The Soviet economy was characterized by rapid growth in the period
1950-61, but rates of growth have declined recently -- in industry
since 1955 and in agriculture since 1958. The major trends in the
economy are presented in Tables 1, 2, 3, and 4* and in the charts,
Figures 1 through 3.**
The increase in GNP averaged about 5 percent annually for the
3 years 1959-61, decidedly less than the 7 percent average for the
preceding 8 years. Agricultural performance, which weighs heavily in
Soviet GNP, was a major factor in the slowdown. In 1961, agricultural
output was about 5 percent above that in 1960 but only 3 percent above
that in 1958. Some slowing down was to be expected after the spurt of
growth associated with the "new lands" and "corn" programs that cul-
minated in the bumper crop of 1958 (see Table 1 and Figure 1). Indus-
try averaged about 7 percent annually in 1960 and 1961 compared with
about 9 percent from 1955 to 1959 and a little more than 10 percent
from 1950 to 1955.
The recent moderate declines in rates of growth appear to be
largely explained by trends in labor and capital resources and in
resource allocations. In industry the most obvious retarding factor
in 1960 and 1961 was the progressive introduction of the 41-hour work-
week during 1958-60, replacing the 47-hour week.
Trends in investment also were much less favorable to growth in
recent years than in earlier years. New fixed investment grew at an
average annual rate of more than 13 percent from 1950 to 1959 (see
Table 1). At the same time, both defense expenditures and consumption
grew much more slowly. From 1950 to 1959 the total investment grew
from 18 percent to 30.5 percent as a share of GNP, whereas the share
of defense expenditures declined from 13.7 percent to 9.3 percent (see
Table 2 and Figure 2). Nearly all of the change in shares must have
occurred since the Korean War. Since 1959 the growth of new fixed in-
vestment has been reduced, to 8 percent in 1960 and 4 percent in 1961.
The trend in shares also appears to have been reversed in 1961 and in
1962, with defense expenditures rising as a share and investment de-
clining.
In 1956 and 1957 especially, diversion of resources from military
uses was crucial in maintaining growth of output and investment in the
Tables 1, 2, 3, and 4 follow on pp. 9, 10, 11, and 12, respectively.
** Following p. 12.
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face of the raw materials crisis of 1956, which was to lead to the
abandonment of the Sixth Five Year Plan (1956-60). A sharp reduction
in military forces and a slight reduction in output of military equip-
ment made possible (1) the expansion of agricultural labor and capital
that was required for the "new lands" program, (2) the continued rapid
growth of industrial investment, and (3) a very large housing construc-
tion program. Two other sources of additional labor were significant
in this period: (1) teenagers pushed into the labor force by the edu-
cational policies at that time and (2) the labor involved in the private
housing construction program.
Since 1957 or 1958 the procurement of military hardware has been
expanding at the expense of production of civilian machinery. Produc-
tion of civilian machinery grew 18 percent and 16 percent in 1956 and
1957, respectively. Since 1957 the increase has averaged about 10 per-
cent. The equipment portion of investment followed suit with a 1-year
lag -- an average annual growth of 16 percent from 1955 to 1958 and an
average of 9 percent from 1958 to 1961. From 1958 to 1962, production
of military equipment grew at an average of more than 13 percent (see
Table 3* and Figure 3**).
The industrial reorganization of 1957 seems to have produced at
least one result unfavorable to growth. Since 1957, inventories have
grown, from an already high level, at a rate exceeding that of total
GNP.*** This inventory accumulation must certainly have aggravated an
increasingly tight supply situation for the period 1958-61.
The composition of industrial growth is shown in Table 3. Aside
from diverse tendencies in military and civilian machinery, the most
notable trends are the following:
1. The accelerated substitution of oil and gas for
coal since 1958;
2. The significant slowdown in production of
metals, especially nonferrous metals, since 1955;
3. The rapid growth of the chemicals industry over
the whole period;
4. The very rapid growth of construction materials
(including lumber and steel), but with an ominous slow-
down since 1959; and
* P. 11, below.
** Following p. 12.
*** See III, C, p. 27, below.
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5. An absolute decline in forest products in 1960
and 1961, which almost certainly reflects the impact of
the shortened workweek on this chronically labor-short
industry.
A development which is not reflected in the aggregate statistics is
the industrywide effort to modernize, mechanize, and diversify models
and in general to apply new technology. This effort, which is a pri-
mary feature of the Seven Year Plan (1959-65), apparently is having only
partial success. In the chemicals industry, in spite of difficulties in
completing new plants, there has been a rapid increase in output pri-
marily accounted for by new products such as synthetic fibers and plas-
tics. In other industries such as agricultural machinery, however, con-
siderable difficulty has been encountered in designing and getting into
production a diversified line of new models. Output of agricultural ma-
chinery fell sharply in 1958 and has not yet recovered to the 1957
level.
In spite of Khrushchev's championing of the consumer, priorities
for consumption have slipped badly in recent years. The relatively
slow growth in production of consumer goods (see Table 3*) in 1960
and 1961 is directly related to the lack of growth in agriculture
since 1958. Agriculture has not been allocated any substantial in-
crease in investment since 1958. The total housing construction has
been declining since 1959, state housing leveling off and private
housing declining drastically. The rapid growth of "nonproductive
investment" in 1956 to 1958 and its slowdown thereafter reflect
chiefly trends in housing construction (see Table 1**).
In 1962 the Soviet leadership adopted a number of stop-gap meas-
ures to adjust to the difficulties that emerged in 1961. Among those
are (1) the designation of priority construction projects to be com-
pleted at the expense of new starts and other projects in process and
(2) an increase in multiple shifts worked in machinery plants to be
implemented over the remaining years of the Seven Year Plan. Also,
in agriculture an enormous program of converting grasslands and fallow
to high-yield (but labor-and/or-machinery-intensive) feed crops such
as corn, peas, beans, and sugar beets was launched last spring. This
"plow up" program may produce an increase in output but will clearly
require more labor and machinery than is currently available to agri-
culture. In 1962, however, in the face of adverse weather conditions,
the program did no more than help maintain farm output at or slightly
less than the level of 1961. In the longer run, more fertilizer will
be required to replace the nutrients formerly conserved by rotation
programs.
* P. 11, below.
** P. 9, below.
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The supply of labor is perhaps tighter now than in several years in
the Soviet economy as a result of the shorter workweek, the halting of
demobilization, the leveling off of participation rates, and the ex-
panded cultivated crop acreage in agriculture. The supply of investment
goods also is stretched tight by the competing demands of an expanding
armaments program, the program to expand and modernize general industry,
and the foreign aid program.
The Soviet leadership has some difficult allocation choices to make
in the near future. The experience of the last few years strongly in-
dicates that the economy can not maintain the rates of growth in all
directions that Khrushchev appears to desire. The recent decisions to
increase meat prices by 30 percent and to maintain the personal income
tax are perhaps only the first of several difficult decisions which
have to be made.
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Table 1
USSR: Indicators of Economic Growth
1951-61
Average Annual Rates of Growth (Percent)
1951-55 _V
1956
1957
1958
1959
1960
1961
Industrial output
10.3
8.4
8.7
8.6
10.4
6.9
7.6
Total investment (new fixed) 12/
12.5
15.0
12.8
16.2
13.1
8.1
4.4
Productive investment
12.5
12.3
5.2
13.3
13.8
9.2
6.1
Industrial
12.6
14.4
5.2
13.0
15.2
10.7
4.2
Agricultural
18.4
5.8
4.4
12.8
7.0
2.4
11.0
Nonproductive investment
12.3
20.8
27.9
21.0
12.0
6.5
1.6
Agricultural output
Moving average for 3 years
5.3
8.9
8.2
2.1
3.4
1.3
N.A.
Straight annual average
4.2
13.0
0
12.9
-6.0
4.1
5.2
Gross national product
6.6
8.0
5.3
11.0
3.6
6.1
4.9
a. The base year for the calculations in this column is 1950.
b. Calculations are based on unrounded data and may not agree with the rates of growth im-
plied in Table 2 (p. 10, below), which is based on rounded volume indexes.
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Table 2
USSR: Distribution of Gross National Product (Adjusted Factor Cost), by End Use
1950 and 1955-62
Values in Billion New Rubles !i
1950
1955
1956
1957
1958
1959
1960 1961 1962 12/
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Percent
of Total
Value
Consumption
53.0
64.2
74.7
63.0
78.7
61.1
83.7
62.6
87.9
59.6
93.9
58.8
97.7
58.3
101.4
58.7
N.A.
Investment 2/
14.6
17.7
26.1
22.0
33.1
25.7
34.6
25.9
43.6
29.6
48.8
30.5
52.3
31.2
52.7
30.5
58.2
New fixed
N.A.
N.A.
20.6
17.4
23.7
18.4
26.8
20.1
31.1
21.1
35.0
21.9
37.9
22.6
39.6
22.9
N.A.
Other
N.A.
N.A.
5.5
4.6
9.4
7.3
7.8
5.8
12.4
8.4
13.8
8.6
14.4
8.6
13.2
7.6
N.A.
Defense di
11.3
13.7
15.1
12.7
14.6
11.3
13.1
9.8
13.7
9.3
14.9
9.3
15.5
9.2
16.4
9.5
18.1
Administration
3.7
4.5
2.8
2.4
2.5
1.9
2.2
1.6
2.2
1.5
2.2
1.4
2.2
1.3
2.2
1.3
N.A.
Total
82.6
100.0
118.6
100.0
128.9
100.0
133.6
100.0
147.4
100.0
159.8
100.0
167.7
100.0
172.7
100.0
N.A.
a. The ruble values in this table were derived by use of 1955 value weights and volume indexes for each end-use component. The summation of these values over
time does not give results identical with those obtained by aggregating sector of origin indexes. The GNP indexes in this report (for example, Table 1, p. 9,
above) are those derived from sector of origin indexes (for example, for agriculture and industry).
b. Estimated from plan data and other sources.
c. Because of rounding, components may not add to the totals shown.
d. Because of the well-known difficulties in using Soviet prices and uncertainties in defense prices in particular, the defense share of GNP, shown here, is
not a reliable indicator of the resource burden of defense in comparison with other countries. Some effort has been made to adjust the defense share to a
factor cost basis so that the trends in shares are meaningful, but defense probably is still too low in level.
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Table 3
USSR: Average Annual Rates of Growth in Industrial Production, by Branch of Industry
1951-61
Percent
1951-55 2/
1956
1957
1958
1959
1960
1961
Industrial materials
Electric power
13.1
12.7
9.6
12.2
12.3
10.5
11.9
Coal
8.4
9.8
8.0
7.3
2.6
1.8
-0.3
Petroleum and gas products
13.4
18.9
17.3
15.1
13.8
14.0
12.4
Ferrous metals
11.1
7.1
6.3
7.2
9.1
8.3
8.5
Nonferrous metals
14.1
6.7
5.1
4.9
7.0
8.3
8.5
Forest products
5.7
3.1
6.3
5.8
7.5
-4.5
-3.2
Paper and paperboard
10.0
7.8
8.7
6.7
4.5
4.4
6.5
Chemicals, including synthetic rubber
13.2
11.5
12.6
12.2
12.7
10.0
11.5
Construction materials12/
16.9
15.9
21.7
20.9
18.2
18.1
10.3
Aggregate raw materials
10.2
8.9
10.1
10.0
9.7
6.7
5.9
Machinery
Civilian machinery
11.8
18.2
15.7
9.3
11.0
8.9
9.2
Military machinery 2/
9.5
-1.5
-1.5
4.5
16.4
8.1
14.5
Aggregate machinery
10.6
8.4
7.8
7.3
13.2
8.6
11.4
Consumer goods
Processed foods
Soft goods
9.7
10.1
10.7
5.9
7.1
6.2
6.7
8.4
8.4
6.8
1.7
5.8
7.8
3.1
Aggregate consumer goods
10.0
7.7
6.6
7.8
7.4
4.2
4.9
Aggregate industrial production
10.3
8.4
8.7
8.6
10.4
6.9
7.6
a. The base year for the calculations in this column is 1950.
b. Excluding production of lumber and steel used in construction. Such production is included under the materials categories forest products and ferrous metals,
respectively.
c. Further work is in progress on all these index numbers but especially on the military machinery numbers. For example, the estimated output of military ma-
chinery in 1950 probably is too high. Calculations are based on value data.
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Table 4
USSR:
Trends in Growth of the Labor Force
1950, 1953, and 1955-62
Million Persons at Midyear
Total labor force
- 1950
1953
1955
1956
1957
1958
1959
1960 1961 1962
94.9
98.7
101.4
103.5
104.5
106.6
108.7
110.2
112.0
113.8
Armed forces
5.3
6.2
5.8
4.6
3.9
3.8
3.6
3.3
3.0
3.2
Civilian labor force
89.6
92.5
95.6
98.9
100.6
102.8
105.1
106.9
109.0
110.6
*
Agriculture
50.8
50.1
50.5
52.1
51.9
51.9
51.9
51.0
50.1
49.2
Nonagriculture
38.8
42.5
45.1
46.8
48.7
50.9
53.2
55.9
58.9
61.4
Industry
16.4
18.4
19.8
20.5
21.0
21.7
22.3
23.2
24.3
24.9
Other
22.4
24.1
25.3
26.3
27.7
29.2
30.9
32.7
34.6
36.5
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200
100
90
80
70
60
50
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961
Figure 1
USSR: GROWTH OF GROSS NATIONAL PRODUCT, INDUSTRY
AND AGRICULTURE, 1950-61
(Volume Indexes 1955=100)
200
100
90
80
70
60
50
1950 1951
36944 12-62
1
1952 1953 1954 1955 1956 1957 1958 1959 1960 1961
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300
200
100
90
80
70
60
50
40
30
20
10
Figure 2
USSR: GROWTH OF CONSUMPTION, INVESTMENT, AND DEFENSE
1950 AND 1955-62
.CONSUMPTION
1950
*Expressed in terms of new rubles
36945 12-62
1955 1956 1957 1958 1959 1960 1961 1962
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300
200
100
90
80
70
60
50
40
Figure 3
USSR: GROWTH OF MACHINERY OUTPUT, 1950.62
(Volume Indexes 1955=100)
240
200
160
120
80
40
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962
36946 12-62
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II. Economic Policy and the Leadership
A. Summary of the Period Before 1959
Many of the difficulties that the Soviet economy is experiencing
in 1962 are a direct result of policies identified with Khrushchev. His
style of leadership was in evidence even during the period of collective
leadership and, of course, since 1957 has dominated the scene. This
style can be characterized as one of chronic optimism -- confidence that
the Soviet economy can move steadily and rapidly ahead, meeting the com-
peting demands for increased defense, growth, and consumption. When de-
velopments make it clear that production will not meet all the important
demands, Khrushchev tends to turn to new forms of organization schemes.
This faith in organizational changes stems from his rather naive belief
that he can provide the right administrative setting to release large
internal reserves.
The fine old Bolshevik tradition of carrying out policy by
sweeping campaigns has never had a more enthusiastic practitioner than
Khrushchev, whether he is expanding sown acreage or introducing new
technology in industry. When organizational changes and programs to
raise output fail to sustain a rate of growth high enough to meet en-
larged commitments, however, Khrushchev tends to hesitate in reducing
commitments. His methods of solving economic problems have sometimes
led to the growth of new problems.
Cumulative evidence suggests that neither of the two major organi-
zational changes -- in industry in 1957, in agriculture in 1958 -- has
been successful (see III, C,* and III, Dxx). Agricultural administra-
tion above the enterprise level underwent additional major changes in
1961 and 1962. Although there have not been radical modifications in
industrial organization since 1957, the tendency has been to add "new
layers" of production and supply organizations to overcome the more
obvious problems. The recent changes in organization announced at the
November Plenum of the Central Committee of the Communist Party continue
the series of administrative reorganizations begun in 1957, all with
the common purpose of obtaining a more efficient result without a funda-
mental overhaul of the system.
Two further developments that illustrate Khrushchev's overoptimism
about obtaining gains in efficiency from the economy are (1) the pro-
gram for introducing new technology in the Seven Year Plan and the
* P. 27, below.
** P. 31, below.
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projected productivity plans based thereon and (2) the decision in
1957 to proceed with the substantial reduction in the workweek in
the nonagricultural sectors.
Khrushchev has had more success in his innovations that have
affected agricultural output. The "new lands" and "corn" programs
probably accounted for more than one-fourth of the increase in farm
output between 1953 and 1960. Khrushchev's luck in the "new lands"
program may be fading a bit each year, however, and may have given
rise to the 1962 innovation, the "plow up" campaign (see III, D*).
The striking success in increasing farm output in the social-
ized sector between 1953 and1958 mut have led Khrushchev to base
future commitments on the assumption that the rate of output would
continue to grow rapidly. Thus he simultaneously insisted on large
increases in output of meat and milk, made promises to consumers to
raise money incomes to pay for the meat and milk, and initiated a
campaign to restrict private agriculture -- the major producer in
1958 of meat and milk. These latter two policies resulted in infla-
tionary pressures, falling output in the private sector, and retail
price increases for animal products.
In summary, the economic policy decisions before 1959 most
closely associated with Khrushchev have not turned out to be very
successful.
B. Current Issues and Policy Discussions, 1959-62
Policy discussions and decisions in the Soviet context have an
"iceberg" character. For motives that probably differ with every case,
the Soviet leaders see fit from time to time to partly disclose to the
public, both domestic and foreign, their policy discussions of pending
decisions. An analysis of Soviet intentions in the broad area of re-
source allocation based on the partial disclosure of policy discussions
and disagreements is complicated by the highly general nature of the
announcements. For example, on the issue of resource allocation to
consumer welfare which is discussed below, it is seldom clear from the
public statements of the leadership what magnitude of change in re-
source commitment is under discussion and what the range of alternative
choices is.
Between mid-1959 and mid-1961, as in the preceding period,
Khrushchev appeared to be concerned about the need to increase con-
sumer welfare. This concern was illustrated in the first half of
1961 by his suggestion that the consumer-oriented policy be enshrined
* P. 31, below.
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in a "new law of socialism' -- in plain words, that the rate of growth
of light industry be raised to that of heavy industry.
It remains unclear, after all of the verbal pyrotechnics from
Khrushchev on shifting additional resources to consumer-related acti-
vities, whether or not an appreciable change in short-run priorities
and/or allocations ever did take place. The best indication of an actual
shift came in the fall of 1959 with the announcement of a special 3-year
program for consumer durables. Apparently related to this decision was
Khrushchev's admission to Ambassador Thompson at the same time that only
with great difficulty had he persuaded his colleagues to agree to the
allocation of 1 million metric tons* more steel to the civilian sector.
He contended that this had been of "enormous value and had only a minor
effect on military and other needs."
At the time of the announcement of a troop cut in January 1960,
Khrushchev was quick to point out that the savings in the military budget,
estimated at 1.6 billion to 1.7 billion rubles annually, would "create
additional possibilities for raising the standard of living ... ." The
only hard commitment of additional funds to this end was a supplemental
allocation of 364 million rubles to the civilian sector in January 1960,
directly tied to the reduction in the armed forces. There was a further
claim by Khrushchev in May 1960 that 100 million more rubles had been
expended on the sugar, meat, and textile industries. Khrushchev made
it clear in the same speech, however, that he had larger allocations in
mind when he said that supplemental allocations of 2.5 billion to 3.0
billion rubles (equivalent to about 7 percent of new fixed investment
in 1960) above the original Seven Year Plan were being earmarked for
the development of the textile and footwear industries and the expansion
of agriculture.
Khrushchev's public speeches throughout 1960 and early 1961 re-
flected confidence that more resources could safely be channeled into
consumption without any retardation of economic growth or weakening of
military power. For example, in his May 1960 announcement of a limited
reallocation of resources to civilian needs, he made explicit the links
between increased output of consumer goods and reduced defense expendi-
tures. Eight months later, at the January 1961 Plenum of the Central
Committee, he unveiled a new "law of socialism" that "production of con-
sumer goods should always exceed public demand," in order to legitimatize
a more ambitious welfare program. Accordingly, Khrushchev felt called
on to provide a theoretic rationale for his position, embraced in
Marxist jargon, and to declare Stalin's "law of socialism" to be "er-
roneous" (according to Stalin, production of goods under socialism al-
ways lagged behind the growth of demand).
* Tonnages are given in metric tons throughout this report.
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At the same Plenum (January 1961), Khrushchev argued against
the "policy of developing ferrous metallurgy to the absolute limit."
He berated "some comrades who had developed an appetite to give the
country more metal" and warned that such a desire might be detrimental
to consumer interest. If they (the Soviet leaders) permitted dis-
proportions to develop in the economy, it would result in "betraying
the confidence of the people." He warned:
We must do everything possible to see that
our economy constantly satisfies the rapidly
growing needs of the population. Otherwise,
there may be a discrepancy between the purchasing
power of consumers and the possibilities for
satisfying their demand -- a situation fraught
with dangerous consequences.
That these words in January 1961 were to be prophetic was suggested
a year and a half later when it was found necessary to offset excess
purchasing power with a significant rise in food prices.
Also at the same January Plenum, Khrushchev contended that
the 2.5 billion to 3.0 billion rubles authorized by the May 1960
Supreme Soviet as supplemental allocations to agriculture and light
industry were "inadequate," insisting that "in spite of the threats
of the imperialists" the USSR was in a position to divert more re-
sources without prejudicing the interest of heavy industry and de-
fense. He gave a clue to the magnitudes that he had in mind when
on 20 May 1961 he made the following statement in the presence of
Western correspondents: "Now we consider our heavy industry as built,
so we are not going to give it priority. Light industry and heavy
industry will develop at the same rate." This old "Malenkov heresy
of equal rates" was not repeated in the domestic media, but a month
later Khrushchev delivered a speech in which he said that "side by
side with heavy industry, light and food industry ... will be de-
veloped rapidly."
However, June 1961 appears to have marked a turning point
in Khrushchev's thinking. Voluntarily or involuntarily, he began to
soft-pedal the welfare line, and the best that he could do at the
22d Party Congress in October 1961 was to reiterate the decision to
make a supplemental application of "about 2.5 billion rubles" to
light industry and agriculture. The general tone of the speeches
and the final Party Program at the Party Congress was one of con-
servative emphasis on the traditional lines of economic development.
The consumer welfare aspect was mostly relegated to grandiose promises
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for 1970 and 1980. The slogans for catching up with the US in meat and
milk consumption in the near term and Khrushchev's "new law of socialism"
were either ignored or dampened.
As the strategic problems in 1961 became more evident, Khrushchev
was persuaded that diversions to consumption would have to be postponed.
Very likely there was strenuous argument within the top leadership about
the allocations of resources in this difficult period. It is suggested
that Khrushchev was persuaded not only by the arguments of his colleagues
but also by what he is fond of calling "life itself."
Since the Party Congress, nearly a year ago, the evidence of con-
troversy over allocational issues has been weak and somewhat ambiguous
with apparently short-run agreement to "hold the line" and indecision
over choices to be made in the more intermediate term. Certainly, the
recent decisions in agriculture must be considered as temporary ex-
pedients. Khrushchev at the opening of the March 1962 Plenum showed
signs of his old enthusiasm for "diversion of resources" to agriculture
but backtracked somewhat in his closing remarks. At the opening
session he said:
The attention ... to questions of increasing
material and technical assistance to the collective
and state farms has slackened in the past two or
three years. Furthermore, some officials display
unconcern and irresponsibility in solving the
urgent problems of increasing the output of equip-
ment, mineral fertilizers, herbicides, etc., ... .
Some leaders think that all questions of the
mechanization of agriculture have been solved and
that now it is even possible to take something away
from the farm machine industry for other branches
of the economy. These are very dangerous senti-
ments, and they must be condemned ... . I think
we began shifting farm machinery plants prematurely
to the production of other items, sometimes far
from the essential ones.
He went on in this vein stressing irmiiediate needs but carefully not
mentioning alms of rubles to be allocated. At the closing session his
tone changes:
Measures for increasing aid to agriculture do
not signify that resources will now be diverted to
agriculture at the expense of development of industry
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and the strengthening of the country's defenses.
The strengthening of the might of the Soviet Union,
of its defenses, is our most important task, and
we will perform it unswervingly. This is the
foundation of the existence of our socialist state,
of its development and successes. This does not
mean that I am in any sense retreating from the
position taken in the report concerning the al-
location of additional material and technical
resources for agriculture. No, the question of
strengthening assistance to agriculture must be
solved, and it will be solved. But, comrades, I
repeat that we must first of all make intelligent
use of the machinery already available to agriculture.
The tone of indecision on resource allocation in March 1962 was
carried over to an interview in April when Khrushchev told Cowles that
no decision had been made on the timing of the manned flight to the moon.
Kozlov also recently has complained to another foreigner about the high
cost of such a project.
Although Khrushchev had practically promised no retail price in-
creases for food in March, the announcement in June of sizable price in-
creases suggests that the problem of inflationary pressures was being
faced in more straightforward fashion. The reports of civil disturbances
associated with these price increases and the appeals from provincial
officials for additional aid in coping with the "plow up" program intensify
the multiple pressures felt by the leadership and make decisions with
reference to competing priorities that much more difficult.
In short, Khrushchev has rather consistently been on the side of
the consumer, at least as much as one could expect in a society dedicated
to the growth of heavy industry and military strength. Beginning in 1959,
however, he has not had his own way very much, although the discussion
and controversy over policy probably has not led to strong factionalism
or deep division of opinion within the top leadership. Nevertheless, if
it is correct to believe that Khrushchev's past performance suggests a
strong desire to raise consumption, the recent erosion in the consump-
tion campaigns by a rapidly expanding military program is surely not
to his liking.
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III. Economic Problems
A. Problems in Investment
The most serious symptom of slackening rates of growth in the
Soviet economy comes from the side of investment. Large expenditures
on new fixed investment have fueled the rapid growth rates of the past,
and future levels of output are larely a reflection of present ex-
penditures on new plant and equipment.
The data in Table 5* suggest an easing off of investment flows
to industry and agriculture during 1959-61. The rate of increase in
industrial investment in 1961 was the lowest in the postwar period.
The actual commissioning of new capacity in industry probably increased
at an even lower rate than productive investment, the volume of un-
finished construction growing more rapidly. In order to maintain an
average rate of increase in industrial capital stock of 11 percent dur-
ing the 1950's, gross investments in new plant and equipment increased
at an annual rate of 12 percent. The announced plans for investment in
1962 do not suggest any significant increase in investment growth over
1961.
The structure of industrial investment over the past decade has
varied because of changes in the economy's demands and, to a smaller
extent, because of changes in cost of introducing new capacity. In the
first half of the decade the rate of increase for the several branches
was nearly the same as the over-all rate for industry, with ferrous
metallurgy lagging behind.
The shortfalls in output in the basic sectors in 1956-57 brouelt
a quick response from the regime. For the years 1956-58 an increased
emphasis was given to basic metals, coal, electric power, and construc-
tion materials. After the flow of new capacity in materials and energy
regained balance with other branches, there was another shift in the
pattern -- new emphasis on machine building and a very rapid increase
in chemicals.
The general slowdown in industrial investment since 1959 has
affected rates of increase in all the branches. Investment in machine
building has declined only moderately in annual increment, probably re-
flecting the increased supporting role that this sector is giving to
defense and space programs. The most ominous indication of continuing
investment problems is the low increase of investment in the construction
* Table 5 follows on p. 20.
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Table 5
USSR: Average Annual Rates of Growth of New Fixed Productive Investment, by Sector
1951-61 and 1962 Plan
Percent
1951-55
2/ 1956
1957
1958
1959
1960
1961
1962 Plan IV
Investment, all sectors
12.5
12.3
5.2
13.3
13.8
9.2
6.1
Industry, total
12.6
14.4
5.2
13.0
15.2
10.7
4.2
Ferrous metallurgy
4.7
0
9.4
35.9
25.0
11.9
8.9
10.6
Chemicals
10.4
8.0
-1.3
39.5
53.0
34.8
15.4
22.0
Fuels and power
12.0
8.3
10.1
9.0
4.1
4.6
4.4
6.7 2/
Machine building
12.2
9.0
1.4
2.1
18.6
18.3
13.4
13.9
Construction materials
and construction
14.8
39.0
9.6
15.3
20.3
15.2
4.4
5.0
Consumer industries
11.7
25.1
6.6
22.2
16.1
17.2
-9.8
33.5 2/
Agriculture
18.4
5.8
4.4
12.8
7.0
2.4
11.0
Transport and communications
3.0
17.2
6.7
15.8
21.6
14.5
5.3
a. The base year for the calculations in this column is 1950.
b. These rates are for state plan investments only. The other data in
ment. The rates of increase in state investment, by branch of industry,
the first half of 1961) were generally lower than the plan rates for the
1962 were as follows: ferrous metallurgy, 5 percent; chemicals, 14 perc
machine building, 8 percent; and consumer industries, 10 percent.
c. Assuming that investment in the coal industry was not planned to
d. Light industry only, excluding the food industry.
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the table are for the total invest-
during the first half of 1962 (over
year. Rates for the first half of
ent; fuels and power, 6.5 percent;
increase
in 1962.
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materials and construction industries in 1961. The 6-months' report in
1962 indicated an actual decline in investment in these industries.
The cyclical changes in agricultural investment during the 1950's
closely followed Khrushchev's innovations in land use. Peaks in invest-
ment in 1954-55 and in 1958 reflected the machinery support required to
undertake the "new lands" and "corn" programs. The decline in machinery
allocations to agriculture between 1958 and 1960 dampened the over-all
rate of increase in output for the sector.
The rather sharp upturn in agricultural investment in 1961 (an
11-percent increase) would suggest, at first glance, that a policy de-
cision had been made to give higher priority to agriculture in the al-
location of investment resources. Because of heavy retirements of
agricultural machinery in 1961, however, the net increase in machinery
stocks was actually below the average for 1955-60 -- 5 percent compared
with an annual average of 7 percent for the previous 5 years. Although
there was much talk about increased investments in agriculture at both
the March and November Plenums in 1962, the lack of firm commitments,
the ambiguity in Khrushchev's statements, and the indecision about in-
vestments in industries supporting agriculture suggest that only mar-
ginal increases in resource allocations have so far been made and that
indecision about major commitments remains.
Construction of new housing, both state and private, was ex-
panded rapidly in 1957-59. The drive against private activity beginning
in 1960 combined with the lower priority given housing in competition
for state resources has resulted in a small decline in investment in new
housing construction over the past 2 years.
The failure of industrial investment to maintain steady increases
over the past 2 years is less understandable than the lag for other sec-
tors. A fundamental tenet of Soviet economic policy is to favor growth.
Under Stalin the leaders quickly compromised goals in the consumer sec-
tor -- housing, agriculture, and light industry -- in order to increase
industrial investment. When high rates of growth were endangered in
1956-57, however, the leadership reacted by trimming allocations in the
defense sector. As of the beginning of 1963, the leadership has yet to
come out clearly in favor of growth at the expense of the other sectors.
There are certain common elements underlying the problems faced
by investment programs in all sectors of the Soviet economy. The volume
of press commentary on the lack of coordination between the producers of
construction materials and producers' equipment and the investment
planners and builders suggests that this problem was worse than usual.
The deteriorating supply situation depressed the over-all increases in
volume of investment. More than that, the continued dispersion of re-
sources among too many projects together with the slowdown in increase
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of output of materials could only exacerbate the problem of project
completion. The end results were serious delays in completions, a
disproportionate increase in the aggregate volume of unfinished con-
struction, and a 33-percent increase in the volume of uninstalled
equipment in 1961, all of which led to the extensive reappraisal of
investment priorities for 1962.
Changes in the growth of output of building materials have
generally been in step with the changes in levels of construction
activity. Rates of growth of both have slowed significantly since
1959 (see Table 6). There are not, therefore, large inventories
of materials available for a rapid reacceleration of construction
activity.
Table 6
USSR: Output of Construction Materials
and Changes in Construction Activity
1951-61
Average Annual Rates of Growth (Percent)
1951-55
2/
1956
1957
1958
1959
1960
1961
Output of construction
materials12/
12.2
7.5
14.1
15.9
14.6
9.6
6.1
New construction
12.8
12.3
14.3
17.3
15.3
8.5
1.4
a. The base year for the calculations in this column is 1950.
b. Including all materials used in construction. The index of output
of construction materials shown in Tables 3 (p. 11, above) and 12
(p. 56, below) exclude the output of lumber and steel used in con-
struction.
The distribution of rates of growth in investment by economic
sector (see Table 5*) does not adequately reflect the growing emphasis
on quality of equipment and materials as opposed to sheer quantity.
Agricultural machinery, traditionally of low quality, recently has
been the subject of further press ndtices, suggesting that present
quality problems are worse than before and that consumers with higher
priority are siphoning off increasing shares of the best quality metals
and semifabricates. The emphasis on subcontracting for component parts
to be delivered to final assembly plants facilitates this favoritism
* P. 20, above.
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shown to consumers of high-priority equipment. Thus, in the first half
of 1961, about 5,000 tractors were rejected by inspectors at the major
tractor plants because of defects in quality. The reject rate in one
plant had increased 20 percent over the previous year. The tractor
producers specifically complain about the low-quality fuel systems
and electrical components that they receive from outside suppliers.
After the machinery passes inspection at the producing plant, there
is another check at the wholesale level. At this next level, 10 per-
cent of all products actually shipped by the tractor plants in 1961
and more than 12 percent of the products of agricultural machine build-
ing plants were rejected.
The increase in deterioration of quality also is evident in
some consumer durables. Approximately two-thirds of all television
receivers are currently being sent in for repair during the first 6
months after retail sale, and replacement parts are in short supply.
These are new model television sets just introduced in 1961.
A general indication of the problem of maintaining quality is
the announced increase in losses from defective production in indus-
try -- up 11 percent in 1961 compared with 1960.
Under the strains of the deceleration over the past 3 years
the nonproductive elements in investment -- for example, housing,
municipal services, and schools -- were reduced more rapidly than
the productive elements (see Table 7*). The interesting exception,
the continual increase of investment in nonproductive equipment,
suggests that rapid increases in urban population have forced the
government to expand investments in equipment for municipal services
waterworks, sewage disposal, and the like -- regardless of pressing
priorities from other sectors.
The response by the regime to the slowdown in formation of new
fixed capital has been as one would have predicted. Measures taken
include reduction in new starts, concentration of resources on priority
projects, and an even greater concentration of resources on the expan-
sion and modernization of present plant facilities than was originally
intended. The reduction of the number of new starts on "green field
sites" reduces initial overhead expenses (such as rail and other service
facilities) per unit of new capacity. The failure to carry throuel the
planned magnitude of investments in the eastern regions (Siberia and
Central Asia) suggests a compromise with short-run production needs at
the expense of longer run productivity gains by expanding existing
plants in the developed western regions.
* Table 7 follows on p. 24.
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Table 7
USSR: Average Annual Rates of Growth in New Fixed Investment, by Function
1951-61
Percent
1951-55 2/
1956
1957
1958
1959
1960
1961
Total investment 12/
12.5
15.0
12.8
16.2
13.1
8.1
4.4
Construction
12.8
12.3
14.3
17.3
15.3
8.5
1.4
Equipment
10.9
23.0
9.9
16.0
8.6
6.7
11.4
Productive investment
12.5
12.3
5.2
13.3
13.8
9.2
6.1
Construction
12.1
5.1
1.7
16.0
17.3
12.3
3.0
Equipment
12.6
28.3
9.3
12.9
7.6
4.5
11.3
Nonproductive investment
12.3
20.8
27.9
21.0
12.0
6.5
1.6
By component
Construction
13.0
22.2
29.1
18.4
13.4
5.4
-0.3
Equipment
2.8
-10.0
15.7
43.7
15.3
21.4
12.3
By use
Housing
13.4
17.6
39.1
21.3
10.4
-0.5
-4.8
Other
10.8
25.1
12.2
20.0
14.9
18.4
10.6
a. The base year for the calculations in this column is 1950.
b. Calculations are based on unrounded data and may not agree with the rates of growth implied
in Table 2 (p. 10, above), which is based on rounded volume indexes.
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An important consequence of delays in commissioning new capacity
is a slowdown in retirements of old plant and equipment. The Seven Year
Plan goals implied an average retirement rate of the industrial capital
stock (at the end of 1958) of more than 8 percent per year. This capac-
ity would be the most obsolete and high-cost plant and equipment, and
by replacing it with new stock, important cost reductions in output were
to be obtained. The data for the first 2 years of the plan suggest a
retirement rate only one-half as great as the average anticipated rate.
Failure to retire capacity in coal, ferrous metallurgy, and electric
power will give temporary, if high-cost, relief, assuming that new
capacity continues to be inadequate. How far this device can be used
to make up for investment shortfalls is uncertain.
Another characteristic response of the regime to present invest-
ment problems is to recentralize much of the planning and supply of the
minor share of investment projects formerly left to republic or local
bodies. The control organs have been alerted, and the provincial Party
secretary who has had ideas about diverting materials and equipment to
a local theater project will now be under closer scrutiny.
All of the above policies for dealing with pressing problems in
investment and new capacity have been used at one time or another in
the past. In essence they are stop-gap measures, most of which tend to
sacrifice longer run productivity gains for short-term production needs.
B. Problems in Industry
The lower rates of growth experienced in Soviet industry since
the mid-1950's seem to have had their origin in the following two Im-
portant developments: (1) increases in inputs of man-hours came to a
halt as the result of the reduction in the length of the workweek, and
(2) gains in the increase in output per unit of input slowed down per-
ceptibly.
The total number of people employed in industry increased at a
fairly constant rate during 1951-61, but the total number of man-hours
supplied in 1961 was practically the same as in 1958. The transition
from the 47-hour to the 41-hour scheduled workweek was remarkably
smooth, and there were clear indications in 1958-59 of gains in out-
put per man-hour, enterprise managers being under pressure to maintain
output after the reduction in the workweek. Such gains, however, were
limited and nonrecurring. Furthermore, they were characterized by sav-
ings of resources in producing output from capacity already in operation
rather than from obtaining further increments in output from the same
resources or from new capacity. The evidence to date strongly suggests
that the program for reduction of hours had a dampening effect on indus-
trial growth in 1960-61.
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A very important element in the growth of modern industrial
societies is related to gains obtainable from factors other than in-
creases in labor force and hours of work or from additions to the stock
of capital (machinery, equipment, buildings, and the like). These "non-
conventional" factors have rather intangible characteristics and include
such divergent items as new technology, improved management, a higher
level of training, and material incentives. The role of the nonlabor
and noncapital elements has been important to Soviet industrial growth
in the past and is being counted on by the regime in the future.
The contribution of these factors to over-all industrial growth
can be approximated by relating the changes in actual output to the
changes in inputs of labor and capital. The difference between the
change in conventional resources and output gives a measure of pro-
ductivity gain expressed as the increase in output per unit of input.
The data in Table 8 give the trends in resource use and pro-
ductivity in industry since 1950. The data are far from precise, and
the results are presented only as an indication of general trends.
Indexes of resource productivity in industry are given in Table 11.*
Table 8
USSR: Industrial Growth and Changes in Resource Use and Productivity
1951-61
Average Annual Rates of Growth (Percent) 2../
Labor
1951-55
1956-57
1958-59
1960-61
Employment
4.8
5.1
3.2
4.7
Man-hours
4.8
3.1
1.1
-0.4
Capital services
11.3
11.1
11.5
12.4
Industrial output
10.3
8.5
9.5
7.2
Increases in output not
accounted for by in-
creases in inputs
3.7
2.3
4.4
2.6
a. The base year for the calculations in each column is the year be-
fore the stated year.
* P. 55, below.
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The experience of the 1950's reflects unevenness in industrial
growth attributable to increases in resource productivity -- major in-
creases in the 1951-55 era, especially in the years after Stalin's
death, were replaced by relatively small gains in the period 1956-57.
The improvement in 1958-59 in resource productivity may have been en-
tirely related to gains in efficiency from the reduction in the work-
week and thus of a one-time character.
The major element, however, in explaining longer run differ-
ences between increases in inputs of labor and capital and increases
in output is new technology. The data available for planned resource
use in industry in the Seven Year Plan, for example, suggest that the
regime hoped to obtain almost half of the increase in industrial growth
between 1958 and 1965 from productivity gains.
The principal part of this planned gain in output per unit of
input would be related to raising the proportion of new plant and equip-
ment that incorporates new technology. Most of the new techniques to be
employed are not fresh from the laboratory but reflect an adaptation of
known and proved technology already in industrial use in domestic or
foreign plants. The emphasis on new technology has been highlighted by
the official campaign tactics employed over the past 3 years. Special
decrees, income incentives, and a new bureaucracy to expedite the tech-
nology plans are just a few of the indications of the intensity of the
drive to raise the productivity of aggregate resources by a broad assimi-
lation of advanced technology.
For several reasons this assimilation has not gone as rapidly
as planned. It is believed that a major factor in the mediocre per-
formance recently has been the competition from defense and space pro-
grams for the required high-quality resources. The introduction of
modern industrial technology in new plant and equipment calls for the
highest quality inputs, both men and equipment. Research and develop-
ment of military application particularly demands advanced and precision
equipment, special materials, and the highest caliber of designers, engi-
neers, technicians, and project leaders. The heavy use of these highest
quality resources may have caused a lag in the adoption of technology in
civilian sectors of the economy.
C. Organizational Problems of Industry and Investment
The industrial reorganization of 1957, under which regional
sovnarkhozes replaced the former industrial ministries, exhibited the
main characteristics of Khrushchev's approach to economic management.
Under the label of "democratic centralism," Khrushchev proposed a more
flexible implementation at local levels of objectives set at the center.
The assumptions underlying this approach seem to be the following:
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1. A reliance on inspirational, highly
motivated leadership at all levels as opposed
to fixed administrative rules and hence a pre-
ference for Party men and organization over
government officials and bureaucracy;
2. An implicit belief that efficient
means leading to good results at local levels
are self-evident to any honest man of common
sense, as they always were to Khrushchev when-
ever he looked closely into any particular
situation; and
3. A conviction that it is feasible to
eliminate by "democratic centralism" the mul-
titude of wastes and inefficiencies in the
Soviet economy which are quite obvious to
Soviet as well as Western observers.
The subsequent history of the sovnarkboz organization proved
Khrushchev's ideas to be administratively naive. Localism and other
symptoms of deviation from the general objectives of the central leader-
ship have led to a series of patchwork decrees which have steadily re-
duced freedom of action of local authorities. Recent official discus-
sion, however, indicates that organizational stress continues and may
even be worsening.
At the November Plenum of the Central Committee, Khrushchev
proposed what appears to be another comprehensive reorganization not
only of the government economic apparatus but also of the Party. Al-
thou& the many important details of the recent organizational changes
have not been announced -- or possibly even decided -- it does not ap-
pear that the reorganization effectively deals with the deficiencies
which have plagued the economy recently and have been vigorously de-
nounced in the Soviet press.
The primary deficiency of present organization is duplication
of authority and responsibility. The enterprise manager operating
under the present system finds that he has several bosses who can levy
production plans on him and, worse yet, several organizations which are
responsible for supplying materials and components. The manager's supe-
riors who pass down production quotas may or may not have control over
the other enterprises and supply agencies that must meet delivery sched-
ules to assure fulfillment of production plans. A system for effective
coordination of plans made by various authorities and of supply with
these plans has not yet been found.
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Under the old ministerial system, whatever its other faults,
each enterprise had one boss for determining plans and providing sup-
plies. Under the present system, bosses are located geographically
and vertically at various levels. From the side of production planning,
for example, part of the enterprise's production may be planned at the
economic region level, part at the republic level, and part by the All-
Union planning agency (Gosplan) in Moscow. In one case the manager of
a machine building plant complained that seven different agencies from
the oblast to Moscow leveled production plans on his plant and that the
nominal superior, the sovnarkhoz, seemed to be unable to stop the pres-
sures. From the allocational side of supplies, there are functional
departments within All-Union Gosplan*which have control over particular
materials and machinery, and other materials are allocated by republic
organs and some minor materials by the sovnarkhoz.
The most concrete evidence that the 1957 reorganization is not
going as planned is the rapid increase in inventories since 1958. After
a temporary letup in the rate of inventory accumulation in 1957, when
Khrushchev was literally peeking in warehouses to press his campaign
against hoarding of materials and machinery, the rate of additions to
inventories increased rapidly. In 1961, total inventories in the econ-
omy amounted to 55 percent of GNP for that year compared with 43 percent
in 1957. In the US in 1956, inventories were less than one-fourth of
GNP.
This rapid increase in stores of fuels, materials, semifabri-
dates, spare parts, and machinery suggest a combination of two supply
problems: first, a persistent penchant of industrial managers to hoard
materials and parts because of uncertain supply arrangements and, second,
a lack of effective coordination in obtaining the precise assortment of
output needed. This latter element leads to a surplus of some items and
shortages of others. For example, the stocks of rolled metal held by
users came to 4 million tons in 1961, whereas the inventory norms called
for only 3 million tons. As the commodities become less homogeneous in
nature the coordination and supply problems multiply. The emphasis on
problems of control and inspection at the recent Plenum suggests that
additional efforts will be made to reduce hoarding and enforce con-
tractual obligations of producers to supply the proper assortment to
users.
The present system of organization and management affecting
production plans and supply also is related to the current unsatisfac-
tory performance in investment. One of the primary reasons why the
volume of unfinished construction and uninstalled investment equip-
ment has been increasing more rapidly than the total investment over
the past year is the failure to link investment plans satisfactorily
with material and machinery supply plans. The failure of planning
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organs, sovnarkhozes, and construction trusts to coordinate correctly
leads to more building projects being in hand at any given moment than
can be supplied with metal, cement, and equipment. Thus the oft-heard
complaint that investment funds remain unexpended because the necessary
materials and equipment do not arrive or that ruble allocations are in-
adequate to spend on physical resources available at another building
site. The temporary solution on the part of the central planners is to
set up a list of priority projects, a device frequently used in the past.
Although this procedure produces a temporary increase in completions, it
usually raises investment costs on the priority project and means that
less important projects remain unfinished and others, perhaps, unstarted.
As a result of the above trends in production and investment
supply, planning, and operational control, there has been a tendency to
recentralize in piecemeal fashion many of the allocation and investment
decisions which could be taken at the local level. From the side of in-
vestment, there was a drastic reduction in 1961 in decentralized invest-
ments, and in 1962 the limit on investment projects that require review
and approval by the Council of Ministers, USSR, was lowered to 2.5 mil-
lion rubles. Even this low level may have been eliminated at the recent
November Plenum, which took measures further to tighten central control
over all construction. Gosstroy, the central construction office, is
to set up priority lists on all projects, set standards for building
designs, and coordinate production and supply of building materials.
In general, the other proposals by Khrushchev at the November
Plenum were a continuation of the piecemeal changes since 1957 and in
the same direction -- further emphasis on central direction of the
economy with the gradual erosion of the limited area of freedom of
action conceded to the local authorities in 1957. Probably the most
important change was the creation of vertical Party organizations from
Moscow to the enterprises (with separate structures for agriculture and
industry) to make the Party directly responsible for the operating ef-
ficiency of the economy. This step is a break with the long tradition
that held that the main function of the Party official is in the realm
of propaganda and ideology, not in the direct control and operational
responsibility of the economy. This emphasis on the formal responsi-
bility of Party men on the carrying out of the leadership's directives
is consistent with the Character of Khrushchev's approach to economic
management that is suggested above. This approach, however, does not
point to a correction of the problems of duplication of authority and
lack of coordination of supply and production plans about which enter-
prise managers have complained so bitterly in the press for the last
2 years. The encouragement of administrative intervention by the Party
committees called for in the proposals is more likely further to con-
fuse lines of authority than to clarify them. Although some short-run
improvement, perhaps by reducing inventories, can be expected from the
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recent changes, it is not believed that the proposed changes will ap-
preciably improve the efficiency of use of resources over the long run.*
It has been observed that socialist central planning can effect
aggregate balances and major adjustments as necessary but, in contrast
to a free market system, cannot make the multitude of fine adjustments
that constitute efficient operation on the part of enterprises and con-
sumers. Khrushchev in effect has been demanding that the Soviet economy
learn to make fine adjustments, but without providing market institutions.
Effective implementation of decentralized decision-making requires the
substitution of market prices and profits as objective criteria of ef-
ficiency for physical output goals and administrative allocations of
supplies. There has been no indication over the past 5 years, nor is
it believed to be likely now, that the Soviet leadership will move to-
ward a system of market socialism as now practiced, for example, in
Yugoslavia.
The more drastic reform of prices, incentives, and planning,
which alone would make possible the much-needed genuine decentraliza-
tion, seems far away. Although such reforms have been proposed by
Professor Liberman and other economists, Khrushchev in his recent
speeches has barely recognized these proposals. Thus the discussions
to date attendant on the reorganization announced in November suggest
no important changes in the role which prices play in the working of
the Soviet economy. Wholesale prices for heavy industry apparently
will continue to influence, but only passively, the decision-making
processes from the Presidium to the enterprise managers.
The recent increase in meat and butter prices was a step to
bring demand into line with supply in one outstanding case of im-
balance. The reluctance and apologetic manner of the announcement
of the meat price increase does not suggest a willingness to use price
changes systematically throughout the economy as a basic guidance method.
In housing, for example, rent is about one-third of the cost of operation
and maintenance. A large increase in rent would go a long way to reduc-
ing the housing shortage and providing funds for investment in housing.
D. Agriculture
Agricultural production increased 50 percent in the decade of
the 1950's, mostly after Stalin's death. This large increase was mainly
the result of seizing opportunities that had been neglected in former
years, notably opportunities for increasing acreage and incentives. A
better perspective of the long-range possibilities in Soviet agriculture
* For more details concerning the organizational changes announced at
the November Plenum, see VI, p. 51, below.
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is suggested by noting that the increase in production comparing 1928
with 1960 was 68 percent, or at an average annual rate of 1.6 percent.*
Agriculture has provided and will continue to provide sufficient
calories for the Soviet population. Khrushchev's concern -- and agri-
culture's problem -- is to raise the quality and variety of food produc-
tion.
Weather conditions over the past 3 years have not been as favor-
able as over the previous 3 years. The current decline in the rate of
growth of agricultural production is explained chiefly, however, by the
exhaustion of one-time gains and by the unwillingness of the Soviet
leadership to commit a higher level of resources to agriculture on a
continuing basis. Resources in this context mean not only quantities
of higher quality resources in the conventional sense -- labor, ma-
chinery, fertilizer, and the like -- but also greater incentives to
produce in the form of a higher real return for work in socialized
agriculture. There was a substantial improvement in the priority of
agriculture from Stalin's death until 1958, but since then policy has
shown a tendency to vacillate. For example, allocations of agricul-
tural machinery were rapidly increased up to 1957-58 but have de-
clined since then. Income measures and consumer goods allocations to
rural areas assured the peasant a relative rise in real income between
1953 and 1958 equal to the rise in real income of urban wage and salary
workers, but over the last 3 years there has been a decline in farm in-
comes while urban incomes have continued to rise.
Another difficulty has been that consumer goods rejected by
urban trade units have been dumped in rural areas. Finally, incentives
were adversely affected by the government measures tending to restrict
private holdings of both peasants and urban dwellers, holdings which
had been contributing more than half of all livestock products to the
economy as well as substantial portions of vegetables.
It is estimated that the resources committed to agriculture --
land, manpower, fixed capital, livestock herds, fertilizer, fuels, and
other inputs -- increased on the average 2.8 percent per year in the
period 1954-58 but only 1.4 percent per year in the 3 years 1959-61.
If the increase in sown acreage is excluded, the increases are esti-
mated to be 2.5 percent per year in 1954-58 and 1.4 percent in 1959-61.
* Soviet agricultural statistics have become increasingly unreliable
in the last few years. As a consequence, the independent estimates used
in this discussion have an appreciable range of error. The estimated
general trends presented in the text, however, are believed to be rea-
sonable.
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The problem of the quality of the inputs into agriculture is
illustrated by Khrushchev's complaints about the poor design and ram-
shackle condition of agricultural machinery and by official statistics
that point to a very short life for agricultural machinery.
The recent increase in the price of meat (by 30 percent) and
butter (by 25 percent) indicates an official concern with peasant in-
centives, although time only will tell the extent to which the price
increases will be reflected in higher peasant income from socialized
activity.
The latest major program for agriculture is the "plow up"
campaign to plant high-yield crops -- corn, peas, beans, and sugar
beets -- on land formerly sown to grasses and oats or lying fallow.
The magnitude of this program, which was announced in March 1962 and
was two-thirds completed during the year 1962, is roughly comparable
to the "new lands" campaign in manpower and machinery requirements.
To date, however, no large-scale expansion of the supply of machinery,
fertilizer, skilled manpower, and other vital inputs has been announced
to round out the program. In the case of farm machinery operators, cur-
rent evidence indicates a rapid migration to nonfarm jobs.
Part of the "plow up" plan appears to be especially dubious --
namely, the part that relies on greatly reducing the amount of fallow
land in the "new lands." This is a case of double jeopardy. The re-
duction of fallow in the "new lands" will intensify a problem that
already has cropped up -- a deterioration in grain yields. Compromise
with good soil management procedures has caused increasing problems of
weed control, moisture preservation, and wind erosion. Another part of
the new plan is the intensive use of land formerly sown to rotational
grasses. The abandonment of the grass rotation system in the northern
USSR without supplementing the supply of soil additives (fertilizer and
lime) carries the risk of depleting soil nutrients.
In the short run the abandonment of the grass rotation system
and the reduction of fallow could result in a sizable increase in pro-
duction of feed crops. In 1962, however, in the face of adverse weather
conditions, this policy did no more than help maintain agricultural pro-
duction at or slightly below the 1961 level.
Another response to agricultural difficulties is organizational
change. Khrushchev, displaying what Pervukhin termed in 1957 an "organi-
zational itch," announced last March another reorganization in agricul-
tural administration. This latest in a long series of organization and
management moves dating back to 1953 continues the current trend of
weakening the position of the government bureaucracy and enhancing the
position of the Party in agricultural administration. Now, for the first
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time, the republic and oblast Party bosses have become a formal part of
the state administrative machinery for agriculture. The current organi-
zation tends to formalize centralized decision-making, in contrast to
the lukewarm efforts in recent years to give more flexibility to decision-
making by rayon supervisors and farm managers -- a policy which was never
systematically implemented, because of arbitrary intervention from higher
levels.
From Khrushchev's point of view, the recent change does have the
advantage of clearly defining the responsibility of the provincial Party
boss for failure in agriculture. Many of these republic and oblast Party
chiefs, however, are in the Central Committee and Presidium. If their
opinions have any effect on the allocation decisions by the leadership,
pressures may be generated to provide more resources for agriculture.
Khrushchev has often indicated his belief that the most impor-
tant variable in explaining lagging growth in agriculture is poor man-
agement. In answer to a query by Cowles last April on what the problems
were in agriculture, Khrushchev said:
What do we lack then? The adequate training
of our cadres, I should say. Many of our agri-
culturalists still have insufficient ... know-
how for managing large-scale husbandries .
Consequently) we are now faced chiefly with an
organizational task.
He has harped on this theme since 1953 and apparently feels that
he can substitute good farm managers for additional material resources.
In the effort to obtain quality in management, the number of enterprises
in socialized agriculture has been reduced from 107,000 in 1953 to 49,000
in 1961 (machine tractor stations, kolkhozes, and sovkhozes). Presumably
the most competent managers were retained, but at the same time the size
of the farm increased, and as a result whatever benefits were gained by
raising the average quality of farm management probably were more than
offset by the large increase in the scale of the enterprise. In 1953
the average farm manager was responsible for 1,500 hectares and about
1.5 million rubles of machinery, buildings, and other capital. By
1961 he was maintaining an average-size establishment of 3,900 hectares
and a capital stock of 6.2 million rubles, an enterprise size that no
other agricultural economy in the world has found to be efficient.
Agriculture remains the most intractable problem for Soviet
economic policy. There are two clear directions in which Soviet agri-
cultural organization could move. The first direction is toward agri-
cultural enterprises analogous to industrial enterprises. The steady
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transformation of collectives into state farms is in this direction,
as is the unification of the administrative system (in March 1962) to
include state and collective farms under a unified command. Continued
change in this direction would be ideologically sound and administra-
tively logical. It would permit a systematic application of accounting,
wage controls, and performance incentives as now practiced in industry.
There is no reason why it should be unworkable, but the cost in higher
wages, added investment, and a much larger administrative and planning
apparatus would be very high. The other direction is represented by
the essentially private agriculture in Poland and Yugoslavia, where
the state supplies only general guidance and allows prices to supply
the resources for growth. The present system in the USSR is an uneasy
compromise with which even the Soviet authorities are unsatisfied. At
present, there is no sign of a drastic change either way, but there is
a steady drift toward the state enterprise form. It is suspected that
this policy of slow change will continue to be accompanied by poor re-
sults, vacillation in allocation policy, and perhaps disagreements
among the leaders.
E. Consumption
Although consumption as a share of GNP has been declining through-
out the 1950's and into the period of the Seven Year Plan, there have been
significant gains in per capita consumption of food, soft goods, housing,
consumer durables, and consumer services. Stalin's simple formula for
consumption was replaced by one that insured a rise in personal consump-
tion and a widening of choice. In Stalin's time, consumption not only
was accorded a low priority and the consumer treated as a residual
claimant to national resources, but the range of choice was narrowed
consistent with the criterion of maintaining a "healthy and alive" popu-
lation. The planners, on perfectly rational grounds, wanted to maintain
a low death rate, provide physical strength with cheap calories, trans-
port the workers to work, and provide enough literacy to read blueprints
and propaganda handouts.
The important trends in the consumption sector of the economy
in the past few years have been as follows: (1) an enormous rise in
disposable money income; (2) a rise in the proportion of new and higher
quality consumer goods up through 1959 but a falling off of the rate
of improvement after 1959; (3) an apparent stagnation and possible re-
gression in the previous trend of substituting high-quality foodstuffs --
meat, milk, and the like -- in the diet for the starchy staples -- grain
products and potatoes; and (4) a considerable increase in leisure time
and a concurrent but temporary increase in private building of houses.
Estimates of average annual increases in the per capita consumption of
various categories of consumer goods are given in Table 9.*
* Table 9 follows on p. 36.
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Table 9
USSR: Average Annual Rates of Growth in Real Per Capita Consupption
1951-61
Percent
1951-55
1956-58
1959-61
1960
1961
Total consumption
5.6
4.0
3.0
2.2
2.0
Housing
0
2.7
2.8
3.1
1.9
Soft goods
10.1
5.2
3.6
3.7
1.9
Total food
4.1
3.1
1.5
0
0
Of which
High-quality food 12/
4.7
4.5
3.0
0.5
-1.0
a. The base year for calculations in each column is the year before
the stated year.
b. Including vegetables, meat, milk, fats and oils, sugar, and fish.
Some of the elements in the rise in disposable money income are
as follows: (1) a doubling of pension payments between 1955 and 1961;
(2) the adoption of a plan for wage reform which would, in the period
1958-65, raise wages in low categories 60 to 70 percent (and in middle
categories 20 to 30 percent); (3) a gradual reduction in the income
tax starting in 1958 (now halted); (4) the elimination of compulsory
purchases of bonds in 1958; and (5) the monetization of a good portion
of rural income that formerly had been paid in kind.
In the meantime the Soviet consumer was getting a higher and
higher real income in the form of a wider variety and higher level of
consumer goods. In food, for example, the starchy-staple ratio (the
proportion of total calories consumed from grain products and potatoes)
fell from about 75 to 65 percent between 1953 and 1961. This ratio has
another 40 points to fall before reaching the 25-percent ratio of the
affluent US, and the Soviet consumer wants those 40 points.
In 1957-58 the consumer got a break when the construction of
private housing was encouraged, the government even providing blue-
prints, trucking, and technical advice for this purpose. By 1959,
investment in new private houses was double that of 1956 and the share
of private construction had risen from 34 percent of the total invest-
ment in housing to 37 percent. Apparently at some point in 1960, a
decision was made actively to discourage this un-Marxist activity. In
any case, there was a decline in private housing activity in 1960-61.
In 1962 a decree was issued forbidding the allocation of building lots
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and issuance of credit to indiiriduals living in republic capitals and
certain large cities. It is not clear whether this is a new measure
or merely public recognition of a de facto situation that has prevailed
for 2 years.
The growing disparity since 1959 between the rates of increase
in money income and the increase in real goods and services is the basis
of Khrushchev's immediate problem with the consumer. Khrushchev, at the
January 1961 Plenum in referring to the possibility of a future imbalance
between the supply of goods and services and consumer purchasing power,
had called it "a situation fraught with dangerous consequences." In
any case, inflationary pressures were clearly in evidence in 1961 and
1962. In the face of the regime's policy not to raise retail prices in
state stores, the resulting pressures took the form of long waiting lists
for consumer durables, growing queues for certain foods and soft goods in
state outlets, rising prices on the collective farm markets, and a growth
in unplanned saving on the part of the consumers.
The problem of the gap between income and real consumption has
been aggravated by the refusal of consumers to purchase some of the
goods offered for sale. As their basic wants have been more nearly
satisfied, the Soviet consumers have demanded goods of higher quality
and in greater variety. Inventories of textiles, clothing, and shoes,
particularly, have accumulated. In addition, the rise in money incomes
has generated a more than proportional increase in the demRnd for meat
and other nonstaple foods. This growing consumer selectivity tends to
concentrate demand in areas of consumer goods production where perform-
ance has been especially poor.
In the face of this inflationary gap and the dim prospects for
future acceleration of production for consumer purposes, the Soviet
leadership in mid-1962 was forced to take the distasteful and unpopular
steps of raising meat and butter prices and rescinding part of the an-
nounced reduction in income taxes. It is probable, however, that con-
sumer disposable income and the available supply of goods and services
remain seriously out of balance at present price levels.
The consumer in the USSR has made rapid strides and in Khrushchev
he has a champion, although one whose promises have a genial expansiveness
not matched by performance. The rate of improvement in consumption is
slowing down because the sectors that supply the consumer -- agriculture,
light industry, and the construction industry -- are not maintaining
their former pace.
F. Official Attitudes Toward Private Activity
The increasing complexity of the Soviet economy and the growing
latitude for discussion and experimentation are both factors that bring
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the question of private economic activity to the fore. In the post-
Stalin era, there has been a revealing ambivalence toward private
activity, probably caused by the conflict between the ideology of cen-
tral planning and the pragmatic desire for more output. This conflict
stands out most clearly in agriculture and housing, where the cost of
insisting on central planning and control reveals itself quite rapidly.
Private agriculture as now practiced in the USSR is almost ex-
clusively made up of "own enterprise" holdings of plots of land -- vic-
tory garden size up to 2 acres -- and small holdings of livestock of
urban households or rural households attached to socialized agricul-
tural enterprises. Although falling as a share of the total agricul-
tural output because of the rapid rise in production in the socialized
sectors, the absolute volume of output in the private sector continued
to expand until about 1958 under the lenient attitude of the regime.
The official policy, which had followed a more or less consistent pat-
tern since Stalin's death, had been to reduce taxes and compulsory de-
livery quotas from the private sector. A sour note was added in 1956
with a legislative effort to reduce the size of the "own enterprise"
of collective farmers, but Khrushchev assumed power in mid-1957 with
a plank in his economic platform calling for the elimination of all
compulsory deliveries from private plots. At this time, 1956-58,
the private sector was contributing 25 to 30 percent of the total
gross agricultural output and 55 to 60 percent of livestock products.
After 1958 the climate again changed for the worse, and there
has since been a constant erosion of the size of private holdings and
the freedom to dispose of output. This situation has had a double ef-
fect of directly retarding agricultural growth and probably reducing
the incentive of the peasant to participate in collective farm activity
as the price of having his "own enterprise." A reduction in private
activity was enforced not only on households attached to collective and
state farms but also on nonfarm households in urban areas, especially
on their holdings of livestock. In 1958 these urban plots held more
than 2 million cattle and more than 1 million hogs and produced 14 per-
cent of the national potato output.
In 1957 the average collective farmer expended two-thirds of
his total labor time on the collective farm but received only 37 per-
cent of his total income from this source; one-third of his labor in-
put on his "own enterprise" brought him 63 percent of his income.
Labor productivity was about the same on both plots and collective
farms in spite of much greater investment per worker on the collec-
tives. Accordingly, from the national economic point of view, one
of the most attractive features of private agricultural activity is
that the state does not have to provide direct supplementary inputs
of management, machinery, and farm supplies. If the regime is firm
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about giving agriculture a low priority for resources, it should adopt
the policy of "efficient neglect."
This apparently irrational streak in policy toward private
activity also is illustrated in the field of housing. The growth as-
pects of private housing have been described in some detail in the
preceding section.* The important economic consideration is that
private individuals had demonstrated a willingness to put a large
amount of labor into an activity greatly needed to improve the comfort
and morale of the population. Even so, ideological considerations (plus
a practical worry about the leakage of construction materials to this
activity and the overhead costs of municipal utilities) overrode the
economic in a seemingly irrational fashion.
At the very time that urban families were being given more
leisure by the reduction in the workweek, official policy was dis-
couraging productive private activity in consumer welfare areas --
food and housing. A Martian observer would have wondered why there
was not an official effort to encourage private activity in order to
relieve the strain on state-owned resources.
* See E, p. 351 above.
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IV. Military Expenditures and Policy
A. Trends in Expenditures
Since 1955 the Soviet military establishment has undergone
sweeping changes involving extensive reequipment with new arms and
weapons systems, the development of a new doctrine for the nuclear
age, and new organizational structures. During this period, Soviet
long-range strike forces have risen from an insignificant to a ma-
jor element providing for the first time a significant and growing
intercontinental attack capability; Soviet air defense has been mod-
ernized with the widespread deployment of surface-to-air missiles
and has been acquiring fighter aircraft armed with missiles; the
navy is being reequipped with missile armament and now possesses
nuclear-powered submarines; and major changes have taken place in
the equipment and organization of the ground forces. Extensive de-
velopment and testing is underway on newer offensive and defensive
systems. Meanwhile, the Soviet space program has become an element
of national power and policy.
The impact of these programs has fallen principally on the
machinery and equipment sector of the economy. The cost of develop-
ing and producing new military equipment, nuclear weapons systems,
and space hardware and the requirement of these programs for the
most critical skills and resources available have combined in recent
years to increase significantly the share of the total Soviet machin-
ery and equipment production allocated to military (and space) uses.
After declining from 1955 to 1957, the total military expen-
ditures grew rapidly, reflecting the large expenditures on (1) re-
search, development, and testing; (2) the introduction of new wea-
pons systems, especially missiles; and (3) the increased availability
of nuclear warheads. The total military expenditures have increased
by about one-third since 1958, from about 13.7 billion rubles (in
market prices) to about 18.1 billion in 1962. The rate of increase
in military expenditures during this period was half again as large
as for Soviet GNP as a whole.
Most of this increase was from the machinery sector of the
economy. During the 1958-62 period the machinery component of mili-
tary expenditures grew from about 50 percent to about 62 percent of
the total, reflecting a trend which is likely to continue into the
future. Major demands have been placed on that part of the manufac-
turing sector of the Soviet economy that supports the military estab-
lishment. For example, expenditures for the procurement of missiles,
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ground electronics, and nuclear warheads alone probably will be greater
in 1962 than for all military hardware procurement in 1958. The growth
in output of these complex products in the last 5 years has required ex-
tensive new investment in equipment and plants.
An estimate of how Soviet military expenditures have been allo-
cated among the four primary military missions is presented in Table 10.
The data show that the Soviet authorities are now allocating the small-
est share of military expenditures to the naval mission and the largest
to the ground mission, although this latter share has declined greatly
Table 10
USSR: Allocation of Mission-Related Military Expenditures a/
1958 and 1962
Percent
1958
1962
Ground mission
49
33
Naval mission
19
15
Air defense mission
16
26
Strategic attack mission
16
26
a. Mission-related expenditures account for about 65 percent of the
total military expenditures for these years and do not include expen-
ditures for research, development, testing and evaluation, and non-
mission related costs such as general command and support.
in the last 5 years. The shares allocated to the air defense and
strategic attack missions together now account for about one-third
of the total military and space expenditures as opposed to about
one-fifth in 1958; these two missions are now about equal, although
air defense probably will account for a somewhat larger share in the
future. Within the strategic attack category, expenditures related
to forces for attack against Eurasia and the periphery have in the
past received by far the larger slice, but at present those for in-
tercontinental attack have grown to absorb almost an equal share.
During this period, 1958-62, expenditures for research, development,
test, and evaluation have doubled and probably will exceed those for
the ground mission next year.
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B. Implication of New Military Doctrine
Beginning with a statement by Defense Minister Malinovskiy at
the 22d Party Congress in November 1961 and continuing through much
of 1962, Soviet military leaders and writers have been discussing the
theses of what is described as the Soviet military "doctrine" for the
nuclear age. The content of this doctrine had been the source of
obvious controversy and debate since an initial outline of views by
Khrushchev in January 1960. In the intervening period, Khrushchev's
initial formulations were altered significantly, in the direction of
larger and more diversified military forces.
In January 1960, Khrushchev drew a relatively reassuring pic-
ture of the Soviet defense outlook. He argued that a future war could
be waged only with rocket-nuclear weapons but implied that Soviet mili-
tary power would forestall their ever being used. Surprise attack was
not a feasible policy, he said, because "sufficiently large" states
would always be able to strike back. Conventional armaments, including
surface ships and aircraft as well as large standing armies, had become
or were rapidly becoming obsolete and hence could be dispensed with.
In contrast to Khrushchev's optimistic outlook, the doctrine
enunciated by Malinovskiy projected a somber estimate. While retaining
Khrushchev's notion that a future war would "inevitably acquire the
character of rocket-nuclear war," Malinovskiy's doctrine refrained
from softening this image with any of the compensating factors that
Khrushchev had offered. In contrast to Khrushchev, Malinovskiy as-
serted that plans for a surprise attack were being prepared by the
imperialists; that "the main, the primary, and the most important gen-
eral task of the armed forces is to be in constant readiness to repel
a surprise attack by the enemy;" and that "final victory in war can
only be achieved by the joint action of all arms and services" and re-
quired the employment of "mass, multi-million-man armies."
The major theses of the new Soviet military doctrine take into
account in a comprehensive way the role of nuclear weapons and represent
a blend of both old and new ideas. The new doctrine holds that the
initial period of a thermonuclear war may determine the eventual outcome
of the conflict. Such a war would be initiated by a US (NATO) surprise
attack on the USSR (Bloc). The primary mission of the Soviet armed
forces is to frustrate such an attack by a preemptive blow against the
means of nuclear weapons delivery. Soviet preemptive forces must be
supplemented by air (M) and antiballistic missile (PRO) defenses as
well as by passive defensive measures. "Multi-million-man" ground forces
are required to carry the offensive into Western Europe, to seize ad-
jacent areas in Eurasia, and to cope with the effects of the initial
nuclear blow against the USSR. These forces are and will continue to
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be equipped with nuclear armed systems on a mass scale and will be
provided with field defensive systems against both manned aircraft
and missiles. The Soviet navy must be prepared to combat Western
seaborne strategic strike forces in the initial period with the ob-
jective of reducing the weight of the nuclear attack on the USSR
and then must support the advance of the Red Army by attacking
Eurasian targets and by interdicting Western sea communications.
Since the ability to acquire and to maintain the requisite
forces is heavily dependent on the size of the economic base, the
doctrine stresses that continued priority must be given to develop-
ment of heavy industry in general and of machine building in par-
ticular.
The effect, if any, of the recent Cuban venture on Soviet
views of military relationships and doctrine is as yet unclear.
Whereas the outlines of the new doctrine seemed to be evolving with
some clarity before the confrontation in Cuba, the unfavorable re-
sults of that operation may generate pressures to reappraise or
even modify aspects of the doctrine.
The signs within the Soviet leadership of controversy over
the direction of military and economic policy during the past 2 years
indicate that the choices have been neither simple nor clear-cut. The
military element seems to have emerged with a larger share of resources
than Khrushchev had in mind in 1960, and it has a new doctrine which
would seem to require continuing large allocations to military pro-
grams. It is clear that this relative emphasis on the military can
be continued only at the expense of other important economic goals.
C. Future Trends
Whereas the results of the first 2 years of the Seven Year
Plan promised a considerable overfulfillment in the goal for expan-
sion of industrial production, the lower rates of growth the past
2 years coupled with much more conservative official Soviet antici-
pations for 1965 suggest that the diversion of machinery and equip-
ment from investment to military and space uses is having a signifi-
cant effect on industrial growth.
The probable trends in output of military hardware for many
systems can be projected for the next year or two relatively accu-
rately on the basis of direct evidence. The major areas of uncer-
tainty are in programs whose major impact would fall 2 or more years
in the future. These include the antiballistic missile and space
programs which probably are now in the advanced developmental stages
but on which sufficient evidence is not yet available to provide a
clear projection of their future pace and scope.
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If the new Soviet doctrine as expounded by Malinovskiy governs
the future development of the military programs, it will have major im-
plications for the general trend in the scale, composition, and cost of
Soviet military programs over the next few years. It implies an almost
inexhaustible demand for large and more advanced offensive and defensive
systems of all kinds, particularly those capable of countering the very
large Western strategic attack forces. These demands could include a
relatively large force of hardened second-generation ICBM's, development
of an ICBM delivery system for the large-yield nuclear warheads tested
since 1961, and more advanced MRBM/IRBM systems. Heavy investment in
active defenses against both the aircraft and the missile threat will
be a necessary complement to the strategic strike forces. The USSR also
will seek ways to improve passive defensive measures for the population.
The USSR continues to devote substantial resources not only to the de-
ployment of aircraft and missile defensive systems but also to a very
large developmental effort in the antimissile field. Ultimate Soviet
decisions on an antiballistic missile deployment program undoubtedly
will reflect, on the one hand, Soviet assessment of the probable develop-
mental timetable and technical effectiveness of antiballistic missile
systems and, on the other, the interaction of strategic, economic, and
political considerations.
It appears that Soviet ground forces will be maintained at some-
thing like present levels but with emphasis on reequipping them with more
advanced weapons, including improved defenses against aircraft and bal-
listic missiles as well as improved means of air mobility, reconnaissance,
and control and communications. The Soviet navy will require a consider-
able investment in submarines and new aircraft missile systems to combat
Western seaborne strategic attack forces.
The impact of these military programs is accentuated by the re-
quirements of the space race. It appears that the Soviet leaders are
committed to a continuing space program as an element of national power
and prestige. The Soviet space program, however, is competing increas-
ingly for the scarcest skills and resources which are needed also for
the ICBM, aerospace defense, and economic investment programs.
A manned lunar landing program is by far the most ambitious and
costly goal in space which the Soviet authorities are likely to pursue
during the remainder of the decade. It is a program which will require
major new vehicle development and facility construction, will place the
greatest demands on Soviet technology, and will account for a large por-
tion of the total Soviet expenditures for space. Once committed to a
schedule, little variation in the magnitude and pace of a lunar program
is possible without major slippage and waste. The vehicles and tech-
niques developed for the lunar program, however, probably will be adap-
table to accomplishing most of the other major space missions which the
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Soviet authorities may wish to undertake, and the timing and magnitude
of these other programs can be more flexible. The requirements for a
new large space booster also may be combined with those of a military
vehicle for the large-yield nuclear weapons first tested in 1961.
There is good evidence that the rising military burden on the
economy has been the source of serious controversy within the Soviet
leadership during the past 2 years. It is expected that further con-
troversies will arise during the next few years if the present estimate
of the force level implications and the attendant economic impact of
the new doctrine are even approximately correct. The actual Soviet pro-
grams will be conditioned by the interaction of a number of internal and
external factors. Much will depend on future trends in US advanced wea-
pons systems programs, on political relationships with the West, and on
political and economic developments within the USSR and the Communist
Bloc. Although the outcome of these various and conflicting pressures
cannot be predicted with precision, the case for continuing strain is
very good.
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V. Foreign Trade and Aid
A. Trade -- General
It is estimated that the total Soviet foreign trade over the
next several years will increase more rapidly than will GNP. This
continued expansion of trade activity, perhaps at a rate of 8 percent
a year, will be mainly accounted for by stepped-up economic relations
with the European Satellites (the USSR's principal trading partners)
and by increased trade with underdeveloped countries of the Free World.
In line with the increased emphasis on Soviet Bloc economic relations,
Soviet trade with Bloc countries (other than Communist China) is ex-
pected to increase by 33 percent during 1962-64 as against a 26-percent
increase for the total Soviet trade in this 3-year period. The present
trend of new Soviet orders to countries of the industrial West for new
capital equipment suggests that this trade will increase much less ra-
pidly than in the past.
In 1961, approximately 55 percent of Soviet foreign trade was
with the European Satellites, 11 percent with Communist China and the
Asian Satellites, 18 percent with the industrial West, and 15 percent
with underdeveloped countries of the Free World. The volume of Sino-
Soviet trade, which fell to a 10-year low in 1961, is not expected to
increase significantly in view of continued ideological differences
between the two principal Communist powers.
B. Trade -- European Satellites
There are two basic reasons for expecting a relatively rapid
increase in Soviet-Satellite trade. First, plans for economic de-
velopment of the European Satellites through 1965 call for a continued
high rate of growth in national income, about 6 to 7 percent a year.
Second, the Satellites (other than Albania) and the USSR will form an
increasingly closely knit economic community within the Council for
Mutual Economic Assistance (CEMA) framework. Plans for more effective
economic cooperation within the Soviet Bloc have been prepared in an
effort to make the Satellites, and the USSR as well, less dependent on
trade with the Common Market countries.
The pattern of Satellite trade with the USSR will continue to
be characterized, in broad terms, by the exchange of Soviet fuels and
industrial and agricultural raw materials for Satellite machinery and
equipment and foods. The Satellites will remain heavily dependent on
the USSR for supplies of petroleum, iron ore, manganese, nonferrous
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metals, wheat, and cotton. Imports of Soviet agricultural products
may be of increasing importance if Satellite agriculture continues
to falter.
C. Trade -- Industrial West
Soviet imports from the industrial West include machinery and
equipment of advanced technological design; ships; copper; and sub-
stantial quantities of certain steel mill products, particularly in-
cluding large-diameter pipe. However, this trade, which grew at an
annual average of $400 million during the period 1958-60, began to
level off in 1961, when the increase was only $110 million.
Soviet exports, in payment for machinery and equipment, con-
sist largely of petroleum and agricultural and forest products, of
which grain has been particularly important. Following a large vol-
ume of Soviet business placed in the last half of 1960 and the first
half of 1961, orders fell off sharply in the second half of 1961 and
have not revived as yet. It is possible that the falling off of new
orders results from a planned phasing in the domestic investment pro-
gram or from an unplanned indigestion resulting from the rising vol-
ume of uncompleted industrial construction. Western industrial ma-
chinery still plays a key role, however, in Soviet plans to achieve
a technological "leap forward." Because of this and the increasing
magnitude of debt repayment falling due to the West, it is estimated
that a continued, but much more moderate, increase in trade between
the USSR and the industrial West will take place.
D. Trade and Aid --Underdeveloped Countries
The growing Soviet presence in underdeveloped countries of
the Free World was reflected in approximately a 50-percent increase
in trade during 1961 compared with 1960. The largest single increase
centered about Soviet-Cuban trade, which accounted for almost three-
fourths of the increase. There were also substantial increases in
trade with India, Indonesia, Iraq, Guinea, Mali, Egypt, and Malaya.
Although Soviet trade with underdeveloped countries of the Free World is
expected to continue its growth, the rate of expansion in 1962 prob-
ably fell sharply below that in 1961.
Over the past year, there have been a number of significant
shifts in the Soviet aid program in underdeveloped countries of the
Free World. Most prominently, there has been a sharp drop in ex-
tensions of economic aid, while extensions of military aid in 1962
will reach an all-time high as a result of the recent rapid growth
in military shipments to Cuba. Furthermore, deliveries of military
equipment in 1962 also will set a new high, amounting to considerably
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more than half a billion dollars. There has been a concomitant dramatic
expansion in the training of nationals from underdeveloped countries with-
in the USSR.
There are a number of likely reasons that can be advanced for
the increased Soviet emphasis on military assistance. First of all, it
is a major diplomatic tool for expanding influence in underdeveloped
countries. This type of assistance exacerbates regional conflicts and
tensions, which the Soviet leadership believes to be to its advantage.
In addition, it provides a long period of training and association be-
tween Soviet military officers and technicians and those of the under-
developed country receiving aid. This opportunity to color the think-
ing and possibly to recruit members of the military elite could be of
particular importance in those underdeveloped countries where there are
practically no professional or business groups to influence the course
of governmental development or philosophy.
Perhaps of prime importance is the potential impact of Soviet
military assistance to underdeveloped countries on the unity and co-
hesiveness of the Western allied powers. The prospect of a politically
as well as economically United Europe has become not only more imminent
in recent months but also more formidable from the Soviet point of view
for two reasons. The first is the UK's recently evidenced willingness
to place ties with the six continental countries of the European Eco-
nomic Community ahead of existing ties with members of the Commonwealth
and the European Free Trade Area, both of which were created by the UK.
Participation by the UK will mean a more potent European Community,
economically and politically. The second reason lies in the fact that
Communist Parties all over the world are deeply divided into two groups:
those who favor traditional, Stalinist policies and those neoclassicists
of the Communist movement who support Khrushchev's revision of policies.
The approach to Western unity could not come at a more uncomfortable time
for the Kremlin leaders, struggling as they are with a fracture in their
own Bloc's unity. Thus Moscow, while acting to reinforce the economic
and political bonds existing in Eastern Europe, would place a special
premium on any current development which might promote discord (divi-
siveness) among the Western allies. If the provision of arms to Indo-
nesia could so exacerbate the Western allies, Moscow undoubtedly would
consider the rewards ample to cover its costs, and if the permanent
installation of medium-range missiles on the island of Cuba could make
the US impotent in the world arena, economic calculations would be con-
sidered irrelevant.
Formerly a sharp distinction was drawn between the impact of
Soviet military assistance and economic aid to underdeveloped countries.
Arms and aircraft furnished were largely obsolescent, drawn from re-
serve stocks, and therefore did not represent a diversion of resources
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away from current production of either capital goods or military equip-
ment. During the past year, however, most equipment furnished has been
identical with material that the USSR is manufacturing for its own armed
forces. This is true of the MIG-21's and the surface-to-air, surface-
to-surface, and air-to-air missiles supplied to Egypt, Indonesia, and
Cuba. This statement also applies to the Komar-class motorboats and
the electronic equipment, tanks, and other arms that were part of the
aid to Castro which began arriving during August 1962. Hence the drain
on Soviet materials, machine building capacity, and technical skills per
ruble of military equipment delivered is much closer to that of economic
goods than before.
In summary, given the present opportunities, the Soviet leader-
ship appears to have decided that it,receives a greater return on mili-
tary aid than economic aid, and if this judgment is correct, the trend
of new commitments should make this change clearer in 1963 and 1964.
This is not to say that the aid program will cease to have an economic
side; indeed, as of 15 January 1963, there were substantial offers of
Soviet aid outstanding that had not been accepted by the underdeveloped
countries. The USSR can be expected to use both military and economic
assistance when it promises to preempt or materially erode other foreign
influence in a country of strategic importance or to create dissension
among the Western powers.
Unless the USSR meets with serious rebuff or loss of influence
as a result of its trade and aid program, it can be expected to make
use of its capabilities when exploitable soft spots appear in the under-
developed world. Furthermore, although they defy quantitative measure-
ment, the striking growth of Soviet prestige and influence in Asia and
Africa over the past 5 years is undeniable. In short, as long as op-
portunities are presented for expanding Communist influence and power
on a worldwide basis, the USSR will continue to assign high priority
to allocating its economic resources in this direction, regardless of
short-run stresses and strains in the domestic economy.
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VI. Outlook
A. Problems and Responses
The recent rates of growth of the Soviet economy probably will
not be acceptable to the Soviet leaders for very long. Their dissatis-
faction with agricultural performance has been plainly stated, even
though it has not been reflected in concrete measures. The recent rate
of growth in industry of 7 percent is clearly below expectations and
long-run goals. This suggests that some very difficult allocation
choices have yet to be made or are being made now. Choices must be
made on the one hand between current consumption, investment, and de-
fense (including space) and on the other hand between investment in
consumer sectors and investment in basic industry. Furthermore, within
defense and space, hard choices must be made among various alternative
and competing programs.
The reduced rate of growth has come very inopportunely at the
same time as rising new demands by the military and space programs.
Indeed, the slowdown was in large part caused by military demands. In
retrospect, the excess of commitments over capacity can be attributed
largely to Khrushchev's chronic overoptimism as a policymaker. His
expectations were overly optimistic in three major problem areas. First,
Khrushchev apparently mistook the record 1958 agricultural performance
for a permanent gain in agricultural efficiency. Second, in industry
he expected gains in efficiency from the 1957 reorganization that have
materialized, if anything, as slight losses. The large increases in
productivity scheduled in the Seven Year Plan (1959-65) strongly suggest
great expectations of success from the program for new technology. The
decision in 1958 to proceed with the adoption of the 41-hour workweek is
further evidence of these expectations. Third, he apparently under-
estimated the cost of the military and space programs. This may have
been a combination of underestimating unit costs, underestimating the
size and number of weapons programs that would be needed in 1960-62,
and perhaps underestimating the resistance of some military leaders to
a reduction in conventional forces. Khrushchev's speech in January 1960
clearly indicated his belief that missile programs should be a way of
reducing resources used by the military, not increasing them. In con-
trast, the doctrine enunciated in November 1961 by Marshal Malinovskiy
emphasized balanced forces, including multi-million-man ground forces.
It is characteristically Khrushchevian to respond to economic
difficulties by reorganizing administrative structures. His first
major divergence from the consensus of the collective leadership was
the proposal for reorganization of industry in 1957, which led to the
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anti-Party fight. Khrushchev has engineered major or minor reshufflings
of the administration in industry or agriculture in nearly every year
since 1957. In November 1962 at the Plenum of the Communist Party of
the Soviet Union, he proposed yet another shakeup of both industrial
and agricultural organization plus a reorganization of the Party struc-
ture.
These proposals by Khrushchev are clearly a preliminary outline
with many loose ends and details yet to be resolved. The central motifs
are perhaps three:
1. A strengthening of control by setting up a joint
Party-state control agency with the intent of reducing the
illegalities, falsification, and speculation that have
plagued both industry and agriculture for the last few years;
2. A bitter denunciation of bureaucratic rigidities
and shortsightedness in Gosplan, especially the preference
for increasing production of steel instead of chemicals --
this wrongdoing to be redressed by transferring some of
Gosplan's powers to state committees for various brancnes
of industry and perhaps by increased monitoring of plans
by the newly established Party industry bureaus and com-
mittees; and
3. A general effort to increase Party participation
in economic management by establishing separate industry and
agricultural Party committees at oblast levels and industry
and agriculture bureaus at higher levels of the Party.
It is clear, however, that the proposals do not point to a
correction of the difficulties in administration that have been most
complained about in the Soviet press for the last 2 years. Enterprise
managers and other local officials have written, in lurid terms, of
administrative confusion and waste arising from duplicating or unclear
lines of authority; of multiple and uncoordinated plans descending on
the enterprise from all-union, republic, or sovnarkhoz levels; and of
gross inconsistencies between production and materials supply plans.
The encouragement of administrative intervention by Party committees
inherent in the new proposal is more likely to confuse lines of author-
ity further than to clarify them.
Neither did Khrushchev's proposals settle the question of
enterprise bonuses and incentives about which economists and managers
have been conducting a lively press debate. Khrushchev gave only a
small nod of encouragement to the celebrated Liberman proposal to make
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enterprise management bonuses proportional to profitability as opposed
to bonuses for fulfillment of output plans.
It is possible that some modification of Liberman's proposal
may be adopted. The potential benefits (for efficiency) of profit
maximization, however, would surely be largely frustrated by the
vigorous and arbitrary intervention in management by the Party com-
mittees to be set up under Khrushchev's proposals. Profit maximization
and price reform as advocated by Liberman and his supporters edge
totteringly close to Oskar Lange's "market socialism." There is no
sign of the kind of ideological upheaval in the minds of Soviet leaders
that acceptance of this approach to economic control would require.
Neither this reorganization nor any other likely to succeed it
will significantly raise the growth capability of the Soviet economy.
The problem for the leadership is to allocate the resources given by
this capability. The growth performance of the last few years suggests,
approximately, that a 9-percent annual growth in industry will require
at least as great a growth in inputs as in 1956-59 -- a moderate growth
in labor force (2 or 3 percent per year) and an 11-percent growth in
capital stock. Agriculture appears to need a growth in capital stock
and other industrial inputs substantially greater than the output growth
desired. Recent experience indicates that these inputs cannot be made
available simultaneously with the 1959-62 growth in arms and space
expenditures and weapons production. For a resumption of a rate of
growth of GNP of about 7 percent and of industry of 9 percent, it
seems likely that military and space expenditures must be, at most,
a constant share of GNP and probably a declining share and that
arms and space equipment must be, at most, a constant share of total
machinery output. A continuing relative rise in military effort could
be combined with a reacceleration of industrial growth only if con-
sumption and investment in agriculture, housing, and light industry
are restrained to very slow rates of growth.
The pattern of allocation of resources that was estab-
lished in 1962 and is tentatively indicated for 1963 shows evidences
of being makeshift and temporary. This pattern appears to include
(1) a leveling off of the previous rise in consumer incomes; (2) a
continuing relative increase in expenditures for defense and space (al-
though this is very uncertain for 1963); (3) a continuation of the
recent slow growth in investment -- with investment in housing con-
stant and investment in light and food industries declining; and
(4) some increase in investment in agriculture but an apparent re-
luctance to make firm commitments for the large investments required
to raise farm output significantly.
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B. Prospects
The current pattern of development of the economy probably
is not entirely to the liking of any of the top civilian leaders.
All will be looking for ways to channel more resources into indus-
trial growth. Recent interviews have established that Khrushchev
has not given up his desire to increase substantially the resources
allocated to agriculture. Other leaders may not share Khrushchev's
enthusiasm for agricultural development, but all will recognize the
penalties in prestige abroad and morale at home that could stem from
a continuing stagnation of production of food. The mediocre farm
performance in 1962 and the serious riots that accompanied the in-
crease in meat prices will sharpen this feeling.
In the defense and space field, there are an indefinite num-
ber of programs that can be advanced to serve some strategic or scien-
tific or propaganda objective. The leadership has to sort out these
competing demands to fit its immediate strategic plans and problems.
In this respect, military demand is relatively short run. In con-
trast, rapid economic growth -- in particular, catching up with the
US economy -- is a fundamental long-run policy of the Party leaders
that they probably will not sacrifice for long except for clear and
present strategic objectives.
Perhaps the leaders will agree that the rapid rise in military
expenditures at the expense of economic growth is or should be tem-
porary. In this event, military expenditures will again soon come
under close scrutiny. In particular, some reduction in the number of
men in service seems feasible. Some conventional weapons and perhaps
even some missile programs are possible candidates for cutbacks. Even
so, with potentially very costly programs in the offing, such as the
development of an antiballistic missile and the landing of a man on the
moon, restraining defense expenditures will be difficult. Judging by
recent experience, the Soviet leaders may well be unable to make a
clear decision in favor of one objective at the expense of all others,
as Stalin might have done, but instead will make marginal decisions,
slowing down some programs, speeding up others, and introducing selected
new programs.
A major factor influencing the decisions regarding defense and
space will be US expenditures in this field. The Soviet leaders will
be torn between the strong incentive (and the pressure from military
advisers) to keep up with the US in these fields and the increasing
awareness that the arms and space races are penalizing Soviet growth
much more severely than US growth.
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Table 11
USSR: Indexes of Resource Productivity in Industry
Selected Periods, 1950-61, and 1965 Plan
Index (1955 = 100)
1950 1953 1955 1956 1957 1958 1959 1960 1961 1965 Plan L.a/
Employment index 79.2 90.8 100.0 106.6 110.4 114.0 117.6 123.1 129.0 139.1
Index of length of workweek 100.0 100.0 100.0 97.5 96.4 94.6 92.6 87.8 83.8 81.7
Index of man-hours worked 79.2 90.8 100.0 103.9 106.4 107.8 108.9 108.1 108.1 113.6
Index of capital services 58.5 83.4 100.0 111.0 123.4 137.5 153.5 173.0 194.1 279.5
Index of "predicted" growth A/ 69.9 87.7 100.0 106.8 113.1 119.2 125.5 131.3 137.7 170.9
Index of actual growth (ORR) 61.3 80.9 100.0 108.4 117.8 127.9 141.2 150.9 162.4 228.8
Actual growth, by periods (ORE)
"Predicted" growth, by periods (index
of "predicted" growth, above)
Actual growth not accounted for by
increases in inputs
Percent of Growth over Previous Period Accounted for by Growth in Inputs
79.7 59.3
81.0 67.8 62.8 51.0
Average Annual Rate of Growth (Percent) A/
66.7 64.5
55.0A/
1951-55
10.3
7.4
3.7
1951-53
9.7
7.8
2.2
1954-55
11.2
6.8
4.7
1956-57
8.5
6.3
2.3
1958-59
9.5
5.4
4.4
1960-61
1959-65 Plan
7.2
8.7
4.7
5.2
2.6
4.4
a. Computations for 1965 are based on the indicated official plan (original) for employment, capital stock, and production. The index of man-hour
inputs for 1965 is based on the assumption that the length of the workweek will be reduced by an additional hour between 1962 and 1965. The official
output plan is used in computations for 1965. It is believed that the plan measure (gross value of output) is similar in concept and coverage to the
ORB index and does not reflect the usual biases believed to be present in the official index of actual industrial growth.
b. This index gives a measure of the level of output expected to be obtained from the indicated levels of "conventional" inputs of labor and capital
(see p. 26, above).
c. 1965 plan over 1958.
d. The base year for calculations in each column is the year before the stated year.
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Table 12
USSR: Indexes of Industrial Production, by Branch of Industry
1950-61
1955 Value-Added
Weights
Index (1955 100)
Sector
Division
Weights
Weights
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
Industrial materials
Electric power
6.5
54.0
61.5
70.4
79.4
88.8
100.0
112.7
123.5
138.6
155.7
172.0
192.4
Coal
17.6
66.9
72.5
77.2
81.6
88.4
100.0
109.8
118.6
127.2
130.5
132.8
132.4
Petroleum and gas products
4.8
53.3
59.5
66.5
74.4
83.8
100.0
118.9
139.5
160.6
182.7
208.3
234.2
Ferrous metals
11.6
59.1
68.0
75.6
83.2
90.7
100.0
107.1
113.8
122.0
133.1
144.2
156.4
Nonferrous metals
9.3
51.7
60.5
71.3
79.2
88.3
100.0
106.7
112.1
117.6
125.8
136.2
147.8
Forest products
26.7
75.7
85.8
85.9
86.2
96.8
100.0
103.1
109.6
116.0
124.7
119.1
115.3
Paper and paperboard
1.6
62.2
69.7
77.1
87.1
95.7
100.0
107.8
117.2
125.1
130.7
136.5
145.4
Construction materials 2/
13.0
45.8
54.3
62.6
71.4
83.1
100.0
115.9
141.1
170.6
201.7
238.3
262.8
Chemicals, including synthetic rubber
8.9
53.9
63.1
70.6
78.8
87.5
100.0
111.5
125.5
140.8
158.7
174.5
194.6
Aggregate raw materials
100.0
44.3
61.5
69.8
75.3
80.8
90.1
100.0
108.9
119.9
131.9
144.7
154.4
163.5
Machinery
Civilian machinery
50
57.3
59.2
62.3
71.8
84.2
100.0
118.2
136.7
149.4
165.9
180.7
197.4
Military machinery12/
50
63.5
76.2
80.9
84.1
92.1
100.0
98.5
97.1
101.5
118.1
127.6
146.2
Aggregate machinery
100
34.2
60.4
67.7
71.6
78.0
88.2
100.0
108.4
116.9
125.4
142.0
154.2
171.8
Consumer goods
Soft goods
Processed foods
63
37
61.8
63.0
74.0
72.0
77.6
78.9
84.8
87.0
94.5
93.2
100.0
100.0
105.9
110.7
112.5
118.6
122.0
126.5
130.3
137.2
137.8
139.5
142.1
150.4
Aggregate consumer goods
100
21.5
62.2
73.2
78.1
85.6
94.1
100.0
107.7
114.8
123.7
132.8
138.4
145.2
Aggregate industrial production
100.0
61.3
69.8
74.6
80.9
90.3
100.0
108.4
117.8
127.9
141.2
150.9
162.4
a. Excluding production of lumber and steel used in construction. Such production is included under the materials categories forest products and ferrous metals,
respectively.
b. Further work is in progress on all these index numbers but especially on the military machinery numbers. For example, the estimated output of military ma-
chinery in 1950 probably is too high.
c. Calculations are based on =rounded data.
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