CURRENT ECONOMIC WEAKNESSES IN THE SOVIET BLOC AND COMMUNIST ASIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01049A002900070001-2
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 51
• Document Creation Date: November 16, 2016
• Document Release Date: March 3, 2000
• Sequence Number: 1
• Publication Date: January 1, 1964
• Content Type: REPORT

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CURRENT ECONOMIC WEAKNESSES
IN THE SOVIET BLOC AND COMMUNIST ASIA
January 196+
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FOREWORD
This report sets forth the current economic weaknesses of the Soviet
Bloc and Communist Asia. It does not present a balance sheet of strengths
and weaknesses. The report concentrates on economic factors and does not
analyze the interplay among economic, political, and military factors.
Although a large number of examples are used to illustrate specific
points, the report cannot supply detail for the wide range of problems
considered, and other reports must be consulted for further information.
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CONTENTS
Page
Summary and Conclusions . . . . . . . . . . . . . . . . . . . 1
I. Current Economic Weaknesses in the USSR . . . . . . . . . 3
A. General Weaknesses . . . . . . . . . . . . . . . . . 3
1. Overcommitment of Resources . . . . . . . . . . . 3
2. An Inefficient Guidance-and-Control Mechanism . . 5
B. Weaknesses in Agriculture . . .
1. Inadequate and Misused Investment . . . . . . . . 7
2. Erratic Planning and Administration . . . . . . . 7
3. Doctrinaire Insistence on Collective and State
Farms . . . . . . . . . . . . . . . . . . . . . 8
4. Unsatisfactory State of Farm Mechanization Pro-
gram and of Farm Technology . . . . . . . . . . 10
5. Chemical Fertilizer Program as a Case Example . . 11
C. Weaknesses in Industry . . . . . . . . . . . . . . . 11
1. Decline in Industrial Rates of Growth . . . . . . 12
2. Emphasis on Sheer Quantity -- at a Cost . . . . . 13
3. Difficulties in Planning and Administration . . . 14
D. Weaknesses in Construction . . . . . . . . . . . . . 15
E. Weakness in Foreign Trade . . . . . . . . . . . . . . 17
F. Weaknesses in the Consumer Sectors . . . . . . . . . 18
1. Shortages of Food . . . . . . . . . . . . . . . . 18
2. Deficiencies in Soft Goods . . . . . . . . . . . 19
3. Small Quantities of Consumer Durables . . . . . . 19
4. Crowded, Run-Down Housing . . . . . . . . . . . . 19
5. Other Weaknesses as Seen by the Consumer . . . . 20
6. Failure to Reduce Hours of Work . . . . . . . . . 21
G. Decline in Over-All Growth Compared with the US . . . 21
II. Current Economic Weaknesses in Eastern Europe . . . . . . 23
A. General . . . . . . . . . . . . . . . . . . . . . . . 23
B. Over-All Economic Growth . . . . . . . . . . . . . . 23
C. Agriculture . . . . . . . . . . . . . . . . . . . . . 24
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Page
1. Stagnation in Production . . . . . . . . . . . . 24
2. Inefficiencies in Management . . . . . . . . . . 25
3. Results of Agricultural Failures . . . . . . . . 26
D. Industry. . . . . . . . . . . . . . . . . . . . . . . 26
1. Decline in Rates of Growth . . . . . . . . . . . 26
2. Obsolescence and Inefficiency of Equipment . . . 27
3. Unsatisfactory Quality of Goods . . . . . . . . . 28
E. Transportation . . . . . . . . . . . . . . . . . . . 28
F. Construction . . . . . . . . . . . . . . . . . . . . 29
G. Living Conditions . . . . . . . . . . . . . . . . . . 29
1. Inadequacies in the Supply of Consumer Goods . . 30
2. Inadequacies in the Supply of Housing and Other
Consumer Services . . . . . . . . . . . . . . . 30
3. Other Deficiencies in Living Conditions . . . . . 31
H. Economic Planning and Management . . . . . . . . . .
I. Intra-Bloc Economic Cooperation . . . . . . . . . . .
J. Conclusions . . . . . . . . . . . . . . . . . . . . .
31
31
32
A. Background . . . . . . . . . . . . . . . . . . . . . 35
B. Difficulties in Agriculture . . . . . . . . . . . . . 36
1. Deficits in the Food Supply . . . . . . . . . . . 36
2. Causes of Agricultural Failures . . . . . . . . . 36
3. Difficulty of Righting Agricultural Sector . . . 37
4. Pressure of Population . . . . . . . . . . . . . 38
C. Difficulties in Industry . . . . . . . . . . . . . . 39
1. Severe Decline in Output . . . . . . . . . . . . 39
2. Dim Prospects for Resumption of Industrial
Growth . . . . . . . . . . . . . . . . . . . . . 40
D. Foreign Trade Difficulties . . . . . . . . . . . . . 41
E. Difficulties in Planning . . . . . . . . . . . . . . 42
F. Consumer Welfare and Morale . . . . . . . . . . . . . 43
IV. Current Economic Weaknesses in North Korea and North
Vietnam . . . . . . . . . . . . . . . . . . . . . . . . 45
A. North Korea . . . . . . . . . . . . . . . . . . . . . 45
B. North Vietnam . . . . . . . . . . . . . . . . . . . . 46
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CURRENT ECONOMIC WEAKNESSES
LV THE SOVIET BLOC AND CO IUNIST ASIA
Summary and Conclusions
The countries of the Soviet Bloc and Communist Asia have certain
economic weaknesses in common: (1) the failure of agriculture to
prosper under a doctrinaire system of collectivization, coupled with
inept policy guidance from above; (2) the failure of industry to adapt
flexibly to new technology and to a wider variety of final product;
and (3) the general failure to provide the populace with adequate
housing, consumer goods of reasonable quality, and, in some instances,
even a sufficient amount of food.
In the USSR the attempt by Khrushchev to improve performance in
hitherto neglected areas of the economy, coupled with rising demands
of military and space programs, has led to an overcommitment of resources
and additional waste and confusion. Agricultural output has failed to
advance above the level of 1958, and the rates of growth in industrial
production and investment have been appreciably lower in the last 4 years
than in the 1950's. The Soviet planning and administrative system has
not proved to be adaptable in meeting the expanded demands for a wide
variety of high-quality goods in all sectors of the economy. The
weaknesses in the economy came dramatically to the fore in the second half'
of 1963, when the USSR contracted for imports of roughly 10 million tons
of Western grain and announced a crash program to quadruple production
of chemical fertilizer by 1970.
In the Soviet Bloc countries of Eastern. Europe, agriculture con-
tinues in the doldrums while the rates of growth of industrial produc-
tion have slumped off. Continued annoyance with difficulties in
everyday living and with the lack of competence of the economic
administrators has left the populace sullen if not mutinous. The
Soviet-style system of central planning and control has proved to be
unsuitable in many areas, the more so because of the great dependence
on foreign trade of many of the countries of Eastern Europe. Move-
ment toward economic integration within the Bloc has been slow.
In Communist China the gravest economic weaknesses are the pre-
carious food-population balance and the lack of technical support
once furnished by the USSR. Production of grain in 1963 is about the
same as in 1957, when there were 75 million fewer people. Imports of
about 5 million tons of grain a year from the West are continuing.
The abrupt withdrawal of Soviet technical aid in mid-1960 -- together
with the wastes of the overambitious "leap forward" of 1958-60 -- has
left China marking time with little immediate prospect for a resumption
of rapid economic growth.
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These economic weaknesses are of considerable importance to the
world image of the Communist system. In the case of the USSR the
leadership has loudly proclaimed the superiority of the system in
providing extremely rapid economic growth, in building up a mighty
military establishment, and in providing a euphoric level of consumer
well-being. Today these boasts sound hollow. Catching up with the
US in industrial production, let alone in living standards, seems
out of the question for at least this generation. The ante in the
military-space race has been raised substantially, and the Soviet
leaders now propose a game with smaller stakes. Finally, efforts
to placate the Soviet consumer continue, but the response of the
Soviet economy to the rising consumer standards of the modern indus-
trial age has been notoriously sluggish., Khrushchev himself empha-
sizes the importance of consumer welfare as a symbol of economic
success and makes sneering references, for example, to the Chinese
Communists as apostles of a "pantsless Communism."
Weaknesses in the countries of Eastern Europe contrast with the
buoyance of the major economies of Western Europe. As for Communist
China, its economic energies for the time being are concentrated on
feeding and clothing the population, and ambitious industrial and
technological programs have been postponed indefinitely.
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I. Current Economic Weaknesses in the USSR
A. General Weaknesses
The Soviet leaders have accomplished certain things at an impres-
sive rate of speed. They have built up the second largest industry in
the world; they have developed a very large machine building industry,
capable of turning out many types of technically advanced machinery for
military and industrial. use; they have greatly expanded production of
basic industrial items, such as steel, coal, petroleum, electric power,
and cement. As an engine of national power, the Soviet economy is a
big, tough establishment.
In large measure these achievements are the result of concen-
trating on a narrow range of economic tasks and the corresponding
neglect of other things. The "other things" can no longer be postponed
without serious economic or political results. Khrushchev, beginning
in 1956, has been forced to deal with some of the neglected areas.
These efforts, together with his challenges to the West, have resu.Lted
in adding commitments to an economy that already was heavily burdened
with ambitious military and investment programs.
Khrushch.ev's efforts to deal with these general. economi. is=u.es
have laid 'bare -- most spectacularly in 1963 -- the cost of concentra-
tion (and achievement;. The growing dispersion of effort among many
major economic problems has led to problems in management and control
the simple emphasis of the past on sheer quantity of output no longer
suffices, and new methods must be sought for forcing or inducing managers
to readjust efficiently to the new economic situation. Included in the
problems of management is the question of flexibility; the new emphasis
on responding to the needs of various users, instead of concentrating
on producing more and more of basic materials and machines for the
restricted purposes of a centralized leadership, requires a much finer
detail. in central planning or, better yet, a system for relieving
central planners of dealing with detail.
The current general weaknesses in the Soviet economy are thus
an cvercommitment of resources and the ineffectiveness of a system of
economic management that worked well enough for the objectives of the
leadership in the past but now is hard-pressed to direct an economy of
increasing diversity of product and of purpose.
1. Overcommitment of Resources
The Soviet economy is then an economy under strain, an.
economy trying to do a lot of things all at once. The economy in the
past, of course, has typically been run full throttle, with men, machines,
and materials pressed hard to achieve ever-increasing output goals.
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What distinguishes the situation in 19633-6)+ is that the pressures on the
economy are tied up with frustrated global political and military ambi-
tions and with disappointed hopes on the part of an increasingly articu-
late citizenry.
The term overcommitment is too often used promiscuously in
describing an economy's problems. In the USSR, overcommitment shows up
graphically in Khrushchev's attempt to boost production of meat by
greatly increasing the number of cattle; the limited amount of fodder
has been distributed among the larger number of cattle, and the result
has been that inputs of fodder go to keeping larger numbers alive --
that is, to growing bones rather than to producing more meat. An
analogous situation exists in construction: because of the great increase
in construction projects, coupled with a limited supply of management
energy and construction materials, a great number of projects are kept
alive but are not being expeditiously completed -- that is, meat is not
being added to the bones efficiently.
The strains and weaknesses in the economy suddenly burst
into the open in August 1963 when the USSR contracted for about 10 mil-
lion tons of Western* wheat and announced a large crash program for ex-
panding capacity and output in the chemical industry. In his report
of 9 December to the Central Committee of the Communist Party of the
Soviet Union,** Khrushchev put the best face possible on these embar-
rassing revelations of weaknesses by pointing out that when grain was
scarce in 1947, Stalin and Molotov simply continued to export grain
and let people starve.
In large part, then, Soviet economic weaknesses stem from
the attempt of the Soviet leadership to do too much too soon. Specifi-
cally the Soviet leadership has somewhat less than half of the gross
national product (GNP) of the US to allocate among the following pur-
poses: (a) the investment in new plant and equipment of amounts
roughly comparable to investment in the US, as a vital part of the
program to "catch up" with the US in economic power; (b) the mainte-
nance of a tremendous military-space establishment, the annual upkeep
of which approaches in real terms the upkeep of the US armed forces;
(c) the feeding, clothing, and housing of a population 18 percent
greater than that of the US; and, a relatively small item, (d) the
supply of arms, military specialists, machinery, and engineers and
other technical people to Cuba, the United Arab Republic, Indonesia,
and other partly developed countries.
* "Western" as used in this report refers generally to non-Communist
industrial nations and in some contexts includes Australia and/or Japan.
** This report will be referred to hereafter as "Khrushchev's report."
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The top Soviet leadership has overcommitted its economic
resources in its impatience to achieve all its goals, and its attempts
to repair deficiencies in one sector have led to difficulties in other
sectors. In late 1963, for example, the need to import up to $1 billion
worth of wheat from the West and the apparent need to import perhaps
$2 billion worth of Western chemical equipment over the next 7 years
worsened an already troublesome foreign exchange problem. The reactions
to this problem -- drawing down of gold reserves, stepping up of exports,
trimming of imports of other goods, and seeking out of large long-term
credits from the West -- all create problems of displacement and rearrange-
ment of economic plans and resources elsewhere in the economy. The eco-
nomic plans sketched out for 1963-64+ have the theme chemical--s _u e- Fer'
alles." Just as "electrification" was the magic word for the legendary
Lenin, so "chemicalization" is the incantation of Khrushchev -- chemicals
to make the fields yield richer harvests of grain and cotton; chemicals
to supply light industry with greater quantities of synthetic textile
fibers; and chemicals to furnish plastics that will serve a wide variety
of uses and release great quantities of metals, wood products, and leather
for other uses. Billions of rubles worth of construction materials are
part of the chemical program -- well, then, comrades, construction of
housing, hospitals, and schools won't advance quite as fast as we'd
like! Thousands of engineers and other skilled people will be needed
to build and operate the new chemical plants -- well, then, comrades,
we'll train them on a crash basis, and we may even cut back some of
our less essential military programs to show that we are a peace-loving
people! Thousands of tons of fertilizer are wasted now -- well, then,
comrades, we'll have to develop teaching activists who will train several
hundred thousands of the peasants in fertilizer application!
Given the overcommitment of resources, under various plans
and programs, the actual allocation of resources is determined by a
system of arbitrary priorities, priorities that can change overnight
in bewildering fashion. For example, one year the planting of corn
can be in fashion, the next year the plowing up of grassland, and in
1963 it was chemicals that were pulled out of the hat. Accordingly,
weaknesses are most pronounced in those sectors of the Soviet economy
that have been time after time shortchanged when the priority system
got down to actual physical placement of resources. Major weaknesses
are to be found in agriculture, in light industry, in certain branches
of construction, in housing, and in consumer services.
2. An Inefficient Guidance-and-Control Mechanism
Besides the overcommitment of resources, a continuing weak-
ness in the Soviet economy is the doctrinaire and heavy-handed system
of economic control, a system that breeds large-scale waste of resources
and that is peculiarly inefficient in making the fine adjustments re-
quired of a modern economy. This guidance-and-control mechanism -- an
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elaborate hierarchy of economic policymakers, planners, administrators,
and managers -- all fortified with a correct "Party line" -- certainly
does not suffer from an underallocation of resources. Rather it lies
as a dead weight on all enterprises of pith and moment.
The Soviet economy is .a "command economy." General economic
policies are set by the handful of top-level Communist oligarchs, among
whom Nikita Sergeyevich Khrushchev casts the biggest vote. These policies
are colored by the quasi-religious doctrines attributed -- sometimes
accurately -- to Saint Karl and Saint Vladimir. (Saint Joseph has been
decanonized.) In general, these policies call for rapid expansion of
the heavy industrial base, collectivization of all economic activity in-
cluding small-scale industry and agriculture, central planning of eco-
nomic affairs, and maintenance of a large military establishment to
protect the revolution and to bring its benefits to oppressed peoples
everywhere. Later on, a controlled abundance of consumer goods based
on scientific norms will become available to everyone "free of extra
charge," but in the meantime a minimum amount of consumption goods,
distributed according to a person's productive output or political
position, is the rule of the game. More detailed information on weak-
nesses in the planning and administrative system is given at various
points in the sections below.
B. Weaknesses in Agriculture
Agriculture has been a chronically weak sector in the Soviet
economy. Estimates of net agricultural output can be only approximate,
but it is believed that no discernible increase has been achieved above
the good year of 1958. Estimated percentage increases in net agri-
cultural output for each year since 1958, above the previous year, are
as follows:
Percent
1959
-4
1960
+3
1961
+8
1962
-4
1963
-4
In this 5-year period, while agricultural production was faltering,
the population of the USSR grew 8 percent, and net production per capita
in 1963 is estimated to have been 10 percent below the level of 1958.
The weaknesses in Soviet agriculture described below are man-made;
these man-made problems, however, have been made worse by the generally
mediocre weather since 1958, a year of unusually good weather. During
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this recent period the pressures on the leadership from the failures and
inadequacies in agriculture have led to a progressive inflation of the
official statistics on agriculture.
1. Inadequate and Misused Investment
Usually outside observers have explained past and present
weaknesses in Soviet agriculture by the low priority given to agriculture
in the allocation of men, machinery, and materials and by the neglect of
agriculture on the part of the central government leadership. Actually
a little salutary neglect on the part of the regime might have left
agriculture in much better shape than the policy actually followed,
which has been marked by (a) the insistence on collectivization as the
ultimate long-term answer to all agricultural problems; (b) the prin-
ciple, especially dear to Khrushchev, that there is no trouble down on
the farm that cannot be solved by a vigorous Party member taking hold
and shaking things up; (c) the abrupt twists and turns in official
directives as to what crops should be planted by what methods under
what organizational rules; and (d) the general inadequacies of incen-
tives for increased effort and improved techniques of production.
Since Khrushchev came into power, resources in considerable
quantity have gone to agriculture, but not enough to make up for years
of neglect or enough to meet the greatly expanded needs of a more inten-
sive agriculture. In addition, some of the investment has been mis-
applied and misused -- for example: (a) a considerable part of farm
machinery is known to be inoperative at any one time because of grave
shortages of spare parts, skilled repairmen, and trained operators,
and (b) according to Soviet studies, 15 to 25 percent of fertilizer
is lost between factory and farm because of poor transport and storage,
and an additional significant part is applied ineffectively to the fields.
2. Erratic Planning and Administration
Central planning of the Soviet kind is supposed to supply
central initiative and technological leadership for the improvement
of agricultural techniques and yields. As it has turned out, however,
erratic and shortsighted planning has hampered Soviet agriculture, and
administrative reorganizations and crash programs to end the stagnation
in agricultural production have resulted only in a compounding of con-
fusion and a further waste in resources.
In the past decade the Soviet leadership has made several
important reorganizations of the systems by which agriculture is admin-
istered. These reorganization patterns have varied in the degree of
decentralization from one in which even minute details of agriculture
are determined in Moscow to one in which agriculture is allowed con-
siderable local autonomy, provided that planned deliveries to state
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collection agencies are made. Another way in which these various
systems differ is the degree to which Party organizations play a
direct role in making agricultural decisions. One of the few amusing
aspects of the vacillations in the organization of Soviet agriculture
is the public scourging of the administrative apparatus for operating
in an uninspired bureaucratic fashion, and, later, when the Party
activists have been thrown into the fray; the denouncing of the
apparatus for operating in an unsystematic disorderly fashion.
Although a great deal may appear to have been accomplished
in the short run, the crash programs for changing the face of agri-
culture are often shortsighted. For example, in the middle 1950's
a great acreage of semiarid lands was plowed up in Kazakhstan and
adjoining regions, and a considerable immediate increase in production
of grain was achieved. The land was not rested to restore moisture
and nutrient content, however, and in 1963 the drought came, and the
winds blew the soil, and yields fell nearly to zero in much of the
area. Khrushchev, in his report, alluded to "enemies of the Soviet
Union" who "have been spreading all sorts of fabrications of late
about the virgin lands, trying to prove that the policy of the recla-
mation of the new lands had allegedly not given the results expected."
On this occasion, Khrushchev, although sensitive about Western gibes,
went blandly ahead with a completely different approach -- a program
for the intensive use of existing acreage through more fertilizer,
with not a kopek more for the program of extensive development --
that is, the cultivation of additional acreage.
The corn program illustrates the erratic nature of plan-
ning in agriculture. In 1955, Khrushchev said "corn," and shortly
the whole countryside was up to its ears in plans for corn. Late in
1963, however, Khrushchev chided comrades who had grown corn in un-
suitable climatic zones on unsuitable land, and he said that the new
agricultural policies, although deemphasizing corn, were not a retreat
from the corn program. The trumpet that blows in Moscow is no un-
certain trumpet, but agricultural officials can expect contradictory
blasts within a short period of time and must pretend that the previous
blasts do not exist. In summary, the waste of investment in agri-
culture and the erratic and frequently short-sighted guidance from
above are part and parcel of the same problem of inefficient use of
the economy's resources.
The dominant units in Soviet agriculture are the 39,700 col-
lective farms (kolkhozy) and the 8,570 state farms (sovkhozy). There
are practically no individual peasants left. Under the collective farm
system, net income is paid out, either in cash or kind, according to
the number of workdays (adjusted for level of skill) of the individual.
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Under the state farm.system the individual is paid a set wage. The
state farm is considered "superior" in an ideological sense because
it is closer to the "factory farm," an idealized production unit
patterned as closely as possible to the industrial plant.
State and collective farmers typically are permitted to
cultivate private plots of one-half to 1 acre in size. These private
plots account for only 3 percent of the sown acreage but for almost
30 percent of the estimated man-years applied to Soviet agriculture,
as follows:
Distribution of Soviet Farm Workers
by Type of Activity, 1963
Total civilian employment in agriculture
38,900
State farms
8,400
Collective farms
19,600
Private plots of collective
and state farm workers
10,900
Rural incomes are low and, especially in the case of collec-
tive farmers, highly uncertain. Thus the small private plot plays an
important role by supplying the rural population with fresh fruits and
vegetables, with meat and dairy products, and with supplementary income.
The importance of the private plot is shown in the following tabulation
of the distribution of production of selected products, by type of farm,
in 1962 (data are taken from the official Soviet handbook):
Product
Total
Collective
Farms
State
Farms
Private
Plots*
Grain
100
58
40
2
Cotton
100
82
18
0
Sugar beets
100
93
7
0
Potatoes
100
20
10
70
Vegetables
100
28
30
42
Meat
100
30
26
44
Milk
100
34
21
45
Eggs
100
11
13
76
Wool
100
46
32
22
* Including production on the private plots of state and collective
farmers and of state workers and employees in rural nonfarm occupations.
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Higher yields and a large share of production of many impor-
tant products are obtained on the private plots in spite of the absence
of state help in the form of equipment and facilities, chemical ferti-
lizer, and extensive pieces of land. The private plot has the advantage
because of personal incentives and the careful attention of the peasants.
The kinds of agricultural activity that are most dependent on individual
responsibility and incentive -- such as livestock-raising -- are often
the kinds that must be expanded if the Soviet consumer is to be pro-
vided with a more varied diet; these new activities sometimes require
new investment in specialized facilities and equipment. But, for
doctrinal reasons, the Soviet leadership is hamstringing individual
incentive by consolidating collective farms into larger units, by
transforming collective farms into state farms, and by chipping away
at the freedoms of the private plot. Thus a fundamental weakness in
Soviet agriculture today is that political doctrine runs counter to
economic requirements. Khrushchev, in his report, shows extreme sensi-
tivity on this point, referring to the "slanders" of Western opponents
of socialism and to the "absolute victory" of collective and state farm-
ing. Presumably, when Khrushchev in this same speech launches a vast
fertilizer program and urges great increases in agricultural output and
productivity, he is merely mopping up after the absolute victory.
!+. Unsatisfactory State of Farm Mechanization Program and o:'
Farm Technology
Another continuing weakness in the Soviet agricultural picture
is the state of farm mechanization. Problems in this area are tied to
problems previously described -- the'inadequacy and misdirection of in-
vestment, the cumbersome nature of Soviet planning, and the failure of
collective institutions to provide incentives for more diligent care
and better maintenance of. livestock and machinery. Flexibility of
design in farm equipment, the achievement of high quality in equipment,
and the provision of a ready supply of spare parts are some necessary
aspects of the farm mechanization program, but none of these has been a
noticeable attribute of the farm equipment industry. Furthermore, the
operators of equipment and, especially, skilled mechanics are the first
to be lured to the less rigorous life of the city. The social and
political institutions of the rural areas cannot handle the problems
that arise under a high-pressure program of mechanization.
The training of agricultural research people and the opera-
tion of agricultural research stations look good on the reports sub-
mitted to Moscow. Yet, in December 1963, Chairman Voronov of the RSFSR
Council of Ministers stated that in the RSFSR most of the 561 agro-
chemical laboratories in operation were not worthy of the name. Voronov
went on --
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As a rule, there are only two men in each lab.
They work in cramped, unsuitable quarters, without
the proper equipment. They do not act in concert;
their work is not coordinated by anybody; the ob-
last and kray experimental stations do not give
methodological guidance to their labs; and the
majority of them do not fulfill their allotted
tasks.
Typically, this leader urged that more, presumably better staffed labo-
ratories be set up.
5. Chemical Fertilizer Program as a Case Example
The current weaknesses in Soviet agriculture, together with
weaknesses in adjoining sectors of the economy, may be illustrated by
Khrushchev's current proposal to raise the annual production of chemical
fertilizer from 20 million tons in 1963 to 70 million to 80 million tons
in 1970. Many steps must be taken to translate the proposal into greatly
increased production of grain -- production and import of chemical equip-
ment, training of engineers and skilled workers in the chemical field,
construction and equipping of fertilizer plants, production of fertilizer,
storage and distribution of fertilizer to regional centers, blending and
bagging, storage and distribution to state and collective farms, produc-
tion of fertilizer-spreading machines, application of fertilizer to the
fields, and reaping and storing the resulting grain. Each step in each
of these operations, with a few exceptions, is a relatively simple oper-
ation. The application of fertilizer to a field, for example, is not a
particularly complicated job, but it does require over-all enlightened
management and a responsible attitude. The key word here is incentive.
Does anyone care whether the fertilizer is distributed in bags or in
bulk? Does anyone care if a certain acreage is not suitable for ferti-
lizer of a certain composition? Khrushchev remarked drily that the
bureaucratic solution is to "give everyone a little fertilizer."
C. Weaknesses in Industry
Official Soviet announcements of industrial production in the
USSR, although they must be examined cautiously, are more reliable than
statistics on agricultural production. A large part of industrial pro-
duction is concentrated in a few hundred large factories, and industry
is not subject to the vagaries of weather. Consequently, industrial
production has advanced at a relatively steady pace, and results have
corresponded fairly closely to annual and to 5-year plans. Exaggera-
tion of achievements by Soviet industry is less than in the case of
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agriculture. Annual rates of growth in industrial production, as
announced by the government, overstate tie actual rate, usually by
one or two percentage points:
Average Annual Rate of Growth
in Soviet Industrial Production
Year
Plan
Announced
Result
Estimated
Actual Result
.
1951-55*
11.2
13.1
10
1956-60**
10.5
10.4
9
1961-63***
8.3
9.0
7
1956
10.5
11.0
9
1957
7.1
10.0
8
1958
7.6
10.0
8
1959
7.7
11.4
10
1960
8.1
9.6
7
1961
8.8
9.3
7
1962
8.1
9.5
7
1963
8.0
8.5
7
1. Decline in Industrial Rates of Growth
In the early 1950's Soviet industrial production grew at an
average annual rate of 10 percent and in the late 1950's at 9 percent.
In the last few years the rate has been 7 percent. This slowing down
in the rate of growth of industrial production has sorely complicated
the task of the Soviet leadership in adjusting to the greatly increased
burdens placed on the economy. Furthermore, this slowing down in indus-
trial growth -- coupled with the stagnant performance in agriculture --
has dimmed if not extinguished their hope of catching up with the US in
this generation.
Of course, an increase of 7 :percent per year in industrial
production under ordinary circumstances is quite respectable, but
measured against Soviet aspirations it is not. Then, too, it should
* Base year 1950.
** Base year 1955?
*** Base year 1960.
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be noted that industry -- especially that part of industry that turns
out capital equipment -- is the apple of the Soviet eye. The USSR has
concentrated on industrial growth, and even in the field of their on
choosing they are not doing too well.
One major cause of the decline in the Soviet industrial
rate of growth is the failure of investment to increase further as a
percent of GNP. In the 1950's, Soviet investment in new plant and
equipment increased from 15 to 23 percent of GNP but subsequently has
remained fixed as a percent of GNP. The high rate of industrial
growth in the 1950's depended on investment's being an ever-increasing
share of GNP, and when the share became stabilized, the pace of indus-
trial expansion slowed. The sharp upturn in military expenditures
starting about 1958 is part of the explanation for the failure of
investment to maintain the pace, particularly because production of
military goods draws on the same high-quality men and materials that
spark industrial growth. And industrial growth also was retarded by
the apparent decline in the ability of Soviet management to get in-
creased gains in the efficiency with which capital and labor inputs
are combined. Finally, the transition from a 46-hour to a 41-hour
workweek in industry had the result that there was little if any
increase in the input of man-hours into industry between 1958 and
1961.
Restoration of the old level of rates of growth is not
likely in the near future unless a substantial reduction in alloca-
tions to the armed forces takes place. In this connection the appeals
by Khrushchev in 1963 and at the start of 1964 for a lessening of the
tempo of the "cold war" could be important from the economic point of
view if they proved to mark, as current economic plans suggest, the
beginning of a reallocation of resources toward growth.
2. Emphasis on Sheer Quantity -- at a Cost
The traditional emphasis on quantitative growth in Soviet
industry has entailed considerable costs in the form of wasted output,
poor quality of product, poor assortment and variety, uneven tech-
nology, and considerable wear-and-tear on workers and managers. Be-
cause heavy industry, especially those branches serving the military,
has always had priority in getting the best manpower, machinery, and
materials, these costs have been especially important in the industries
affecting the consumer.
An example of wasted output -- the factories producing
trucks and tractors turn out as many units as they can, but at the
same time the tire industry runs into trouble, producing an insuf-
ficient volume of tires of notoriously low quality. Result,-- trucks
and tractors stand around waiting for tires.
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Examples of poor quality and variety -- producers of clothing
strive to fulfill and exceed production goals. To get sheer quantity of
output, they skimp on quality, and the inspectors become accustomed to
passing shoddy goods. Sheer quantity means, in the extreme case, one
style, one color, and very few sizes. The retail distribution system
in effect is dealing with a monopoly supplier, and remonstrances would
be futile. And, until recently, consumers had to take what was supplied.
Now, however, consumers are in a position to reject poor-quality goods;
they are not able, as in a market economy, to signal the producer effec-
tively as to how much quality and diversity they are willing to pay for,
but they are able to take the first step -- of letting unsold goods pile
up on the shelf. In the case of clothing, cigarettes, and consumer
durables -- for example, radios -- the Soviet citizen -- now free to
criticize the "bureaucracy" if not the leading individual culprits --
equates "Western" goods with quality. Visitors from the West discover
an open or furtive admiration for their possessions, from automobiles
to footwear, from luggage to Kleenex tissues. Khrushchev was un-
characteristically reserved in the following statement: "Some of our
fibers are considerably inferior to imported ones in their physico-
mechanical properties and finish."
As for uneven technology, Soviet industry is an interesting
blend of the latest wrinkle in automated plants side-by-side with exceed-
ingly primitive factories. In some cases the unevenness of technology
merely reflects the high priority of military and heavy industry. In
other instances, technology suffers from the unwillingness of industrial
managers to experiment with new techniques or to replace old equipment
at the expense of current output.
The past emphasis on fulfillment or overfulfillment of
physical output quotas might have been logical in the early phase of
Soviet industrialization when the Soviet leadership concentrated on the
rapid expansion of production of a narrow range of basic industrial
materials and machinery. Under these circumstances a "command" system
in which orders are imposed downward through an administrative hierarchy
works fairly well. Now, however, managers of industrial enterprises and
trusts are supposed not only to meet physical quotas but also to lower
costs of production, to adopt the latest technology, and to improve
quality and assortment of goods in response to the needs of a more
sophisticated and varied group of users. At the same time, the central
leaders enjoin the managers to keep in mind national goals and to avoid
"provincialism" -- that is, making decisions on the basis of local
interests. The general weakness in the industrial administrative system
is that the manager does not get clear signals as to what is really
wanted (how much physical output, for example, may be sacrificed in
order to get a higher quality of product), nor, even if the signals
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are clear, is the manager necessarily motivated by the system to re-
order his activities. Because complexity of product and complexity of
user demand are increasing inevitably, this weakness becomes more and
more serious. For example, Khrushchev himself recently castigated
two sovnarkhozy (economic administrative areas) for failure to get
into production of new raw materials required for the expanded syn-
thetic fiber program.
Three lines of attack on the weakness have appeared:
(a) a proposal, by Professor Liberman of Kharkov, for a limited
decentralization of decision-making by setting up one criterion of
success -- profitability* (ratio of profits to capital plant used in
the enterprise); (b) proposals by various economists to increase the
power of the central planning apparatus to handle the new complexities
by development of new mathematical techniques coupled with the use of
giant computers; (c) proposals, usually favored by Khrushchev, to send
dedicated Party men in as troubleshooters when the bureaucrats have
failed. These kinds of proposals may all be tried, thus still further
tangling the situation. Up to now the most important changes have
been in reorganizing lines of authority, expecially at the top levels,
and in introducing Party elements as overseers of the production
process. Proposals to liberalize the scope of authority of managers
of individual enterprises run contrary to political doctrines of
central planning, forced-draft growth, and preeminence of the authority
of the Communist Party.
The inflexibility of the industrial administrative system
in dealing with variety and with change is reflected in the existence
of many informal arrangements that fill in the interstices in the
economy. Managers of enterprises employ fixers and expediters, who
arrange special dispensations (for example, arrangements with local
authorities to wink at unlawful overtime work) or turn up nonofficial
sources of raw materials. Small-scale enterprises in basements supply
services or handicraft goods, filling needs that fall in between the
lines of the economic plan. The central authorities -- as in the case
of the private plot in agriculture -- wisely tolerate many of these
activities because it helps the system work. Of..course, individual
enterprise in currency speculation or the use of state raw materials
for private gain is proscribed, and several score of enterprisers have
been shot in the last couple of years to underscore the point.
D. Weaknesses in Construction
In his speech of 24 April to the RSFSR conference of industrial
and construction workers, Khrushchev expressed his exasperation at the
* Physical output quotas, price, and major investments would still be
determined by central authority; individual enterprises would have con-
trol over inputs of labor and raw materials and methods of production.
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persistence of shortcomings in construction programing in the USSR.
"The increase in unfinished construction is a swamp," he complained,
"and we are dragged into this swamp by certain comrades who begin more
and more new construction sites indiscriminately ... . The more con-
struction sites there are in the process of construction, the less
materials and equipment every construction site will receive. The
advantage lies not in the fact that we have a large number of con-
struction sites where work has started but in an accelerated pace
of completion of projects." He criticized both Novikov (Chairman
of the State Construction Committee, Gosstroy, USSR) and Lomako
(Chairman of Gosplan, USSR) for "deficiencies in their work [and]
the disorder in construction" and called on Ustinov (Chairman of the
Supreme National Economic Council) to occupy himself with the problem.
Construction programing is one of the most intricate and
difficult problems faced by Soviet economic planners. There are more
than 100,000 state construction projects underway in the USSR, and
the supply of construction resources (building materials, manpower,
and equipment) is insufficient to meet the requirements of all projects
simultaneously. Without adequate control. measures the supply of con-
struction resources tends to be allocated. among the many projects in
accord with a Russian proverb: "Each sister gets one earring." Con-
struction projects in the USSR, therefore, generally take considerably
longer to complete than would otherwise be necessary, and the ineffi-
ciency is reflected in higher costs. As the construction effort has
increased rapidly in size and complexity in recent years, the Soviet
system of construction programing has become more and more inadequate
to the task. The cost of such inefficient programing thus has reached
impressive proportions in terms of additional production forfeited.
Khrushchev, in a series of statements, has shown that he has long
understood this problem. He has not yet developed a solution, however,
that satisfies both the requirements of the situation and the tenets
of the Communist system.
With the supply of resources insufficient relative to the
number of construction projects underway, Khrushchev has centered his
attention largely on two kinds of corrective policies: (a) increasing
the supply of construction resources and (b) concentrating the avail-
able supply of resources by reducing the total number of projects on
which construction is continued. The first policy would permit an
increase in the total volume of construction performed, acceleration
in completion of projects, and reduction of the cost of construction
without reduction in the number of projects underway. The second
policy would permit accelerated completions and lower cost of con-
struction without requiring an increase in the supply of construction
resources or in the total volume of construction performed. The two
policies are not mutually exclusive, but Xbrushchev from time to time
has shifted his attention from one to the other.
However, warnings and admonitions from the center to make
construction more efficient do not mean that things actually change
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at the construction site. Khrushchev, for example, complained in April
1963 that Gosstroy and Gosplan had failed to review proposals to elimi-
nate 2,500 projects, with the result that financing of these projects
was undertaken after all. In reviewing the lists of approved projects,
province and district Party leaders cut back only a small number of the
total projects subject to their review. As of April 1963, more than
100 of the most important projects that were to have been completed in
1962 still had not been supplied with all their equipment. Ustinov,
reporting on December 11 to the Plenum of the Central Committee of the
Communist Party, said that too much time is lost between the various
stages of a project: planning the project, the actual construction,
training the production workers who will man the new plant, starting
production, and reaching the planned quantity and quality of output.
He cited a characteristic example: a sulphuric acid workshop commis-
sioned in 1962 at the Sumgait phosphate fertilizer works has still not
reached its planned capacity. The cost of producing 1 ton of sulphuric
acid there is twice that of other enterprises throughout the country.
E. Weakness in Foreign Trade
The weakness in the Soviet foreign exchange position with the
industrial West is another major weakness brought to the surface in
late 1963. This weakness is closely tied to the domestic problems
described in the earlier sections.
Over the past few years, Soviet exports to the industrial West,
which have consisted mainly of basic commodities such as petroleum,
wood and wood products, grain, and ferrous and nonferrous metals and
ores, have been insufficient to pay for Soviet imports of Western
machinery and manufactured goods. The difference has been made up
largely by sales of gold and more recently by medium-term credits.
Gold sales since 1955 probably have been greater than domestic produc-
tion of gold. New medium-term credits from the industrial West
amounted to about $300 million annually in 1962-63. Repayments of
principal plus interest came to $240 million in 1963, leaving net
credits of only $60 million. Total outstanding medium-term credits
at the end of 1963 were about $575 million.
The scheduled import of 10 million tons of grain in 1963-64
at a cost of roughly three-fourths of a billion dollars has greatly
accelerated the drain on Soviet gold reserves. Moreover, Khrushchev's
program for a tremendous increase in chemical production appears to
require the import of a minimum of several hundred million dollars
of additional chemical and related equipment from the industrial West.
The import of this equipment, now that gold reserves have been heavily
drained, depends on securing large additional credits from the West --
perhaps up to $500 million annually from the current level of $300 mil-
lion -- with payments extended over a long period of time. These credits
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could furnish the Soviet leadership with an important respite and room
for maneuver in the face of its growing economic difficulties.
A second chronic weakness in the Soviet foreign trade situation
is the inability of this large industrial country to compete with even
small industrial nations of Western Europe in quality and reliability
of machinery and manufactured products. The internal conditions that
push the Soviet industrial manager toward quantity rather than quality
of output mean that the USSR has difficulties in selling these advanced
types of products in the industrial West. But, even more important
than the quality issue, the Soviet foreign trade monopoly has shown
little understanding of the techniques and problems in marketing such
goods in the West.
F. Weaknesses in the Consumer Sectors
Throughout the Soviet era the concentration on growth in
heavy industry and on increases in military strength has been at the
expense of the consumer. Since Khrushchev has been in power, he has
posed as a champion of the consumer. Yet the consumer continues to
chafe under a regimen that features a starchy and monotonous diet;
poorly styled clothing of inferior quality; very small quantities of
many consumer durables found everywhere in non-Communist industrial
nations; and -- probably the biggest sore spot -- badly crowded, run-
down housing. In 1963, total consumption per capita was less than
one-third that of the US, but this comparison does not fully reflect
the considerable advantages that the US enjoys in the quality, variety,
and ready availability of consumer goods.
1. Shortages of Food
In some aspects of consumption, there have been important
improvements since Stalin died, but promises and expectations have
easily outdistanced performance. Perhaps the most galling aspect
from Khrushchev's point of view of the agricultural failures of 1963
was the open evidence for all the world to see that after more than
40 years of Communism and a decade of his stewardship the USSR could
not feed itself and had to turn to the capitalistic West for 10 mil-
lion tons of grain. As domestic conservation measures, the government
lowered the quality of bread, introduced informal rationing measures,
and cracked down on the widespread practice of feeding bread to live-
stock. (This crackdown illustrates the failure of the Soviet price
system to limit the employment of resources to their most valuable
uses; a rise in the price of bread was called for so that it would
not be profitable to use it to fatten livestock.)
Khrushchev's promises never have been presented more glow-
ingly than when he used to talk of surpassing the US in per capita
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consumption of meat, butter, and milk. Failures in agriculture,
described in a previous section, have punctured this dream. In
addition to these products the provision of fresh fruits and vege-
tables and of quality foods in general is hampered by lack of re-
frigeration, by backwardness in techniques of packaging and storage,
and by the general failure of the system to transmit the wishes of
the final user back to the producer. In these respects the Soviet
system is markedly inferior to a market system, in which the con-
sumer is able to insist on quality and variety at a mutually agreed
on price.
2. Deficiencies in Soft Goods
Humor magazines and circus clowns in the USSR appear to
specialize in jokes about ill-fitting and poorly made clothing. Some
of the reasons for deficiencies in this area were mentioned in the
discussion about light industry above -- namely, the low priority of
light industry in obtaining competent workers and managers, new equip-
ment, and suitable raw materials.
3. Small Quantities of Consumer Durables
The average Soviet consumer, without an automobile and
with little hope of ever having one, is forced to use public trans-
portation facilities that Khrushchev refers to as approaching the
best in the world. He can hope that out of the 70 million families
in the USSR by 1965 his might be one of the fortunate 8 million to
possess a (small) refrigerator if present production plans are adhered
to, and he can even hope that the refrigerator might be one that really
refrigerates: It might not occur to him to miss such luxury items as
freezers, dishwashers, and clothes dryers, which are almost nonexistent
in the USSR. TV sets are readily available in large cities, but the
quality among different models varies from fair to atrocious, and con-
sumers sometimes insist on a repair ticket at the time of purchase in
the expectation that the set will not work until after some initial
repairs.
4. Crowded, Run-Down Housing
The great majority of urban families in the USSR have a
small one-room or two-room apartment and share kitchen and toilet
facilities with other families. A man must rise fairly high in
industry or government to rate a larger private apartment, and in
some instances successful Soviet astronauts are rewarded with a private
apartment. Making arrangements for an apartment is an important part
of getting married, and the lack of sufficient housing space probably
is a main cause of the low urban birth rate. Because of the continuing
large-scale movement of people from the country to the city, the
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construction of urban housing has done little more than to keep pace
with the growing population. The Soviet urban dweller must make do
with only 70 square feet of living space, which is less than he had
in the early 1920's and only slightly more than he had immediately
following World War II. He has little prospect of ever experiencing
the luxury of 300 square feet per person enjoyed currently in the US.
5. Other Weaknesses as Seen by the Consumer
Shortcomings in the quantity, quality, and availability
of food, clothing, durables, and housing are not the whole story of
weaknesses in the consumer sector. The interminable queuing, the
bootlicking necessary in some cases to get scarce items such as
apartment space, the maddening inefficiency of a distribution system
that provides a surplus of Item A in one locality while acute shortages
exist elsewhere, the contrast between relatively large supplies in
Moscow and Leningrad and the lack of goods in the province, the export
of semiluxury items in great demand domestically, the favored treat-
ment of the ruling elite in the allocation of scarce supplies, the
printing of minute editions of the works of a vers libre poet in con-
trast to the printing of many thousands of copies of a political tract
by a Party hack, the continued absence of many of the convenient little
repair and service shops taken as a matter of course in any civilized
country -- all these clumsy and inefficient aspects of consumption
reflect the general low priority of the sector. And on top of all
this the cornucopian promises'.
Money incomes in the USSR show the same general pattern
of inequality of distribution as in the US. However, consumers in
non-Communist countries can allocate their incomes among a wide
variety of different kinds and qualities of goods. The Soviet con-
sumer cannot spend more on Item A and less on Item B just because he
would prefer 100 rubles worth of additional B to 100 rubles worth of A;
to illustrate, most Soviet consumers would like more housing space and
better quality housing, but they cannot increase the real satisfaction
obtained from their ruble income by redirecting their expenditures
toward housing.
Consequently, when it is said that the real income of the
consumer in the USSR or another Communist country is a certain fraction
of the income of a consumer in a non-Communist country, such a comparison
overstates the proportion. Even if quality of goods has been taken fully
into account, other shortcomings and annoyances in the system, together
with the inability to apportion income among various kinds of consump-
tion, mean that the real income of the Communist country has been over-
stated.
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6. Failure to Reduce Hours of Work
In weighing the meaning of a consumer's income, it is neces-
sary to take into account how long and how hard he has to work for that
income. Contrary to plans announced by Khrushchev in 1958, the Soviet
worker will continue on a 6-day, 41-hour workweek through 1965 and will
continue to pay an income tax. The USSR apparently has shelved its
plans to reduce the workweek to 35 hours beginning in 1964 and to elimi-
nate the income tax by October 1965. No mention of these goals is con-
tained in the economic plan for 1964-65 that was announced in December
1963. The Seven Year Plan (1959-65), announced in 1958, provided for a
reduction in the workweek from 46 hours to 41 hours by 1960, to 40 hours
in 1962, and to 35 hours beginning in 1964. The reduction to 41 hours
took place as scheduled, but no further reductions have been made. Also
according to the plan the level of tax-exempt income was to be raised
annually beginning in October 1960 until all income became tax-exempt --
and the income tax thus eliminated -- in October 1965. The program pro-
ceeded on schedule in 1960 and 1961, when tax-exempt income was raised
from 37 rubles to 60 rubles a month. (Average monthly earnings of Soviet
workers was approximately 85 rubles in 1961.) The program was halted
abruptly in September 1962 and has not been resumed.
An increase in the minimum wage and in disability pensions
that originally was scheduled to take effect in 1962 is now planned
for 1965. The Seven Year Plan called for an increase in the minimum
wage from a level of 27 to 35 rubles per month in 1958 to 40 to 45
rubles during 1959-62 and to 50 to 60 rubles during 1963-65. The
plans announced in December 1963, however, call for an increase to
40 to 45 rubles during 1964-65-
The delay in wage hikes and the failure to cancel the in-
come tax probably reflect the planners' efforts to hold the line on
purchasing power because of shortfalls in production of consumer goods.
The shelving of the 35-hour workweek may stem from a reassessment by
the Soviet leadership of the labor supply and the labor requirements
of rapidly expanding service sectors. Since 1961, high labor turnover
in Soviet industry has been symptomatic of serious shortages of skilled
workers -- hardly the proper climate for a drastic reduction in man-
hours in that sector of the economy. In addition, a reduction in the
workweek at schools, hospitals, retail stores, and other service facili-
ties might seriously curtail the very services that Khrushchev has
promised to improve.
G. Decline in Over-All Growth Compared with the US
Great difficulties are encountered in comparing the level of
total output and the rates of growth of total output of countries whose
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price systems, economic institutions, and. economic goals differ widely.
Therefore, the following comparisons of US and Soviet growth must be
regarded as approximations only:
Average Annual Rate of Growth in GNP
1951-55*
1956-59**
1960-63***
1951-63*
US
4.3
2.2
3.5
3 . 4
USSR
6.6
6.9
4.1
5.9
Soviet GNP grew at an average annual rate of nearly 7 percent
in the 1950's, an annual rate about twice that of US GNP. The slowdown
in Soviet industrial and agricultural growth has brought the Soviet rate
down close to the US rate in the last few years; in fact, in 1962 and 1963
the increase in US GNP was substantially greater than in Soviet GNP,
mainly because of the disastrous Soviet experience in agriculture. In
spite of mild cyclical ups and downs in US business activity, the average
rate of growth in the US averages -- and may continue to average -- a
fairly stable 3.5 percent. In the next few years the over-all Soviet
rate of growth will depend largely on (a) the success of efforts to
regenerate the agricultural sector and (b) the degree to which military-
space programs are. held in check or, conversely, the degree to which
especially scarce high-quality resources are devoted to investment.
If Soviet industry continues on its new lower plateau of rates of
growth and if agriculture manages to keel) up with the increase in popu-
lation, over-all growth of about 5 percent annually is likely. In any
event, the gap between US and Soviet rates of growth has narrowed and
will remain narrowed or even disappear over the next few years.
Soviet GNP in 1950 was roughly 3) percent of US GNP and in 1963
had grown to roughly 47 percent of US GNP. Because the difference in
rates of growth has narrowed, little change in this proportion is ex-
pected over the next few years.
Base year 1950.
Base year 1955.
Base year 1959?
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II. Current Economic Weaknesses in Eastern Europe*
Like the USSR the countries of Eastern Europe have set up an
economic system operated primarily through commands from Party and
state authorities and have followed economic policies stressing the
rapid development of heavy industry. Consequently, these countries
have encountered some of the same basic economic weaknesses as the
USSR -- a high cost of industrial development; glaring inefficiency
in collectivized agriculture; drabness and lack of variety in con-
sumption; sluggishness in technology, except in a few areas; and a
lack of flexibility in adapting policies and production to changes
in the economic situation. In some respects these weaknesses have
been felt more severely in Eastern Europe than in the USSR. Soviet-
type policies and institutions often have proved poorly suited to
smaller countries, which have very different histories, cultures,
and economic structures and are much more dependent on foreign trade.
In recent years the more industrialized countries of Eastern Europe,
especially Czechoslovakia and East Germany, have experienced severe
economic difficulties and have found the established policies and
system to be inadequate for solution of these difficulties.
B. Over-All Economic Growth
By concentrating on investment rather than on consumption,
the countries of Eastern Europe have achieved high rates of economic
growth. However, these rates, if they are calculated in a comparable
manner, are no higher than in continental Western Europe. In recent
years, moreover, economic growth has slowed considerably in the more
industrialized countries, as is seen in the following tabulation of
official data** for national income:
Percentage Increase Above the Previous Year
1960
1961
1962
1963
East Germany
4.5
3.9
1.2
3.0
Czechoslovakia
8.2
6.8
1.5
Negl.
Poland
4.5
8.1
1.5
4.7
Hungary
10.1
5.8
5.0
N.A.
* In this report, "Eastern Europe" or "countries of Eastern Europe"
includes Bulgaria, Czechoslovakia, East Germany, Hungary, Poland,
and Rumania.
** Official data for the countries of Eastern Europe generally are
employed in this section of the report, but, as in the case of other
Communist countries, these data either grossly or subtly exaggerate
economic achievements.
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The decline is due to stagnation or reduction in agricultural
production and a drop in the rate of industrial production. It has
been accompanied by a lack of growth in consumption and by slower
growth or even a reduction in the level of investment.
As a result of its slower growth, Eastern Europe has lost
ground to continental Western Europe in each of the past 4 years,
1960-63.
C. Agriculture
1. Stagnation in Production
Agriculture is the weakest part of the Eastern European
economies. Agricultural production has stagnated since 1959 or 1960
in almost all of Eastern Europe. Production of key crops, such as
grains and potatoes, has tended to decline in several countries, with
unfavorable effects on the raising of livestock. The stagnation of
agricultural production is apparent even from official statistics,
as shown below, and even these unfavorable statistics probably are
biased upward:
Annual Percentage Changes
Gross Agricultural Production
Grain Production
1959
1960
1961
1962
1959
1960
1961
1962
Bulgaria
18
3
-3
4
23
-1
-10
4
Czechoslovakia
-1
5
0
-8
15
3
.1
0
East Germany
3
6
-1
1
-5
6
-26
21
Hungary
6
-5
1
1
29
-6
-11
10
Poland
-1
5
10
-8
4
1
8
-13
Rumania
21
2
8
-9
46
-8
8
-9
Official statistics on net production (total agricultural
production less the cost of such things as feed, seed, fertilizer,
insecticides, spare parts, and fuel) show an even more unfavorable
picture. In Czechoslovakia, net production in 1962 was 17 percent
below the level of 1961, as shown below:
Annual Percentage Changes
in Net Agricultural Production
1959
1960
1961
1962
East Germany
1
2
-1
-5
Czechoslovakia
-12
4
-2
-17
Hungary
4
-11
-4
2
Poland
-4
4
13
-17
Rumania
34
0
4
-6
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Moreover, it is not true as commonly believed that in-
vestment in agriculture has been negligible. On the contrary, these
poor results in recent years have been achieved in;;spite of fairly high
investments in agriculture. As is shown below, the Eastern European
countries have used much larger shares of their total capital invest-
ments for agriculture than the selected countries of Western Europe,
if countries at similar stages of economic development are compared:
Percentage Share of Agriculture in Total Capital Investment, 1958-61
West Germany
6
East Germany
12
France
7
Czechoslovakia
17
Austria
13,
Hungary
17
Italy
12
Poland
12
Greece
13
Rumania
20
Bulgaria
31
2. Inefficiencies in Management
Maladministration in general and collectivization in par-
ticular have been the main causes of the poor performance in agri-
culture. Collectivization was pushed in the late 19,50's in Czecho-
slovakia, East Germany, Hungary, and Rumania and had been practically
completed by 1961. Its effects were to reduce the care given to
cultivation of crops and the raising of livestock, to reduce the
amount of family labor available, to cause a poor distribution of
labor on collective farms (with too little time being spent on the
collective and too much on the small private plots), and to raise
the need for mechanized equipment and livestock shelters without
correspondingly raising production possibilities. These adverse
effects of collectivization in turn are the result of the strong
preference of most peasants for private ownership, of premature for-
mation of large farms, and of a system of payment for collective work
that discourages initiative and care.
Inefficiency has been caused not only by collectivization
but also by the direct interference of ignorant Party officials in
agricultural matters. For example, Party officials in East Germany
have forced collective farms to sow an uneconomically large acreage
to corn because promoting the cultivation of corn was current Party
policy.
Poland, the only country where agriculture remains pre-
dominantly private, also has had difficulties in agriculture --
production dropped sharply in 1962 following an excellent year in
1961 and did not incrase much in 1963. On the whole, however,
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agricultural performance has been better in Poland than in the coun-
tries that have collectivized. In particular the investment require-
ments have been proportionately smaller.
3. Results of Agricultural Failures
The weakness of agriculture has resulted in a stagnation
or decline in supplies of quality foods, such as meat and dairy prod-
ucts; in increased imports of grains; in decreased exports of foods;
and in some countries in a shift in investments to agriculture at the
expense of pressing needs elsewhere. The resulting increase in the
strain on the balance of foreign payments, especially with the West,
has been severe in some countries of Eastern Europe notably,Czecho-
slovakia, East Germany, and Poland, and has led to cuts in imports of
goods supporting industrial growth. In 1.962-63, East Germany, for
example, reduced its imports from West Germany of industrial machinery
in order to increase imports of food, although West German machinery
plays a key part in East German investment plans.
D. Industry
1. Decline in Rates of Growth
The countries of Eastern Europe have been able to-achieve
rates of industrial growth comparable to those in countries of West-
ern Europe such as West Germany, France, Italy, Austria, and Greece
that also suffered heavy damage during World War II as a result of
defeat or occupation. This growth in Eastern Europe, however, has
been more costly than in Western Europe. It has been achieved with
larger increased in the number of workers and by devoting larger
shares of the national income to industrial investments. Since
around 1960, moreover, growth has slowed considerably, as is shown
in the following tabulation of official data:
Annual Percentage Increases
in Gross Industrial Production
1963
1959
1960
1961
1962
(Officially Expected)
Bulgaria
20
13
12
11
10
Czechoslovakia
11
12
9
6
Negl.
East Germany
11
8
6
6
4
Hungary
9
12
10
8
7
Poland
9
11
10
8
5
Rumania
11
17
16
15
13
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To a large extent the causes of the decline are fundamental.
The more industrialized countries, and especially Czechoslovakia and
East Germany, have run out of easy ways of increasing production --
such as shifting labor from agriculture to industry, increasing rapidly
the employment of women, and putting spare productive capacity to work.
Consequently, maintenance of high rates of growth now depends to a
greater extent on increased investment and on technological innovations.
However, the rapidly growing needs for investments in other sectors,
especially agriculture and the growing replacement needs within in-
dustry, limit the possibilities for increasing new industrial invest-
ments. The Eastern European regimes have placed great hopes on
development of new technology, but they have had difficulty obtaining
and mastering this technology. For example, Czechoslovakia produced
and installed several generators of 100-megawatt capacity for electric
power stations but had to rebuild several of these partly and, after
many months, still because of technical flaws, is unable to use them
efficiently.
2. Obsolescence and Inefficiency of Equipment
In spite of very large investments in industry, the in-
dustrial plant of Eastern Europe is not particularly modern. This
condition is partly the result of having installed Soviet equipment
that was below world standards and frequently also below the best
Soviet standards. In the industrialized countries a large part of
the equipment in basic industries such as steel and power is of post-
war vintage because investments were concentrated in these industries.
Equipment in a large part of the machine building industry and in
practically all of light industries, such as textiles and leather proc-
essing, however, is obsolete and frequently also is in a poor state of
repair. Well above one-third of the machine tools in use in East
Germany, for example, date from before World War II, and more than
two-thirds of the machines used in the Polish wool textiles industry
were built before 1900.
Although the plant in basic industries is relatively
modern in most countries of Eastern Europe, some of these industries,
as well as many industries producing finished goods, nevertheless
are highly inefficient. In many instances -- for example, in the case
of steel in Hungary -- it probably would have been cheaper to import
materials than to produce them, but domestic production was pushed
partly as a matter of prestige and partly because the USSR could not
supply the imports and because the countries in Eastern Europe could
not pay for such imports from the West. High costs also were caused
by dependence on Soviet ores, which had to be transported long dis-
tances, and by poor planning of the location and organization of new
plants, such as the large Hungarian iron and steel combine at
Dunaujvaros. Finally, it has taken many years for some of the new
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plants to produce at their scheduled efficiency because of delays
in delivery of and flaws in domestic and foreign equipment and be-
cause of shortages of skilled engineers, managers, and workers.
Another cause of high costs was the construction of plants for the
specific purpose of supplying the USSR without an adequate economic
basis. Uranium mining in East Germany is a well-known illustration
of an activity serving Soviet needs but highly unprofitable to East
Germany. The East German shipbuilding industry, which sells almost
exclusively to the Soviet Union, also is unprofitable.
3. Unsatisfactory Quality of Goods
The dominant role of the USSR in the foreign trade of
Eastern Europe not only has held back the growth of technology and
the development of an efficient pattern of investment but also has
led to production of manufactured goods of a type and quality that
are difficult to sell on Western markets? Even the most advanced
countries, such as East Germany and Czechoslovakia, have great
difficulty selling significant amounts of machinery to Western Europe.
The quality and variety of consumer goods available for exports re-
flects the lack of attention to consumer industries and the lack of
knowledge of Western markets. The noncompetitiveness of Eastern
European exports of manufactures in the West has become an espe-
cially serious problem for East Germany and Czechoslovakia and an
important problem for. Hungary and Poland because of their increased
needs for imports of agricultural products, key industrial materials,
and specialized machinery.
A general weakness in Eastern Europe is the inability
of industry to produce the assortment of goods most suited to the
needs of consumers. Because the system of economic management and
incentives is designed to achieve maximum increases in the sheer
quantity of production, customers often have had to accept products
of inferior quality or of inappropriate characteristics. Recently,
however, requirements have become more complex as a result of
technical advance, and consumers can afford to be more demanding
as a result of improvement in the over-all balance between supply
and demand in the market. Consequently, as in the USSR, large
inventories of goods that could not be sold have accumulated. The
regimes have been concerned increasingly with this waste of chroni-
cally scarce resources and have exhorted. managers and workers to
improve design, assortment, and quality of consumer goods.
E. Transportation
Transportation is one of the least advanced branches of eco-
nomic activity in Eastern Europe. In order to be able to concentrate
investments in industry, the Eastern European regimes have tried
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to minimize investments in transportation by using existing facilities
to the utmost. This policy was successful for a number of years. In
1961-63, however, the strain on the transportation system, especially
on the railroads, became severe. In Czechoslovakia in particular the
railroads were unable to carry the goods available, and, consequently,
transportation became a bottleneck. For example, in August 1963, two
large steel plants in the Ostrava area of Czechoslovakia (the Trinec
Iron Works and the Klement Gottwald Works in Vitkovice) could not meet
planned production goals, because of shortages of raw materials caused
by a shortage of freight cars. Most of the other countries also ex-
perienced serious shortages of freight cars and other transportation
facilities during the unusually cold winter of 1962-63. These problems
have dramatized the lack of flexibility in the transportation system
and the progressive deterioration in the condition of equipment as a
result of inadequate maintenance. In intra-urban transportation the
conditions are even worse.
F. Construction
Construction in the countries of Eastern Europe has suffered
from low labor productivity, backward technology, and frequent short-
ages of materials. These problems have been caused partly by the
fact that the demands placed on the construction industry have been
too great and partly by poor administration of the industry. As a
result of these weaknesses and of unrealistic planning of investments,
construction time of projects and construction costs have almost al-
ways been much greater than planned. In turn, lags in construction
schedules have led to an increasing backlog of unfinished buildings
and structures. In East Germany, for example, these lags have greatly
delayed the completion of large new industrial plants, including the
oil refineries at Schwedt and Luetzkendorf, the second major chemical
works at Leuna, and the synthetic fiber plant at Guben. In the past
2 or 3 years, the backlog has grown considerably in several countries,
and the regimes have greatly curtailed the number of new starts in the
hope of reducing it.
G. Living Conditions
Personal consumption has increased much more slowly than
national income in Eastern Europe. In East Germany and the western
part of Czechoslovakia, the standard of living, which before World
War II ranked with the highest in Europe, has increased very little
from the prewar level and is now far behind that of the advanced
countries of Western Europe. Improvements have been greater in the
less developed countries of Eastern Europe, but they have been un-
evenly distributed. Established urban workers, as well as the pre-
war middle class, often have suffered a decline in their standard of
living. Ex-farmers who found jobs in the cities are better off
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materially but face a severe shortage of housing and many difficulties
of adjustment. Farmers also are better fed and clothed but have to
cope with frequent interference in their affairs by Party and govern-
ment officials. In the past 2 years, there has been practically no
increase in personal consumption in most of the countries of Eastern
Europe. Moreover, a series of annpyances and frustrations (described
below) attributable to the Communist way of doing things has meant
that the consumer now gets less satisfaction out of the same income
compared with the pre-Communist period.
1. Inadequacies in the Supply of Consumer Goods
The people of Eastern Europe generally have enough food
to eat and enough clothes to keep warm, but the quality and variety
of the consumer goods available are poor, and a general drabness is
evident. Supplies of such goods as good-.quality clothes, imported
foods (like coffee and citrus fruit), consumer durables, and, in some
countries, basic items such as meat and dairy products are limited.
The drabness of life also is due, however, to the lack of attention
to consumer satisfaction in production and trade. Producers generally
do not care about style, color, or variety, because they get their
bonuses for the quantities produced. Retailers have little or no
authority to influence assortment or prices. The large accumulation
of inventories of cheap textiles in Poland during recent years is a
direct result of poor quality and assortment combined with inflexible
prices. Moreover, inefficiency in distribution is frequently respon-
sible for gluts of perishable products like cherries in some rural
areas and their complete absence in large cities.
2. Inadequacies in the Supply of Housing and Other Consumer
Supplies of services are even worse than supplies of goods.
Housing is very cheap but also very hard to get. For most of the
postwar period, construction of new housing in the cities has not kept
pace with the growth of the urban population, causing overcrowding and
exacerbating social frictions. Political favoritism, for example, is
sometimes an important factor in the allocation of housing.
Very often the housing repair services taken for granted
in Western Europe -- plumbing, roofing, glazing, carpentry, and the
like -- are completely lacking or are available only after long de-
lay. The suppression of private handicraft and service trades during
the early 1950's in nearly all the countries of Eastern Europe left a
large void in the supply of these and other consumer services. It is
very difficult to have goods repaired, all the more so because the
factories often cannot supply the needed. spare parts.
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3. Other Deficiencies in Living Conditions
In addition to having little choice of goods to buy, the
Eastern European housewife also may have to spend hours queuing up in
front of stores. Shortages of quality foods, especially meat and
dairy products, have been common in recent years. In Czechoslovakia
and East Germany they have been constant since 1961.
Another negative factor in the Eastern European standard
of living is the necessity for several members of most families to
find salaried work and of the principal wage earner to do odd jobs
to supplement his wage to make ends meet.
H. Economic Planning and Management
Many of the problems that have developed in the various parts
of the economy have their roots in the system of economic planning
and management. Modeled after that of the USSR, this system in the
countries of Eastern Europe has shown itself to be too inflexible to
cope successfully with the rapidly changing problems of a modern
economy. As long as it was possible to tap unused national resources,
sizable progress could be made. But now that progress can continue to
be rapid in countries such as East Germany and Czechoslovakia only
through increased efficiency, the shortcomings of the system have be-
come apparent. Serious mistakes have been made in economic planning
because of inadequate economic knowledge and criteria or a doctrinaire
approach. Because the system does not stimulate imagination leading
to the correction of such mistakes, erroneous policies continue to be
pushed with great damage to the economy. Another weakness is in the
implementation of economic plans and policies. The formal lines of
economic management tend to be bureaucratic and conservative, and
attempts to energize the system through Party cadres with little tech-
nical competence often do more harm than good. Perhaps the most seri-
ous weakness is in the system of incentives for producers, which is
built around fulfillment of plan indexes rather than designed to
satisfy the needs of customers and of society. In such matters as the
determination of the precise technology most appropriate for a prod-
uct, and the final assortment of items to be produced, the planners
and administrators have little knowledge, and the producers have an
inadequate basis for decision. It is in making fine distinctions
that the system usually is most inefficient, but the ability to make
such distinctions is becoming increasingly important as the demands
on the economies gradually become more complex.
I. Intra-Bloc Economic Cooperation
Intra-Bloc relations under Stalin consisted of rather crude
exploitation of Eastern Europe by the USSR, although little reliable
data are available as to its exact magnitude. It may be assumed
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that this crude exploitation is a matter of the past, but memories
of that period still rankle and bedevil :intra-Bloc relations. More-
over, the weakness of Soviet-type policies and institutions has been
even more apparent in intra-Bloc economic relations than in the do-
mestic problems of the individual countries of Eastern Europe. There
has been very little systematic progress toward the economic inte-
gration of the Soviet Bloc beyond the increased interdependence that
was the inevitable result of the division of Europe into two camps
and systems. Trade continues as the mos-: prominent intra-Bloc tie.
Bloc leaders admit that there has been very little conscious special-
ization of production and that the coordination of economic plans
through the Council for Mutual Economic Assistance (CEMA) still occurs
after national plans have been formulated and entails few changes in
these plans. In most instances, CEMA merely ratifies the specializa-
tion of production that already exists. Moreover, capital movements
within the Bloc are small, and movements of labor across national
boundaries are practically inexistent. Recent Soviet attemps to move
toward supranational planning were unsuccessful because of nationalist
sentiment in Eastern Europe, and, in spite of some progress in tech-
nical cooperation and in formation of a freight car pool and a CEMA
bank, intra-Bloc cooperation still takes the form mainly of bilateral
agreements.
The poor performance of CEMA in promoting cooperation among
its members, by comparison with the Common Market and even with
Western Europe as a whole, is due partly to the greater differences
in the level of economic development, partly to stronger economic
nationalism, and partly to some inherent characteristics of the
Bloc economic system. In contrast to the countries of Western Europe,
the countries of Eastern Europe vary greatly in level of economic de-
velopment, from highly industrialized East Germany and Czechoslovakia
to still partly underdeveloped Bulgaria and Rumania. Consequently, the
national interests of these countries are different, the most advanced
being interested in specialization as a means of increasing efficiency
in existing industries, and the least advanced being more concerned
with building new industries. Because of nationalistic interests,
they still keep labor and capital at home, and foreign trade still
seems to be viewed as a necessary evil. The defects of the Bloc eco-
nomic system, especially its lack of flexibility, are compounded in
foreign trade. In the absence of a central economic authority for the
Bloc, the lack of flexibility of the system greatly impedes multila-
teral clearing, and there is no reliable way to enforce implementation
of agreements and contracts.
J. Conclusions
The countries of Eastern Europe, like the USSR, have seen
themselves in an economic "race" with the advanced Western countries.
Over the long run they have not achieved a faster growth of production
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than the countries of continental Western Europe. The increase in
production has been more costly than in Western Europe, and, con-
sequently, consu.unption. has increased less. The unmeasurable elements
in consumer welfare have been even less favorable to the countries of
Eastern Europe than the measurable elements, even if no account is
taken of the lack of political freedom. The Soviet Bloc has shown
less ability than Western Europe to move toward economic integration.
In recent years the rate of economic growth has declined substantially
in the more developed countries of Eastern Europe; economic problems
have multiplied; and the regimes, at least temporarily, appear to have
given up the "race." The inadequacy of the Soviet-type economic system
to cope with modern economic problems has been an important cause of
the poor performance of the developed countries of Eastern Europe in
recent years.
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A. Background
The fundamental fact faced by economic policymakers in Communist
China is the existence of a huge and growing population in combination
with a relatively small amount of arable land, a low level of technology,
and a small amount of capital plant. After seizing power in October 19+9
the Communist leaders began a determined drive to industrialize China by
putting an increasing share of the nation's income into investment and
by importing modern industrial plants and technicians from the Soviet
Union and Eastern Europe. The First Five Year Plan (1953-57) followed
the Soviet model of development and resulted in a growth of industrial
output that averaged 15 percent annually. Because the regime brought
peace and order to war-torn China, agricultural output kept up with the
growth in population through 1957, although the margin between production
of food and the minimum needs of the population remained perilously thin.
Most important of all, China had made a moderate but hopeful start toward
sustained economic development.
In 1958 the regime became impatient with the tempo of its indus-
trial program and launched the "leap forward," a Chinese-style economic
program designed to take advantage of China's huge underemployed rural
population. Mao Tse-tung said that China was to l"walk on two legs":
at the same time that the modern industrial program was to be speeded up,
the peasants were to be mobilized into huge supercollectives -- the so-
called "communes" -- and the economy was to be carried forward by sheer
weight of numbers. The leadership, however, permitted its economic pol-
icies'to become divorced from reality. Overnight, untrained cadres were
placed in charge of construction of a huge number of irrigation and flood
control projects, and political fanatics rather than competent techni-
cians took over the planning and administration of industry. Abnormal
numbers of machines broke down, many irrigation projects were ineffective,
products of little economic use piled up in warehouses, and people became
exhausted and apathetic from overwork. By mid-1960 a pullback from the
"leap forward" was overdue. What might have been an organized retreat
turned into a rout, however, when the USSR unexpectedly withdrew its
technicians from China and the regime encountered the worst agricultural
crisis in its history.
The failure of the "leap forward" is now abundantly clear, and
Peiping's hopes of achieving world power status in this decade have
vanished. The economy is still painfully underdeveloped, and much of
the capital plant built up at great cost is standing idle or has deteri-
orated because of abuse and poor maintenance. The regime boasts about
economic self-sufficiency when it should be seeking gains from inter-
national division of labor. Since 1959, output of grain in China has
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been no higher than it was in 1957 before the "leap forward," although
the population has increased from 1957 to 1963 by 75 million. Industrial
production is now about half the level that it achieved in the peak
period of 1959-60. After 4 years of hardship not only do the Chinese
people remain more poorly clothed and fed than they were during the
1950's, but there is no prospect for significant improvement within the
next year or two. The margin that had been built up by 1957 between
total production and minimum consumption needs has disappeared because
of the "leap forward" and the withdrawal of Soviet support. And the
inexorable growth of population means that the margin is getting harder
and harder to reestablish.
B. Difficulties in Agriculture
1. Deficits in the Food Supply
Agricultural output in Communist China in 1957 was suffi-
cient to provide adequate food for the farm population and the urban
labor force and to permit the regime to export small amounts of grain*
and other agricultural products in order to help finance imports of
machinery. Although an exceptionally good harvest was obtained in 1958
(about 200 million tons of grain), output of grain fell sharply in 1959
(to about 165 million tons) and dropped again in 1960 (to about 160
million tons). During these years, output of cotton also declined, and
production of subsidiary foods such as vegetables and fruit was consid-
erably below normal. The grain harvest improved slightly in 1961 and
increased to about 180 million tons in 1962. Output of grain in 1963
was no higher than in 1962 and may have been slightly less, although
supplies of vegetables and fruit were moderately greater. Production
of cotton and other industrial crops since 1960 has been below the
levels achieved in 1957.
The Chinese consumer today is eating slightly more grain
and considerably more vegetables than he was in the worst year of food
shortage, 1961, but his total caloric intake remains substantially
below the level to which he was accustomed during the First Five Year
Plan (1953-57). After the poor harvests of 1959 and 1960, Communist
China's grain deficits were 22 million and 30 million tons on the basis
of the per capita level of 1957, and during those 2 bad years China
probably used all of its grain reserves that had been accumulated in
1958 and earlier. Although output of grain increased in 1961 and 1962,
the intervening growth in population kept per capita output of grain
well below the level of 1957. The poor harvest of 1963 will result in
a grain deficit of nearly 20 million tons compared with the level of
per capita production in 1957.
2. Causes of Agricultural Failures
The major causes of agricultural failures in Communist China
during the past few years have been adverse weather and the mismanagement
* Including tubers on a grain equivalent basis.
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and relative neglect of agriculture. Peiping has claimed that unfavor-
able weather, including prolonged droughts in some areas and floods and
excess moisture in other areas, was responsible for the sharp drop in
the grain harvest during 1959 and 1960. Although weather conditions
improved slightly in 1961 and again in 1962, the year 1963 proved on
balance to be unfavorable.
Many of the agricultural difficulties of the last few years
in Communist China have resulted from the policies of the "leap forward"
and the communes -- such as the disruptive effects of commune organiza-
tion, the vacillating policy with respect to private plots and private
livestock holdings, and agricultural innovations that often ignored
practical experience and that could not be assimilated quickly under
varying local conditions. Examples of the latter are (a) plowing the
land to a depth of 2 feet, (b) indiscriminately dredging mud and refuse
from old ponds for use as fertilizer, and (c) planting seeds abnormally
close together without providing sufficient water and fertilizer. Fi-
nally, the fundamental long-term economic policy of giving priority to
industry necessarily has resulted in relative neglect of agriculture.
3. Difficulty of Righting Agricultural Sector
The most important agricultural task, and perhaps the
greatest economic need, of Communist China is to modernize agriculture.
China's arable land, only 11 percent of the total area, is worked re-
lentlessly, but cultivation methods are primitive, and most of the farm
work is done by human labor. The leadership in Peiping now believes
that increases in agricultural output large enough to raise consumption
levels, build up stocks, and restore exports cannot be expected for some
time to come. The economic spokesmen for the regime acknowledge that
agricultural growth will require increased capital investment in the
form of technical improvements, expanded water conservation and irriga-
tion projects, selected mechanization, and greatly increased use of
chemical fertilizer. Some technical advances, such as improvement of
soil and seed, may be relatively inexpensive but will require complicated
organization and years of development. Construction of chemical ferti-
lizer plants, both from domestic resources and from imports, will be
expensive and time-consuming. Contrary to the apparent hopes of the
regime in 1959-60, it now seems clear that more than a bumper harvest
or two will be required to get the surplus from agriculture that will
again permit Peiping to push ahead in industry. It is more probable
that only at the end of a decade of high priority to agriculture and
prudent administrative policy could the agricultural sector be in a
relatively favorable position to contribute to resumption of sustained
industrial growth.
The best hope for short-run improvements in agriculture is
the return of average weather -- a factor beyond the regime's control --
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and a moderate approach to institutional arrangements in agriculture.
Communist China's attitude toward private farming is summed up in its
concept of "small freedoms within the large collective," which is
essentially a flexible strategy subject to tactical change as the need
arises. During the "leap forward," private farming was abandoned
altogether. In the recent years of food shortage, however, the regime
encouraged private plots and free markets in order to provide incen-
tives to farmers to increase the supplies of vegetables, fruit, meat,
and eggs. If the outlook for agriculture in a given year improves
substantially, the "small freedoms" almost certainly will be circum-
scribed. The ideologues in Peiping are compelled in both propaganda
and practice to uphold the collective farm and to denigrate the private
farm, but in doing so they rob the peasant of the incentives that will
encourage him to give his best to the lwad. The morale of both peas-
ants and cadres in many areas of China has been shaken badly in recent
years by the failure of the communes, by the inability of the regime to
develop a successful model for collective farming, and by the off-again-
on-again attitude toward private farming.
Although Communist China was a net exporter of grain until
1960, the agricultural reverses of the past few years have made it
necessary for Peiping to import about 5 million tons of grain annually
during 1961-63, mostly from Canada and Australia. Contracts have been
signed for continued imports of grain in 1964, and it seems likely that
substantial imports will be required for the next several years. China
has spent about $350 million annually in scarce foreign exchange to
finance imports of grain; as a result, Peiping has had to postpone orders
for badly needed machinery, industrial equipment, and raw materials.
4+. Pressure of Population
Official propaganda from Peiping has admitted recently for
the first time that the economic welfare of the state is threatened by
unrestrained growth of population. The total population of Communist
China at the end of 1963 was about 720 million, and the rate of growth
is now about 2 percent annually. Although new methods of birth control --
including abortion and sterilization -- are now being discussed, China's
shortage of qualified medical specialists and adequate medical facili-
ties precludes the widespread use of these techniques. The contraceptive
methods advocated by the government and the campaign for late marriages
have found some acceptance in urban areas, but the rural population has
shown little interest in such methods. The regime is experimenting on
a small scale with economic pressures aimed at reducing births, such as
cutting out various benefits for children beyond the third child.
The peasants, comprising 80 percent of the population,
remain the key element in any birth control campaign that seeks to re-
duce substantially the national rate of growth of the Chinese population.
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It is hard to imagine that institutions governing family life and re-
lations between the sexes could be smashed so thoroughly as to permit
effective birth control within a generation. However, the Communist
leadership can be utterly ruthless, and a "leap forward" in compulsory
sterilization is not wholly out of the question.
C. Difficulties in Industry
1. Severe Decline in Output
Total industrial production in Communist China today is
little more than half the peak levels of production attained in late
1959 and early 1960 during the ill-fated "leap forward," when steel
was made in many thousands of little backyard furnaces. Current output
is only slightly higher than in 1957. Capacity, however, is much
larger now in nearly all industries than in 1957, even though much of
it is idle or in miserable operating condition. Industrial output
dropped sharply in late 1960 as the result of the withdrawal of Soviet
technical aid and the accumulated problems of mismanagement during the
"leap forward." The decline in production continued into 1961, in-
dustry failed to achieve an upturn during 1962, and only a moderate
recovery in industrial output occurred in 1963.
The slight improvements that were obtained in industrial
production in Communist China in 1963 were overshadowed by the major
difficulties that still confront Chinese industry. The most difficult
problems in light industry are related to agricultural production;
two-thirds of the output in this sector is dependent on agricultural
raw materials, and no substantial increases can occur until agriculture
recovers. For example, textile mills are operating well below capacity
because the cotton harvest for several years has been below the level
of 1957. Most of the heavy industries have the capability to increase
output, but the need for many products of heavy industry such as cement
and crude steel is relatively low because the regime's present economic
priorities do not require large amounts of new construction and because
insufficient finishing capacity exists in the steel industry.
The deterioration in Sino-Soviet economic relations has
affected production in technologically advanced industries, has con-
tributed to failures to meet goals in construction, and has been a
prime factor in the delays and revisions in industrial planning for
Communist China. The deterioration in Sino-Soviet economic relations
was highlighted by the abrupt withdrawal, late in July and August 1960,
of all the 1,390 Soviet technical experts who were in China assisting
in the building and operation of large new industrial plants and work-
ing on other technical assignments. These modern industrial plants --
steel mills, machine building factories, aircraft plants, oil refineries --
represented the cutting edge of China's whole economic development program.
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About one-half of the scheduled Soviet aid projects had been completed
by mid-1960, when the industrial technicians were pulled out, but many
projects were in varying stages of construction. The suddenness of the
Soviet withdrawal -- the Chinese claim the Soviet personnel simply
dropped their tools and went back home with the blueprints -- caused a
suspension of activity on a number of large-scale projects and brought
production to a halt in some new plants Estill being operated under Soviet
supervision. The Chinese leadership apparently has been unable to settle
on remedies for this setback in construction activity, and decisions as
to the scope and magnitude of industrial expansion in the future have
been delayed for several years.
2. Dim Prospects for Resumption of Industrial Growth
Communist China does riot have the capability to restore the
rapid industrial growth rates of the First Five Year Plan (1953-57) --
an average annual rate of about 15 percent -- unless substantial outside
help is received for both technology and capital equipment. China has
mastered the basic technology of many basic industries, such as aluminum,
steel, and electric power, but needs to import modern capital equipment
in order to develop them rapidly. Other industries have substantial
production capacity but continue to require technical assistance from
abroad in order to keep up with advances in product designs and new de-
vices. There are a few highly complex industries in China, such as
shipbuilding and aircraft, that depend for their rapid development on
both imported knowledge and equipment, including spare parts.
During the "leap forward" in Communist China, some raw ma-
terial industries, such as coal and pig iron, developed at a phenomenal
pace if quantity alone is counted, but these industries turned out prod-
ucts that were notoriously high in cost and low in quality. Many of the
small and medium-size facilities that sprang up during 1958-60 have now
been closed, and China is short of high-quality, low-cost industrial raw
materials such as timber, coal, and iron ore. Large additional invest-
ment in extracting and cleaning facilities will be required to assure a
steady and uniform supply of these essential industrial raw materials.
Current attempts by Peiping to expand output in those in-
dustries receiving priority are encountering technological problems of
varying degrees. The chemical and petroleum industries, for example,
are having difficulties in obtaining and. operating complex equipment.
Within a few years the Chinese may be capable of building small plants
to produce chemical fertilizer, but in the meantime the most that they
can hope for is completion of the plants already started, which will
produce only a fraction of the fertilizer that China's farms could use-
fully abserb. Although production of crude oil and most petroleum prod-
ucts probably will meet minimum Chinese needs for the next few years,
modern refinery equipment will be required soon and probably will have
to be imported.
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In the basic industries lower on the priority list, where
some expansion may be required within a few years, technological prob-
lems also present a barrier to rapid growth. The metallurgical in-
dustries will have trouble in obtaining the precision rolling and finish-
ing facilities that they require unless large quantities of equipment
are obtained through imports. The electrical equipment industry will
not be able to produce the large generating units that will be needed
by the electric power industry if output greatly expands.
The major problem in the research and development field as
it applies to industry concerns the acquisition of both personnel and
equipment. At present the prospects for undertaking a research program
that will cover the wide range of Chinese industrial problems are poor.
Although the laboratories at higher levels, such as the Academy of
Sciences, are well equipped, laboratories at lower levels are short of
quality equipment. Communist China is still faced with the perennial
problem of a shortage of skilled personnel such as engineers, scien-
tists, technicians, and managers. In addition, the education system
up to a short time ago was still suffering a hangover from "leap for-
ward" education methods, through which engineers and physicists were
created in a semester.
The decline in industrial production and the slowdown in
technological developments in Communist China have had adverse effects
on the technically advanced parts of the Chinese military establish-
ment. A large part of weapons systems and the industrial plants to
produce weapons that were imported from the USSR before 1960 are dete-
riorated and obsolete. Communist China probably does not now have the
technological capabilities to design and produce new weapons. Chinese
spokesmen have finally admitted that the effort to produce atomic weap-
ons may not bear fruit for at least several years. In 1963 these spokes-
men bitterly denounced the perfidy of the Soviet leadership that had
started to help the Chinese in nuclear research in 1957 but that had
abruptly ended its support in this field in 1959.
The chastening experiences of Communist China in industrial
development underscore a major weakness -- namely, the scarcity of
technical resources in relation to China's military and economic am-
bitions. This weakness could have been largely overcome with time if
Soviet aid had continued, but the sudden withdrawal of Soviet support
not only killed projects scheduled for the future but also undid the
benefits from many of the projects already completed. For instance,
there were dams with no generating equipment, weapons factories with no
spare parts or trouble-shooters, and output with no market.
D. Foreign Trade Difficulties
The economic and political difficulties of Communist China of
the past few years have had a profound effect on its foreign economic
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relations. The reduction in agricultura:L products available for export,
the deterioration in Sino-Soviet relations, and the policy of retrench-
ment in industry have combined to lower the total volume of trade and
to alter sharply its direction and composition. Total imports and ex-
ports in 1962 amounted to only $2.5 billion compared with $4.2 billion
in 1959. The regime is now concentrating on imports of foodstuffs and
raw materials that account for about 80 percent of total imports. Im-
ports of machinery and other needed investment goods have plummeted from
one-half of total imports in 1959 to less than one-sixth in 1962. Trade
with the USSR and the countries of Eastern Europe represented about 45
percent of total trade in 1962 compared with nearly 70 percent in 1959.
Communist China's reserves of go:Ld and foreign exchange are at
a minimum necessary to conduct normal trade and other economic relations
abroad. A large part of the convertible foreign currency that China
currently earns through exports must be used to pay for the imports of
grain. The prospects for increasing exports during the next few years
are not bright. The products that China can sell abroad most easily --
foodstuffs -- will likely be least available for export, whereas those
hardest to sell -- textiles and minerals -- will be relatively more
plentiful. Exports of manufactured consumer goods other than textiles
could be expanded if the Chinese would develop quality and varieties in
these products and would engage in intensive sales efforts. Large in-
creases in Chinese exports, however, must await a revival and expansion
of agriculture.
E. Difficulties in Planning
In the more comradely days of the early 1950's, Mao espoused
the policy of "lean to one side," which committed Peiping to follow
the Soviet model of industrialization and provided China with Soviet
machines and technicians. This policy, which proved successful during
the First Five Year Plan (1953-57),,became a casualty of the bitter
Sino-Soviet dispute. Peiping has fallen back on a theme of economic
construction by self-reliance -- a program that implies a very slow and
painful recovery in industry and agriculture.
Communist China's Third Five Year Plan, scheduled to begin in
1963, apparently did not get off the ground. No goals have been an-
nounced for an annual plan since 1960, much less for a new 5-year plan.
The economic indecision that has prevailed in Peiping during the past
few years has compounded the economic difficulties that arose from poor
weather, isolation from the USSR, and the aftermath of the "leap for-
ward." Only general guidelines for the economy have been announced
from Peiping, and these imply that the major claimants on scarce devel-
opmental resources in China today are (1) the advanced weapons program
and probably armaments in general, (2) agriculture and industries
supporting agriculture, (3) consumer goads industries, and (4) foreign
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trade requirements (particularly the continued expenditure of foreign
exchange for imports of grain).
If Communist China is to regain its economic momentum over the
long run without substantial help from abroad, Peiping must solve its
food-population problem before a sustained drive in industry is feasi-
ble. Premier Chou En-lai stated in November 1963 that agriculture will
remain the basis of the Chinese economy throughout the period of "build-
ing socialism." If this priority for agriculture is maintained, the
rate of economic growth in China for the next 5 or 10 years probably
will be well below that of the First Five Year Plan (1953-57), when GNP
increased at an average annual rate of about 6 percent.
Should the Chinese leaders become impatient with a postpone-
ment of rapid industrialization, however, they might divert foreign
exchange earnings and domestic resources from agriculture to industry.
If a marked switch to industry should occur within the next year or
two and if agriculture should fail to receive the physical resources
that it requires, agricultural output would continue to stagnate. If,
in addition, Peiping should harden its position on private plots and
incentives to the peasants, it would be only a matter of time --
perhaps 2 or 3 years at most -- before a food shortage more serious
than the recent one would develop. A decision by the regime to accel-
erate industrialization would probably entail the acceptance of con-
siderable starvation and an increased resort to police controls to
maintain political stability.
During the First Five Year Plan (1953-57) the Chinese Communists
built up the rudiments of a good central statistical system along Soviet
lines. This system was badly damaged during the "leap forward," when
"politics led economics", and a lack of good statistical data currently
hampers economic planning. It is true, however, that some of the ground
lost during the "leap forward" has been regained, and the absence of
published statistical data may be more the result of embarrassment at
the low figures rather than the lack of figures.
F. Consumer Welfare and Morale
Two major weaknesses in the area of welfare and morale should
be noted here. First, the thinness of the margin between production
and consumption of food for the country as a whole means that a small
setback in production, in imports, or in distribution of foodstuffs
can rapidly push the situation across the danger line as in 1960-61.
Second, the morale of the population gets lower and lower as the food
stringencies persist because tolerance of the stringencies depends on
hope that the situation will improve; thus the leadership can no longer
count on the esprit that united the nation in support of economic devel-
opment in the First Five Year Plan (1953-57) and that made possible the
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burst of energy in the insanely feverish "leap forward" era (1958-60).
From the point of view of the Chinese Communist leaders, these morale
aspects constitute a weakness because they limit the range of options
open to the leadership. For instance, if morale were given heavy
weight, a sustained program to increase agricultural production at the
same time that the little concessions to the peasant were continued
would have much better prospect of success than a program that called
for an immediate resumption of industrial growth under the banner of
autarky and anti-imperialism.
Because of the vacillations in Chinese Communist economic pol-
icy and because of widespread shocks in the economy -- for example, the
withdrawal of Soviet aid -- a phenomenon allegedly confined to capital-
istic countries has appeared -- unemployment! No official government
data are announced, of course, on unemployment, but refugees in Hong
Kong report large-scale dismissals from factories and report also the
measures, such as relocation, taken by the authorities to deal with
this capitalistic problem. Persons sent back from the cities to rural
areas are hardly welcome, because feeding them means a dilution of an
already inadequate food supply.
Young people no longer can go to higher-level schools in the
vast numbers publicized by the regime under previous plans. Their
aspirations for technical and managerial jobs cannot be fulfilled.
They no longer are carried along by the momentum of a rapidly growing
national economy that is "catching up" to Japan or Britain. Their
loss of enthusiasm for the new order is a problem to the regime because
of the question not only of "political purity" but also of productive
efficiency.
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IV. Current Economic Weaknesses in North Korea and North Vietnam
A. North Korea
The North Korean economy is in the midst of a reorientation of
its national economic development plan that supposedly will shift major
emphasis from expansion in heavy industry to production of consumer goods
and support of agriculture. This change in priorities diminishes the
possibility that the regime will fulfill the over-all goals of its
ambitious Seven Year Plan (1961-67). Industrial growth slackened in
1963 because of poor planning and economic organization in industry
and perhaps because of a decline of imports of machinery and equipment
from the Soviet Bloc. The regime has attempted to increase output of
consumer goods (such as clothing, footwear, sewing machines, and bicy-
cles), but the impact of these increased supplies on the prevailing low
levels of living of North Korea's 11.6 million people will be negligible.
Imports of machinery and equipment from the Soviet Bloc have
been essential to the industrial buildup of North Korea, but the regime
is now trying to reduce this dependence. (North Korea is siding with
Communist China in the Sino-Soviet dispute.) North Korean trade dele-
gations have visited many countries since June 1963, from Holland and
Egypt to Indonesia and Cambodia, in an attempt to find new sources of
raw materials and industrial goods traditionally imported from the Soviet
Bloc. Few trade contracts have been concluded. In any case, the poor
quality of goods that North Korea can offer for export will not be able
to compete favorably in world markets. The regime probably will have
difficulty in replacing the USSR as a source of machinery and technology.
Industrial development in North Korea has been retarded by poor
performance in coal and steel, which achieved only about 85 percent of
their planned levels in 1962 and probably did no better in 1963. In
spite of increased investment in the mining industry in 1963, amounting
to 21 percent above the previous year, it is unlikely that output of
coal in 1963 reached the goal of 15 million tons that was originally
set for 1962. Important construction projects such as the Pyongyang
Thermal Powerplant and the rolling mill of the Nampo Smeltery continue
to lag far behind schedule. A lack of standardized plans, blueprints,
and construction materials has retarded progress on many construction
sites.
Although the North Koreans claim that their grain harvest has
increased from 3.8 million tons in 1960 to 5 million tons in 1962, the
grain ration has remained unchanged at about 1.5 pounds daily for the
average industrial worker, with smaller amounts given to farm workers,
housewives, and children. Good growing weather and increased invest-
ment should have provided some stimulus to agriculture during 1963, but
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it is believed that poor administration and inefficient use of the labor
force held output to only a small gain above 1962. Living conditions
in the agricultural cooperatives are so :primitive that most ablebodied
young men have migrated to the cities, leaving the arduous work of agri-
cultural production to the elderly and to the very young.
The North Korean regime has been in power for almost 16 years
and has received massive economic and technical assistance from Communist
China and the USSR, but the North Korean peasant and worker remain rela-
tively poor. The average North Korean worker must work more than 9 hours
to earn enough to pay for 1 meter of cotton cloth compared with less than
2 hours of worktime for a worker in South Korea. Similarly the average
North Korean industrial worker must spend up to 950 hours on the job to
earn a bicycle, considerably longer than a worker in South Korea. A
police-state system of distribution reserves the best consumer goods for
Communist Party members and government officials.
Current economic problems in North Vietnam indicate that the
regime will have great difficulty in fulfilling its First Five Year Plan
(1961-65), the goals of which have already been reduced from the original
plan. The key economic weakness is agriculture. The poor harvest of
1963 -- affected by drought, typhoon, insects, and disease, as well as
by poor management, peasant apathy, and a lack of fertilizer -- has ag-
gravated further an already tight food situation in North Vietnam. Four
consecutive years of mediocre harvests have caused the regime to become
seriously worried about its food-population balance, and recent official
statements have referred to low food reserves and the possibility of in-
sufficient food supplies in the event of a continuation of natural calam-
ities.
Since March 1960, when a census revealed that the population of
North Vietnam numbered nearly 16 million persons and was growing rapidly,
the regime has been particularly concerned about its ability to feed the
population. The regime launched a low-keyed birth control campaign in
mid-1961, which was considerably stepped up in 1962 and was pushed un-
evenly during 1963. The population of North Vietnam, which numbered
17 million at the end of 1963, is growing at an annual rate of about 2
percent. North Vietnam does not have the medical facilities necessary
for a successful birth control campaign in the short run, and the pros-
pects of reducing the rate of growth of :population substantially are not
bright for several decades.
Although the effect of the Sino-Soviet dispute on the economic
development of North Vietnam is still uncertain, some recent reports
have indicated that Hanoi's support of Peiping has resulted in reduction
in aid from the USSR. A curtailment of Soviet aid would result in a
slower rate of economic growth and particularly in the rate of industrial
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growth. Communist China, hampered by its own economic difficulties,
cannot replace all of the technical aid and equipment being supplied
to North Vietnam by the USSR.
North Vietnam has a serious shortage of trained managerial and
technical personnel, particularly for the construction and operation of
modern industry and transportation. The influx of several thousand
advisors and technicians, primarily from the USSR and Communist China,
has been the major feature of the technical assistance programs to
North Vietnam. The major new industrial plants are the iron and steel
mill at Thai Nguyen, the superphosphate plant at Lam Thao, and the
machine tool plant at Hanoi. In addition, the Communist countries
have supplied technical data, advised in planning, and trained Viet-
namese in their universities. In spite of increased efforts by Hanoi
to close the gap between requirements and supply of skilled manpower,
inadequate schools preclude the training of sufficient engineers,
technicians, foremen, and other supervisory personnel required for
North Vietnam's ambitious industrial plans, and Hanoi remains highly
dependent on technical assistance from abroad. Furthermore, the
support by North Vietnam of the large-scale Communist insurrection in
South Vietnam is a drain on its slender economic resources and is main-
tained at the expense of the rank-and-file citizen.
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 Fl Analyst: , D/A
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available or distri -RDP79T01049A00290'00~l8 1 2
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Date of Document _ January 1964 Number of Copies
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13 Jan 64
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'~'~ ~DSv
~~ 6S
STATINTL
STATINTL
Approved For
Release -
-2