DCI BRIEFING FOR HOUSE APPROPRIATIONS COMMITTEE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP82R00025R000400220016-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 16, 2016
• Document Release Date: January 6, 2005
• Sequence Number: 16
• Publication Date: February 5, 1965
• Content Type: BRIEF

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OCI No. 0758/65
5 February 1965
DCI BRIEFING FOR
HOUSE APPROPRIATIONS COMMITTEE
THE SOVIET ECONOMY
1. The Soviet economy is large, and it continues
to grow.
A. Since 1958 its Gross National Product has
been about one-half that the United States.
B. The Soviets, however, allocate their out-
put by standards which differ greatly from
ours.
C. Their allocations stress the elements of
national power. They give high priority
to the continuing modernization of their
military forces, to space programs, and
to modernization of industrial capacity.
(CHART, US and Soviet GNP by end use)
1. Thus, as this chart shows, in dollar
values Soviet spending for defense and
for investment approaches our own. The
portion of their investment allocated
to industry, in fact, exceeds our own.
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2. When it comes to consumption, however,
a Soviet population which is almost
one-fifth larger than ours gets less
than one-third of what is spent for
consumption here.
3. The consumer's welfare is further re-
duced by the poor quality and assort-
ment of goods, and by his lack of
choice.
II. While the Soviet economy continues to grow, a
general slowdown has become evident in recent
years.
(CHART, US and Soviet Annual GNP growth rates)
A. The Soviet GNP growth rate, which was
averaging about seven percent a year in
the late 1950's, works out to about four
percent a year for the early 1960's.
1. The 1964 increase was a healthy five
to six percent, but a substantial part
of this apparent growth is merely the
recovery from the poor performance in
1963, when a near-disaster in agricul-
ture kept GNP growth down to less than
two percent.
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(CHART, US and Soviet Absolute GNP)
2. The Communist Party schedule for catch-
ing up with the US in the 1970's has
been set back considerably by the re-
cent slowdown. From 1956 to 1961, the
Soviet growth rate averaged twice that
of the US. In this period the absolute
gap between the two economies, when
both are measured in dollars, actually
declined a little. Since 1961,'however,
the absolute growth of the US has been
about twice that of the USSR, and the
absolute gap has increased as fast or
faster than Soviet GNP.
(CHART, Industrial Production, US vs. USSR)
3. In industry, 1964 saw the continuation
of the slow decline in rates of growth
from eight-and-one-half percent an-
nually in the period 1956-59 to seven
percent in 1960-62 and now to five per-
cent. ,tc; _ plan
4. The pattern of growth in Soviet GNP in
the present period, in summary, is a
composite of:
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(a) Erractically fluctuating agricul-
tural production with small long-
term growth, and
(b) slowly declining growth rates in
industry.
B. Two major causes of the decline in the rate
of growth of Soviet industrial production
are, first, the inability of the Soviets to
maintain the rate of growth of investment
in new productive capacity, and second, the
competition of defense spending for high-
quality resources needed to support the
modernization of industry.
III. Defense spending-in which we include the Soviet
space program--is growing less rapidly in total
right now, but it remains a problem for the
whole economy.
(CHART, total defense expenditures and proportion
devoted to exotics--R & D, adv, wpn. procure-
ment, etc.)
A. This is primarily because advanced weapons
and space programs require the best and
scarcest inputs of skilled scientists and
engineers, new alloys and other high-cost
materials, and the most advanced industrial
processes.
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B. These are the very inputs which are also
needed to carry through the modernization
of the civilian economy, and in this key
area the competition for critical resources
remains intense.
C. In this competition, the civilian economy
fares rather badly. Our best measure of
this is our estimate of the increases in
Soviet spending on military research and
development, the space program, and the pro-
curement of advanced hardware for missiles,
radars, and nuclear weapons.
(CHART, Spending for R&D, etc.)
1. As can be seen quite clearly in this
chart, these expenditures are growing
much faster than total military spend-
ing. They have just about doubled
since 1958.
2. Within this trend, the procurement has
tended to level off, but Research and
Development spending continues to rise.
This supports the point I made earlier
that the Soviets are putting great
stress on achievement of qualitative
improvements.
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D. Mr. Kosygin in his economic report last
month announced a cut in the defense budget
of 500 million rubles (about 550 million
dollars); however, other items in the budget--
such as scientific research--conceal addi-
tional spending on defense programs. These
concealed items are more likely to rise
than those in the announced budget. In
general, we believe that there will be a
slow increase in Soviet defense spending
over the next few years.
IV. Another basic difficulty of the Soviet economy,
of course, is agriculture, which exerts a drag
on the whole economy.
A. The problems here are chronic--a long history
of neglect, the inherent deficiencies of
the collective farm system, some real limi-
tations in soil and rainfall, and the dif-
ficulty of training enough/ skilled farm
managers and mechanics.
(CHART, Total and per capita agricultural production)
B. Crop production made a considerable recovery
in 1964, but livestock did not, so that
total agricultural production last year was
about at the level of 1961. On a per capita
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basis, with the constant increase in popu-
lation, it was lower than either 1961 of 1958,
the two relatively good years on the chart.
The USSR is continuing some. grain purchases
from the West.
C. In mid-1963, Khrushchev sponsored a large
crash program for the "chemicalization" of
the economy. This chemical program was
aimed at aiding agriculture by raising the
annual production of chemical fertilizers
from 20 million metric tons in 1962 to 35
million in 1965 and to 70 million metric
tons by 1970. The new leadership is re-
ducing sharply the increase of investment
scheduled for 1965, and acting very cau-
tiously in taking up the long-term credits
available for importing equipment from the
West.
V. There is also a more general reason for this
slowdown with which the Soviet economic planners
have to contend.
A. The Soviet economy is becoming more developed
and mature. It has already drawn from the
land to the cities most of the excess rural
workers agriculture could spare. By and
large, the easiest technological gains have
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been made, including those gains taken over
lock-stock-and-barrel from the US and West-
ern Europe. Further technological gains
will require more domestic R&D--and more
resources.
B. As as result, every percent of future growth
is a little harder to,athieve.
(CHART, Direction of Soviet Foreign Trade)
VI. One of the consequences of all this can be seen
in what has happened in the area of Soviet for-
eign trade.
A. The Soviets have been trying to increase
their industrial imports from the West--as
you can see from the bottom segment of each
of these bars.
(CHART, Soviet financing of hard currency deficits)
B. For these industrial imports, the Soviets
have had to depend on medium-term credits.
Their exports have not been generating
enough hard currency to cover imports.
C. The medium-term debt piled up in this way
has grown rapidly since 1959. Last year
it reached some 620 million dollars.
(CHART, Soviet gold production, sales, and reserves)
D. Another way the Soviets have paid for their
imports is with gold. This has led to an
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almost precipitous drop in their gold re-
serves. By the end of 1964, these were
down to only about one and a half billion
dollars.
E. The Soviet "trade drive" in the underdevel-
oped countries has also slacked off. Trade
between the USSR and a selected group of
developing nations rose substantially dur-
ing the past decade, but there are no major
new initiatives at present.
F. Exchanges of important raw materials and
manufactured goods with other Communist
countries still account for more than 70
percent of Soviet trade.
(CHART, Soviet aid to Free World dountries)
VII. Soviet aid--is a vigorous and active program.
This chart shows the scope of Soviet military
and economic aid to Free World countries over
the past ten years.
A. The green bars represent extensions of eco-
nomic aid, and the green line linking them
shows the extent to which these commitments
have been fulfilled by deliveries. The
black bars represent military aid agreements,
under which delivery has generally been
completed with little delay.
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B. As the USSR enters its eleventh year of aid
activity in the Free World, the program is
becoming increasingly complex, the immediate
returns less discernible, and Moscow has
learned by experience that a foreign aid
investment does not guarantee a return in
the currency of political influence.
1. Moscow is, however, committed to main-
tain its existing programs, and remains
ready to consider aid for newly emerging
states. Assistance to non-Communist
countries was favorably reviewed by
Soviet leaders in 1962 and 1963, and
Khrushchev's fall is not expected to
cause any modification of the foreign
aid program.
2. After two years of relatively low ex-
tensions of new economic aid, the Soviet
Union in 1964 again topped $1 billion--
largely due to sums offered to under-
write new five-year plans which start
this year, such as Egypt's. Aid extended
in 1964 amounted to $875 million for
Communist countries and $820 million for
Free World countries.
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(CHART, Soviet aid by countries receiving it)
VIII. Soviet military aid frequently is given with less
restraint that economic credits. It places less
burden on the economy and it serves immediate
political objectives more rapidly.
A. Three fifths of all military aid to non-
Communist nations has gone to two pivotal
countries--Egypt and Indonesia--whose poli-
tical policies, while not necessarily con-
sonant with those of Moscow, have discomfited
the West.
1. The Middle East is generally committed
to bloc arms. The development of the
United Arab Command--dominated by Egypt--
probably assures Moscow of preeminence
in Middle East military programs. For
example, Nasir is pressing Jordan and
Lebanon to obtain MIG jet fighters.
2. Current military assistance to Indonesia
continues to maintain a toe hold for the
Soviets in Asia.
3. The USSR, learning by experience, is
proceeding cautiously with military aid
for new, unsophisticated, and politically
volatile African states.
B. The Soviet military aid program continues,
however, to grow in scope and content.
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Advanced weapons systems now are a standard
export item. The USSR continues to supply
advisory missions, and to expand the train-
ing of free world military officers at its
institutes, and is now supplying arms pro-
duction:f acilities, for instance, a MIG jet
fighter factory for India.
IX. Economic problems certainly had something to do
with Khrushchev's fall.
A. We have no evidence, however, that his suc-
cessors are planning any major changes for
this year in the pattern of economic alloca-
tions.
B. We are highly skeptical of the announced cut
in defense expenditures for 1965.
C. There are two areas, however, where some
changes have been in motion--economic organiza-
tion, and economic thought.
1. Organizationally, the new leaders are
already busy trying to undo some of what
they have referred to as Khrushchev's
"hare-brained schemes"--for example, the
division of the Communist party into
separate industrial and agricultural
organizations.
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2. They are also experimenting with the
ideas of Professor Liberman and others
who would like to see profits and the
market play a much greater role in guid-
ing production.
D. Obviously, Marxism-Leninism is not going to
tell the Soviets how to solve their problems.
On the contrary, they are now in fact rifling
the storehouse of Western ideas for ways and
means of coping with their economic difficul-
ties.
X. While the Soviet economy has slowed down pretty
much across the board in recent years, the growth
has by no means come to an end.
A. Western, and Yugoslav, ideas will help to
the extent that the Soviet Union actually
adopt them. Czechoslovakia and other East
European countries, incidentally, show signs
of putting more Westernized concepts into
practice in their economies.
B. Some of the things the Soviets are trying
in agriculture are intelligent. Barring
bad weather, agricultural production should
rise--perhaps an average of three to four
percent a year over the next five years or so.
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C. Our analysis by no means suggests that the
Soviet economy will be unable to sustain a
vigorous military and space program.
1. These expenditures may level off, or even
shade down a little, between now and 1970.
On the other hand, they might continue
to rise by as much as 20 percent. In
either event, the strain on scarce re-
sources is going to remain, and perhaps
even grow.
2. In short, we are not prepared to forecast
that economic pressures are driving the
Soviet Union into a corner where it will
be willing to accept new arms control
measures.
XI... Our best guess is that the growth of Soviet
Gross National Product for the rest of this
decade will average between four and six per-
cent a year. Just where it falls within this
range will be determined to a considerable
degree by weather and its effect on agriculture,
and by future trends in defense spending.
A. In any case, the more general problems of
industrial maturity and backward agriculture
are going to make it difficult to substain
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a six percent rate of growth, and the rate
is very unlikely to regain the seven percent
level characteristic of the mid-1950's.
B. The performance we envisage by the Soviet
economy is not going to satisfy the Soviet
leaders, and it will help stimulate renewed
conflict within the Kremlin.
C. At the same time, however, it will not really
provide much comfort for us, because what-
ever the difficulties, it will continue to
furnish the Soviets the necessary wherewithal
for their challenge to the Free World.
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