DCI BRIEFING FOR JOINT ECONOMIC COMMITTEE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00171R001100010011-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 67
• Document Creation Date: December 15, 2016
• Document Release Date: December 15, 2003
• Sequence Number: 11
• Publication Date: May 21, 1976
• Content Type: BRIEF

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21 May 1976
DCI BRIEFING FOR
JOINT ECONOMIC COMMITTEE
24 May 19 76
INTRODUCTION
I. Mr. Chairman, it is a pleasure to be here this
morning. i am glad to be following precedent
of discussing with the subcommittee the economies
of the Soviet Union and the People's Republic of
China.
I am also pleased to note that in the eleven
months since Mr. Colby last appeared here,
CIA analysts have continued to contribute
substantially to the highly useful products
sponsored by this committee. I understand
that this practice began some 15 years ago,
when the Agency first contributed to the Com-
mittee's annual compendium of papers on the
Soviet and Chinese economies. I welcome
this opportunity to make the results of our
analytical efforts available on an unclassified
basis, to scholars and government components
outside the intelligence community.
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1. In that connection, I have been pleased
to learn that the Agency has followed
the practice of providing your committee
with each unclassified study concerning
the Soviet and Chinese economies as
they are completed, and that members
of your staff have received occasional
briefing on these subjects.
B. At this point, Mr. Chairman, I would like
to make a few general observations on the
two major economies and their allocation
of resources, and then speak on the special
matter of the refiguring of Soviet defense
spending on the basis of rubles.
II. First, let me highlight a few features of cur-
rent Soviet economic trends.
A. In 1975 the Soviet economy suffered its most
serious setback since Brezhnev came to power.
For agriculture, the year was disastrous.
And in trade, the combination of increased
grain imports and sluggish Western demand
for Soviet exports led to a record hard cur-
rency trade deficit.
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B. Last year's troubles will hurt the economy's
performance this year.
1. We are getting reports of food shortages,
particularly of meat, as well as stories
of work slow-downs and vandalism in the
markets, as the people vent their ire.
2. People are grumbling, but this is not
likely to pose problems of public order
that the regime cannot cope with.
C. In planning for 1976, the Soviets have had
to cut back their targets to allow for in-
evitable shortages of farm products. Ap-
parently some prospective contracts for
Western technology and equipment have also
been shelved, possibly because of the hard-
currency bind.
1. The 1976 plan embodies relatively mod-
erate goals, which we consider to be
generally attainable.
D. Similarly, the basic guidelines of the So-
viets' 10th Five-Year Plan, which begins
this year, are generally much like those of
the last one, though they set more modest
goals. They reflect the restrained ap-
proach of Brezhnev's leadership over the
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past 10 years. He has taken no steps to
make bold, innovative changes in the eco-
nomic system.
E. As you will hear soon, Mr. Chairman, we see
many signs that the Soviet economy has en-
tered a period of slower growth, at a
time when all major sectors -- defense,
industrial growth, and consumption --
are demanding increases. I would only
underline that the leadership's handling
of these issues is bound to be contentious,
particularly when the old guard of the polit-
buro will be passing from the scene.
III. In respect to China, Mr. Chairman, the picture
is one of more impressive growth, but in a
highly erratic overall pattern.
A. As in the Soviet Union, agriculture has
generally been a problem area. The Chinese
have been according an increasing share
of resources to agriculture. They also
are having some success in stemming the
growth of the population, now estimated
to be about 950 million.
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B. Second, I would remind you that the greatest
disruptions in China's economic growth have
closely matched periods of political turbu-
lence -- the Great Leap Forward in the early
1960s, the Cultural Revolution of the late
60s, and the anti-Confucius campaign of two
years ago. So in trying to project economic
trends into the future, we must provide a
cautionary note in view of the sudden lead-
ership changes in Peking this year.
1. Chou's death, the subsequent removal
of Teng Hsiao-ping as acting premier,
and the elevation of Hua Kuo-feng
to the premiership last month took place
in a period of political controversy
that underlines the uncertainty sur-
rounding future policies. Attacks
on Teng Hsiao-ping have raised specific
economic issues.
C. Nevertheless, Chinese awareness of the
close connection between success in eco-
nomic development and political stability
perhaps explains why -- during the strug-
gle to oust Teng Hsiao-ping -- careful at-
tention was given to emphasizing that nothing
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should interfere with production or other
operations in the economy.
1. The situation is obviously still fluid.
Chou's death and Chairman Mao's physi-
cal decline have ushered in a period of
political turbulence which may become
intensified upon Mao's death. Past
experience suggests that such turmoil
might cause marked disturbances in the
economy as well.
IV. My final comments, Mr. Chairman, concern
your committee's special interest in Moscow's
allocation of resources to military and
space functions, especially as figured in
the Soviets' own budgets, that is, in rubles.
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B. Applying our building block methodology to
this new information, we have of course
changed our estimates. Some of these changes
seem quite startling, at first glance at
least.
1. For my part, Mr. Chairman, I just
want to say how impressed I am with
the intelligence community's constant
re-examining of old judgments in the
light of the unceasing flow of new
information.
C. Also, I must add my own words of caution
on the dangers of magnifying the signifi-
cance of any of these figures in themselves,
whether in dollars or in rubles. At most,
they offer some elucidation of trends,
relative internal priorities, and general
order of magnitude.
D. It is also important not to misunderstand
the significance of the new estimate of the
share of Soviet GNP devoted to defense, as
expressed in rubles. It does not signify
a dramatic jump in the size of Soviet defense
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programs. It does reflect an increase in our
assessment of the cost of those programs.
V. Mr. Chairman, we appreciate testifying in closed
session so that we may answer your questions without
the inhibiting effects of concern for protection
of sources and methods. We will later review the
transcript to remove any classified information
with the aim of permitting the publication of as
much of our testimony as possible.
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PART I: THE SOVIET ECONOMY
Results in 1975
I. Mr. Chairman, I would like to expand on the So-
viet economic situation in 1975-76 and on likely
developments during the remainder of the decade.
A. Last year the growth of Soviet gross national
product slumped to about 2 1/2 percent compared
with the 4 percent annual average rate in 1971-74.
(Chart: US-USSR: GNP)
1. The miserable grain harvest -- output
was only 140 million tons compared with
a plan of 216 million tons -- pulled total
agricultural output down by 9 percent.
Since agriculture represents roughly one-
fifth of GNP, this drop clearly was the
major factor in last year's decline in
the rate of overall growth.
2. Moscow took a number of steps to lower
the demand for grain:
a. Livestock was fed substitutes such
as reeds and leaves, and in some
cases actually moved out of the
drought-afflicted areas;
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b. All grain export commitments to East-
ern Europe were canceled. These had
been running at about 7 million tons
annually.
3. At the same time, grain reserve stocks
were drawn on heavily -- to what we be-
lieve are now minimal levels -- and Mos-
cow arranged large-scale grain imports.
a. Including the most recent deals with
Canada, Australia, and the US, we
calculate the Soviets have purchased
about 37 million tons since July, in-
cluding 19 million tons from us.
4. Despite all these measures, feed supplies
in the USSR have been inadequate. Distress
slaughtering began as early as last sum-
mer, and by yearend, inventories of hogs
and poultry -- the two principal grain
consumers -- were down by 20 percent and
15 percent respectively.
a. This meant a short-term rise in meat,
but at the expense of future supplies.
Both the quantity and quality of meat
evidently have already turned down.
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We estimate that the Soviet consumer
will get 25 percent less meat this
year than last.
B. Soviet industrial output was about normal in
1975. It grew by 6 1/2 percent, in line with
average over the past five years. (Chart: US-
USSR: Industrial Growth)
1. The production of industrial raw materials
grew impressively, chemicals being the
star performer.
2. The output of consumer goods grew less
than in the past.
3. Producer durables also fell off.
4. And the production of primary energy
continued to move up steadily, reflect-
ing the USSR's unique position of energy
self-sufficiency among the world's in-
dustrialized powers. (Charts: US-USSR:
Primary Energy, 1975; USSR: Oil and
Natural Gas Production and Trade) Even
though the Soviets face difficult prob-
lems in developing petroleum fields in
distant and inhospitable areas, it is
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only a question of time before these ex-
tensive reserves come on stream.
5. Steel output was at a record level, but
demand still outran domestic supply, so
imports continued to be high. (Chart:
Crude Steel Production in Major Countries)
6. As for machinery, technologically advanced
items, and equipment for the agricul-
tural sector led the way.
a. Dramatic rates of increase -- such
as 32 percent for computer equip-
ment -- were possible because output
in 1974 was low compared with levels
in other industrialized countries.
The USSR is now concentrating on a
computer series modelled on the tech-
nology of the IBM 360 line, which was
developed here in the early 1960s.
C. In the area of capital investment, the Soviets
last year continued to devote a high propor-
tion of GNP -- one-fourth compared to about
one-sixth in the US -- to expanding the stock
of new plant and equipment.
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D. All in all, the Soviet consumer had a rela-
tively good year in 1975, despite the worsen-
ing agricultural situation. The food marketing
pipeline remained full, aided by distress
slaughtering, and other consumer goods and
services were more available than before.
(Charts: US-USSR: Composition of Diets,
1974; US-USSR: Per Capita Consumption, 1974)
1. On a less positive note, the increase
in average wages was kept down again
last year to restrain inflationary pres-
sures; savings bank deposits rose again
until they are now equivalent to more
than one-third of total money incomes.
2. The total supply of new housing edged
up, but living space -- on a per capita
basis -- remains below even Soviet norms.
E. Soviet foreign trade continued to rise last
year. Its value, measured in dollars, grew
by an impressive 35-percent; on a volume
basis we estimate the rise to be well under
half of this rate of increase.
1. The rapid rise in imports from the de-
veloped West (including Japan) plus a
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drop in demand in the West has resulted
in hard-currency deficits in recent years.
(Chart: USSR: Hard-Currency Merchandise
Trade) Last year, with recession in the
West cutting demand still further, the
foreign-exchange position deteriorated
dramatically. The USSR had a roughly
$5 billion hard currency trade deficit
compared with a $900 million deficit in
1974.
a. This occurred despite a further rise
in the share of high-priced oil and
oil products in Soviet exports. (Chart:
USSR: OiZ Share of Hard Currency Exports)
b. The Soviets finance their large and
escalating hard-currency trade deficits
through a combination of credits and
gold sales. With the conspicuous ex-
ception of the US, since mid-1974 West-
ern governments have extended or backed
more than $11 billion in long-term
credits to finance Soviet purchases
of machinery and equipment.
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C. Although the USSR's medium and long-
term debt rose rapidly last year to
at least $7 billion, debt service re-
mains manageable, as it accounted for
only about one fifth of Moscow's hard-
currency earnings in 1975.
d. While the Soviets are concerned, they
still purchased last year more than
$4 billion in Western technology and
equipment for future delivery.
Soviet Economic Aid to LDCs
F. You are interested, Mr. Chairman, in how the
Soviet economic aid program fared in these cir-
cumstances. Deliveries to LDCs last year were
about $400 million, the 1970-73 average, down
by one third from the unusually high 1974
figure swollen by emergency wheat shipments
to India.
1. As before, the Near East and South Asia
received the lion's share. Egypt, Iran,
India, Turkey, and Iraq alone accounted
for more than 70 percent of total aid de-
liveries.
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2. New commitments were up sharply, to a
record $1.3 billion. They included Mos-
cow's largest credits ever extended to
LDCs -- $437 million to Afghanistan and
$650 million to Turkey.
3. We expect the Soviets to maintain recent
delivery levels in 1976 despite the pos-
sibility that Egypt will begin to phase
out the Soviet program. Expanded de-
liveries to other Near East and South
Asian countries should make up the short-
fall.
The Outlook for 1976
II. Turning now to the Soviet economic plan for
1976, one is immediately struck by the gen-
erally low and fairly realistic goals pro-
jected -- with the possible exception of agri-
culture. Clearly the Kremlin recognizes that
last year's harvest failure will have substan-
tial carryover effects. (Chart: USSR: Growth
of GNP, by Sector of Origin)
A. The consumer will be hardest hit; growth
of industrial production also will be
slowed, and the Soviets will continue to
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carry a sizable hard-currency trade defi-
cit. GNP as a whole is planned to in-
crease by about 4 1/2 percent (up from
the estimated 1975 rate of 2 1/2 percent).
B. The projected increase in industrial output
of 4 1/2 percent is the lowest planned for
since World War II.
1. This low target reflects anticipated
shortages of agricultural raw materials
and continuing lags in bringing new
plant and equipment on stream.
2. Targets for both heavy and light indus-
try are down by historical standards,
but heavy industry retains preference,
as usual.
C. Growth in total investment is to be halved,
to about 4 percent.
1. Once again the plan places major em-
phasis on completing unfinished invest-
ment projects and modernizing existing
plant and equipment.
2. Agriculture and its supporting indus-
tries are to maintain their priority
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status, receiving more than one third
of total investment.
D. Among the many ingredients in the plans,
the most questionable is agriculture, which
is scheduled to rebound, from a 9 percent
decline in 1975 to a 9 percent growth this
year. With grain stocks down and livestock
herds reduced, the agricultural situation
seems bound to remain precarious.
1. Achievement of the ambitious agricul-
tural output goal is crucially de-
pendent on above-average weather during
the rest of the growing and harvesting
seasons.
a. We believe that winterkill of winter
grains planted last fall was higher
than normal. These grains generally
account for one third of Soviet
grain harvests.
b. Soil moisture conditions for spring
grains, which will be planted this
month, have been improving steadily,
but are still not good following
last year's drought.
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E. In the area of consumer welfare, the Soviet
populace this year faces the prospects of
the smallest gains in the Brezhnev era.
1. The rate of increase in per capita real
income will decline from the 1974-75
level, and the rise in the average
wage for workers will be held below
3 percent. Both indicators reflect
the limited prospects for increased
supplies of consumer goods and ser-
vices, as well as the leadership's
determination to restrain inflationary
pressure.
2. Probably the most serious problem af-
fecting the Soviet consumer this year
is the anticipated one-fourth dro in
per capita meat consumption. This
will return the populace to the level
of the late 1960s.
a. Despite gains during the past decade,
the average Soviet citizen still
eats only two fifths as much meat
as his US counterpart and three
fourths as much as the average Pole
or Hungarian.
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b. As meat supplies are relatively
abundant on the world market, we
expect that the Soviets will import
meat products this year. They
could buy as much as a million
tons -- their logistical limit --
which would raise per capita supply
by about 10 percent; this would also
add another 1 billion dollars to their
already large import bill.
F. The 1976 plan calls for a rise of 13 1/2
percent in the value of foreign trade, a
rate that probably will be exceeded by a
wide margin based on past experience and
the likelihood of continued inflation.
1. In their hard-currency trade, the
Soviets probably will run a deficit
on the order of 3-5 billion dollars.
2. The 1976 import picture is fairly
clear. Imports from the West will
continue to rise under the $8 billion
in contracts for plant, and equipment
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signed in 1974-75, and the grain
bill will be at least 2 billion dollars.
3. On the export side, Soviet prospects
depend primarily on the degree and
pace of recovery in the West.
4. To finance the deficit, the Soviets
will continue to resort to both credits
and gold sales. As a result, they will
end 1976 with an external debt substan-
tially higher than at yearend 1975,. but
one that will still be within manage-
able limits.
The New Five-Year Plan
III. I will conclude this section, Mr. Chairman, with
some comment on the Five-Year Plan for 1976-80,
and then a few general observations.
A. The USSR is starting the new plan period
on an inauspicious note, with the conse-
quences of the 1975 crop failure being
felt strongly this year.
1. The new plan presumably was in fairly
firm shape, at least in its basic
guidelines, before last year's drought
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occurred. Consequently, the planners
must have had to do some serious re-
drafting in the last half of 1975.
2. In the process they apparently opted for
realism and moderation in setting goals.
They seem to have largely avoided the
taut and overambitious plans tradi-
tionally preferred by the Kremlin.
The 1976-80 targets imply a GNP growth
of 5 percent on an average annual basis --
somewhat lower than what was actually achieved
in the 1960s. It is also lower than it first
appears because it is calculated against a
somewhat depressed 1975 base.
C. In brief, the guidelines are as follows:
1. Agriculture will continue to receive
an unusually large share. of the country's
total investment despite -- or perhaps
because of -- this sector's disappointing
development record;
2. Growth in industry and construction is to
feature gains in productivity and improve-
ment in quality rather than brute force
increases obtained through greater in-
puts of labor and capital. As you know,
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Mr. Chairman, this is a very old, al-
most wistful, theme in Soviet economic
planning;
3. Under the plan the consumer is to hold
his own compared with other resource
claimants ;
4. We believe that long-term growth in
military spending will continue for the
next few years, albeit perhaps at a more
moderate pace. I will treat this spe-
cial subject a bit later.
5. Trade with the West will increase in
volume and in overall importance to
the economy; this trade continues to'
play an essential role in Soviet moderni-
zation efforts.
D. Let us look at industrial plans first. In-
dustry is expected to continue its same
steady rate of expansion as in the 1960s,
at an average annual rate of 6 1/2 percent.
The Soviets place even greater emphasis on
higher quality of output and on the in-
creased application of advanced technology.
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1. Machinery output -- the source of equip-
ment investment, military hardware, and
consumer durables -- is slated to grow
at 9.2 percent annually, well above
the 8 percent rate achieved during
the first half of the decade.
2. This high projection reflects the in-
tention to raise the share of investment
funds spent on equipment rather than on
the construction of new facilities.
E. Agricultural growth is to be substantially
higher than normally scheduled -- an average
of 5 1/2 percent, but this is against the
low 1975 base.
1. The increase depends heavily on achieve-
ment of the grain harvest target of
215-220 million tons per year for
the next five years. Except in 1973,
when the harvest reached a record 222.5
million tons, the Soviet grain crop has
always fallen well below this range.
2. Apparently the leadership believes the
1975 downturn was an aberration unlikely
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to be repeated. In contrast,-we con-
clude that the frequency of weather-
related crop shortfalls foreshadows
unfavorable conditions in at least one --
and perhaps two -- years out of the next
five.
F. The rate set for new investment is unusually
low: As a result, the Soviets will be hard-
pressed to maintain the traditional high
rates of increase in their stock of new
plant and equipment.
1. The most striking change is the slow
growth projected for capital invest-
ment -- 4 percent, or only three fifths
of the growth actually achieved during
the three preceding five-year plan
periods.
a. The planners hope this reduction will
force managers to use capital more
judiciously -- by completing un-
finished projects faster and by using
of more technologically advanced
machinery and equipment.
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b. We are skeptical. The Soviets have
been down this road before. While
they have made some short-term gains,
before long their planning and
management system tends to undercut
these initiatives.
G. As for the consumer, he can expect a moderate,
if slower, increase in his living standards.
The regime has told the populace that its
interests will not be sacrificed unduly to
achieve other economic goals.
H. In the area of foreign trade, the 5 to 6
percent average growth rate planned for
1976-80 is probably conservative, inas-
much as actual trade has usually exceeded
original targets.
1. Eastern Europe will remain the USSR's
major trading partner, but the developed
West have a somewhat larger share of
total Soviet trade.
a. In buying from the West, the Soviets
plan to concentrate on advanced
equipment and technology; exports
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to the West will again feature fuels
and industrial raw materials.
b. Despite the recent rapid rise in
Soviet hard-currency indebtedness,
we.expect the USSR to continue the
extensive use of Western credits
in 1976-80.
c. The Soviet Union should be able to
turn over its hard-currency obliga-
tions without any real problems, as-
suming (1) that Western governments
remain willing to keep lending to
Moscow and (2) there are no unusually
severe or consecutive agricultural
reverses.
Prospects
IV. In the past we have characterized the Soviet economy
as having great crude strength. Growth has come
more from the expansion of the number of units of
labor and capital than from increases in the quality
and efficiency of labor and capital.
A. The Soviet leadership has insisted upon a
rapid rise in expenditure on new plant and
equipment and has extracted as large a work
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force as possible out of the populace. These
have been hard-core economic policies.
B. At the same time, the leadership has failed
to close the productivity gap with the de-
veloped West. Measured in output per unit of
capital and labor, productivity is only about
one half that of the US.
C. Given this mixture of achievements and short-
comings in mobilizing resources, the Soviet
economy has demonstrated sufficient strength
to do three things: (a) provide adequate sup-
port for an aggressive foreign policy and a
formidable military posture, (b) slowly nar-
row the production gap with the US, and (c)
gradually raise the level of consumption of
the Soviet people.
D. There are telling indications, however, that
the Soviet economy will develop less rapidly
than in the past.
1. The current slowdown in the flow of new
investment will force the USSR to operate
an industrial plant that is growing older
and more obsolescent.
2. Annual increments to the labor force are
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scheduled to slow markedly by the early
1980s.
3. We doubt that the Soviet leaders will bene-
fit as much from the application of new
technology as they obviously desire.
Party thinking opposes radical reform of
the economic system involving decentrali-
zation of decision-making and the intro-
duction of effective financial incentives.
E. Intimately related to the outlook, of course,
is the share of Soviet resources allocated to
defense -- a subject I am about to discuss.
Let me note now only that if the Kremlin con-
tinues to allocate as great a share of-GNP to
defense programs as it does now, it will be
hard pressed to sustain the 4-1/2 percent
average GNP growth rate achieved over the
past decade.
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PART II: SOVIET DEFENSE COSTS
I. Mr. Chairman, I will now turn to the allocation
of resources to military and space functions in
the Soviet Union. As you know, we completed
our latest estimate of the dollar costs of re-
producing Soviet military programs in the US in
February. We have also published, in the last
week, a major revision of our estimate of Soviet
ruble spending for defense.
New Information
A. Before I review these estimates with you,
I'd like to put them in context by discussing
the new information and analysis which under-
lies the revisions. Some of our new data
result from normal, annual revisions in our
estimates of the size and characteristics of
Soviet forces -- the building blocks which
we use to construct our dollar and ruble es-
timates.
1. For example, as a result of the latest
round of National Intelligence Estimates
the intelligence community has revised
its figures on the production rate of
the Backfire bomber and of some major
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ground force weapons such as the T-72
tank and the BMP infantry combat vehicle.
We also revised our estimates of the de-
ployment rates of several strategic mis-
siles and tactical aircraft.
2. In the spring of last year we completed
a major interagency study of Soviet mili-
tary manpower. That study resulted in an
upward revision of the estimated level of
active military manpower, and an offsetting
decrease in estimated civilian manpower.
We also made some changes in the distribu-
tion of manpower along the Soviet military
services.
3. We also improved our knowledge of the tech-
nical characteristics of Soviet weapons.
25
B. As part of our continuing effort to improve our
costing techniques, we conducted an extensive
survey aimed at identifying aspects of Soviet
military programs which were not explicitly
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accounted for in our previous estimates.
1. This year, we have included, for the first
time, explicit estimates for Soviet prein-
duction military training and utilities
for military facilities.
C. We also made major improvements in.the past year
in our methodologies for estimating the dollar
costs of Soviet weapon systems. Some of the
top weapons experts in the US military and in
industry helped us.
Impact of Changes on Dollar Cost Estimates
II. To illustrate the impact of these changes, let me
now discuss our latest estimates of what it would
cost in dollars to reproduce Soviet military pro-
grams in the US.
25
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A. Our current estimate -- shown on this chart --
is that the dollar cost of Soviet military
programs for 1975 is 114 billion dollars,
expressed in constant 1974 prices. (Chart:
US Expenditures and Estimated DoZZar Costs of
Soviet Defense Programs) That total exceeds
comparable US authorizations for 1975 by about
40 percent.
1. If the costs of pensions are subtracted
from both sides, Soviet programs in 1975
exceed US authorizations by some 50 percent.
B. The last published CIA estimate, disseminated
in January 1975, showed the total dollar costs.
of Soviet defense programs exceeding US auth-
orizations by 20 percent in 1974.
C. The estimates which I have been discussing
with you today show the dollar costs of Soviet
programs exceeding the US authorizations in
1974 by about 30 percent.
D. This upward adjustment of about 10 percent was
caused by two factors. The first was a down-
ward revision in US authorizations in the
latest Five Year Defense Program. But more
important were the changes. which I have just
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described in our estimates-of the size and
costs of Soviet programs.
1. The comparison between US and Soviet pro-
grams is particularly striking in the.in-
vestment area, shown on this chart. (Chart:
DoZZar Cost of Soviet Programs as a Percent
of US Defense Expenditures -- Investment
Cost) In investment -- which includes pro-
curement of weapons and equipment and con-
struction.of facilities -- estimated dollar
costs for Soviet programs exceeded US spend-
ing by 85 percent in 1975.
E. I'd like to note that the comparisons I've just
made represent nearly the limit of utility of
our dollar cost estimates.
1. They can provide a -general appreciation of
the magnitude of Soviet defense activities
in terms familiar to US decision makers.
They can also reveal broad trends in re-
lationships between the US and Soviet de-
fense establishments that are difficult to
measure in other ways.
2. While there is some relationship between
dollar costs and military capabilities,
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the dollar cost estimates can not be used
to draw inferences about relative military
effectiveness. Other data, such as the
composition of the forces, the character-
istics of weapons, and the strategic en-
vironment in which they might be used, are
far more important in making such judgments.
3. Moreover, we should bear in mind that the
two powers have different military require-
ments. Our bombers, for example, impose a
heavy need on the USSR for air defense; the
reverse is not true.
4. Nor can these dollar numbers be used to
draw conclusions about the burden of de-
fense on the Soviet economy. For that
purpose we estimate Soviet defense spend-
ing in rubles.
25)4
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254
Revision in Ruble Estimates
254
A. Our ruble estimates -- like the dollar esti-
mates I have just discussed -- are based pri-
marily on a direct-costing methodology.
1. Both estimates begin with the detailed
identification and listing of the physi-
cal components and activities which make
up the Soviet defense program for a given
year. The physical forces and programs
which we cost in rubles are precisely
the same as those which we cost in dollars.
Consequently, changes in our appreciation
of the Soviet force structure have an
impact on both the ruble and dollar esti-
mates.
2. To estimate some ruble expenditures, like
personnel costs, we apply ruble costs di-
rectly. For other items, we convert the
estimated dollar costs of Soviet equip-
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ment and activities to ruble terms. We
do this by applying ruble-to-dollar con-
version ratios for various classes of
equipment and programs, reflecting our
appreciation of the relation of Soviet
to US prices in these areas.
B. As a result of an intensive collection and
analytical effort over the past several
years, we have acquired a great deal of
new information on the ruble prices of
Soviet military equipment. This new
data --
has changed
markedly our appreciation of the ruble
costs of Soviet military programs, parti-
cularly in high technology areas. This
resulted in major adjustments in many of
the ratios used for conversion from dollar
to ruble terms.
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2. We have also acquired a number of ruble
prices for Soviet aircraft and their
components, as well as for missile
components and electronics. Analysis
of this information indicated that in
these areas -- as in shipbuilding --
major upward adjustments were required
in our ruble-to-dollar conversion ratios.
C. The effect of the changes I have described
so far is illustrated on this chart, which
shows our latest estimates of Soviet de-
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fense spending in rubles. (Chart: Esti-
mated Soviet Expenditures for Defense,
1970-75)
1. In our estimates, we have postulated two
possible definitions of defense activity,
because we do not know precisely how
the Soviets account for their defense
programs. Using a definition which
encompasses a range of activities
comparable to those included in the US
budgetary definition of defense, we esti-
mate that the USSR spent some 40-45
billion rubles in 1970. In 1975 esti-
mated total outlays for these purposes
had risen to 50-55 billion rubles,
measured in constant 1970 rubles.
This is shown by the lower band on this
chart.
a. Under a broader definition -- one
which the Soviets might use and
which would include additional
military-operated programs such
as the entire space program we estimate that total defense
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spending amounted to 45-50 billion
rubles in 1970 and rose to 55-60
billion rubles in 1975. This
definition is portrayed by the
upper band. The single line be-
low shows the announced Soviet
defense budget.
2. The new estimates for 1975 are about
twice the previous intelligence estimate
of defense spending in that year. About
90 percent of the increase in the estimate
is accounted for by our new understanding
of Soviet prices and costs.
3. Our new estimates indicate that the average
rate of growth in ruble expenditures for
defense during 1970-75 was 4-5 percent.
The annual growth rates varied during the
period, however, as shown on the lower
part of the chart, reflecting primarily
the contraction and expansion of procure-
ment outlays for strategic missiles.
Historically, the growth in total Soviet
defense spending has accelerated during
periods when the USSR re-equips its forces
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with new strategic weapons. As these
programs reach completion, the rate of
growth in overall spending tends to decline.
4. Previous estimates, while showing the
same general pattern of growth, placed
the long-run average annual rate of growth
of Soviet defense expenditures in rubles
at about 3 percent. The new ruble prices
of military hardware indicate that high-
technology programs -- the most rapidly
growing component of Soviet military ex-
penditures -- are much more costly to the
Soviets than we previously believed. As
a result, the new estimates show more
rapid growth.
5. This chart shows how our new estimates
of ruble prices for Soviet equi ment
have affected the growth rates. (Chart:
Estimated Soviet Defense Investment Ex-
penditures, 1970-75) Investment ---
procurement of weapons and equipment
and construction of facilities -- com-
prises about 40 percent of total Soviet
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defense spending in rubles. This growth
reflects both the emphasis the Soviets
are putting on modernizing their forces
with new, high technology systems and
the fact that these items are extremely
costly to them.
I want to emphasize, however, that
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much of the new data underlying the revision is
still being evaluated. Consequently, the esti-
mates should be considered as interim, and sub-
ject to change as the work progresses and new
information is acquired.
C. The methodology we use contains inherent limi-
tations and while the new data do improve our
confidence in the present results, they must
be treated with reserve.
Resource Implications
V. To close this portion of the briefing, I'd like to
discuss the resource implications of our new ruble
estimates. Although no single measure adequately
describes the economic impact of the Soviet defense
effort, defense spending as a share of gross na-
tional product is often used for this purpose.
A. When measured according to a definition of de-
fense activities roughly comparable to that
used in the US, the Soviet defense effort ab-
sorbs some 11-12 percent of Soviet GNP. When
the calculation is based on the broader defini-
tion of defense, the share increases to about
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12-13 percent. Because the rate of growth in
defense spending was roughly the same as the
growth in GNP during 1970-75, there was little
change over the period in the share taken by
defense.
1. The new estimate of the share of defense
in the Soviet GNP is almost twice as high
as the 6-8 percent previously estimated.
As Mr. Bush stated earlier, this does
not mean that the impact of defense pro-
grams on the Soviet economy has increased:
-- only that our appreciation of this im-
pact has changed. It also implies that
Soviet defense industries are far less ef-
ficient than we formerly believed.
B. Another economic aggregate which may be used
to describe the impact of defense programs on
the economy as a whole is the defense share of
machinery output. At present Soviet defense
takes about one third of the output of the
machine-building and metal-working sector --
the sector that produces investment goods as
well as military weapons and equipment.
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C. We do not know exactly how the Soviet leaders
evaluate the size and economic burden of defense.
Some leaders often make public statements which
reflect their concern about the sacrifices in
economic growth and consumer satisfaction that
follow from their defense priorities. This
concern, however, has not prevented steady in-
creases in military programs. Major defense
programs have been generously supported even
in periods of economic setbacks.
1. Of course this situation may not always ob-
tain, and the problem of lagging economic
growth will make steadily rising defense
costs a painful issue for the leadership.
a. But the economic burden will not be the
only, or perhaps even the major, con-
sideration in its specific decisions on
future defense programs.
b. Other factors -- such as the leaders'
views of foreign military threats, the
powerful institutional forces which
support defense programs, progress in
arms limitations negotiations, and the
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momentum of technological advances in
the defense sector -- will also have a
major impact.
2. While the implications for future programs
of our new perception of the Soviet defense
effort are not yet clear, we believe that
long-term growth in military spending will
continue, albeit perhaps at a more moderate
pace for the next few years. The annual
increment in Soviet GNP is large enough to
allow both increases in defense spending
and at least slow improvements in living
standards. Moreover, even the present level
of Soviet defense investment programs is so
high that with modest rates of growth -- or
even with a constant level of defense spend-
ing -- inventories of military equipment
could continue to rise. Much work remains
to be done, however, in assessing the im-
plications of our new estimates of ruble
defense expenditures for future Soviet
policy decisions.
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VI. Mr. Chairman, we have more detailed data on the
allocation of our estimates to military mission
or resource categories. Rather than go into them
here, I will make this information available to
your committee as part of the sanitized version
of our testimony, and proceed now to the ques-
tion of China.
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PART III: THE CHINESE ECONOMY
Data Availability
I. In turning to China, Mr. Chairman, let me stress one
basic analytical problem: very little hard economic
information is available on China, compared with the
large amounts concerning the USSR.
A. Nevertheless, we do have enough data
the outlines of economic policy; to analyze for-
eign trade in some detail; and to ascertain gen-
eral trends in domestic output, weapons develop-
ment, construction, and consumer welfare.
Development Objectives
II. In its planning, Peking has two fundamental economic
objectives: first, to maintain an adequate level of
food and clothing for the growing population; and
second, to develop a modern industrial base that,
while small, will be capable of supporting a strong
defense force.
A. In pursuit of these objectives, China initially
adopted the Soviet model for both its economic
organization and its pattern of resource alloca-
tion.
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B. Soon, however, it became apparent that Soviet-
style policies and institutions were in many
ways inappropriate.
C. In the first major reform, you may recall that
in 1957 Peking tried to increase efficiency by
revamping its highly centralized planning and
management procedures to allow for greater par-
ticipation by the provinces and lower levels.
D. The second major change was begun in the early
1960s, following a series of crop failures.
China was forced to increase the share of re-
sources going to agriculture.
1. With land limited, expansion of production
had to come from increased yields. This in
turn required costly modern inputs such as
chemical fertilizers.
2. The priority accorded agriculture showed most
recently in 1972-73 when the Chinese de-
cided to make large-scale purchases of Western
plants and equipment to produce chemical
fertilizer and synthetic fibers.
E. Next in investment priority, following agriculture
and those industries directly supporting agricul-
ture, are certain segments of industry, the
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military establishment, and transportation and
communications.
1. In industry, the favored positions of the
petroleum and petrochemical industries are
clear. An investment shift benefiting coal
and iron ore mining, and especially finishing
facilities for steel products, has also been
taking place.
2. In transportation, large investments have
been made at China's major seaports to handle
the recent sizable expansion in foreign
trade.
Consumption Trends
III. What, you may ask, has been the result of these shifts
on the Chinese people?
A. Probably most important is the fact that per capita
real consumption has gradually risen, even though
the share of national output going for consump-
tion has steadily declined. This rise in consump-
tion has appeared largely first in industrial con-
sumer goods and second in services provided by
the state, particularly health and education.
1. Consumption has grown most rapidly in rural
areas. They have benefited from government
policy to encourage production and to narrow
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the gap between income in the countryside
and the cities.
2. The slower rate of urban consumption growth
has caused some labor problems in recent
years. Average wages are now only slightly
above the level of the late 1950s.
B. Widespread dissatisfaction with wages became ap-
parent during the 1974 campaign to criticize
Lin Piao and Confucius.
1. Despite a highly-charged political atmosphere,
which made it risky to complain about personal
welfare, workers persisted in voicing their
grievances.
2. While officials have hinted that the problem
will be dealt with in the future, it will not
be readily solved because it involves politi-
cal issues of ideological versus material
motivation -- plus the practical problems of
allocating scarce resources.
Economic Growth Since 1965
IV. I will now turn to the trend of Chinese economic growth
over the past ten years. (Chart: China: GNP, Industrial
Production, and Agricultural Production)
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A. As this chart shows, the rise has been impres-
sive, but erratic. Domestic political upheavals
largely explain the uneven pattern.
1. As you see, production fell sharply in the
aftermath of the Great Leap Forward (1958-
60) and to a lesser extent during the Cul-
tural Revolution (1966-69).
2. The anti-Confucius campaign in 1974 -- al-
though less disruptive -- took its toll slow-
ing the expansion of output.
B. Nevertheless, with the help of a large investment
program, China's gross national product in 1975
was roughly 75 percent larger than it was'in
1965.
Industry
V. China's industrial production grew at an even faster
pace. In 1975 it was almost two and a half times
the level of 1965 -- an average annual growth rate
of 9 percent. (Chart: China and USSR: Industrial
Production)
A. You can see that Chinese industrial growth
compares favorably with that of the USSR, even
though the pattern has been much less steady.
B. As would be expected in an economy stressing
investment, output of producer goods has grown
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more rapidly than has production of consumer
items -- averaging 10.5 percent a year.
1. Machinery production, a major component
of producer goods, has grown even more
rapidly -- by 14 percent yearly.
2. Progress in the petroleum industry has been
particularly noteworthy. In the past decade,
crude oil production has grown seven-fold,
from 220,000 barrels a day to 1.6 million
barrels a day.
3. But even in those sectors where growth has
been less spectacular, substantial progress
has been made: in steel, a troubled indus-
try in recent years, output during the past
decade has more than doubled.
D. In comparison, the growth of industrial consumer
goods production has averaged 7 percent yearly
since 1965.
1. Some items, made entirely from industrial
raw materials, have grown more rapidly; for
example, the output of bicycles has risen by
13 percent yearly.
2. Other items, which depend on raw materials
from agriculture, are relatively sluggish;
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for example, cotton cloth production has
grown by only 2 percent yearly.
E. Since most consumer goods in China are derived
either directly or indirectly from agriculture,
the practical necessity for heavy investment in
agriculture becomes more apparent from the above
data.
F. Before turning to agriculture, I would make a
few comments on industry's figures for 1975,
when production rose by about 10 percent, up
from only 5 percent in 1974.
1. First, the factors that lowered performance
in 1974 -- coal shortages, work stoppages,
and transport tie-ups -- were less prominent
in 1975.
2. These depressing factors still had their af-
fect,. however. For example, steel production,
which grew by 9 percent in 1975, was never-
theless only 2 percent higher than in 1973.
3. In contrast, the petroleum industry continued
its strong growth, with a 20 percent increase.
4. Healthy gains were reported for other commodi-
ties,. but in many instances these gains
largely represented a step-up from the lack-
luster performance of 1974.
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Agriculture
VI. Now, a few points on China's agricultural picture.
A. First of all, foodgrain production in the
past decade has barely kept pace with the
estimated 2 percent annual growth in'popu-
lation. And, cotton output has not even
met this low rate of growth -- growing by only
16 percent over the entire ten-year period.
B. This may be a good place to draw attention
to Peking's recent successes in population
control.
1. New research indicates.that annual popu-
lation growth has fallen appreciably
since 1970, perhaps from 2.3 percent in
1970 to 1.8 percent in 1975. A con-
tinuation of present policies should
lead to even further drops in the birth
rate.
2. These gains reflect Peking's sober ap-
praisal of the difficulties inherent in
raising agricultural output.
C. To return to agriculture, it is interest-
ing to note that year-to-year fluctuations
in Chinese output of grain have historically
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been much narrower than fluctuations in So-
viet output, as this chart shows. (Chart:
China and USSR: Grain Output)
1. Over the past five years, for example,
Soviet grain output has fluctuated by
as much as 27 percent from expected out-
put, compared with a maximum deviation
of about 2.5 percent for China.
2. The primary reasons are differences in
cropping practices and weather patterns.
a. China practices multiple cropping,
and weather patterns rarely produce
a poor harvest in both North and
South China in the same year.
b. In contrast, the Soviet Union pro-
duces more than two thirds of its
grain in regions of marginal pre-
cipitation, frequently subject to
drought.
D. In 1975, Chinese agricultural production
showed no appreciable improvement over 1974.
1. Foodgrain production was essentially
unchanged from the record crop of about
260 million tons (excluding soybeans)
in 1974.
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2. Soybeans and some minor industrial crops
gained slightly; cotton output may have
declined by as much as 10 percent.
3. Improved harvests in regions surround-
ing North China's major cities permitted
a reduction in grain imports in 1975 to
only 3.3 million tons, about one half
the 1974 level. Shipments were almost
entirely under long-term agreements with
Canada and Australia.
4. China re-entered the world cotton market
last fall and had purchased 70,000 tons
by the end of the year.
Foreign Trade
VII. I will now turn to China's foreign trade. China's
total trade was $14 billion in both 1974 and 1975,
as shown in this chart. (Chart: China: Foreign
Trade, by Major Area)
A. Taking a longer view, the value of China's
foreign trade in 1975 was more than three
and a half times trade in 1965, although the
growth shown for recent years is exaggerated
greatly by price increases.
1. The past decade also saw a further shift
in China's trade orientation toward the
Developed West and away from the USSR.
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Whereas two thirds of trade was with
Communist nations in the late 1950s,
the share now is less than 20 percent.
B. The jump in imports in recent years in part
reflects Chinese willingness to incur debt
in order to purchase Western industrial
plants and transport equipment in quantity,
as shown in this chart by the trade deficits
since 1973. (Chart: China: Trends in For-
eign Trade)
1. In 1974, the Western recession depressed
demand for Chinese exports and contributed
to a record trade deficit of $800 million.
2. In 1975, by trimming imports and pushing
exports, the deficit was reduced to less
than $400 million.
C. Imports of machinery and equipment continued
to climb in 1975, reaching $2 billion, com-
pared with $1.6 billion in 1974 and $330
million back in 1965.
D. By contrast, China cut back sharply last
year in agricultural imports.
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1. At $820 million, they were less than half
the 1974 figure and not much greater than
the $710 million of the years earlier.
E. China's emergence in 1973 as an oil exporter
came at an opportune time.
1. Earnings from expanding oil exports have
compensated for falling demand in the
West for Chinese textiles and a variety
of light manufactures and handicrafts.
2. Oil exports of 172,000 barrels a day to
non-Communist countries earned $750
million in 1975, up from 88,000 barrels
a day and $450 million in 1974.
F. During 1975 a pause took place in new pur-
chases of whole plants from the West in or-
der to absorb the industrial plants already
ordered.
1. During 1972-74, China signed contracts
for about 110 plants, worth $2.2 billion,
for delivery through 1978.
Trade With the United States
VIII. As for United States - China trade, the surplus
of almost $700 million enjoyed by the US in 1974
fell to less than $150 million in 1975.
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A. Agricultural exports, which accounted for
80 percent of total US exports to China in
1972-74, have been phased out for the time
being.
B. US exports to China in 1976 may be less than
the $300 million of 1975.
1. In contrast to farm products, however,
US industrial exports should continue
strong on the basis of previous contracts
for plants and equipment.
C. This year, US imports from China may rise
to $200 million from the $160 million of
last year.
Foreign Economic Aid
IX. One other element worth noting is China's foreign
economic assistance program. (Map-chart: China:
Aid Activities, 1956-75) During the past two
decades, Peking has pledged $4 billion in economic
aid to the LDCs, about two-thirds of the total going
to Africa. This aid is provided through interest-
free credits with extended repayment schedules.
A. About $1.7 billion of this aid has already
been drawn.
B. The single most important project has been
the recently completed $400 million Tan-Zam
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Railroad, which links the Zambian copper belt
to the Tanzanian port of Dar es Salaam.
C. In 1975 the general pattern continued. Peking
signed agreements for new aid totaling about
$300 million, of which $180 million was with
African countries.
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PART IV: THE COSTS OF CHINESE DEFENSE PROGRAMS
I. In this last section of my prepared statement,
Mr. Chairman, I will comment on the costs of China's
defense programs. The basic consideration to bear
in mind is that the Chinese military in many ways
mirrors the economy that supports it.
A. For its combat strength, the greater part of
China's armed forces relies upon manpower and
easily manufactured, low-technology weaponry.
This like most of China's economy is labor inten-
sive, with little capital.
B. In contrast, China has also developed and de-
ployed a limited number of modern weapons, re-
flecting the mastery of some of the technology of
an advanced industrial nation by the economy's
small, capital-intensive sector.
defense production accounts for a large portion
of activity in the advanced industrial sector --
far larger, for example, than is the case in the
US or USSR.
D. Some understanding of trends in China's defense
effort can be obtained by examining our esti-
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mates of dollar costs for procurement of mili-
tary equipment.
1. The term "procurement" as we use it here
includes only the cost of producing arms
and equipment, not any costs-associated with
research, development, testing, and evalua-
tion (RDT&E), or those for facilities, per-
sonnel or operations and maintenance.
2. Let me remind you that dollar cost estimates
reflect the cost of reproducing the Chinese
programs in the US.
II. Chinese military procurement, as measured in constant
1974 dollars, grew very rapidly in the late 1960s,
but after 1971 fell substantially. For the next three
years it remained at a plateau about equal to the 1969
level as shown in this chart. (Chart: China: Military
Procurement).
A. Much of the decline resulted from a sharp drop
in aircraft production, but there was some slow-
down in almost all of the Chinese weapon procure-
ment programs. (Preliminary rough estimates
show a somewhat similar trend in RDT&E costs,
with rapid growth in the late sixties, a peak
in the 1970-71 period, and a subsequent decline.)
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B. As you can also see in the chart, there was a
distinct rise in estimated procurement costs in
1975, although the level is still much below the
1971 peak.
1. Most of this increase is attributable to
more costly aircraft and to some increase
in ship production.
C. What meaning do we attach to the lower level of
procurement since 1971?
1. It does not involve a reduction in Chinese
forces, but rather shows that new equipment
is being delivered to the forces at a slower
rate.
2. The primary reasons for this decline probably
are:
--.a reduced likelihood of armed conflict
with the Soviet Union;
-- new priorities favoring civilian economic
growth by a less military-oriented lead-
ership; and
-- difficulty in developing follow-on ad-
vanced weapon systems.
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III. China's past history of sudden bursts and unexpected
reductions in defense production makes it difficult
to judge whether the upturn in 1975 is a temporary
phenomenon, or the beginning of a long-term trend.
I offer a couple of projections, however.*
A. First, over the next several years, as the Chi-
nese begin to replace obsolescent equipment with
more modern systems, procurement costs can
be expected to grow somewhat, even if produc-
tion in terms of numbers of units does not in-
crease.
1. In 1975, for example, the increased produc-
tion costs of a few relatively more modern
and expensive weapon systems more than off-
set savings from the reduced production of
older and cheaper weaponry.
B. Second, the present general ordering of military
versus civilian priorities probably will persist
through this decade, no matter who wins the cur-
rent struggle for political power.
1. This is because the two most important bases
of this ordering will continue to be the
controlling factors for the remainder of this
decade. I refer to the cost and difficulty
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of a more ambitious weapons effort, and the
urgency of China's need to modernize and
expand its basic agricultural and industrial
production capacity.
C. Third and last, this does not preclude further
military growth and modernization.
1. If economic factors dominate defense policy
decisions, the growth and modernization can
be expected to proceed at a measured pace
that will probably increase gradually as
China's industrial base expands.
2. A sudden diversion of resources into defense
production, however, can not be ruled out
if Chinese policymakers were to perceive a
substantially greater external threat. As
you know, China's perception of an increased
threat from the USSR in the late sixties led
to the rapid expansion in defense programs at
that time.
3. Moreover, China's now enlarged military indus-
trial base, resulting from that buildup,
provides China with the potential for a much
greater military production effort.
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