PROPOSED REPORT ON U.S. ECONOMIC INTELLIGENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000300040023-4
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 21
• Document Creation Date: December 20, 2016
• Document Release Date: August 29, 2007
• Sequence Number: 23
• Publication Date: May 12, 1982
• Content Type: MEMO

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May 12, 1982
MEMORANDUM FOR THE PRESIDENT'S FOREIGN INTELLIGENCE ADVISORY
BOARD MEMBERS
SUBJECT: Proposed Report on U. S. Economic Intelligence
Attached is the proposed Report on U. S. Economic Intelligence
prepared by the Economic and Natural Resources Task Force.
Members of the Task Force are:
Chairman
Co-Chairman
Joe Rogers
Robert Six
John Connally
Leo Cherne
David Abshire
Martin Anderson
Alfred Bloomingdale
W. Glenn Campbell
Peter O'Donnell
H. Ross Perot
Leo Cherne
Co-Chairman
Economic and Natural Resources
Task Force
Attachment: a/s
(Mr. Cherne gave to DCI)
DCI gave cy to: DDI (Mr. Gates)
SA/DCI (Mr. Meyer)
ER/ES sent c EXDIR
ER File
3 JUN 1982
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APPENDIX A: GENERAL OBSERVATIONS
SURPRISE AND ECONOMIC INTELLIGENCE
Areas which suddenly increase in importance as a result of present
or projected crisis and which require economic intelligence, are often
not high on the priority ladder and, consequently, were not previously given
the attention suddenly made necessary. Available economic intelligence_.
in such situations is usually deficient in illuminating optional policy
responses. This has been true of Central America, the Caribbean and
Eastern Europe.
THE NEW QUICK-REACTION CAPABILITY
A corrective step taken by the DCI has already helped to overcome this
deficienty. The intelligence community has been required to develop a
"quick reaction capability." These rapidly prepared assessments have been
provided. in fact. in recent months and they have been helpful in the oolicv
process. Where a low priority had previously governed intelligence directed
to that area, there is necessarily less depth, often of economic intelligence
which has been accumulated and available to throw maximum light on the
policy choices.
THE OFFICE OF GLOBAL ISSUES
A more fundamental step has been?required, and personally directed by
the DCI Casey, which offers considerable promise that surprise will find
us less and less wanting. An office of Global Issues has been created within
the CIA to deal with intelligence requirements in those parts of the world
which increasingly challenge our economic strength and stability because
they have developed significant technological strength enabling them to
threaten our primacy as well as to impede our ability to withhold significant
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APPENDIX A - 2 -
military and industrial technology from the Soviet Union or other
adversaries. The Office of Global Issues was brought into being to deal
with intelligence needs that cut across geographic area boundries as well
as to develop the capability to meet a host of new intelligence estimating
needs as we face the crises most likely to occur in the future.
THE INTEGRATION OF AREA ANAYLSTS INTO MULTI-DISCIPLED INTELLIGENCE
A substantial reorganization of the CIA's analytic community,
initiated by the DCI in the fall of 1981, promises a significant improvement
of all forms of analytic intelligence, including economic. The various
forms of intelligence have been combined so that the specialists in the
different disciplines all function together as a joint enterprise, focusing
on the geographic area-of the world to which their work relates. The
synergism expected from the combined intelligence disciplines should make
more useful and sophisticated the output of previously separate analytic
staffs.
There is discontent in some sections of the analytic community as a
result of this reorganization. It remains to be seen whether the dissatis-
faction has any significance beyond the normal resistance to change.
The problem of information overload is one which PFIAB urged attention
in the mid 1970s. The problem has not been solved and may, in fact, be
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APPENDIX A - 3 -
more'severe as a result of the improvements in memory and speed of the
technology employed. PFIAB should give continuing attention to this
problem.
SHORTAGE OF SPECIALISTS WITH FOREIGN LANGUAGE CAPABILITY
Among the handicaps to improved intelligence is one which is frequently
acknowledged -- serious shortages of personnel with adequate foreign
language competence and expertise in the cultural and historic backgrounds
of particular areas in crisis. Some of the areas in which there is a shortage
of such competence, for example are of obvious
importance. This deficiency, not quickly remediable, is as evident in the
processing of technical intelligence by the NSA as it is in the CIA. We
have no information whether this same deficiency diminishes the contributio
which can be made by human intelligence. To some extent, it is logical to
assume that to be the case.
RESISTANCE TO NEW AND MORE QUALIFIED PERSONNEL
Improving the quality of inelligence staffs runs into another staffing
barrier. It is difficult to improve quality by attracting new professionals
who have substantial capability, unless one can place these more experienced
individuals at appropriate levels within the organization. The intelligence
structure, like all bureaucracies, resists introducing any newcomer at higher
levels of professional work than those already in place.
RELATIVE QUALITY OF VARIOUS KINDS OF INTELLIGENCE
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APPENDIX B: THE CHANGING NATURE OF ECONOMIC INTELLIGENCE
Foreign based economic problems faced by the U.S. during the 1970s
were essentially defensive ones for us:
1) Oil shortage and U.S. petroleum dependency on unstable foreign
sources.
2) Consequent concern about U.S. dependence on foreign sources for
strategic and critical materials
3) High technology flow (legal and illicit to the Soviet Union)
4) Massive reserve fund accumulations by Persian Gulf members of
OPEC -- with feared threat, now diminishing, to the stability of
the Western banking and financial structure.
U.S. economic intelligence during the 1970s mirrored our concern
with these threats and-was, and largely continues to be, a servant of
policy designed to minimize shocks and threats. This economic intelligence
capability has, in the last decade, grown and improved.
Even though the need for economic intelligence for defensive policy
continues, a new need has arisen which, not surprisingly, is only partially
satisfied by the intelligence community.
If the essence of the need for economic intelligence in the 1970s was
to enlarge our ability to defend our interests against shocks to our economy
and those of our allies, an altogether new emphasis is likely to dominate
today's and tomorrow's foreign policy concerns and intelligence needs.
This new intelligence focus flows from the increasing need to retaliate
in circumstances which threaten our national interests.
Several serious crises during the last few years illustrate this
changing need for the exercise of U.S. national power through the application
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APPENDIX B: - 2 -
of economic and political measures rather than the traditional reliance on
military strength.
--the taking of I' tages by Iran resulted in the application of
economic penalties.
--the invasion of Afghanistan led the U.S. to impose an embargo on
the sale of U.S grain to the Soviet Union.
--the military takeover of the government of Poland and the application
of martial law, led to a debate within our government, and extensive
disagreement within the Western alliance, as a variety of economic
responses were considered. No measure which was considered proved
equally useful or acdeptable in its effect on the U.S. economy and
the economies of our closest alliance partners. Nor were the real
and long-term effects on the Soviet's client states in Central Europe
sufficiently clear. In addition, the dynamic effects on the Soviet
Union, which would result from these debated reprisals, were
inadequately illuminated by economic intelligence.
The Soviet Union is in a period of significant demographic, economic
and political stress. The economies of Central Europe are extremely
troubled. In Europe, our conventional military responses are at best
hobbled and our capability deficient.* Yet our economy, despite the
difficulties we presently confront, has no equal. But we are unable to bring
this overwhelming strength to bear to meet our necessities and opportunities
as we face the actions of our adversaries. To do so, in the very first
instance, requires that our intelligence be able to play its role in
providing the essential knowledge and judgments to illuminate our options
and their short and long run consequences.
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APPENDIX B: - 3 -
The most important judgment this Board can make is that further
strengthening of economic intelligence, a process already underway, is
essential if we are to be able to use the most powerful element of our
national strength -- the size and strength of the American economy. To do
this, economic intelligence must, while continuing its defensive attention,
move more creatively to production of estimates and analysis which provide
vital judgments on the range of tactical and strategic measures which may
be required to:
.a) Assist in the rapid adoption of tactical policy decisions
needed to discourage or respond in retaliation to threatening or
adverse Soviet behavior.
b) Assist in the formulation of strategic economic policy designed
to stimulate or coerce long-range modification of Soviet directions
and capability.
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PROPOSED REPORT ON U.S. ECONOMIC INTELLIGENCE
May 10, 1982
It was the decision of this Task Force that its initial
effort should be focused on the adequacy of intelligence
in the following areas:
Assessment of Soviet strengths and weaknesses
Economic means of maximizing:
Soviet dependency
Soviet vulnerability
Soviet injury
Dynamic assessment of impact of:
denial of U.S. grain
denial of gas pipeline assistance
denial of credits
denial of specific technologies
and other methods of.reprisal against Soviet
repression, aggression, adventurism and the
exploitation of instability elsewhere in the
world.
We identify this as the first effort, but it should not be
understood to mean that we are content with existing economic
intelligence, either in areas of resource stringencies or con-
straints which threaten our national security. There are other
areas as well to which this Board will devote its future efforts.
The urgency and value of this effort to see that economic
intelligence more adequately meets the needs of policy in these
directions is clear from the consensus judgment about the problems
the Soviet Union is likely to face ,in the years immediately before
The assessment presented to us by the top Soviet analysts
within CIA conveys the following:
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The 1980s will be a decade filled with considerable difficulty
for the Soviet Union. An unprecedentea congruence of economic
difficulties together with problems which flow from a change in
Soviet leadership succession is likely to occur in an environment
of significant pent up tension. The demands on U.S. policy -- to
capitalize on opportunities to advance U.S. and Western security
interests, and minimize undesirable outcomes in a timely fashion --
are likely to be heavy.
If any doubt remains about the urgency of this intelligence
task, it was dissipated by a candid judgment made to this Task
Force by DCI Casey': "We do not know sufficiently the way in which
.the Soviet Union operates~71-___.
STRENGTHS AND WEAKNESSES OF THE SOVIET' ECONOMY
The operating consensus within the CIA as it assesses Soviet
industry, labor force inadequacies, demographic change, present
and future resources and their geographic location, an inadequate
infrastructure, particularly of transportation systems, stress
the following economic facts and projections.
Major Elements of Soviet Strength:
The principal strengths of the Soviet economy are its size
(second largest), large base of natural resources, a labor force
that is 1/ times that of the U.S., an unchallenged commitment to
military growth, and the ability to produce modern and formidable
weapons in quantity.
Principal Basic Chronic Weaknesses:
I On the other hand, production of consumer goods is abysmal,
and the agricultural sector is one of the least efficient areas
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of the Soviet economy. Additional resources applied to agriculture
have produced little or no return. _
The Soviet system tends to reproduce its industrail structure
in the same form and in the same locations with consequent weaknesses
and deficiencies.,
The USSR's dependence on external technology is believed to
have caused a consequent degradation in their own technology base,
except in the production sector devoted to meeting military needs.
There are no built-,in balancing forces. Thus, for example,
heavy industry continues to be emphasized at the expense of
consumer goods. This may lead to political problems for the
leadership. It is likely to exacerbate both the labor force
problems and the demographic tensions-which lie ahead.
Growing Resource Stringency:
The Soviet Union-is moving into an era of great resource
stringency. The Soviets have exploited areas of rich resources
to the fullest, and are now finding it increasingly difficult to
sustain, let alone increase, production of oil, coal, and iron ore.
(but not precious metals., including non-ferrous strategic metals
such as titanium).
They have depleted the areas that geographically are easily
accessible and which. incur lower extraction and production costs.
They have large resaurce reserves but the quality of those unexploited
resources is not as good and their, locations make them more difficult
and costly to exploit. Extracting these new resources will require
enormous additional investment and an infrastructure not now in
existence.
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For example, the Donets coal basin that produces the world's
best grade of coking coal is in decline. The vast coal fields of
Siberia produce a much lower grade of coal that must be shipped
via the single Trans-Siberian rail line to the industrial concen-
tration west of the Urals. Much of the coal is lost enroute
because it auto-ignites and smoulders on exposure to air and
significant quantities are eventually reduced to ashes.
The Russians (or-anyone else) have yet to develop the technology
to permit electrical transmission over the great distances involved,
thus negating the option of'transforming the coal into energy in
Siberia. Any other alternatives, such as building factories in
the east, would involve enormous cost, vast transportation problems
and labor force resistance or unavailability.
Declining Oil Output:
To sustain oil production during recent years, the Soviets
have resorted to pumping water into the more. depleted oil fields
in order to salvage as much oil as possible., Unfortunately, as
more water is pumped into the oil fields, there-is more water and
less oil in each barrel pumped resulting in higher and higher costs
per barrel of oil produced. Because oil exports are a major source
of hard currency for the USSR, they have cut back on shipments to
the Bloc countries. The foregoing premise is the essence of the
CIA analysis of future Soviet oil stringency. We nevertheless
remain restless without, at this point, being able to challenge
this conclusion. Our discontent flows from the fact that so long
as there is oil in the ground in significant quantities, and this
fact is conceded, one cannot conclude that they will refrain from
finding ways of extracting that petroleum. There is, for example,
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the possibility that the new leadership in the Soviet Union in
the course of the succession transition, may choose 'this area
as one of priority concern.
The New and Growing Labor Force Problems:
The present premise which animates the following expectations
is that of the CIA Soviet analyses.
Although. the total population of the Soviet Union continues
to grow, the Russian proportion of the toal population is gradually
declining, resulting in an increasingly inadequate skilled labor
force. (The overall population increase "results from a growing
in the'non-traditional Great Russian population area.) Sixty
percent of the.population is under 40. Until the mid 1970s, they
were accustomed to-yearly increases in their standard of living,-
but in recent years the'standarct of living has remained static.
ji This both. reduces labor incentive and may find these younger
workers less docile.
Given that (1) the economy is very dependent on labor-intensive
processes; (2) the skilled labor force'is not growing adequately;
and'(3) there are severe.restraints on the availability of capital
for investment in.labor-saving methods, the Soviet economy is
expected to take an abrupt and steep down-turn in the mid-1980s.
Severe Decline Expected'iri the Economy of the'USSR;
Labor productivity has already fallen drastically. There has
been a continual slide in capital investment. Whereas they used
to invest 5 to 6 percent of GNP per year, planning through-the
mid-1980s calls for only l.b percent of GNP for investment per year.
The outlook through. the mid-1980s is one to two percent, growth. per
year in economy. There may be a one-time rebound next year if the
weather permits a good harvest.
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(We insert here a strong caution about being seduced by any
one coherent premise when it is one of the functions of the
intelligence community, and certainly the function of. this Board,
to raise questions about the reliability of assessments, no matter
how logical they appear to be at the particular moment. If. one
were to examine in our own economy the surprises which have been
thrust upon us by changes that have taken place within the last
decade or two, a certain measure of humility would emerge.
These comments are not made in criticism of either the
professional capability of the economic intelligence analysts
or the logic which leads them to their: present conclusion.)
Deficient and Archaic Transportation Capability:
The Soviet transportation system (consisting primarily of
railways since the USSR has neither a highway network nor.numbers
of trucks comparable to the U:S. or Western Europe) is stretched
to the breaking point now. It is not expected to be able to meet
future needs. As an example, harvest time requires a huge diversion
of available transport to move harvested grain, resulting in a
period during the fall and early winter when materials to be
transported become back-logged. Each year the period of back-log
has become longer and this year it wasn.'t cleared until February
of 1982.
The Growing Need for Hard Currency and' Foreign Credits:
Perhaps their most vulnerable area is that of credit. They
are in a hard currency bind, with their debt now at $20 billion
and growing. A $20 billion debt would normally be readily manage-
able, but for the essential unconvertability of?their currency, an
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urgent need for imported grain and industrial equipment, the
dependence of the increasingly troubled Bloc nations and the
consequent need for credits. (The debt of the Bloc states adds
an additional $50 billion which they find increasingly unmanage-
able.) The USSR is running out of hard currency earning capacity
ii with problems in oil, coal and steel production; no new clients for
arms sales, while facing the continuing need to import grain.
As a result of population growth., nearly static grain output
and Brezhnev's decision to increase meat production, the Soviet
Union moved from being a grain exporter in the sixties to being
an importer in the seventies and continuing into the eighties.
There is an essential and unstated premise in the CIA projec-
tions that, having learned the lessons we already have, especially
in Central Europe, further credits.in significant amounts are not
likely to. be readily forthcoming. We register skepticism that
this in fact will prove to be the case.
The vigor with. which. capitalist institutions, including the
financial institutions, respond to real or illusive benefits'
cannot be underestimated. The fact that private interests will
be moved to serve private purposes makes all the more urgent the
maximum intelligence illuminations of the effects of the options
under consideration. 'In any event, as the Soviet ability to earn
hard currency degrades, they will find it increasingly difficult
to maintain the required level of food imports. There will be
other problems for the Soviets resulting from the decline in export
earnings that they-are now facing. How can they (1) continue to
support their clients, (2) continue military growth, and (3) satisfy
the 60 percent of the population that is under 40 as the country
faces a static standard of living? .
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The Increasingly Imminent- Chan'gein Leadership:
There are additional uncertainties and difficulties added
to the mid-1980s period for the Soviets as a result of Brezhnev's
approaching replacement. There will be increasing jockeying for
succession within the Politburo. Every change of leadership since
Stalin has seen a major change of some aspect of national policy,
so whoever succeeds hrezhnev is also likely to institute major
changes as well.
THE CRUCIAL PROJECTED CHANGE'IN THE'"SOVIET ECONOMY
If the preceding CIA assessment Is essentially accurate and
there is no reason to question major elements of it (birth rates
and the changing demography are already unalterable), the problem.
for the Soviet Union may be quite starkling.-.For the greater
part of Soviet history, the location of its key industries, its
basic energy sources (oil, coal and water), the location of its
trained labor force, its major universities and the location of
its scientific, technical and managerial personnel, the location
of the bulk of its grain and meat output, was concentrated in the
heartland of European Russia. While widely dispersed and with
chronic transportation deficiencies, this, nevertheless, provided
the base for an integrated economy.
The economy which will emerge during the.balance of the 1980s
in some profound ways changes and stresses the dynamic interplay
of each of these basic elements in the economic structure. The
bulk of industrial activity, including that segment devoted to
military production, will continue, as.in the past, to be located
in the Soviet European heartland. So too will the increasingly
deficient agricultural production.as well as the Institutes and
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Universitieswhich produce the Soviet's scientific, technical
and managerial personnel.
More and more, however, energy production will concentrate
in the distant areas where new oil and gas, as well as the hoped-
for additional coal, will be exploited. Climate, and inadequate
manpower, will exacerbate the fact of distance and the inadequacies
of transportation. Increasingly, the growth of populations needed
to un this scattered industrail structure will be located in
distant south eastern sections of the Soviet Union. This growth
sector of the labor force of tomorrow will be increasingly
Islamic, increasingly untrained, and increasingly unmotivated
either for the work which will be.required or the shift in their
location made necessary by the new demands in industry and energy
exploitation.
In the opinion of the Board, this conclusion is all the more
convincing because it tells us what we. would like to hear, and is
therefore needful of careful and objective scouting within the
Intelligence Community. This may prove to be a most useful area
for competitive analysis involving, on the one hand, the very
best of the Intelligence Community's Soviet experts, and on the.
other hand, outside economists trained in. the expertise of
economic forecasting.
WHAT WE KNOW AND DON'T KNOW ABOUT THE SOVIET ECONOMY: THE
IMPLICATIONS FOR ECONOMIC INTELLIGENCE
The following judgments emerged from the series of briefings
presented to this Task Force, amplified by additional meetings
with the key officials in the Soviet Division of the CIA.
1. We do have adequate to good understanding of the operation
of particular Russian industries. Our knowledge is best concerning
those sections of the economy directly related to military output.
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2. We do not have uniformly adequate knowledge of the work
and relative progress of the research, technology and scientific
communities in the Soviet Union.
3. We have an excellent knowledge of the acute deficiencies
of that portion-of the economy devoted to consumer-goods.
4. We have superior knowledge of the output of Soviet
agriculture and a remarkable record in crop forecasting.
5. The intelligence community, for obvious reasons, has
devoted considerable attention to the outlook for Soviet petroleum
production. We appear now to have a reasonably good fix on this.
Nevertheless, we are concerned that there exists a potential for
projective error, with large policy implications.
6. We know that the Soviet economy has experienced increasing
problems; that it suffers from a severe shortage of hard currency;
that the completion of the gas pipeline will provide substantial
European currencies; that credits are all important to the growth
of the Soviet economy which, in the last few years, has been
slowing down markedly.
7. Knowledge of the dynamic interplay among various segments
of the Soviet economy is the most vital element in which our.
intelligence is deficient, and in a closed society, difficult
to rapidly remedy. The absence of this knowledge is a serious
impediment to the making of policy designed to have the effects
upon the USSR which we seek. Among the policy issued in which
decisions should be made with greater confidence that intelli-
gence has provided adequate illumination of the dynamic or
ultimate consequences, are the following:
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a) the building of turnkey industrial facilities by
foreign contractors
b) specific retaliatory measures in response to crises
such as those which have occurred in Afghanistan or
Poland
c) specific decisions which are made in relation to the
transfer of technologically advanced knowledge,
components or products. The depth of knowledge and
the dynamic effect of any of these measures does not
exist sufficiently to provide the policymaker with
the widest range of available options. In many
instances, existing intelligence can only provide
knowledge of the immediate effects expected to result
from particular denials or reprisals.
"For want of a nail, a kingdom was lost." Our knowledge of
which nails hold what together is deficient. This is essential
when we need to know the ultimate economic consequences,
beneficial or detrimental, which are the results of each option,.
under consideration. Such intelligence is especially essential
if we are to correctly identify which measures will, in the
longer run, have the effect on the USSR which our policy seeks.
In one area we can be confident that we have identified a
vulnerability, and a policy directed to that vulnerability, of
which the short and long range effects appear reasonably clear --
the denial of credits. Yet, even in this connection, intelli-
gence adequate to understanding the dynamic operation of the
Soviet economy is deficient. The relationship between the
Soviet economy and the Warsaw Pact economies dependent upon the
USSR is inadequate. The absence of confident, economic intelli-
gence assessments addressed to these vital connections is of
immediate significance as we face U.S. decisions and those of
our allies made necessary by the worsening economic plight of
Poland, Rumania, Czechoslovakia and Hungary. Similar economic
difficulties in Yugoslavia involve related but separate assessments.
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Unfortunately, those with the requisite skills, e.g.,
economists trained in forecasting, are found neither in CIA nor
in any other government agencies.
INTELLIGENCE TASKS FOR THE FUTURE
Each aspect.of this increasingly fragmented and stressed
economy requires the most detailed and accurate continuous
observation and assessment.
William J. Casey, then as a member of PFIAB in late 1976,
summarized the needs of economic intelligence as directed against
the Soviet Union:
Over the period 1977-85 policymakers will have a
need for more precise intelligence and estimates
on--
the level of the Soviet military effort
and its impact on the Russian people.
the stability and the vulnerabilities of the
Soviet economy and its ability to carry the
military burden placed upon it.
the economic leverage we may have to induce
the Soviets to scale down their military
effort.
the significance of technological, financial
and organizational impacts provided by the
West to the growth and vigor of the Soviet
economy and its ability to sustain a high
level of military effort.
It is encouraging to conclude our observations by reporting
that the new intelligence need is now understood not only at the
top levels of the intelligence community, but also by those
who direct Soviet economic intelligence within the CIA. Since
the most urgent policy decisions likely in the immediate and
long range future will be within this context, maximum effort
must be devoted to converting this awareness into more adequate
economic intelligence.
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