CENTRAL INTELLIGENCE AGENCY BRIEFING ON THE SOVIET ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00364R001101590024-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 59
• Document Creation Date: December 20, 2016
• Document Release Date: February 20, 2008
• Sequence Number: 24
• Publication Date: December 1, 1982
• Content Type: REPORT

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STATI:NIINT OI'
THE I;ONORABLE HENRY ROWEN
CHAIRMAN
NATIONAL INTELLIGENCE COUNCIL
CENTRAL INTELLIGENCE AGENCY
BEFORE THE JOINT ECONOMIC~CQ1~lMITTEE
ONOMITRCASDE,
`.SUBC
'
T
Y
EC
ANCE AND g~R11
FIN ,
'CENTRAL INTELLIGENCE AGENCY BRIEFING
. Coi TSE SOVIET ECONO!'iY"
DECEMBER 1, 1982
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PREFACE
BY
SENATOR WILLIAM PROXMIRE
VICE CHAIRMAN
SUBCOMMITTEE ON INTERNATIONAL TRADE,
FINANCE, AND SECURITY ECONOMICS
The following report of the Central Intelligence Agency responds
to my request for a balanced assessment of the Soviet economy
showing both its capabilities and vulnerabilities. The result is
a unique contribution to our understanding of Soviet economics.
Its uniqueness lies in the fact that it analyzes the strengths as
well as the weaknesses in the Soviet economy.
~~ It is worth highlighting the principal findings in the study:
* Soviet economic growth has been steadily slowing down.
However, there will be continued positive growth for
the foreseeable future.
* Economic performance has been poor and there have been
many departures from standards of economic efficiency.
But this does not mean the Soviet economy is losing its
viability or its dynamism.
* While there has been a gap between Soviet performance and
plans, an economic collapse in the USSR is not considered
even a remote possibility.
Analysts in the West have typically focused on Soviet economic
problems. The attention to the negative aspects of the Soviet
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economic .system and to the failures of performance is appropriate
.;?
and necessary. The danger ire suer. an approach is that, by over-
looking the positive side, wee see an incomplete picture which leads
us to form incorrect conclusions.
The Soviet Union is our principal potential adversary. All
the more reason to have accuz-ate, balanced assessments of the state
of its economy. one of the worst things we can do is to under-
estimate the economic strength of our principal adversary.
It needs to be understooci that, while the Soviet Union has
been weakened by such harmfu]. developments as the inefficient per-
formance of the farm sector and the heavy burden of defense, it is
the world's second largest economy in terms of GNP, has a large
and well trained labor force,, is highly industrialized, and possesses
enormous reserves of natural resources, including oil and gas and
the relatively scarce minera7Ls and precious metals. It is sobering
to reflect on the possibilit}~ that Soviet economic trends might
improve rather than grow worse.
This report should go fair to clear up the confusion that exists
in Congress and the public a:s to where the Soviet economy stands.
It should also make it obvious that there is at least the same degree
of uncertainty in making fors=_casts about future economic performance
in the Soviet Union as there is with respect to our own economy.
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 T . I NTR4ntlr;'1' I ()1~
A. ~7r. C;hairman, in vo~~r request that v-~e brief vo>*
subcommittee on Sovie? e~onomi~ prospects, you noted the
"unusua~ amount of conf>sion in ron4ress and ttie Penera~
public today as to where the.Soviet economy stands." You
also sugp~ested that our briefing he built around an
assessment of "the capabilities and vulnerabilities of
the Soviet economy."
1. K'e agree that coniusion regarding the Soviet economy
abounds.
2. We believe, however, that this confusion results not
so much from dise~~reement over Soviet economic
performance as from ~.~ncertainty as to hove to
interpret that performAm~e.
3, 1R'estern ohcerve*s haVP tender! t0 ~escrihp Soviet
eCOmOim1C pP.rfOTT'.'1ar1!`P, aS "pAOr" r1r "rjeteri.OrAtln~'t at
A tlme N!F-P.n SOVIft ~efcnsF Soendinr? continues t0
ripe. overAl.l Soviet gross nationet product in real
terms continues to inc*e9se, And Soviet rINP is second
in size only to that of the i?S.
B. These characterizations eye not wring.
1. Given past rates of economic growth, the gap between
Soviet performance anc? plans anrt expectations, and
the marked departure from standards of economic
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efficienc~t, t+~~ reco~~ cornpile~
in recent ,years l~e.s indeed been
by the Soviet economy
2. R.esul t s that ere ~insat i stRCtorv when Treasured by tlli s
yardstick, ho`n~ev+~*, do not mean that the soviet
economy is l~sini? its viahilit~' as well As its
dynamism.
C. In fact, we do not r_on~ider an economic "collapse"--e
sudden and sustainer' decline in GNP--even a remote
possibility.
1. Our protections indicate thatcro~~Tth in GNP will
remain slow but positive.
2. Growth is being retArded be a combination of
factors. Some a.re beyond Soviet control, and some
reflect the vaeak:nesses of the Soviet economic system
that even the ne~v~ Andropov regime is not likely to
chance. Other lrpctArC h~ldin~ down economic growth
represent aolicv choices--for example, the allocation
of resources to defense--that could he modified but
Pre unlikely to c~~a.ngc mach in the near term.
3. 1\'evertheless, w~e expect annual growth to average one
to two percent for the foreseeable future. Per
capita eonsumptio~ could level off. or even fell
slightly.
P. Ret>rning to voi~r initial questions. we will try to give
as balnneed a picture. of the soviet economy as possihle.
N'e v:~i l l sur*.mPr? ize anc' access i t s has i s capahi l i t iec and
vu ] nerah i 1 '+ t i c~a .
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~~'p wi 1 1 , hrnvc'ver, f i rat ident i fv the CrnA I c LnAi
economi c act i v i tv i s ?~~s i gned to SE`rve i n the t)SSR
-And then descrihe S~vint success in meeting these
goals.
2. As a final piece of stage-setting. we will discuss
how the 11th Five-Year Plan is faring, judging by the
results of the fi*st two years, 1981 and t982.
I1. Soviet Economic Ohjectivec anc? Priorities
A. Turning first to Soviet economic objectives And
priorities, we believe that Soviet economic activity has
el'~n~eys focused on builciin~ military power.
1. But the Soviet leadership has also always ple.cec!
great stress on rapid economic gro~~~th.
2. The good life for the Soviet poqulace, in they form of
A risirg standard of t.ivin~, has been of importance
to ~Roscow too for almost 3n years. but improvements
in the a~elfAre of Soviet consumers have generally
been suhordinated to the demands of the military anc!
to the high rate cf c-Anital investment necessary to
insure fast GNP gro~~~th. It BDpears, though, that
consumer inte~est~ ere now being treated somewhat
less cavalierly. Breaking precedent, the 11th Five-
Year Plan calls for capital investment to grow more
slowly than consurr~ntior..
3. In pursuit of these national ohje~tives, successive
re8-imes have liven heavy industry priority status
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'~" becausF ~ t i s t~~~ sotirre of mi ~ i tarv hardware end
investment Pools.
4. ?-'~eanwh; 1 e, desai t:e somp Pxoer imentet i on vvi th
decentralized forms of economic administration, the
Soviet leadership has remained firm?y committed to
strict central planning anti management of most
economic act ivi t~4~. The jest i f icet i on has been that
rigorous centralization is required for fulfillment
of national objectives.
R. Soviet economic performPn~e in terms of the objectives
and priorities establ~she~' by the leec~ership has been
mixes?.
1. The Soviet Union has
militarp force.
hui?t an ex~eed~n?ly powerful
t'n~'er Khrushchev the emphasis was on
strgte~ic nuclear prO~~A.mc, but Brezhnev presic~ec~
over an across-t:he-5oarc~ expansion and modernization
of all Soviet foroes.
e. Since the maid-1960s the tTSSR has increased its
arsenal of intercontinental nuclear delivery
vehicles ne~a*!t- sixfold--overturning tTS
quantitative superiority--and giving itself an
assured nuclear retaliation capability.
b. Durin? the same period, ~Soscow has more than
tripled the size of its battlefield nuclear
forces, reducing the creclihi 1 itv of ~TA'TC)'s
nuclear weAOOns ns a co~~nterwei~;ht to the WapsaM~
Pmt's larQ'er ~onuFntional forne.s.
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. kieanwhile the Soviet Union has more than doubled
the artillery firepower of its divisions,
increased ninefold the weight of ordnance that
tactical air forces can deliver deep in NATO
territory, an!? reclueec? the West's qualitative
lead in such key areas as tank armor.
d. At sea, the USSR has introduced new, heavily
armed surface ships, nuclear-powered submarines,
and naval airoraft and q~~adrupled the number of
missile launchers on ships and submarines.
Meanwhile, unc!er 13*ezhnev the i?S SR has expanded
its military activities in the Third World--
ranging from arms sales to Soviet forces in
e~efensive roles any! support of Cuban fore~es in
combat to intervention in Afghanistan.
2. Rfiile developing its military power. the USSR has
until recently been ahle to maintain a rapid rate of
economic growth.
a. Soviet GNP, as measured by CIA, grew at an
average annual rate of 4.6 percent from '195Q
through 1981. During the same period US GNP
increased by 3.4 percent per year.
b. Soviet growth. however, has steadily slowed
during this period--especially after 1978. ~~The
deceleration can be seen in Figure 1: The
average annual rate of increase in rNP was about
6 percent during the 1?SOs, 5 percent during the
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1~ROs, and nc~~rty ?1 nereent hetwecn 1970 And
1978. in 1?7~--8t, yearly growth averaged lees
than 2 percent. ?'hi s ,year we expect (;NP growth
to be about 1.5 percent.
c. To a remarkable degree, the slowdown in Soviet
economic growth has a parallel in OECD
countries. During the first three years of the
seventies, OECD GNP increased at the rate of 5
percent ner year. The crisis induced by OPFr oil
prices brought OE('.) growth to a halt in 7.974-
15, Then in 197-"q, (*Np resumed A res(~ectRh]e
rate of growth of u percent per year. In lA~~-
gi , however . ~:NF ero~4=th i n t~+e nRCT col lapsed to
1.2 percent pPr year.
d. The slowdown in the USSR in part reflects fo>r
consecutive p~c?r or mediocre harvests. Rut most
sectors of the economy have been slug~is~h,
especially industry.
(1) In large measure, industrial performance has
been held back by the emergence of serious
bottlenecks unconnected N=ith agriculture.
Growth in industrial output, which averaged
almost S percent a year in 1971-?S, fell
ahr>ptly in 1978 and in ]Q76-8] averaged ,lust
? clightty over 3 percent annually.
(2~ The decline in grog+=th has been steady.
In~ustriA~ oro~~~etion drew by cnly 2 percent
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' in y981 a*~d is exaeete~, to rise by 1-1J2 to 2
percent t~l i s Vear . __._
g, The higher prix*ity accorde~! to militar~~ stren~!th is
suggested by the continues' rise in defense spending
at the average annual rate of 4 percent that has
prevailed since the mid-19FOs.
e. C.roKTth in dPi'ense spending has continues! in Spite
of competition for resources thgt might ease
strains in t!~P rest of the econom~~.
h. Defense spPn~~in~ is noH~ about t? to ?4 percent of
(;*,
4. qt the carne time, ~ea~ershio concern about consumer
welfare teems to have sotnewhr+t dilated the commitment
to growth.
a. The share of Soviet r~HP al:ocated to fixed _
capital investment--the c~rivin~ force behind
Soviet economic gro~~Tth--has more or less
stabilized in the last fe~v ,years at about 2R
percent (fac~tcr c~~st), compared with about 20
percent in ]:960.
b. Slowing investment greart'~ is eaplainec~ partl~~ by
bottlenecks ir, sectors providing building
mater:ais a!nd mechirerv. Rt~t it probably also
stems from a political recision to protect Soviet
ennsi~m~ers in ~ ti~'1r of tiRhteninQ economic
cnnstraints.
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Nonetheless, ns shown in Figure 2. consumption
st i ] I account': for on ] V a5 percent ~f Soviet ('ANT'',
tar b~loNr the shti+?e in most non-communist
industrialized countries.
III. The 11th Five-Year Plan So Far
A. Turning to recent developments, the results of the last
two .years must have br.en most disappointing to Soviet
leaders. It is alrea!~y clear that most of the imigortant
goRls of the 11th Five-Year Plan cannot be met.
1. The plan was excessively ambitious from the start.
For examp]e, both industrial prodt~etion and
agricultural o~.itput were to grow by about 5 percent
annually, even though production in both .sectors ha.d
grown at much slower rates in 1976-80.
2. Performance has been far below plan. The small
increase in agricultural output this year will da
little more than offset the decline in 1981, while
stagnation or fal]irg output in key industrial
branches threatens to intensify already serious
bottlenecks.
3. Production of steel sn!i steel products continues to
sputter, with output this year little changed from
two ~-ears ago and helovc the peaks reached in 1978.
cement production. meanwhile, fell below the .].980
level, and freight car product+on wi1T c~eeline this
year. for the sixth consecutive year.
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4.~.The slump in steel is particularly damaging to
.machinery production. Along with shortfalls in the
output of building materials. it:also threatens to
curtail growth in construction. Even the moderate
1981-R5 investment tercets coup be in jeopare~v.
5. From the beginning the 11th Five-Year Plan gc-els
depended on large prncl~~etivitV incregses.
Underful f i 1 lment of tl~e proc~uet i vi ty plans hers been
striking, however. ThP rise in.inc~ustrial ~ahor
productivity, for instance, Averaged only 1.~1 percent
e year in 1981-82, far below 'the 4.5 percent-per-year
increase called for by the plan.
6. The unrealistic, almost fantasy-like character of the
plan can be illustrated by comparing production-goals
with investment plans. As our next chart (Figure 31
shows, incremental capita] output ratios--that is,
the amount of additional. capital needed to produce an
additional unit of output--have been rising steadily
and steeoly in the 1~SSR for many years, withi little
prospect that the rise will soon end. Yet, based on
little tpore than Admonitions that productivity must
rise, capital investment targets in conjunction witih
~~ output qoe~ s impl~? a decline in these -rat io.+.
B. Bright spots in economic ~erformence in 1981-82 .ere hard
to find. But there have been a few.
1. On,the production side, natural gas continues to rise
/
at a rapid rate--7 percent in 1981 and nearly 8
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percent this year.
2. -4vcrnl 1 nner~y pry+t's,tit ion mifiht ho considered A
plus. in 1982 et leact, output of all major forms~of
primary energy rose. Oii production continues to
inch ahead--hy about 0.9 percent this ,year. ,And coal
output. reversing a three-.year decline, evident!v
will rise by about 2 percent. At hest, however, it
will barely exceed the iP80 level.
3. The USSR has also suhstantially improved its hard
currency balance ~f trade this ypar.. Our next chart
(Figure 4) i?lust~ates the point.
a. The hard currency trade deficit last year was
about $4 billion, causing some anxiety in H~estern
financial circles. Judging by first half 1982
results, the deficit this year will be reduced to
perhaps $2 billion.
(1) The central authorities, with their ltotal
monopoly of control over foreign trade and
the altocHtion of key resources, sharply
raised the volume 4f of 1 exports to 'the 1A'est,
~?espite softening prices in world markets.
At the same time. they held the value of hard
currency imports steady.
(2) The result was a trade deficit in the .first
half of 1982 that was almost S4 billion lower
than i*~ the same six months of 1981. The
already relatively small heed currency debt--
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' ~1 1 .fi hi I ?inn ~~t the end of 131--wi l l rice
little if at a;l.
tr. The Soviets have pail a price for this 'success,
however.
(1.1 The inereece ?n of 1 exhorts to the 1"'est came
at the expense of deliveries to Eastern
Europe anti clomestie consumption.
!21 In hol~ting the value, of impo,r,ts,,st.e$.~dv,., , . .
Nloscovr also accepted a reduction i n the
volume of hard currency imports. In-
particular, it scaled back purchases of
Western equipment and consumer goods needed
to help m~?~dernize Soviet industry and meet
consumer needs.
IV. Basic Strengths of the Economy
A. We turn now to our discussion of the strengths and
weaknesses of the Soviet economy. We v~ill look first at
the USSR.'s economiey~strone paints, starting with those
attributes that shore up the economy as 8 whole, anti then
move on to identify spe~ifi~ sectors
that ~lre performin?
in a ~. ;'eularl.y effective fash-ion. ~,
B. The sf~ size of the economy, reflecting the subst~.nt~el
growt: .ice World War II, is one of its strengths. As
the hex. chart (Figure 51 indicates. Soviet C~'P in 198?
will equal about 51.6 trillion, roughly 55 percent of US
C3NP this year. Per capita C~1P is almost ;6,000..
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C. The~populAtion is also to me, currently numbering abort
270 million. The lah~r i'oreF totals shout t47 million
and, by wort~l StandAr~ts, it Net l-trAine~ And M~AI ]-
educated.
Z. Literacy is by no~~~ almost universal in the USSR. ThP
educational level. of the population has been rising
rapidly. Twenty-three percent of those over 16 in
1979 have completed at least a secondary education
(10th grade in the So~~iet Union) compared with only
14 percent in 1970. In 1979 an additional 7-1/2
percent also had completed higher education, compared
with 5 percent in 1970.
2. A particular effort is being made to expand the
education of the indigenous nationality groups in the
Central Asian republics. The USSR wants to upgrade
the skills of the relativel~~ large pool of labor
available there any possibly encourage outmit~rAtion
by acsignina these hptter ec~ucAtec! vount~ peo4>le to
~~
labor-short areas. graduates of higher, specialized
secondary, and vo~Rtional-technical schools receive
compulsory work assiQnment,s at specific enterprises
where, it is hoped, they will continue to work.
3. The emphasis on mathematics. engineering, and science
i~~ ,viet schools is also a plus for the
technologically oriented Soviet society. About one-.
third of total instruction time in secondary schools
}
is~devoted to mathematics and science. There are
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? '' serious flaK~s, however, in So+iiet eduction.
including too much rote tPrrning and, at the
university levP'I. narrow specialization early bn.
D. Another of the strengths of the Soviet economy is the
tremendous accumuI,9~tior, of capital assets that has
occurred since Worlci Wa.r II.
1. The value of gross fixed capital assets--buildings,
machinery, equipment, and the like--amounted to over
1.74 trillion rubles in 1980 according to Soviet
published data. ~'he value of Soviet capital assets
expressed in constant prices increased almost 11-fold
between 1950 anc9 1980 and about 4.4-fold from 1960
through 1980--1c>ng after the USSR. had recovered from
wartime devastation.
2. This phenomenal expansion reflects the allocation of_
a ]arge and, until recently, rising share of Soviet
resources to cA.t~itAl investment. The Papld growth of
capital assets has res~~Itec~ in a more than three-fold
increase in thr amount of capital per ~i~orker. The
rise was almost 3-1/2 fold in industry and over five?
fold on state and collective farms.
3. Two-thirds of the stock of capital assets is
concentrated in industry, agriculture, transportation
and corrrnunicationc, end construction. Only about 15
percent of total gross fixed capital consists of
housing or is u:,ec' to provide services to the
population such As he:~lth care and education.
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4.Although the rApid Accumulation of capital assets is
one of the Soviet [?nion's strengths, the CAp1tAl
stock includes A lisp*~nnrtinnrltely 1Arae shArn Af
warn out And technoloeicnlly ohsoletc equipmernt.
Soviet policies have kept retirement rates oi'
existing assets artificially low and have prolonged
their service lives through repeated capital repairs.
E. The USSR is exceptionally ~}ell endowed with natural
resources, as the reserve estimates in Table 1 indicate.
1. Beginning with energy, the Soviet Union has about 40
percent of the world's orovec~ reserves of natural
gas--the 30 trillion cubic meters under Soviet
contro~ exceed the reserves of all industrialized
nations comhinecl.
e. Soviet reserves of coal acec-unt for 3!1 percent of
the ?*Orl(l's t~tAl recoverable reserves and are
sufficient to insure over ?.0~ years of otatput at
current rates of production.
b. The Soviets do not. puhlish figl~ces for oil
reserves, as they do for gas and coal. 4llr
estimate is that oil reserves, at least in Nest
Siberia, are substantial, though increasingly
difficult to exploit.
2. The ?USSR is abundantly stocked with other important
raw materials.
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According to Soviet ~t~~~lie~, iron ore res~Prv~:~
amount to nhout R(~ hi 1 l ion t~r~~--come 40 ~pe.recnt
_ of the world's total.
b. With as much as one-fifth of the world's forest
resources, the USSR has a virtually inexhaustible
source for prod>cin~ wood and wood products.
c. 1n addition, the Soviets claim--and may Drell
have--the world's lamest reserves of manger:nose,
nickel, lead, molyhdenum, mercury, attd
antimony. Thcy R-so say that reserves of
chromite, golc'. a]atinuri-group metals, zinc,
copper are among the largest in the world and
sufficient to support Soviet mine production for.
many ctecac]es .
d. The Soviets also have substantis.l reserves of
potash any' phosphate rock--raw materiels for the
production of chemical fertilizers--although a
large portion of the newec phosphate deposits
consist of poor quality ore.
f. With its wealth in human, capital, and material
resources, the USSR is highly self-sufficient--another of
the economy's major strengths. Our next chart (.Figure a)
illustrates this.
1 . Thr~ sigh c~etfree of Soviet self-sufficiency ',In vital
ratio materials is shown by its position as a net
exporter of A large numher of these materiels. Net
exports of enemy--mostly of oil and natural t;as--now
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total Ahout ~ m~llinn l~arrnlc st ~~v equivRlPnt o^
about t5 percent of total Energy production.
.~ 'F~-e Soviets are maim exporters of precious metals,
ferrous and non-ferrous ores and metal products,
chemicals, and timher. Because of expected gains in
output the Soviets will be able to expand sales of
kev minerals such ac platinum group metals, nickel,
cobalt, manganese. chromite, and gold during tote
1?80s. V4'e also e.nticipatP maior increases inn the
Soviet exoorts of am*~anie, nitrogen, and potash
fertilizer a^d methanol.
3. Though hichly self-sufficient, the IISSR is not
autarkic. Indeed, for at least the last decade,
trade with the We~?t has been an important element in
the USSR's efforts to modernize the Soviet economy
detail le.ter, but
let me ment,i;,on here that the Soviets now must
~~-.
and render it more efficient.
a. I will develop this point in
rely on 1+'estern imports of capital ancc technology
to increase or maintain production of some of the
raw materials in which they are abun~ant:ly
endowed and self-sufficient.
b. 1 would also like to note that imports iProrn the
Vest have become critical to Soviet efforts to
improve, or simp~y maintain., the .o!tality of the
;Soviet diet. Ir. i.?6t, imports of grain and other
agricultilrpl pro~-!rts reached Plmost tt~ big?ion,
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~;* AbOllt 10 per^ent of the L'BSR's total hard
c-.~rrency purchases.
c. Rut despite the large-scale expansion in
agricultural imports, the Soviet tTnion remains
basically self-sufficient with respect to foot.
l?] These imports are intended mainly to prevent
e creel i ne i n meat r_onsurnpt i on anc! are r_ot
essential to maintaining an adequate quantity
of food consumption.
~2` At 3,?00~ ~AlOries--see o~!* next chart
(Fie'u*e 7', w-':ich compares the composition of
the US e-nd Soviet diets--avera?e ctaity food
intake is enuivalent to that in c~evelopeci
V1'es.tern cn~~ntrie~. Grain production is more
than sufficient to meet consumer demand for
breac', and other cereal products.
4. Tc summarize, whe^ we say the USSR is self-
suff~.icient, we do not mean that the Soviets neither
need r.or ber~ef i't i'rom trade.
s. Imports, particularly from the [Vest, can plae an
important role, ir, relieving critical shortages,
sourrins? technoloaicel progress, and >renerally
improving Soviet economic performance.
b. ~'hqt eve c!o imean is that the ghility of the Soviet
economy to rernr~in viable in the absence of
ir*~ports is much ~~eatPr than that of most,
possi`~ly all, ether industriialized economies.
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"'~ C'o~;sequen! !y, t'~e sus~eot ihi l i tv of the Soviet
t'n i on to eco:no*.ni c l overage tends to be I imi tad...
G. In considErinq funda?rental strengths, the highly
centralized, rigid system of administering the economy--
while perhaps the Soviet union's major economic
millstone--has hac~ its advantages in enabling the
leadership to mobilize resources in crASh programs to
achieve priority objectives.
1. The p??me example ~f this canAhility has been
'Moscow's success in builc~inq up its military might.
This has been gchieved th*ou~th centrAlly-directPr!
mobilization anc'r a'l~cation of the USSR's highest
quality human acid material resources enc~ a rigorous
system of quality control in military production that
prevents the shoc~~+ine~s so charACteristic of Soviet .
civilian output,,.
2. Centrally directte~' concentration of resources does
riot of course titiork ever~~where. Agr.:culture, which we
Hill discuss in mere retail later, 's an example.
a. Even thouq!~ o~~er a ouarter of total investment
has been allocPte~! to the far*n sector for many
years, agricu'tu~al output continues to he a
c'isa?ppointmen_~ *.~ So~~iet leaders. The*e are many
reasons for t?~is, but one overriding reason is
thAt effective central supervision over an
activity cond~~ctcd over so vast a geographical
Rrea is virtuP>>y impossible.
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Another is that ecnnomic~ Administration by fiat
is singularly ill-suited to a sector where
_ ineent ivec to in!'i~~i~JuRl prorluccrs Are so crucial
a determinant of o?.~, for eXAmDle, *?wre thRn 80 percent
of new mine aiit~ut wss needE?d to offset depletion
at older i1ndE'r~round operations.
~' c. Even the extraction and distribution of natural
gas has grown considerably more expensive.
(7.1 Natural i;as deposits in the old producin~-
areas--North Caucasus, Transcaucasus,
Ukraine, Volga-Urals, and western
Turkmenistan--are severely depleted. More
and more gas must be piped from central Asia
and especially Tyumen oblE:st to replace
exhausted '.Deal supplies.
(Z1 Such long-~istence transmission of natural
gas requires construction of lengthy
pipelines anc~ a great nAny compressor .
st~itions:, a very expensive operation.
d. F,asi'.v aecess~'?le supplies of many non-energy raw
materi~.ls have also beer exhausted.
(1) The Sov'.ieis have largely depleted reserves of
copper, nickel, and bauxite in the Ural
Mountains and are beginning to tap deposits
in northern Siberia or, in the case of
bauxite, are exploiting non-bauxite ores and
hoostinq imports. Similarly, the richest
deposits of phosphate rock in the Kola
peninsula have heen depleted, forcing the
~oviet~ t~ move to lower-qua:ity deposits in
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Siberia.
(?) 1n the case of iron ore, the Soviets have
depleted their richest deposits in the
tNesterr. USSR. To compensate for declining
ore grades, increpsing amounts of investment
must be devoted to ore-enriching fACi.lities,
raising both production costs and manpower
requirements.
(.3) The Soviets are also faced with the c9epletion
of forests it the traditional logging areas
of the north-western USSP. Government
planners have chosen to ovPrcut these forest
tracts bpvonc'. the point of nA.tural
re~eneratior, so that, at least temporarily,
the SCA1P. Of CpP.rAt1AnS in Siberia could be
held down. Kilt when loggers are forced to
expand operations in Siberia--and the Far
East--recovery costs will be high because of
the distances involved, the harsh climate,
and the lack of infrastructure.
3. As our nest chart (Fii*ure 9) shows, the increase in
fined capital investment has also slowed markedly in
recent years. This deceleration can be seen. as both
forced upon the leadership by shortages of k:ey inputs
and--as I noted earlier--as a conscious policy
choice.
a. Growth was 7 nernP-;t a vPar in ]971.-75, slowed to
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about 5 pFreen~ n ?~ear in 1976-7R, And fell
shrirply to nn o~ver~:ge annual rate of only about
1.5 percent in 147!1-80.
b. Growth picked iip in 1981--fixed investment rising
by 3 percent--hut the 11th Five-Year Plan calls
for investment in 1981-85 to rise by less than 2
percent a pear. This. is by far the lowest
planned rate of increase in the post t~'orld War II
period. The rise from 1971-75 to 1976-80 was
nearly 30 percent.
C. Aecause of tighteni*1~ demn~rpphic, Investment, and
resource constraints, the traditional Soviet economic
growth formula of relying on lavish use of labor,
capital, and material inputs is no longer applicable.
1. The Soviets themselves have long recognized the need
for a new approach. For at least a decade t1'~ey have
been stressing the necessity of switching frnm an
extensive to an .intensive pattern of growth.' This
means essentially that growth must largely spring
from productivity gAins--from more efficient use of
resources for any gi~?er, level of technology and .from
faster technological progress.
2. But the prc-ductivjty of cepite.l has actually been
falling for save*al years, and labor productivity--
see our next chart (Fieure ]Ol--has been rising at
steadily declining rates. For this, shortcomings in
the Sovie*, system teem lar~el}~ to blame, a matter to
_~r .
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..?
which I will now turn.
D. The Soviet economic system is peculiarly ill suited to
promote efficiency and technological progress. Four
features of the system help to explain why.
1. First, economic planning and management are highly
centralized, with resources allocated mainly by
administrative fiAt. Reforms aime~ at increasing the
degree of enterprise autonomy have generally come to
naught.
e. Indeec!, CPntr!?l control over economic activity
has been on the ircreRSe for the last several
years, as indicate] b~~ an increase in the: number
of commodities that are allocated in physical
terms according to central planning decisions.
b. The arbitrary nature of central decisions, on
allocating inputs and assigning outputs, which is
aggravated by the gbsence of prices that
accurately reflect relative scarcities, c~reeludes
efficient planning.
2. Along U~ith overcentrali~ation, the coals the central
authorities impose on the econorly have gener;al~y been
unrealistic. Faced 4~~i th a SAP het~Neen NThat they want
to ~'o and ~~~hat is pos~ihle. Soviet leaders have
tenc'ec~ to call for
productivity gains and material
savings that are hey~nc? the syst.eri's capacity.
e. The economy thus chronically operates under
conditions of strain and shortage. And, as I
_~~_
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indicated carl-er, the number end severity of
supple bottler^cks hRVe been increasing; in recent
years.
b, itii t-h inputs r^gulerly hare' to come bv, -.
enterprises have a strong incentive to hoard.
This intensifies hott]er.enks qnc' ]eadc to more
hoarding, in a depressing circle of waste.
3. OvercentralizRtion couDlec~ with unrealistic planning
has meant that the behavior of factory directors is
largely dictated '~y the urgency of meeting the plan
imposed by hiQhesr authorities.
e. Fulfillment? however, is generally measured by
multiple anc9 often inconsistent "success
indical:ors" o* varying degcees of priority, such
" as physical volume of output, gross value of _
output,, value added, materiel savings, and
D~OdUCtlVlty?
b. The principal drawback of this system is that
managers often. strive to meet the targets even at
the expense of what is economically rational from
the standpoint of the central siithorities and
society as a ~~~hole.
c. For examDle~, ~` gross value of output is a prime
goal, wastes is enco>>ragecl, as maneeers seek to
._ make their production a5 material-intensive as
possible.
d. The Soviet Union is currently elevating value
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added in production to the position of the prime
success indicator. Though probably less perverse
_ a target than gro~c value of output, it, 'too, is
subject to abuse. For example, it could induce
managers to increase employment at a time of
?ab~r stringency.
4. Finally, Soviet e~onc-m~c.performanee has long been
impaired by the separation of research, development,
and production into different organizations. F.ach
organizatio-1 operates according to different planning
targets.
e. Scientific Research Institutes do basic research
and are paid for successful completion of
research projects whatever their practical
benefit to the economy.
5. Design Bureaus develop the blueprints for new
eouipment and Are Largely rewarded for t1~ie
s~~ccessful test ing of the protototvpe. 1;tewarc~s
tare only loosely ?inked to successful
incorPOratinn of the new product into serial
production.
c. Production plants, meanwhile, are rewarded for
increasing both p?~ysical output and the value of
output.
(11 The introduction of new products at .a plant
initially disrupts serial outp~it,
? jeopardizing plan fulfillment and resulting
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?. rata+arr'Is .
(~) The Soviets have no competitive marketplace.
to force both developer and producer to
-' introducE~ better prod~~ets anc~ technologies.
Indeed, hostility to technoloc;ical change at
the produce* level is characteristic of the
Soviet e~^onomy--as Yuri Anclropov told the
Central i~ormii~ttee of the Part.r a week ago.
d. Because of this division of labor and the systems
rewards, Soviet products remain in production for
an inordinatelt~ long time, new products
frequently emboc~v only minimal ehang~, anc' the
fruits of truly advanced research impact on
serial production only with great delay. Over
the last deca~'e Rnd a half, the Soviets have
reoreanized c~FVnlooment anc' nroduction
e~tahlishmet:t~ to deal with *.his problem. gut
the pro5lem.P~'rsists.
E. !Moving from genPraliz^tior.s to particulars, Hie ~ti~ill look
now at the ,areas in >~~: i ~~h the LSSTt seems part i eularly
weak or vulnerable.
F. Historically, agricultt!re has been the economy's leading
problem sector. Tts performance over the past four years
has strengthened its claim to that dubious distinction.
1. After peaking in 1Q?8, farm output fell steadily
th~ou~h ? ~1R1 , r:he+~ i t cton~! mover 1 t1 pe^cent below the
19iR levc?I '1'I~i~ ~+rtir pr.~~!uct ion i5 expected to rise'
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but h~~ only about t~+~o DP.rc!P.nt.
2. The grain crop N!hich r?cachect a record high of ?37
mr]]ion tons in 1478, has not reachP~! 1Q0 million
tons in any sribsegraent year. Last year the grain
harvest was so lows that Moscova never announee~d a
figure, although unofficial statements put the crop
at 158 million tons.
3. Production of meat--a key commodity in the regime's
drive to better t~e Soviet standard of living--has
also fared poorly. 1t rea.ched 15.5 million tons in
1978 but has heen below that level since, ranging
from 15 to 15.3 m:ll~on tons over the last four
,years .
4. Bacl weather has heen a major factor in the decline in
agricultural production since ]478, but harsh weather
and unfavorable geo~raoh~cal conr?itions constitute a
perr.-anent threat and ohstacle to aaricr~lture anc~ only
partly explain ~~~hv Soviet efforts over the years to
boost farm output have not yielded more dividends.
a. >llishandling of the sector by t'.'~e Soviet
authorities has also had much to do with its
disappointing performance.
b. Management and planning processes are much too
centralized. Farm efficiency is seriously
handicapped by constant intervention of
unquelif.iec' officials reggrdin~ what to plant,
when to plant, when to harvest, and the like.
_~n_
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c. Price$ 0! ~'~Ot~ far-! i~~J1.?t~ :iL?Cj OUtPuts SPt bV the
CC11tr;~1 gt]ttir~ritlPS Are enc-e~;raking an Rssortment
of o~.~tout they ~ i 5 inconsistent ~ti~i th the hat io^.A1
plan. At a tame ?-hen '1"oscoH? is striving to
expend outc!ut: of meat. milk, and eggs, relative
prices are such that farmers find it more
profitable to concentrate nn ero~ring croes.
d. Though investment iii sericulture has been heavy--
over a quarter of tots] investment outlays has
gone to the fa*m sector for many dears--much of
it has been ~~~sdirected.
(11 There has tieen too m~~ct~ emphasis on
constructor, net ennugh on equipment.
`~r~-1 Furthermore, the quality of farm machinery is
low, with ttio incic~er.ce of hreakdownc high. _
e. Deliveries to tne.ag~icultural sector cf needed
mfl'erie.j inputs, such as fertilizers, have beer
insufficient ~~'`~ile the proportion of aged and
u^skillet wr.~r~ers in the fF.rm labor force--which
aceour.ts for shout 20 percent of the total labor
force--is high.
f. The ree'imE haG ptso famed to take maximum
ad~~antage o!.? she potential of the private sector
i n agr i cul tttrc~, even in pFr i o!ts, such as the
present:, when it is eneot~ra~ing expanc~ect output
t hrr~.
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5. In recognition of the rising popular demand for
quality food, Brezhnev told the Central f'omrnittee in
1>~te 1981 that food was the most important "political
and economic problem" of the 11th Five-Year Plan.
a. The increase in demand reflects rising consumer
expectations and incomes. The inability to
satisfy that demand is a function of botr~
stagn~snt output of most livestock products anc?
the regime's un~~~iilingness--reinforced b~~
Poland's experience--to raise prices in ~~tate
stores.
h. The leadership has attempted to ease the
imbalance between supply any! demand by allowing
various local rationing schemes under which
customers may purchase only limited amounts of
certain-foods in state stores. But long lines
for meat, mill:, and milk products remain.
~~~idespread. 't'o soften the impact of shortages on
the work force, the regime has redirectE~d
suhstantisl amounts of quality foods from public
state retail outlets Lo special distribution
outlets in factnriQC and other economic
enterprises.
6. Against thi s hAekgrni~nc~, Rrezhnev t.ast stay unveiled
his Food Pro~rarn--in preparation for a year and a
half. The ohiect~ve of the grogram was to boost
Soviet food oroctuction enc! reduce dependence on
_~~_
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ports--quickly. Tho Food program attacks
agriculture's pro!?ems from three directions: --
a. First, it rec>^Pnizes the agricultural
administra*.ion by creating commissions at all
levels of government to coordinate agricultural
operations and all related activities, ranging
from sectors provi:~in~ supplies to agriculture to
the processing. distribution, anal marketing of
farm output.
b. Second, ~~it'~o~-t significantly reisin~ previous
targets for total expendit~~res, the program seeks
to redirect investment to weak links in the food
production ch:~in. Investment in sectors
producing mac+,inerv for agriculture is to rise
sharply. To reduce vraste, investment in on-farm
food processing and storage facilities has been
liven top priority. 'Fiore investment in r~iral
ho>i~ding anr? other priority sectors of
the civilian economy.
h. The an~etite of the Soviet economy fog steel is
probably unparalleled--and a reflection of its
relative techno]oPical backwardness.. Last ,year
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t'ie 1~SSR wi ~:~, i i' *. to m,.rn_ =_;~an r,Rl f the C.,'~P of
the T?nitAd States used ?.~~ --+i~lion metric tons of
ro?led steel p^oducts compAred with i'S
cor:sumption of 1:4 million tors.
c. Thy shortages of steel won't be remPC~iec~
quickly. 1n~~cctment rPC;u~^?*r?nts to cope with
the c?ec? inina_ ~~u~l itt' ~?f ~?e ire pcrRlAting
rapidl~~. Anc' r~e~~' capFCii~1 rec~iires lc~tg gestation
periods before i', can bP hrought nn strea*r. In
'addition , supf, l i es of coy: i ng coy. l and i ror= or e
are likely to continue to 7e ti`~t ir= the next
several veers.
2. Transportation is a^other sector responsible for
recent poor econor~:ie performance. Snarls on the
rRilroadc--the b~gckbone of the system--have disrupted.
economic activit;v a^.ross the beard. but most
pA;?icularlti~ in t`!~ ~elirP^v ~~ rAH' materials such as
coal, iron o*n. ti'r!;Pr, scrhr-^ie~al, and chemical
fertilizer.
a. `^he Eo~~iet ecc?n~my ^erui yes a lsrge volume Of
transport se~~~nes not oni}T because of its size
any' complevi tv but al s~ `?ecause the country's
resources and people Rye soree~? widely over a
ver~~ large ]and mass.
b. ~c~ompared with ?Zorth AmericP Pr.d Europe, the pSSR
i ~ poor 1 v Sc~rv~~? by
VPFl~-~?C~iln~ ~ti~rt~'r transport,
and gove'rn~n;~n! r~~l ;c~' ''?+s '~c~~{ heck the
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development of an adequate highway system. The
brunt of the transport burden, therefor, hac
fallen to the raitroacis.
c. The railroAdS, however, apoear to have reached
their canRCity ce!!inu with prPSert technoloP~~
anc' facilities. ~~nsequently, the transport
sector Krill find it difficult to support economic
growth through the next several vears at least.
3. In the ener~v field the leadership !'sees rather
different problems in the coal and oil industries.
8. Coal production, e:hich dropped during 19'79-81,
has been hampered by deteriorating underground
mining conditions at larger, established mines,
by shortages of labor and declining labor
productivity, and by insufficient capital '
investment.
b. Oil proctvetion continues to innrease, ttiou?h
slowly. F.ven the very small ~rovrth of the last
few vears hAS required an enormous effoT?t.
4. Finally, shortages of ra~c materials and depletion of
fuel and poweT? supplies have caused a marked slowdown in
the production of construction materials.
a. Current output, for example, increased bV less
than 2 percent annually during 1976-80 compared with
nearl~r 5-1/2 percent annually in the preceding five
year period.
b. Shortfalls in the production of cement, roofing
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materials, constr:i~tion resources, and wRll materiels
have restricted construction activit~T throughout the
economv.
H. As we emphasized earlier, the Soviet economv does not
depend on trade for survival. Total imports equal about
12 or 13 percent. of C',I~iP, those from the West--only about
5 percent. But, because of the difficulties just
enumerated, the elimination or easing of critical
bottlenecks and the achievement of key elements in Soviet
development plans arse closely tied to imports from the
1. The USSR H~itl have to import a broad range of Western
oil and gas equipment if it is to minimize the fall
in proc?uction in fields where depletion is at an
advanced stage, increase output elsewhere, and help
locate and develop reserves.
e. Pipelaving equipment capable of handling large-
diamPte* pipe is produced only in the West, an~i
we estimate that the Soviets a*ill need .to import
at 1~-20 million tons of steel pipe during the
remainder of the 1980s to build the pipelines
they have scheduled.
b. They will also continue to need sophisticated
exploration eoipment, high capacity submersible
pumps for the oil fields, and probably high-
powerec? turbir:es fo* qas compressor stations.
2. Soviet regi~irem~ents for quality steel should result
in annual imports of steel tether than pipe of about
_ , .,
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..?
$2 billion (current pr~cetl at lPact until thE~ mid-
1980s.
3. Irctports of chemical eo~iiament and technoloey probably
will continue to be large, reflecting the still
antiquated characte* of some parts of the chemical
industry and the importance of the industry for
agricultural production.
4. Imports of grain and other agricultural commodities
have soared in recent years any almost certainly will
remain high. Crain pt:rchases in 1979-82 averaged
more than 30 million tons a year?
1. The USSR's ability to earn the hard currency it needs to
pay for its t~'estern imports is, however, already under
pressure and may well diminish in the future.
1. The main reason is the levelin(? off ane~ possible
decline in Soviet oil production.
e. Because !~omestic consumption vrill continue to
rise and because of ongoing demands from Eastern
Europe, we expect oil exports t~ the Nest--which
account for about half of Soviet hard currency
merchandise export earnings--to fall.
b. According to our projections the rise in hard
currency earnings from stepped up exports of
natural gas will only partially offset the
anticipated decrease in receipts from oil.
2. Other factors also have restricted Soviet hard
currency earning capacity.
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a. Primaril~~ hec~~~~se of the softenin? of enerQv
prices. Soviet terms of trade vis-a-vis the West
will be less *84'orahle in the 7980s than they
were in the 1 ~"Os, when up~~-ttrd spi rat in? of l end
gold prices hrnuaht the T'ccp windfall gains.
b. In ac~e?~tion, c:emPnc? for Soviet rax~ materiels will
be weak if Western eoonomic act~vit~~ fails to
pick up.
c. Soviet manufa.etured foods, which are generally
not competitivE~ in Western markets, are unlikely
to take up tree slack.
d. Finally, less ~?eveloped countries. including OPEC-'
countries, probg51~' will be less ab]e to pay cash
for Soviet arms.
3. The Soviet capacit~~ to buy from the t~'est is of course
backstopped by the i'SSR's ht~~e stock of gold. Rut
the USSR. is reluctant to un!~ertake massive sales of
gold in an uncertain market beequse of the dox~nward
pressu*e ttiat Soviet sales exert on prices.
4. On balance, the unpromising e!cport outlook suggests
that the L'SSR mf~y have to make do with little if any
increase in real im,~orts in the 1980s.
J , The USSR's relat ion> !^'i tl~ Eastern Europe add another
dimension of strain. Because it wishes to maintain
political and social ctahility in Eastern Europe, the
Soviet Union has given favorable economic treatment to
five of the six `'Jarsa!" Pact countries--(;zechoslovakie,
East C;erman~~. 13u1~ar ir.. polanrl. .and Hungary. The
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exception has been Romania.
1. This special treatmcn~. car "assistance", has taken
t~c~o basic forms: Sc~hsidizstion and credits.
e. Subsic'ies have not keen given directly. They
have instea~! hePn extenccec~ through preferential
terms of trarlP. That is, Eastern Europe's terms
of trade vis-a-vis the Soviet T?pion are more
advantageous than those that would preve.il if
Eastern Europe conducted that same trade with the
non-communist world.
b. In essence, the t'SSR sells energy, mainly oil,
and other ra~~? materials to F,astern Europe' for
less than world market prices and pays more than
world prices for the manufactured goods iit buys
from Eastern Europe.
c. Estimates of the cost to the Soviet Ilnion of
giving preferential to*ms of t*a~lP to F.a;stern
Europe ere rough-?-and controversial, Accor~ir.g
to the highest 1~'estern estimate we know of, these
subsidies totaled almost ~^,~ hillion in ]_96(1-R0,
with about 90 percent of this amount aecumtilating
after 197. The !~uge lump implicit in subsidies
reflects the explosion in wo*ld oil prices in
1973-1980 and the large rise in opportunity costs
to the iJSSR of its oil exports to Eastern Europe.
d. The credits come mainly from the trade surpluses
the USSR has consistently run vis-a-vis Eastern
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.~., Furooe since the mice-1?"Qs, although the &eviet
tTnion has al:+o given some direct hard currency
assistance to Roland.
2:~ Eastern Europe, 15Attling severe economic problems of
its own, continues to depend on Soviet assistance.
Rut economic stringencies in the USSR have increases'
greatly the cost to the Soviets of aiding Eastern
Europe.
3 . The iJSSR apparent 1 y has deci sled to qi ve reducer!
priority to Eastern Europe's economic needs in the
future. Soviet oi] exports to Eastern Europe were
cut this year, end the USSR.'s trade surplus with the
area apparently declined. Soviet subsidies will
probably fall too. But a drastic cut in exports of
raw materials anc~ in trace credits and subsidies is
unlikely.
VI, iTneertainties Attacher~ to the C:ro~vth Forecast
A, p,efore s-immin~ uD oi~* mAin points, nar, rhAirman. I would
like to nnt? that Andropov's advent to power has not
altered our assessment of Soviet economic prospects.
1. The exogenous factors impeding economic growth are
not affectec! by the change in leadership.
2, y!oreover, Andropor's eomnents to the Central
Committee last week point to no significant changes
in economic policy.
a. He in!ticat~ec thPt he will take a cautious
eoproach t~o c~~nnc~mie reform.
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b. 1-le furt~~er mr~cic ~I,?nr thr+t defense send he~avv
industry ~.Nii? retain their priority.
3. Th.e smattering of econ~mic~ ta~Rets for 1~A3 announced
at the Supreme Soviet meeting a weak ago are
overambitious, suegnstin? that *e?ief of economic
Strains and bottlenec-:~ from more realistic p~annin?
is not to he exoectA~.
B. Andropov is. ho~~:ever, i.n n-. extremely e~?rly aoint in hi s
reien. Thuc maio~ oo~ic~- chHn~es cnulc~ lie ahead. For
this reason--anci for reasons unrelated to lea.ders;hip
changes--ot~r forecast of aver:~ge annual growth in real.
GNP of ] to 2 percent co~.~l~ be off the mark.
1. Growth could be more r~~pid, for example:
e. If the USSR enjoyed a run of gooc! luck with the
weather, leading to P succession of good
harvests.
b. 1f the ne~y leA''Prchtp were wining to undertake a
substantial reallocation of resources from
~efensP to investment.
c. I f the ne~+~ re~imF v,~ere P.hle
5om?ho~~~, perhaps by
divertina_ resources from cefense to consumption,
to improve morale and tahor prn~uctivit~r,
d. Above all. if efficiency could be boosted by
mitigating some of the most damaging features of
the existing system. Produetivit~~ might be
raised. for example. without a drastic overhaul
of the system through
-~?-
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(11 amore hglAnced gllocation of investment to encl
the neglect of s~~ch vita) sectors as
transport. and by
(?1 stopping t~:e proli!'PrAtion of success
indicators And of overlapping lines of
a~atho~itr~ thAt has characterized the so-
cAlle~ "reforms" of past Fears.
n, If An~ropov---`sic rule sP~!irely estahlishe~--
unr'ertool~ ba,i~ changes thAt slgnificant~y
rE?[~llCPf~ centrN~ i~Rtion Anil $ave suhstant~ally
greater play to mArket forces, the prospects
~?~ould he even hette*. such R reform, however,
would be constrAinec? b~' the imperatives of
maintaining po?iticAl ~ontcol in a large
multinational society. Furthermore, attempts to
implement reform ~~Toulc~ encounter stubborn non-
compliance by nprty and economic bureaucrats.
2, ~;rewt!, could he less rapid, for example:
a. If the bad vveFther of the last few years
cort~ntie~!, ~^et~sin~ A Permanent depression in
e~ricu'ttural outC?ut. In any case, there is a
theory, substantiAtec'? by evidence, that the
genPra>>y favorahle weAther that prevai?ect
het~~~een the early t.Qs~s n^~ mid-1470s wAS An
t,~berAtion. ~Ithou~h the weather for crops in
thc~ pASt sevcr,~~ years was su*ely worse than any
long-r~+r~ Hver:+c*n. A return to the pre-1975
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e
conditions i~ ~~nl il~.ely.
b. If the ne~~~ lcadc~rsl~ip siecis?ed to accelerate the
- ~roa}th in siefense spending at the expense of
investment.
c. If the ripple eff?et of ci;rre+~t hott?enecks
intensified.
d. t f pubs i^ c~Tn; ~; c;r any ADAtt'v s'eepeneo' markes?ly
or antive unrest :~eveloped.
3. of these poccihiliti~c, sF~rious w.iciespres~' unrest--as
the Polish c~xnP^ie.nc~ su~~estc--is the one most
likely to hi t aggre~s,t~ output the hsrclest. Ho~ti'ever,
we consider such an eventuAlity unlikely. It would
probably require a steep and prolone'ed drop in living
standards in the first instance. Large-scale labor
disturbances might also occur if Andropov pursues?
with excessive zeal his {promised cAmpaign to impose
greater di~cialine in the work place.
_a~-
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VII. C'.onC~udin~ Com~nents
To sum up our presentatic~r,, then i_
A. Soviet economic growl:h has slower' markedly in recent
veRrs. The slog-!c~own partly reflects declining inc*ements
to the SUDp1V of 'labor An.ci the stock of capita] and
sharply ~ncreasec~ co~,f~ in r~o~ueine And transportin?
vital energy and raw
n~:~terials. Rut it also stems from
the inabi'it~~ of the ~vstern to ntfcet these constraints
by bringing about sub~tantia] increases in efficiency and
productivity. Indeed, Peonomie growth has sharply
decelerated even before the labor and energy shortages
have reachee' their maximum severity.
B. The consequences of the slowe~own are:
1. First, much harder choices for the leadership in
Allocating resources to consumption, investment, and.
defense.
2. Second, the furt.'~cr invalic!at~on of the iiSSR's clAim
that its economy ;~ an apnrpn^iate r~~oc~el for the rest
cf the world, 4articiilarty the third ~~~or~c!.
C. 1n spite of itt~ dissan~intinq Derformance, the Soviet
economy, ho~~~ever, i s nc-t qpi n? to coy ~ aDSe. indePr], we
expect rNP to continue tc grow, $lthough slowly.
Furthermore, so far, c'efense spenc~inc~ continues to rice.
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