(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00591R000100060004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: January 12, 2017
• Document Release Date: April 22, 2011
• Sequence Number: 4
• Publication Date: January 1, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Status and Prospects
Soviet Economic Reform:
SOV 85-10012X
January 1985
Copy 3 6 3
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Directorate of Secret
Intelligence
Soviet Economic Reform:
Status and Prospects
Policy Analysis Division, SOYA,
Office of Soviet Analysis. Comments and questions
are welcome and may be directed to the Chief,
This paper was prepared by
Secret
SOV 85-10012X
January 1985
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Secret
Soviet Economic Reform:
Status and Prospects
Key Judgments The Chernenko regime has inherited some recent modest economic reforms
Information available along with longstanding obstacles to major change in the economic system.
as of 1 January 1985 Analysis of this legacy and of the current leadership's economic views
was used in this report.
suggests that:
? The Soviets are likely to continue efforts started under Yuriy Andropov
to improve the system of economic incentives and performance indica-
tors-measures that offer some hope of economic benefit with minimum
disruption to present lines of authority.
? New initiatives are most likely in the area of organizational reform-to
streamline the ministerial bureaucracy and restructure it to better deal
with regional or cross-ministerial issues.
? The leadership will not countenance more radical measures that move
toward market socialism, such as Hungarian-style economic
decentralization.
The economic impact of these modest reforms is likely to be small, because
they will not touch basic systemic flaws, such as insufficient consumer
input into production decisions.
The leadership apparently believes that the system is fundamentally sound
and that modest reforms and policy initiatives such as investment shifts can
perceptibly improve economic performance. From its perspective, to move
outside the limits of the present economic model would entail political and
economic costs and risks greater than the potential benefits. This view is
not likely to change unless there is a powerful catalyst, such as:
? A drop in living standards that would cause civil unrest or an unaccept-
able decline in productivity.
? A belief that poor economic performance threatens defense capabilities.
? A realization that the Soviet economic system is not adequate to the task
of narrowing the technology gap with the West.
The eventual emergence of a new generation of Soviet leaders less bound
by the ideological and political constraints of the past might increase the
leadership's sensitivity to such potential problems and decrease its reluc-
tance to propose and then implement reforms that might ameliorate them.
Secret
SOV 85-1001 2X
January 1985
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Key Judgments
Andropov's Legacy
Likely Reform Initiatives 5
Possible Catalysts for Major Reforms 7
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Soviet Economic Reform:
Status and Prospects F_
Introduction
Since Stalin, Soviet economic development has been
achieved primarily through massive infusions of labor
and capital-a strategy of "extensive" growth. This
strategy went hand in hand with an economic system
that was highly centralized and emphasized growth
with little concern for efficiency. Both the strategy for
growth and the system now have become anachronis-
tic. Soviet economic (GNP) growth declined from an
estimated average annual rate of 5 percent in the
1960s to 3 percent in the 1970s, and a further drop is
likely in the 1980s. As a result, the leadership has
launched a drive for "intensive" growth-increased
productivity-and called for modifications or "re-
forms"' of the economic system that reinforce this
change in strategy.
This paper examines recent attempts to reform the
organization and management of the Soviet economy
and the prospects for future change. It focuses initial-
ly on Yuriy Andropov's legacy because Andropov
imparted a new momentum to reform and laid out a
general reform agenda. The paper then speculates on
how the Chernenko regime will carry through and
expand Andropov's initiatives. A section on obstacles
to reform examines the factors that are likely to
prevent major systemic change. A final section specu-
lates on catalysts that might propel a future leader-
ship into more radical options. The appendix provides
a more detailed description of the conservative model
currently in use, examines alternative economic mod-
els that are theoretically available to a Soviet leader-
ship, and assesses the support that these enjoy. F__1
three areas-economic organization, planning, and
the system of incentives and performance indicators
("the economic mechanism" in Soviet parlance). He
stressed the urgency of implementing reform meas-
ures, calling the time "ripe" for change, criticizing
"fussing and talk" instead of action, and declaring
that half measures were unacceptable. He wanted the
new reforms in place by 1986 in order to "enter the
12th Five-Year Plan (1986-90) with a smoothly oper-
ating economic mechanism."
In his speeches and writings, he raised expectations
that the new regime would take a fresher, more
flexible approach to the economy's systemic problems.
In a February 1983 Kommunist article, for example,
Andropov stressed that Marx himself had never ad-
hered strictly to some "abstract ideal of neat, sleek
`socialism' " and that Marx's ideas were "not a dogma
but a guide to action." He subsequently recommended
studying the economic experiments of other socialist
countries and borrowing those that are relevant. He
established a special interdepartmental council head-
ed by Nikolay Baybakov, chairman of the State
Planning Committee (Gosplan), to study such innova-
tions in the field of economic management. Party
secretary Ryzhkov's new Central Committee Eco-
nomic Department, formed to articulate broad macro-
economic policy issues, also was charged with recom-
mending managerial reforms.
New Initiatives. The reforms actually launched dur-
ing Andropov's leadership fell largely in the third area
that he targeted for improvement-incentives and
performance indicators. They had much in common:
Andropov's Legacy
Upon acceding to party leadership in November 1982,
Andropov called for improvements "in the entire
sphere of economic management," specifically in
'The word reform is anathema to most Soviets, who prefer to use
more neutral terms such as improvements and restructuring.
Reform will be used in this paper, however, as a convenient label for
all changes, large and small, in the Soviet economic system. This
definition encompasses measures that are "administrative"-large-
ly organizational-and "economic"-concerned with planning or
? They shared a strong commitment to central plan-
ning and central control over the key economic
decisions such as pricing and new investment. En-
terprise rights were strictly limited, and plan fulfill-
ment was still the key performance indicator.
25X1
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Reform Initiatives Under Andropov
Decree on Contract Discipline in Industry. Published
in April 1983, this decree focused on the importance
of filling orders for contracted deliveries in industry,
calling this "one of the decisive conditions for the
intensification of economic development. " Although
not recommending specific remedies, it called on the
state planning and supply organs (Gosplan and Goss-
nab) to take major responsibility for linking the
payment of bonuses more closely to fulfillment of
contracts and improving the reliability of the supply
system.
Five-Ministry Industrial Experiment. This experi-
ment, announced in July 1983, began on 1 January
1984 in two all-union ministries-Electrical Equip-
ment Industry and Heavy and Transport Machine
Building-and three republic-level ministries-Food
Industry (Ukraine), Light Industry (Belorussia), and
Local Industry (Lithuania). It was expanded to an-
other 21 national and republic ministries in January
1985. The decree seeks to raise productivity and
speed the introduction of new technology by improv-
ing planning indicators (for example, elevating the
importance of contract fulfillment), expanding the
decisionmaking power of the enterprise, and linking
earnings more directly to performance. The enterprise
will have more control over investment funds, the size
of the work force, and incentive payments, and a
limited authority to establish prices for new products.
for not adequately stimulating the introduction of
new technology and called for some changes in
management and incentives. Specifically, 25 percent
of worker and enterprise bonuses could be lost by an
enterprise that failed to meet S&T plan targets, and
more liberal price increases would be allowed for the
production of high-quality items.
Experiment in Consumer Services. This experiment,
approved in February 1984 and begun on 1 July,
seeks to raise the interest of consumer service enter-
prises in serving the public as opposed to institutional
customers. Pay will be more closely linked to final
results; enterprises will be given more authority over
wages, the number of employees, and the use of
profits; and contract fulfillment will become a major
performance indicator.
Increased Emphasis on Small Labor Units. In March
1983 party secretary Mikhail Gorbachev launched
the organizational campaign for a new pay system for
farmworkers. Small teams will be formed on a
voluntary basis to make contracts with farm manage-
ment for the delivery of agricultural products. In
return, they will receive the necessary equipment and
supplies for an extended period, will be allowed to
make production decisions, and will be paid accord-
ing to 'final results. " The brigade, a small labor unit
in industry, is designed to perform along similar
lines.
Decree on Science and Technology (S&T). A decree
issued in late August 1983 criticized scientific organi-
zations and government ministries and departments
? They represented a continuing effort to find the
right combination of performance indicators that
would make enterprise actions responsive to plan-
ners' objectives. The most important objectives were
defined as increasing productivity and introducing
new technologies.
? They were a tacit admission that past reforms had
been only partially implemented, since many of the
"new features" were actually retreads of earlier
decrees.
These initiatives, taken as a whole, represented a
decision to retain the basic structural features of the
? They attempted to refine incentives with an empha-
sis on personal accountability; wages, bonuses, and
fringe benefits were tied more closely to individual
effort and performance.
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
25X1
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
"conservative" economic model of the Brezhnev era
and to reject systemic reforms that would have result-
ed in a major devolution of key decisionmaking
authority to the production unit. Indeed, this was the
message of a press conference for foreign and domes-
tic journalists held in August 1983 soon after publica-
tion of the decree announcing the five-ministry experi-
ment. Nikolay Baybakov, apparently appointed as
regime spokesman to clarify the meaning of the
reform, stated:
We are not setting ourselves the task of weaken-
ing the centralized management of the economy.
On the contrary, we are taking steps to improve
centralized management and to enhance its
scientific essence and efficiency.
The major difference between this approach to
reform and that of the late Brezhnev years was a
willingness to give somewhat more freedom to the
production unit in operational decisions in return
for the unit's assuming increased responsibility for
results. This emphasis reflected Andropov's cam-
paign for increased discipline and responsibility
throughout the economy-one of his major contri-
butions to improving economic growth.
Impact. The economic impact of these reforms is
likely to be small. Many of the "new" provisions
have been tried before with limited success. Grant-
ing enterprises more control over investment funds,
for example, was a part of the 1965 reforms. The
planning of investment supplies was not decentral-
ized at the same time, however, and would-be
investors were unable to obtain the necessary phys-
ical resources needed to implement the plans. The
same conditions prevail today. Similarly, contract
fulfillment has been an enterprise success criterion
for years but with little effect. While official
progress reports to date on the five-ministry experi-
ment indicate that the participating enterprises
have achieved substantial improvements in con-
tract fulfillment, an experiment-as even some
Soviets have pointed out-is conducted in a hot-
house atmosphere with the enterprises involved
receiving priority treatment. The same results
probably will not materialize as the new measures
are spread throughout the economy.
Moreover, these reforms do nothing to correct basic
systemic distortions that ultimately prevent Soviet
planners, managers, and workers from making eco-
nomically efficient decisions. The three most funda-
mental flaws are (1) the lack of a reliable guide for
making economic decisions (the price system is seri-
ously flawed); (2) the limited influence that consumers
have on producers; and (3) the absence of real compe-
tition among suppliers.'
The Chernenko Regime's Potential
The current leadership's public statements and its
actions over the last year provide some evidence of
how it intends to expand on the Andropov-sponsored
initiatives. They also contain hints about other initia-
tives that may be undertaken and provide a basis for
evaluating whether this leadership is willing to go
beyond the limits of the current conservative econom-
ic model.
Current Leadership Views. Before becoming General
Secretary, Konstantin Chernenko had no economic
responsibilities and displayed little interest in econom-
ic matters. During most of the Brezhnev years, he was
occupied with the administrative details of running
the Central Committee's General Department, and
later he acquired the ideology portfolio. Nevertheless,
he espoused some views during this period that are
directly relevant to reform.
As the party's chief guardian of ideology, for example,
Chernenko took a hard line on economic orthodoxy.
He stressed that the "political" factor must be taken
into account in every economic decision, stating that
"a narrow, pragmatic, mercenary view of economics is
alien to Communists." Chernenko also maintained
that ministerial controls were too strong at the region-
al level. In May 1982 he solidly endorsed the rayon
agro-industrial associations (RAPOs),' saying that
their formation was necessary to end the ministerial
' RAPOs were created in 1982 by the Brezhnev Food Program to
strengthen management at the local level. The intention was to give
them broad authority over all agriculture-related enterprises in the
25X1
25X1
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
disarray "which had previously been eroding this
effort." He apparently had some hand in encouraging
the economic experiments in Georgia that in effect
shift decisionmaking more toward the regional level.4
Upon becoming party leader in February 1984, Cher-
nenko repeated Andropov's call for improving the
system of incentives and performance indicators. He
endorsed the expansion of enterprise rights, specifical-
ly the five-ministry experiment. He also argued that
the managerial organs of the economy are overstaffed.
In his speech to the April 1984 plenum, he called for a
reduction "not only at lower and middle levels of
management but also at its summits." He recom-
mended that a better ratio be maintained between
those involved in production and management, urging
moves "from the office desk to the machine tool."F__
At the April 1984 Central Committee plenum, Cher-
nenko urged the local Soviets to "keep their fingers
permanently on the pulse of our economic life" and
specifically directed them to play a greater role in the
construction of economic and cultural projects. He
faulted the ministries for "still trying to circumvent
the- local Soviets" and for neglecting the construction
of housing and social, communal, and cultural facili-
ties.
Mikhail Gorbachev, the unofficial "second secre-
,tary," has a longer history of concern with economic
questions than does the General Secretary. As the
party secretary responsible for agriculture, Gorbachev
has long been a strong advocate of improving incen-
tives and using "economic" rather than "administra-
tive" levers to manage: the economy.' His speeches
and writings indicate that he favors:
? The collective contract method-a scheme to im-
prove incentives in agriculture, which he introduced
at an :all-union conference on. agriculture in March
1983.
' These include the Abasha experiment, the forerunner of the
RAPO, and the formation of a new organization in Poti charged
with coordinating the development of all industrial, transport, and
consumer service enterprises in the city. Georgian party leader
Eduard Shevardhadze said in February 1984 that Chernenko
"played a large role in the elaboration and adoption" of a Decem-
ber 1983 decree that endorsed the Georgian experiments and
claimed that "some of them were even adopted at Chernenko's
initiative."
? Self-financing for Soviet farms as a means of
improving managerial accountability, initiative, and
production efficiency.
? The expansion of production on the peasants' pri-
vate plots.
? The RAPO reorganization.
Grigoriy Romanov, the party secretary responsible for
the defense and machine-building industries, built a
reputation as an economic innovator and efficient
manager while party chief in Leningrad during 1970-
83. He was closely identified with two initiatives-the
production association and social planning-that had
as their aim improved economic management through
stronger regional control. Production associations-
organizations that manage the activities of several
related enterprises-gained considerable authority at
the expense of the central ministries and in 1973 were
accepted for eventual-implementation throughout the
economy. Social planning was an attempt to find an
integrated solution to economic and social problems
by increasing regional influence in the planning proc-
ess and cutting across departmental boundaries. This
concept was incorporated in the economic reforms of
1979. Romanov's recent speeches indicate a continued
interest in the search for new management tech-
niques.
Nikolay Tikhonov, Chairman of the Council of Min-
isters since Kosygin's death in 1980, does not appear
to be a specialist in the reform area like his predeces-
sor-the father of the 1965 economic reform-and
has had little to say publicly on this subject. In his
book on the Soviet economy published in 1984 and in
his Supreme Soviet election speech of March 1984, he
offered a pedestrian rendition of established themes,
noting the need to improve management and endors-
ing the principles of improved incentives and expand-
ed enterprise rights that underlie the five-ministry
experiment. In the past, he has supported cross-
ministerial approaches to economic management,
such as the territorial production complexes. Al-
though Tikhonov was resist-
ing Andropov's reform proposals, it was never made
clear whether the point of contention was their pace,
specific experiments, or general philosophy.
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Geydar Aliyev, First Deputy Chairman of the USSR
Council of Ministers since November 1982, is ru-
mored to be a contender for Tikhonov's post. In his
former position as party boss in Azerbaijan, he rarely
spoke about the economy's systemic weaknesses and
has not addressed this topic since coming to Moscow.
Aliyev stood practically alone among the leadership in
failing to note the importance of economic reform in
his Supreme Soviet election speech in early 1984.
Instead, he stressed the need to strengthen discipline
and improve organization-themes that had worked
well in enhancing his reputation for tough leadership
in Azerbaijan.
Likely Reform Initiatives. The strong sense of conti-
nuity with previous reform themes evident in the
current leadership's statements suggests that the
Chernenko regime will continue the modest efforts
begun under Andropov's leadership to improve the
system of incentives and performance indicators.
Since Andropov's death, all the members of the senior
leadership have endorsed such changes, which offer
some hope of economic benefit with minimum disrup-
tions to present lines of authority. In late August the
Politburo acclaimed the success of the five-ministry
experiment and approved the proposal of the Council
of Ministers to extend it to other sectors in January
1985. In an October speech to a People's Control
conference, Chernenko revealed that a Politburo com-
mission had been formed to propose improvements in
"the economic mechanism." In a December 1984
issue of Kommunist, Chernenko emphasized the im-
portance of this task, stating that technological ad-
vances "remain poised in midair" unless accompanied
by "perfection" of the economic mechanism.
If other changes are to come, the Chernenko regime
most likely will move in the area of organizational
reform. This was one of the few economic topics on
which Chernenko himself held strong views before
becoming General Secretary. One of the major goals
of such reform is likely to be a reduction in the size of
the bureaucracy. Some moves in this direction may
have been under way at the time of Andropov's death.
According to dissident historian Roy Medvedev,
Andropov had proposed that the swollen ranks of
party and governmental administrators be reduced by
20 percent. 25X1
Another likely target for organizational reform is the
ministerial structure itself. According to Romanov in
March 1984, a future Central Committee decree on
improving the management mechanism will focus on
"the structure of ministries and departments."
General support for such change is evident in the
Soviet press. One of the most comprehensive calls for
ministerial reform was made in a July 1984 Pravda
article by Dzhermen Gvishiani, a deputy chairman of
the State Committee for Science and Technology.
Gvishiani-a son-in-law of former Premier Aleksey
Kosygin-lent his authority to various proposals for
improving the ministerial system, including the cre-
ation of new territorial organs for such sectors as
construction and transportation, special organizations
to manage priority programs, and the possible forma-
tion of superministries (to coordinate the work of
related ministries). In this regard, a 27 May decree on
ways to improve the construction industry indicated
that in the future more emphasis will be placed on the
territorial (as opposed to ministerial) management of
construction, although it left unspecified how this
would work.
The economic impact of such new reforms would be
similar to that of the Andropov initiatives. They
might allow the current economic model to operate a
little more efficiently but would not correct its basic
flaws. The political impact of organizational change
probably would be more significant. The reorganiza-
tion of the ministerial system would necessarily force
some power sharing by the Moscow ministries-with
regional authorities, enterprise managers, and perhaps
new organizations such as superministries. It is doubt-
ful that such measures could be taken without Pre-
mier Tikhonov's support, and it is by no means certain
that he would back them.
The current leadership has given no indication that
more radical structural reforms that involve major
decentralization, such as those proposed in Hungary
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
(see appendix), are being considered. In an October
issue of Kommunist, Politburo member and Ukraini-
an party boss Shcherbitsky harshly criticized those
reformers who would put their trust in "spontaneous
market regulation" of the economy, claiming this
would damage the economy, harm the "vital interests
of the working people," and ultimately threaten the
return of capitalism. There seems to be a general
leadership consensus that the system is fundamentally
sound and that modest reforms and policy initiatives
such as investment shifts and a change in patterns of
trade can perceptibly improve economic performance.
Obstacles to Reform. Formidable obstacles block any
regime's attempts to make fundamental changes.
These obstacles to some degree also inhibit even
modest reform efforts.
The ministerial bureaucracy is a major obstacle to
reform not only because of its inertia and belief in its
indispensability-typical of any entrenched bureau-
cracy-but, more important, because of its well-
founded fear that a shift in the locus of decisionmak-
ing, which usually accompanies reforms, will lead to a
loss of power and prestige. Council of Ministers
Chairman Tikhonov, who has served in the ministerial
structure since 1950, is unlikely to give enthusiastic
support to major changes in his "empire." Chernenko,
moreover, would probably not want to put much
political pressure on one of his staunchest allies.F_
Other vested interest groups, as diverse as party
apparatchiks and members of the labor force, also
resist reforms because they fear change and a loss of
power. Reforms that allow enterprises to respond
more to economic incentives than to administrative
directives would reduce the party's ability to intervene
in economic matters. As long as party officials are
held accountable for economic results, they will be
loath to relinquish control. Workers may fear that
reforms will have a negative impact on income distri-
bution and job security; worker apprehensions were
largely the reason for the interruption of the Hungar-
ian reforms in 1972.
believe that major structural change cannot be ac-
complished in a gradual fashion. As one Soviet aca-
demic said:
It is impossible to perfect a mechanism of
economic management that took shape many
decades ago by gradually replacing the most
obsolete elements with more effective
ones ... the discrete character of
change ... must be recognized. This means that
this change occurs rather infrequently ... but
then is complex and profound.
A lack of practical prescriptions for reform by Soviet
economists confuses and irritates the leadership. At
the June 1983 plenum both Andropov and Chernenko
criticized the social scientists for failing to provide
pragmatic solutions to economic problems. The Cen-
tral Economics and Mathematics Institute, which has
been engaged in a long-running dispute with the
Institute of Economics, was specifically censured for
its failures at this session. Subsequently, a February
1984 decree attacked the Institute of Economics for
"serious shortcomings," including the failure to pro-
vide a sound theoretical basis for "perfecting the
economic mechanism."
The size and complexity of the Soviet economy also
raises legitimate fears that reforms would initially
cause severe dislocations, which the leadership would
judge to be economically and politically unacceptable.
Hence, Andropov's warning in August 1983 that "in
an economy of such dimension and complexity as
ours, we must take extreme care." For this reason,
Soviet academicians have told Westerners that many
East European reforms-particularly Hungarian-
are not relevant or applicable in the USSR.
Ideology also tempers the pace and depth of reforms.
Moscow considers itself the chief guardian of Marx-
ist-Leninist orthodoxy and an economic role model for
the rest of the world and would be very reluctant to
adopt changes that could be interpreted as a rejection
of such principles and as an open invitation for even
more sweeping changes elsewhere in the Soviet Bloc.
A traditional preference for piecemeal change also
predisposes the Soviets toward modest reforms, ac-
cording to many Soviet and Western economists who
Secret
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Secret
Below the members of the Politburo are Gosplan
officials, prestigious academic economists, and other
members of the economic establishment who must
translate the often nebulous line on reform estab-
lished by the leadership into specific recommenda-
tions for change. These experts could influence the
direction of reform and to a large extent determine its
success or failure. The economic establishment, how-
ever, is deeply divided in its views on reform and
provides little support to the regime in developing a
comprehensive and internally consistent approach.F_
A battle currently raging over price formation is
typical of the disagreements among the specialists.
This battle has a long history and pits the mathemat-
ical economists against the traditionalists. Nikolay
Fedorenko, the director of the Central Economics
and Mathematics Institute (TsEMI), is the leading
proponent of the "optimality "school of thought,
which argues that a price system reflecting scarcity
information will promote the optimum use of re-
sources. He has repeatedly presented his "optimal
planning" proposals to Gosplan but has thus far been
rebuffed by a group of economists associated with the
Institute of Economics. They believe that not just
scarcity but multiple criteria should be used in a
socialist society. The debate has become heated at
times, with Nikolay Glushkov, chairman of the State
Committee on Prices, accusing Fedorenko of trying to
'foist" his views on government organs after 'failing
to prove their correctness in open scientific debate."
The economists are also far apart on other crucial
reform issues such as the choice of the best enterprise
performance indicator and the ideal organizational
form for promoting technological progress.
The pressure for liberalization in the sociopolitical
areas that followed economic reforms in Eastern
Europe, in fact, is reason enough for apprehensions
among Soviet leaders about the course of reform in
the USSR.
Possible Catalysts for Major Reforms
The Chernenko regime, then, is likely to settle for
piecemeal, modest economic reforms that do not move
the system outside the bounds of the current conserva-
tive model. Like its predecessors, this regime appar-
ently perceives that to do otherwise would entail costs
and risks greater than the potential benefits. Powerful
catalysts would be required to change this perception
and to compel this leadership or a future one to seek
out more radical reform strategies. The chances that
such pressures will develop are not high, but under
certain conditions the leadership might take more
decisive steps.
The Consumer Factor. Continued slow economic
growth makes it increasingly difficult to provide for
the needs of the three major resource claimants- 25X1
defense, investment, and consumption. If the regime
were to follow policies that always relegate consump-
tion to the role of residual claimant, living standards
could stagnate or decline. This might lead to active
unrest and worsen morale and labor productivity.' If
faced with such problems, the regime may feel that
reforms have become necessary and worth the risk
involved. A recent ideological debate in the press-
over the meaning and implications of "contradictions"
in a developed socialist society-indicates that some
influential Soviets now believe that consumer con-
cerns put pressure on the leadership for reforms,
political as well as economic.
Under these conditions, the Hungarian experience
could look attractive, leading to the adoption of some
aspects of the Radical and Liberal models (see appen-
dix). Hungary's New Economic Mechanism deserves
some credit for improving the lot of consumers and
keeping discontent at a relatively low level. The
variety and quality of consumer goods, including
agricultural products, were improved by increasing
incentives and efficiency in the socialized sector as
well as by legalizing activities in the private sector. 25X1
On the other hand, the Hungarian workers were
fearful that the reforms would go too far and expose
them to the vagaries and insecurities of the market-
place.
25X1
25X1
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
The Military Factor. The political leadership, sup-
ported by the military, may come to believe that
current reforms will not substantially improve the
efficiency of the Soviet economy, particularly the
more backward civilian sectors, and that this will have
serious implications for the quantity and quality of
military goods. At present we estimate that nearly 25
nondefense industrial ministeries are involved in pro-
viding R&D, materials, components, and parts to the
nine defense industrial ministries. Thus, systemic
problems in the civilian sector would adversely affect
the defense sector even if it were problem free. F_
There is some evidence that, in at least some official
Soviet circles, there is a recognition of the link
between economic reform and military strength.
There are, however, divergent views about what re-
forms are needed to protect the military interests, and
as yet no one seems to be arguing that the problem is
so severe that major changes are needed.
The Technology'Factor. Soviet political leaders and
economists alike believe that the introduction of new
technologies, which save labor, materials, and energy,
will help relieve the resource constraints and industri-
al bottlenecks that have been at least partially respon-
sible for the steady decline in economic growth. They
view success in this area as essential not only to meet
domestic economic goals but to keep up with techno-
logical and military developments in the West. At
present the Soviets are trying to develop a program to .
accelerate technological modernization on a national
scale. All of the proposed changes assume that the
present planning model will be retained.
market forces.
Many Western specialists on the Soviet economy and
some Soviets believe that the conservative model that
is currently used will not prove adequate to the task.
According to one Western economist, who put it most
succinctly, to accept the current model "is to give up
the goal of attaining the technological level of the
leading industrial countries. Whatever the merits of
the Soviet economic mechanism, the promotion of
technological advance is not one of them."' If this
becomes apparent to the leadership, the continuing
technology gap may be a catalyst to reform. Since the
present system's inflexibility and centralized nature
are major stumblingblocks to innovation and its trans-
lation into production, logical reforms would move
toward greater decentralization and the injection of
approach.
The Political Factor. In the near future a new
generation of Soviet leaders will take on the responsi-
bilities of devising economic strategies. They will face
many of the same obstacles to reform that stymied
initiatives by their predecessors, but some of these
obstacles may be less inhibiting. Ideology, for exam-
ple, may not be as important to those who did not
grow up in the early years of Soviet power; they may
believe that a more practical approach is relevant to
contemporary problems. The ability to appoint a 'new
generation of officials in the ministerial structure
should reinforce the leadership's ability to take a fresh
The emergence of a younger generation of Soviet
leaders alone, however, probably would not be enough
to stimulate more radical reforms. At most, genera-
tional political change will make it easier for the
leadership to act should the economy deteriorate to
the point that living conditions are declining and
military and technological competition with the West
is more difficult to sustain.
25X1
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Secret
Appendix
Reform Options
This appendix examines the range of reform options
available to the leadership. It groups these options
into four basic models 8 and describes their support-
among the leadership, in authoritative newspapers
and journals, and in unofficial sub rosa conversations
and publications.
The Conservative Model is the one that has been used
by all Soviet regimes since Stalin. It is based on the
principle of central planning and, thus, places strict
limits on the decisionmaking power of the production
unit. Adherence to this model has not precluded a
broad range of modifications, largely designed to
promote technological progress and improve the quali-
ty of production. Some of these employ economic
levers-new forms of incentives-while others use
administrative measures-changes in the structure of
authority.
Most Soviets acknowledge that this model has been
successful in generating "extensive growth," but some
question whether it can also yield "intensive
growth"-increased productivity. So far, the Soviet
leadership and a broad range of government and party
officials as well as academicians appear convinced
that the basic structural features of the present
system are sound and that patches here and there will
be adequate to ensure its success. This does not
preclude heated debate in the leadership and the
economic establishment about the type and size of
The Reactionary Model presumes a return to a more
Stalin-like economic system, that is, one that is even
more highly centralized and tightly controlled than
the present system. Consistent with and perhaps
essential to this shift in planning and management are
changes in economic policy such as coercive labor
laws like those of the late 1930s and a return to the
high-investment growth strategy of the 1960s. F_
The official viewpoint seems to be that economic
circumstances now are very different than those in the
8 These models are based on those outlined in Joseph Berliner's
article "Planning and Management" in The Soviet Economy:
1930s and that the inflexibility of the reactionary
model is ill suited to promoting intensive growth.
Moreover, the actions of recent Soviet regimes indi-
cate that they believe consumer/worker demands
must be assuaged to some degree to increase produc-
tivity. Both Andropov and Chernenko, for example, 25X1
pledged increased supplies of consumer goods and
services, and work on a consumer "program" is under
way; agricultural investment has retained its one-
quarter share of total investment, and strong support
for the Food Program continues. These policies would
be at odds with the more repressive and austere
conditions required by the reactionary model.
Andropov's discipline campaign, however, did contain
some elements of neo-Stalinism. When first intro-
duced, it apparently released a pent-up wave of
nostalgia for the strength and decisiveness of a Stalin; 25X1
many Soviets expressed satisfaction with the cam-
paign as something long overdue and necessary to get
the economy moving again. The subsequent course of
the campaign, however, illustrates the difficulties of
implementing such a policy in today's milieu. Work-
ers began to complain as the crackdown became too
heavyhanded and indiscriminate. Fearing that a fur-
ther alienation of the work force would complicate the
labor shortage, the regime was forced to repackage
the campaign as a more subtle drive for personal
"accountability." Carrots were added to the sticks.
New decrees provided flexible work hours for the
service sector and expanded consumer services at 25X1
factories so that workers could remain at their jobs
the required time and still take care of household
errands.
The Radical Model entails a decentralization of
planning and management as originally proposed in
Hungary's New Economic Mechanism (NEM).' The
' The NEM's basic features, introduced in 1968, were substantially
diluted in subsequent years by a layer of controls-subsidies, price
controls, and administrative guidance-to provide more insulation
for the economy. New measures announced last year are to be
introduced gradually during 1984-90 and seek to revive the 1968
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
government remains in control of basic economic
strategy-key investment decisions, income distribu-
tion-but'the enterprise is freed of plan directives and
able to pursue profits based on market-determined
prices and costs. This approach, in essence, is market
socialism.
The Soviet leadership traditionally has decreed that
moves toward market socialism are ideologically un-
acceptable. Although both Andropov and Chernenko
spoke of the need to study and borrow from the
economic systems of "fraternal countries," they
stopped short of endorsing the more radical reforms.
Official comment has been favorable, for example, on
selected aspects of the Hungarian experiments-in
agriculture, credit and finance, and retail trade-but
has avoided references to industrial decentralization,
the heart of the NEM. Soviet reforms, including those
initiated by Andropov, have attempted to modify the
behavior of managers and workers within a tightly
controlled sphere of operational decisions bound by
the plan and with centrally administered prices as an
immutable given.
Because of the leadership's stand on this type of
reform, open and explicit advocacy of it in official
publications is rare. Support is usually couched in
deliberately ambiguous terms such as "radical re-
structuring" and more reliance on an "automatic
mechanism." There are exceptions to the rule, howev-
er. In the October 1983 issue of The Economics and
Organization of Industrial Production (EKO),10 B. P.
Kurashvili, a Georgian lawyer known for his unortho-
dox views on economic reform, specifically argued
that the Soviet Union should adopt a system like
Hungary's. He urged the creation of a single industri-
al ministry that would guide the economy by indirect
means-"investment, credits, taxes, and other eco-
nomic means." State organs would have "no right to
pass down specific, obligatory plan targets."
Such views are more frequently expressed in private
or aired in academic circles. Ivan Buzdalov, a senior
researcher from the Institute of Economics of the
World Socialist Systems (IEMSS) candidly tells
'? EKO is the house organ of the Institute of Economics and
Organization of Industrial Production (Siberian Department of the
Academy of Sciences), headed by the influential economist Abel
Westerners that he is an advocate of economic reform
along the Hungarian lines. A paper delivered to an
April 1983 symposium of an economic institute at-
tached to the Academy of Sciences in Novosibirsk
directly attributes the recent slowdown in economic
growth to centralized planning and excessive bureau-
cracy. The author, a sociologist, discusses at length
the social groups whose vested interests lead them to
oppose reforms. She is not explicit about the type of
system she favors but implies her support for market-
type reform. This view is probably shared by a large
number of academicians.
The Liberal Model would preserve the traditional
planning methods for most of the economy but liberal-
ize the restrictions on private initiative. Within the
socialized sector, the economy would operate, as in
the past, with centrally established production targets,
centralized material technical supply, and centralized
price administration, but outside these boundaries
individuals or small groups would be encouraged to
engage in economic activity for private profit. This
system, to varying degrees, is common in Eastern
Europe.
The Soviet Constitution of 1977 specifically sanctions
the expansion of the private sector in consumer
services. Subsequent regimes, however, have shown
little interest in taking such initiatives. Recent actions
indicate that this option is currently out of favor with
the Chernenko regime. An April article in a Soviet
history journal suggested that current expansion of
the private sector could help overcome economic
bottlenecks, noting that Lenin has used free enterprise
in the consumer sector in the early 1920s. An October
issue of Kommunist sharply attacked the article,
resulting in an unusual public retraction and a prom-
ise that future articles would meet required "scholar-
ly-methodological" and "political standards."
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
25X1
25X1
25X1
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Secret
A series of decrees during 1977-81 marked renewed
regime support for the private farm sector, and this
was enshrined in the 1982 Food Program. There is no.
guarantee that such support will continue. In the past,
the leadership has been exceptionally fickle on this
issue; private effort is encouraged in poor harvest
years but is repressed when the socialized farm sector
recovers.
A larger role for the private sector is supported by a
broad range of Soviets, including both liberals and
conservatives, and has been a frequent subject of press
articles in recent years. Kommunist editor and Cen-
tral Committee member Richard Kosolapov, in con-
versations with US Embassy officers in Moscow, has
often volunteered his view that small-scale private
enterprise is not incompatible with socialism as long
as it remains under effective controls. Soon after
Andropov became General Secretary, the influential
economist Abel Aganbegyan argued in Trud that
private participation in such consumer service areas as
transportation and retail trade should be allowed to
increase. He hastened to add that these ventures
should be taxed and should operate under strict state
control. Reform advocate Buzdalov said in June 1983
that his institute (IEMSS) had endorsed the need for
the private sector in consumer services and had been
supported in this effort by the staff of party secretary
Gorbachev. He lamented that this idea was effectively
blocked by the Institute of Economics.
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
 Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4
Secret
Secret
Sanitized Copy Approved for Release 2011/04/22 : CIA-RDP86T00591 R000100060004-4