GORBACHEV'S ECONOMIC AGENDA: PROMISES, POTENTIALS, AND PITFALLS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00591R000300450003-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: August 26, 2010
• Sequence Number: 3
• Publication Date: September 1, 1985
• Content Type: REPORT

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Directorate of Secret
Intelligence
and Pitfalls
Gorbachev's Economic Agenda:
Promises, Potentials,
Secret
SOV 85-10165
September 1985
Copy 5 6 4
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Directorate of Secret
Intelligence
and Pitfalls
Gorbachev's Economic Agenda:
Promises, Potentials,
Office of Soviet
Analysis, with contributions by SOYA analysts
Performance Division, SOYA,
Comments and queries are
welcome an may e directed to the Chief, Economic
Secret
SOV 85-10165
September 1985
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Gorbachev's Economic Agenda:
Promises, Potentials,
and Pitfalls
Key Judgments Since coming to power, Mikhail Gorbachev has set in motion the most
Information available aggressive economic agenda since the Khrushchev era. The key elements
as of 6 September 1985 are:
was used in this report.
? A reallocation of investment resources aimed at accelerating S&T and
modernizing the country's stock of plant and equipment.
? A revitalization of management and planning to rid the Soviet bureau-
cracy of incompetence and petty tutelage and put more operational
control of enterprises in the hands of managers on the scene.
? A renewal of Andropov's anticorruption and discipline campaigns,
coupled with a new temperance campaign, to increase and perhaps
improve worker effort.
All of Gorbachev's initiatives are aimed at raising productivity and
efficiency throughout the economy by matching more and better equip-
ment with a motivated work force and an enlightened managerial cadre.
He has put his finger on the very tasks that the economy has never done
well and has become progressively less able to do as it has grown in size and
complexity.
Although Soviet economic performance has improved in recent years from
the low levels of 1979-82, Gorbachev still faces an economy that cannot si-
multaneously maintain rapid growth in defense spending, satisfy demand
for greater quantity and variety of consumer goods and services, invest the
amounts required for economic modernization and expansion, and continue
to support client-state economies. Gorbachev, in our view, has a clear
understanding of these limitations; he is obviously extremely impatient that
they be addressed now
Soviet officialdom probably was caught offguard by Gorbachev's sweeping
condemnation of past economic policies, particularly considering the recent
economic rebound, and was surprised that he apparently was ready to take
action so early in his tenure. Despite the urgency of his rhetoric, he seems
aware that implementing his programs too rapidly carries substantial
economic and political risks:
? He has prepared the party and bureaucracy for substantial change by
bluntly laying out the need for management reorganization and renewal,
but has yet to provide specific details on controversial issues that would
provide a basis for organized resistance.
? He has moved aggressively to replace old-line economic managers but
has yet to replace Council of Ministers Chairman Tikhonov, regarded by
most Soviets as a major political obstacle to economic change.
Secret
SOV 85-10165
September 1985
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? He has talked about the potential need for "profound" changes in the
area of economic reform, while strongly supporting the need to maintain
central control.
Program specifics will be announced by next February along, we judge,
with Tikhonov's replacement. It is unlikely that they will contain any
radical departures from what Gorbachev has already announced. At
present his game plan seems to be a realistic assessment of what can be
done in the short run while planning and developing a consensus for more
radical change over the long haul if he deems that it is needed.
Success with the initial stages of Gorbachev's program could provide a
relatively immediate growth dividend that could be used to bolster worker
morale and underwrite future growth. How much economic improvement
will occur and how long it can be sustained, however, is very much an open
question. Modernization is slow by nature in any economic system and in
the Soviet case will run into the perennial conflict between meeting output
goals and reequipping enterprises with new equipment and technology.
Streamlining the bureaucracy will be resisted by countless officials whose
jobs and perquisites are threatened, and a new set of incentives must be in-
stituted to motivate a new type of Soviet manager. Discipline campaigns
can go only so far in energizing a cynical work force.
Gorbachev will be hard pressed to find the resources necessary to
underwrite his modernization goals. The economic dividend from manage-
ment reforms and the discipline campaign will not substantially relieve the
basic scarcity of resources nor obviate the need for fundamental systemic
change:
? Improving worker morale and management effectiveness will require an
effective incentive system and a greater availability of high-quality
consumer goods at a time when the investment sector will be oriented to-
ward producer goods and new defense programs will be coming on line.
In fact, Gorbachev's investment program implies a potential decline of
some 60 percent in the investment increment going to consumer-oriented
sectors.
? The regime's plan to hold energy's share of investment constant comes at
a time when demand for energy will grow and the cost of offsetting
declining oil production will be rapidly rising. If the requisite investment
is not forthcoming, the current decline in oil production could become
precipitous.
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? The increased managerial independence necessary to spur effective
technological development and utilization is inconsistent with a centrally
planned pricing and allocation system, leading to the likelihood of
management disillusionment and subsequent reversion to the very
methods that have led to waste, fraud, and mismanagement for years.
Gorbachev could employ various options to address these issues, but all
contain serious pitfalls. East European countries could be ordered to
shoulder a larger part of the economic burden, including increased exports
of equipment to the USSR, but their own deep economic problems increase
the likelihood of confrontation between Moscow and its allies. A drive to
increase imports of Western technology would come at a time when the
prospects for expanding hard currency exports, particularly oil, look dim. A
shift of resources from defense to civilian uses could have considerable
positive impact over the long run, but even the suggestion of such a shift
might damage Gorbachev's relations with the military and risk deep
divisions within the Politburo. Finally, major economic reforms to promote
managerial effectiveness would encounter strong resistance on political and
ideological grounds, particularly since they threaten the institutional
prerogatives and thus the privileged position of the Soviet elite.
Indications that Gorbachev has decided on and gained consensus for more
radical changes could include:
? New, dramatic initiatives to reach an accord at Geneva and concrete
proposals for reduced tensions at the November meeting between the US
President and the General Secretary, which might signal a willingness
and desire to reduce the Soviet resource commitment to defense and
create an atmosphere for expanded commerce with the West.
? Select legalization of private-sector activity, particularly in regard to
consumer services, which would indicate a willingness to confront past
economic orthodoxy in order to improve consumer welfare and thereby
economic performance.
? Breaking the monopoly of the foreign trade apparatus, which would
signal an increased reliance on managerial independence at some cost to
centralized control.
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Continued reliance on marginal tinkering despite clear indications that the
plan for economic revitalization is faltering would indicate that Gorbachev,
like Brezhnev before him, has succumbed to a politically expedient but
economically ineffective approach.
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The Gorbachev Agenda
Accelerating S&T Progress 5
Restructuring Investment 5
Reorganizing Management and Planning 6
Tightening Economic Discipline 6
An Integrated Approach 6
Long-Term Uncertainty 10
Problems Facing Industrial Modernization 11
Revitalizing Management 13
Dealing With Finite Resources 14
A Rocky Road Ahead 15
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Gorbachev's Economic Agenda:
Promises, Potentials,
and Pitfalls
In March 1985 Mikhail Gorbachev inherited a tech-
nologically backward economy that had experienced a
decade of slowing growth punctuated by harvest
failures, industrial bottlenecks, labor and energy
shortages, low productivity, and declining efficiency
of investment (see figure 1). The simple growth formu-
la that had propelled the USSR to a major world
power in the postwar era-ever-increasing inputs of
labor and capital resources-by the mid-1970s was no
longer effective
During the 1950s, this growth formula resulted in
rapid gains in output because of the very low level of
GNP in the early postwar period and the relatively
high efficiency of new fixed investment in reconstruc-
tion and repair of war damage. As the USSR moved
out of the reconstruction phase in the 1960s, however,
highly effective investment projects became more
difficult to identify, and centralized planning and
management of a burgeoning economy became more
cumbersome and inefficient. Unable to improve their
ability to deal with an increasingly complex economy,
Soviet leaders had little choice but to sustain the large
commitment of resources to investment if economic
growth was to continue apace. In addition to main-
taining larger annual flows of investment, Soviet
planners have swelled the expansion of plant and
equipment by:
? Holding retirement of equipment to a minimum.
? Prolonging the service lives of technologically obso-
lete capital through repeated extensive repairs.
? Continually expanding new construction projects,
thus channeling the bulk of investment into build-
ings and structures rather than into new equipment,
the principal carrier of new technology.
Sustaining a high level of increase in total capital
assets by these methods enabled the Soviets to achieve
high rates of growth and to support an enormous
defense establishment, but also impeded technological
progress and productivity gains. Efforts to increase
the quality and quantity of output and make better
use of available resources in the economy continued to
be frustrated by a backward technological base, in-
flexible production processes, and, perhaps most im-
portant, a cumbersome and inefficient system of
planning and management.
These problems were well understood by Gorbachev's
predecessors. Rhetorically at least, Brezhnev recog-
nized that in the future the economic system would
have to operate differently if it was to meet the needs
of the Soviet polity and society. Various Central
Committee and Council of Ministers' decrees were
promulgated to address these problems, but Brezhnev
in his waning years lacked the energy and political
will to follow through on his diagnosis. As a result of
this administrative lethargy and the endemic nature
of many of the problems facing the Soviet economy,
Brezhnev's successors were saddled with:
? A technologically antiquated industrial base and a
burdensome defense sector that has systematically
siphoned off high-quality resources needed for eco-
nomic revitalization.
? An energy sector beset by stagnation and decline in
production of its major fuel-oil-and a 30-year
pattern of energy use that inhibits the rapid transi-
tion from oil to other fuels.
? A level of technology that generally lags that of the
West. Even in military applications, the Soviets
have encountered technological problems in recent
years that are sharply driving up costs and delaying
new sophisticated weapon systems, thus creating a
further drain on available resources.
? An inefficient farm sector that despite large invest-
ments still employs one-fifth of the Soviet labor
force, is bereft of an adequate storage and transpor-
tation system, and is unable to produce grain and
meat in sufficient quantities to meet rising domestic
demand.
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Figure 1
USSR: Key Economic Indicators,
Average Annual Growth Rates
Combined Productivity of
Land, Labor, and Capital
6
F,.
6
4
11,
N,
4
4~
A"
A
q
2
fi
2
? A hidebound bureaucracy whose rigidities contrib-
ute to irrational investment decisions, retard scien-
tific-technical innovation, and encourage high costs
and massive waste of resources.
Moreover, by the end of the Brezhnev era, a growing
malaise had spread through much of the work force,
not only because gains in living standards had slowed,
but also because workers believed that the system was
incapable of bringing any meaningful improvement.
This attitude-reflected in the rise of alcoholism and
related health problems-exacerbated the corruption
and inefficiency that had permeated the Soviet eco-
nomic bureaucracy from farmhand to factory worker
to the ministerial superstructure. Workers and man-
agers alike spent increasing amounts of time and
effort trying to insulate themselves-often through
illegal means-from the effects of shortages in both
the home and factory. This reduced productivity on
the job and promoted greater shortages of goods and
services throughout the economy, especially for indi-
viduals and enterprises with little or no "special
access."
While Andropov's ascension to power gave a glimmer
of hope for change, his tenure was too short and he
had too little personal energy to reverse the decades of
abuse and mismanagement tolerated by his predeces-
sors. Anticorruption and discipline campaigns stimu-
lated some improvement in economic growth but
made only minor ripples across the surface of the
deeply entrenched system of planning and manage-
ment. Chernenko, for his part, paid little more than
lipservice to these initiatives.
When Gorbachev came to power, many Soviet offi-
cials-except those of the old guard, who felt threat-
ened-had high expectations for a vigorous revival of
Andropov's anticorruption and discipline programs, as
well as a stepped-up pace of personnel change. But,
with economic growth having recently accelerated
from the unusually slow rates of 1979-82, many
probably felt that he would avoid sharp changes in
resource allocations.
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Gorbachev has made it clear he intends to overcome
entrenched resistance to his domestic programs by
cleaning house:
? He has named eight new economic ministers since
coming to power, including those in charge of oil
and steel production.
? He has replaced three Central Committee depart-
ment chiefs who oversee the machine-building, con-
struction, and trade and services sectors.
In addition, he has supervised an extensive turnover
among regional party first secretaries-who play a
critical role in implementing economic policies, are
spokesmen for local economic interests, and act as
facilitators in overcoming economic bottlenecks. Al-
ready over 20 such officials have been appointed,
nearly one a week since Gorbachev came to power,
and more changes are likely during the party elec-
tions that will precede next February's party con-
gress.
Gorbachev probably also has other high-level changes
in mind:
? Reports persist that he intends to retire Premier
Tikhonov at the congress or perhaps even sooner.
Some Soviet officials claim that Gorbachev might
Gorbachev, however, has taken little solace in recent
economic improvement; by all indications he realizes
that long-term gains will require solving endemic
problems that for the last decade have prevented the
economy from simultaneously sustaining:
? Continued rapid growth in defense spending that
had proceeded unabated since the mid-1960s.
? Greater quantity and variety of consumer goods and
services demanded by an increasingly discriminat-
ing population.
? Rapid growth in investment goods for economic
modernization and expansion.
? Increased support for client states whose own econo-
mies are coming under increasing strain.
In little more than five months, Gorbachev has dem-
onstrated that he is the most aggressive and activist
Soviet leader since Khrushchev. He is taking power by
take the job himself, while others indicate that he
will give it to a close ally like RSFSR Premier
Vorotnikov or party secretary Ryzhkov.
? Several Soviets have strongly implied that State
Planning Committee Chairman Baybakov is on the
hit list, and Gorbachev indirectly criticized him in
June for undermining an economic experiment be-
ing implemented in major industrial sectors.
? Gorbachev may also want to go after the remaining
dozen or so top economic officials who have been
around since the beginning of the Brezhnev era.
He has already shown his intention to reassert party
control over the vast economic bureaucracy, which
had grown accustomed to Brezhnev's benign neglect.
The firings so far have probably sent an unmistak-
able message to economic officials that they must toe
the mark or face disgrace and forced retirement.
virtue of his strong, assertive personality and by
aggressively inserting his own cadre into key positions.
Moving forcefully to place his personal stamp on
economic policy, Gorbachev has repeatedly told man-
agers that they must change the way they do business
or "get out of the way":
? He has assailed managers by name for lack of
innovation, laziness, and poor management and has
strongly implied that they will be removed. He has
attacked the complacent attitude toward corruption
within the party bureaucracy and called for promo-
tion of younger and more competent officials at all
levels. While such rhetoric is not new in itself, he
has already underscored his intention to back up his
tough rhetoric with dismissals (see inset "Gorba-
chev's Hit List").
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? He has returned for revision the centerpiece of the
planning system's raison d'etre, the draft five-year
plan, demanding specific changes-so far unspeci-
fied-in the planned pattern of resource allocations
for 1986-90.
Gorbachev is determined to deal with the economy's
underlying problems. He has thrown down the gaunt-
let on issues as controversial as the allocation of
investment, broad-gauge management reform, and a
complete purging of incompetent and corrupt officials
from the system. While the details of his economic
game plan probably will await the new draft of the
12th Five-Year Plan (1986-90) to be announced at the
27th Party Congress in February 1986, the broad
features of his program are already emerging. All are
aimed at raising productivity and efficiency through-
out the economy-something the system has never
done very well and has become progressively less able
to do as it has grown in size and complexity. He has
called for annual growth in national income of at least
4 percent. If this plan were achieved, growth in real
GNP as measured in the West would also amount to
an increase of about 4 percent per year-a healthy
increase above the good performance of 1983-84 (see
inset "Measuring Soviet Economic Growth"). He
plans to achieve this goal by pursuing an ambitious
strategy for modernizing the economy's stock of plant
and equipment and by raising the level of effort and
sense of personal responsibility of managers and
workers alike.
Gorbachev personally has provided a pointed example
of how critical a substantial improvement in produc-
tivity and efficiency is to his entire program. In his
June speech to a special science and technology (S&T)
conference, the General Secretary indicated that an
additional 8-10 million people in the labor force and
an average annual growth in investment of 5.5 to 7
percent during every five-year period would be re-
quired to achieve his goal of 4-percent annual growth
in national income in the absence of a substantial
increase in the combined productivity of land, labor,
and capital. Both he and his audience probably were
aware that less than 4 million people will be added to
the labor force in 1986-90 and a 5.5- to 7-percent
increase in the rate of growth of investment would put
Measuring Soviet Economic Growth
The principal conceptual difference between GNP and
Soviet reported national income is the latter's exclu-
sion of (1) most personal services as well as services
provided by the government (for example, health,
education, housing, personal transportation and com-
munications, recreation and personal care, govern-
ment administration, credit and insurance, research
and development, and military personnel costs) and
(2) depreciation on fixed capital. However, official
Soviet statistics on growth of national income over-
state real growth, because they do not allow properly
for inflation. The CIA index of GNP, which attempts
to correct for these differences, has shown real growth
to be about I percentage point lower than reported
statistics on national income. Moreover, Soviet plan
data, such as Gorbachev's 4-percent-growth target,
unlike officially reported achieved rates, are not
distorted by inflation.
severe strains on the other resource claimants-de-
fense and consumption. They also probably recog-
nized that productivity increases will not be easy-
growth in combined productivity of land, labor, and
capital has been consistently negative for the last
decade.
To help address these issues, Gorbachev has appointed
several economic advisers who have long advocated a
major overhaul of the economic system: substantial
increases in investment in machine building, changes
in the incentive structure, a greater role for private
activity, and more devolution of authority and person-
al responsibility to enterprise managers (see inset
"Reform-Minded Economist Advising Gorbachev").
The ascent of such reform-minded economic advisers
to policy-level positions is a signal of Gorbachev's
commitment to finding ways to make the system work
better. At present these include accelerating S&T
progress, restructuring investment, implementing
management reforms, and tightening discipline.
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The prominent and controversial economist Abel
Aganbegyan has become an influential informal ad-
viser to General Secretary Gorbachev. The longtime
director of an economic institute in Novosibirsk, he
recently moved to Moscow to head a committee of the
Academy of Sciences. Aganbegyan has a history of
involvement in controversy with conservatives over
his criticism of the workings of the economic system.
Several changes he has proposed, which include
accelerating the modernization of industry through
retooling and a streamlining of the Moscow-based
bureaucracy, have become major themes in Gorba-
chev's recent speeches on the economy.
Aganbegyan's new status is another indication of
Gorbachev's intention to shake up the economic
establishment. At 52, Aganbegyan's ties with Gorba-
chev date back to Moscow University days in the
1950s. As an adviser to Gorbachev, he is likely to
reinforce the party chief's determination to look for
new a roaches to economic planning and manage-
ment.
There have also been indications that Tatyana Zas-
lavskaya, a well-known sociologist and close col-
league of Aganbegyan, may now have a stronger voice
in the academic community, if not an advisory role in
the government. In a recent interview in Izvestiya, she
reiterated arguments originally made about the inap-
propriateness and ineffectiveness of the centralized
economic system in a confidential document that was
leaked to the Western press in April 1983.
Accelerating S&T Progress
Gorbachev views a modern, efficient industrial base
as crucial to the success of his economic program. A
special conference was held in June to develop a
comprehensive strategy for accelerating technological
progress. In addressing the conference, Gorbachev
focused on the need for the rapid introduction of new
production technology, insisting that the Soviet Union
must launch a revolutionary program to reequip its
factories and farms with the most up-to-date machin-
ery. He recognizes that acceleration of S&T progress
depends critically on the success of other elements of
his strategy. As he pointed out at the conference:
? In carrying out the S&T revolution, the command-
ing key role belongs to machine building.... First
and foremost, machine building itself must be
reconstructed.... In the years 1986-90, capital
investment for the civilian machine-building minis-
tries should be increased by 80 to 100 percent.
? The acceleration of S&T progress insistently de-
mands a profound reorganization of the system of
planning and management.... Without this, every-
thing we are talking about today may remain but 25X1
Restructuring Investment
Gorbachev recognizes that his call for accelerated
technological progress is only possible with a major
alteration in investment priorities. Currently, 30 to 40
percent of all Soviet equipment has been in operation
for more than 15 to 20 years. By 1990, Gorbachev
declared, one-third of the fixed capital stock-includ-
ing one-half of all machinery-must be "new." He
urged that special priority be given to the "develop- 25X1
ment and introduction of fundamentally new systems
of machines and technologies" and called for a 50-
percent increase in expenditures for retooling existing
enterprises financed, in part, by a cutback in new
construction.
In his June address, Gorbachev accused the State
Planning Committee (Gosplan) of paying "verbal
tribute" to the role of civilian machine building while
continuing to starve it of resources and suggested that
his call for nearly doubling investments for this sector
in the 1986-90 period could be achieved by the partial
redistribution of capital investments from the indus-
tries that use the machines. This "suggestion" was
presaged in a particularly forceful statement in a
speech to an ideological conference last December,
where Gorbachev insisted that the longstanding prac-
tice of allocating economic branches the same propor-
tions of new investment from one plan to another must
be "changed decisively."
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In this context, Gorbachev hinted that the need to
supply additional resources to machine building might
affect the priority status of two of the biggest claim-
ants on investment resources, energy and the agro-
industrial complex:
? He suggested that the share of investment in energy
could be "stabilized" by giving greater attention to
conservation.
? He indicated that the present level of investment in
the agro-industrial complex is adequate and that it
is the return on this investment that continues to be
unsatisfactory.
He has not addressed how other major claimants on
investment-such as defense-will fare.
Reorganizing Management and Planning
Gorbachev has been particularly critical of intermedi-
ate management bodies that choke off initiative and
has hinted that they should be streamlined or elimi-
nated. His aim is to rid the system of some of the
massive bureaucratic apparatus whose petty tutelage
in implementing Central Committee decisions defeats
the purpose of the decisions.
The level of specificity in his June speech in Dnepro-
petrovsk suggested that plans for such a reorganiza-
tion have now reached an advanced stage and will
include the creation of superministerial bodies, start-
ing with agro-industrial and machine-building sectors.
His speeches also suggest that these superministries
will be restricted to "strategic" planning and leave
operational control of enterprises in the hands of the
managers on the scene.
Gorbachev's first move to give greater operational
independence to enterprise managers was to expand
the economic experiment, begun in January 1984,
giving enterprises greater control over investment and
wage funds and making fulfillment of contractual
sales obligations the prime indicator for evaluating
enterprise performance (see inset "Managerial Initia-
tives"). He has also implemented a far-reaching ex-
periment at the Tol'yatti Automotive Plant that in-
creases the plant's authority for its own management
and for making purchase and sales agreements with
foreign firms, without the direct participation of the
ministries or foreign trade associations.
Gorbachev has also endorsed Brezhnev's 1982 Food
Program, which, as party secretary responsible for
agriculture, he helped formulate. In this connection,
he has supported increasing the authority of the
regional agricultural production associations
(RAPOs}-an innovative form of administration that
cuts across ministerial lines and concentrates author-
ity at the local level for coordinating the activities of
farms, agricultural service agencies, and processing
enterprises in a given district.
Tightening Economic Discipline
Gorbachev is banking on improved worker effort to
immediately bolster economic growth. Because he
needs the support of both managers and workers, he
has appealed directly to them to buy into his program.
He has pledged to increase both the material rewards
for good performance and the penalties for violations
of economic discipline.
Much of Gorbachev's campaign for improved worker
effort, however, will rest on the more vigorous imple-
mentation of programs initiated before his tenure.
These include:
? Improving labor productivity by reviving the disci-
pline campaign, which Andropov initiated but which
flagged somewhat under Chernenko. Gorbachev has
already initiated a vigorous antialcoholism cam-
paign that is serving as a daily reminder of the new
leadership's seriousness and intensity in attacking
problems of both a social and economic nature.
? Tying workers' earnings more closely to their out-
put, through greater differentiation of wages and
expanded use of contract brigades-small groups of
workers whose earnings depend on fulfillment of
contractual obligations to management.
On balance, Gorbachev's game plan reflects an appre-
ciation of what we and many Soviets believe to be
many of the economy's fundamental problems. More-
over, he recognizes that all elements of his program
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The Soviets have announced a major expansion of the
experiment in industrial management that began on 1
January 1984 in five all-union and republic-level
ministries and was extended this year to 20 addition-
al ministries. The experiment will extend to all
machine-building ministries and many consumer-
related industries in 1986 and to all of industry in
1987.
? Enterprises will have increased authority to spend
limited amounts of investment funds at their own
discretion for industrial renovation and for con-
struction of housing or other consumer-related un-
dertakings. The state planning and supply organs
have been instructed to give such projects priority.
? Penalties for delays, nondelivery, or delivery of 25X1
inferior goods will be increased, and rewards for
timely provision of satisfactory products will be
The experiment's aim is to improve the central
planning and management system by reducing the
number of success indicators used to evaluate enter-
prise performance and by slightly increasing the
enterprise's limited control over wage and investment
funds. The decree to expand the experiment presents
measures to improve product quality and further
increase enterprise control over plant operations:
? Enterprises of the machine-building sector produc-
ing products judged to be of highest quality will be
able to increase their earnings by raising prices up
to 30 percent. Enterprises producing lower quality
goods will have to cut prices by up to 30 percent and
then reimburse the state for lost revenue with
money taken from their worker and manager bonus
funds.
cannot be implemented immediately and simulta-
neously across the economy. The centerpiece of his
modernization strategy, replacing the economy's stock
of machinery and equipment and improving manage-
ment techniques, will require years of effort. Never-
theless, Gorbachev probably feels that, unless he
starts now in earnest and maintains constant pressure
on his economic managers, the future will continue to
be hostage to indecision and inaction.
Gorbachev, in essence, is proposing an integrated
approach for the resurgence of economic growth (see
figure 2). Anticorruption and discipline campaigns are
implemented.
Moscow has also announced a managerial reorgani-
zation program-described as a model for the rest of
the economy-for the Ministry of Instrument Manu-
facturing (Minpribor). The program includes:
? Eliminating the management level that lies between
the enterprise and the ministry.
? Creating additional scientific production associa-
tions to spur R&D and prototype production.
aimed at reducing worker apathy, which, together
with the attendant massive waste and theft of re-
sources, have held down growth in productivity
throughout the economy. Some success here, along
with some redirection of investment resources, fewer
layers of bureaucratic tutelage, and a more equitable
system of rewarding productive workers and manag-
ers, is geared to provide a growth dividend that can be
used both to bolster worker morale (via more and
better consumer goods and services) and to underwrite
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Figure 2
Gorbachev's Growth Strategy
Streamline Reform wage
management structure and
and planning success indicators
Anticorruption,
temperance, and
discipline campaigns
Raised productivity:
More hours, greater effort,
and less theft
Production dividend:
More output of goods
and services
More machinery
Better machinery
Restructure Tie R&D associations
investment closer to production
Reward productive workers Raise investment growth Strengthen defense
and managers
Higher consumption
Increase - Increase morale and
private pride in work
Increase retirement of
old machinery
activity
Improve quality Modernize capital stock
Stimulate innovation
Conserve resources
Reform
price
system
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further growth. Gorbachev appears to be counting
heavily on a synergistic effect among the several parts
of his program to provide even greater dividends in
the years ahead, returning the economy to an upward
growth path and, perhaps, providing him with justifi-
cation for future fundamental changes in the central-
ized control of the economy, if needed.
Gorbachev's strategy is not without substantial eco-
nomic and political risk, particularly as he is seeking
to change an economy that has recently been on the
upswing. In public statements, Gorbachev has so far
focused on the general themes of his economic pro-
gram rather than on specific measures that could
galvanize opposition. He may well have decided to
refrain from translating vague expressions of support
for controversial measures into specific proposals until
he has more fully formulated his plans-in part by
encouraging public dialogue and selectively testing
some options-and consolidated his political strength.
He has not openly challenged the legitimacy of cen-
tralized economic control, including such fundamen-
tal obstacles to the success of his program as the
arbitrary nature of Soviet prices that prevents plan-
ners from making economically rational decisions, or
the lack of sufficient consumer input into production
fraining from more radical measures because he hopes
that the steps he has already proposed will be suffi-
There is also growing evidence that Gorbachev favors
an expanded role for private initiative as a way of
alleviating consumer problems without much addi-
tional investment or change in the way the socialized
sector is organized and managed. In the past, Gorba-
chev has been a staunch supporter of expanding
production on private agricultural plots, and, in his
speech to the Central Committee plenum in April, he
twice referred to the contribution that the private
farming sector can make to improving the quality of
life. In May he returned to this subject in a speech in
Leningrad and expressed disagreement with the Polit-
buro's recent handling of the issue. He contrasted the
Politburo decision to earmark land for an additional
1 million private market gardens with Soviet citizens'
requests for some 15 million new plots. "Mathemati-
cally," he noted with evident sarcasm, "our approach
to this problem is fundamentally weak."
Gorbachev's remarks in Leningrad also lend credibil-
ity to earlier reports that he favors the more contro-
versial policy of allowing a greater role for private
initiative in the service sector. He called for a "more
realistic evaluation" of the major role "moonlighters"
currently play in providing such services as home 25X1
repairs and seemed to suggest that the state should
not just tolerate such activity but should actively 25X1
support it. Materials used, he said, are generally
stolen and "come from the state anyway." In this
context, Izvestiya acknowledged in August that illegal
private services are too widespread to stamp out and
called for their legalization under contract to state
enterprises.
cient to remedy the economy's ills.
Whether he will be able to achieve his economic goals
in the absence of additional, bolder changes-moves
toward market socialism, for example-is problemati-
cal. There have been hints in Gorbachev's past and
recent speeches and in the statements of some knowl-
edgeable Soviet officials that he may eventually be
willing to make such changes. In his Lenin Day
address in April 1983, for example, Gorbachev
stressed the importance of greater reliance on prices
as an economic lever. He returned to this theme in his
June 1985 address to the S&T conference, calling for
a more decisive shift from administrative to economic
methods of regulating the economy. In the same
address, he also called for an end to "the domination
of the consumer by the producer."
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Gorbachev needs some near-term success to sustain
his early momentum for change, particularly since he
is seeking major changes in an economy whose perfor-
mance has improved in recent years. To this end, he
made it clear at a recent Central Committee meeting
that the 1986-90 Five-Year Plan must get off to a fast
start. He should be able to capitalize on the aura of
change and rejuvenation he has created in the early
months of his regime to elicit some genuine increase
in effort by at least part of the work force. Moreover,
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According to Abel Aganbegyan, writing in the Soviet
labor newspaper Trud in 1981, one-half of the decline
in growth of labor productivity that occurred in 1976-
80 compared with 1971-75 was due to `people's
attitudes toward their work. " Andropov recovered
some of the earlier momentum with the initiation of a
tough discipline campaign in 1982; labor productivity
rose by 3.2 percent in industry in 1983 as slackers
were forced to actually be on the job during the time
they were counted as being there. Gorbachev may be
able to recoup even more of the momentum with his
revival of the discipline campaign and his strong
stand on temperance. Indeed, the reduction in absen-
teeism due to drunkenness may have a potential for
achieving a greater increase in actual hours worked
than was achieved under Andropov. Moreover, Gor-
bachev's direct appeal to workers, together with his
other initiatives, may elicit a more responsible ef-
fort-at least in the short run from many who
might otherwise merely put in their time.
the discipline campaign, which was evidently an im-
portant factor in the economic upswing during Andro-
pov's tenure, could again have a favorable impact on
economic performance (see inset "Potential Gains
From Increased Discipline"). This, together with a
new set of Gorbachev appointees-who probably have
the energy and determination to use the carrots and
sticks available to them with greater consistency than
their predecessors-could promote at least some
short-run gains in economic performance. Although
Gorbachev is gambling heavily on the impact of his
early initiatives-a risky approach given that previous
attempts to implement similar changes have been
frustrated by entrenched bureaucratic interests-his
prospects for near-term success should not be underes-
timated.
Gorbachev's program also may get a short-run boost
from the upsurge in machinery production that oc-
curred in 1983-84 and a particularly favorable harvest
this year. Growth in production of machinery picked
up sharply in 1983-84, registering annual increases
better than 5 percent, after averaging about 3.5
percent per year in 1981-82. The added machinery
could help raise growth in investment enough to get
Gorbachev's modernization program moving. More-
over, the outlook is for a substantial increase in crop
production and livestock products this year after a
dismal performance by the farm sector in 1984 (see
figure 3). A better harvest this year would help hold
down queues for food, provide workers fewer excuses
to be away from their jobs during working hours,
improve consumer morale, and reduce hard currency
outlays for grain.'
How much economic improvement will occur and how
long it can be sustained, however, is very much an
open question. Short-run gains alone will not ensure
success. For longer term aspects of the program to
succeed, many things must go right for Gorbachev-
some he can control, others he cannot. Moreover, the
synergism he appears to count on may not develop,
especially in the short run. For example, he hopes to
pair improved worker initiative with a modernized
industrial base. But this will require redirecting in-
vestment resources, which, in turn, could lead to
bottlenecks in industries whose investment allocations
are squeezed. Any campaign-style modernization pro-
gram could create imbalances in new capacity and
encounter lengthy delays in achieving results.
Moreover, if plants are forced to shut down produc-
tion lines to permit renovation, short-run performance
indicators will be adversely affected. This, in turn,
might provide ammunition for Gorbachev's oppo-
nents, who could contrast 1983-84 industrial produc-
tion gains with a poor output record of newly renovat-
ed enterprises as evidence of harebrained or
misguided programs. In the long run, each of Gorba-
chev's initiatives faces particularly challenging prob-
lems that will take more than strong rhetoric and
willing hands to overcome.
' Moscow also should enjoy the benefits of a buyers' market this
year in the international grain trade. World supplies are expected to
continue to be abundant, largely because of a bumper crop in the
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Figure 3
USSR: Agricultural Performance
Problems Facing Industrial Modernization
Renovation. Renovating existing enterprises rather
than building new ones is a key element of Gorba-
chev's modernization strategy. He is likely to find,
however, that this approach is fraught with difficulty.
Plans to concentrate investment on renovation have
been touted by Soviet leaders for more than 15 years
but have never been effectively implemented. The
strategy has been resisted by enterprise managers
because the downtime required to replace old machin-
ery, as well as the uncertainty inherent in new
production processes, threatens their ability to achieve
short-term performance goals. Maintenance and sup-
port for new processes-particularly highly automat-
ed processes-are essential, but problematical in the
Soviet economy. It has always been safer from a
manager's perspective to build a new production plant
or add to an existing plant than to renovate an
operating facility.
Moreover, the renovation approach is not effective for
large areas of the country. According to Soviet litera-
ture, many of the existing industrial facilities are so
decrepit that renovation-if possible at all-will be
extremely costly and time consuming. Modern equip-
ment requires facilities that have a broad assortment
of heating and ventilation features. Most old buildings
in the USSR cannot be easily converted to accommo-
date such equipment. This is especially relevant to the
thickly populated regions of the European USSR, the
Urals, and the Donets and Dnepr Basins-the old
industrial core of the Russian Empire, which accounts
for about 75 percent of total Soviet industrial produc-
tion.
In addition, the emphasis on renovation could exacer-
bate the ever-present tension in resource supply
throughout the economy. For example, as production
lines are shut down for renovation, the lost production
will have to be made up by other plants if supply
bottlenecks are to be avoided. Too much simultaneous
renovation could lead to shortages of key industrial
materials. Indeed, many of these materials are al-
ready stretched so thinly that even small shortfalls are
magnified as their impact ripples throughout the
system.
Machinery Production. Gorbachev plans to under-
write industrial renovation by a rapid expansion in
output of high-quality equipment. To achieve his
announced goal of 50 percent "new machinery" by
1990, he must manage an acceleration in the annual
output of producer durables to rates unmatched since
the early 1970s. Additionally, the machines must be
tailored to meet the unique needs of the wide variety
of plants being remodeled-a difficult task for an
industry accustomed to manufacturing large lots of a
small variety of equipment for use in plants being
constructed under highly standardized designs. In-
deed, the increased pressure on Soviet machine build-
ers to boost output probably will reinforce the tenden-
cy to reproduce the same pattern of output that has
prevailed for years, only faster and-unless major
gains are made in quality control-perhaps in a more
slipshod manner.
Advanced Technology. In addition to rapidly expand-
ing machine-building capacity, Gorbachev must turn
around a system characterized by its relative failure
to create and use technically advanced equipment.
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ments by industry and foreign trade specialists con-
clude that the quality of Soviet machinery is well
below world standards.' The geographic and bureau-
cratic separation of research organizations from pro-
duction enterprises impedes introduction of new tech-
nology into the production process. Insufficient
funding of research-most noticeably in the machine
tool industries and in the ministries responsible for
producing agricultural machinery-contributes to
poor performance. Finally, the Soviet system of
bonuses-with its inherent bias toward volume of
production and apparent rather than real quality
change-is a de facto barrier to the production of
better capital equipment. According to one high-
ranking Soviet official, only 15 percent of wage and
performance bonuses are keyed to the introduction of
new technology and equipment.
Many Soviet officials probably view Gorbachev's
modernization strategy with pessimism. A "Business
Club" roundtable discussion that Pravda held recent-
ly, for instance, pointed to major difficulties in imple-
menting the ongoing renovation program in the
Ukrainian Republic (home for about 20 percent of
Soviet industry). The program-developed along the
same lines as Gorbachev's strategy-is failing, it was
concluded, because of:
? Perverse incentives that discourage construction
ministries from undertaking reconstruction.
? Inadequate funding for installing equipment.
? Lack of qualified workers.
? The inability of the machinery industry to keep pace
with the increased demand for more efficient, spe-
cialized equipment needed for renovation.
While Gorbachev may ultimately be able to overcome
some managerial biases by changing success criteria
(which he has not yet done) and appointing new
managers, he cannot overcome the economic realities
of outdated plants and limited investment resources.
In the final analysis, no matter how hard Gorbachev
pushes, modernization will occur only slowly and must
' Evidence also suggests that average leadtimes for using new
technology are much longer in the USSR than in the West. Data
show that about 50 percent of US and West German inventions are
implemented in about one year compared with three years for
Soviet inventions. At the end of two years, the US implements
about 66 percent; West Germany, 64 percent; and the USSR, 23
Central authorities are attempting to stimulate high-
quality production by assigning higher prices. Enter-
prises producing a new product or one judged of the
"highest quality" are able to increase earnings by
raising the price by up to 30 percent. This is leading
to actions that planners did not anticipate, and
innovation is the loser.
For example, the Noril'sk Metallurgical Combine
responded to the leadership's call to innovate by
manufacturing an improved copper cathode. Once
produced, it had to be inspected by central authorities
to be certified as being of the highest quality. The
State Price Committee then had to review a formal
petition for a price adjustment. When the higher price
was approved, central planners readjusted the com-
bine's sales targets to take into account the increased
revenues the superior product should generate. Pro-
duction plans were formulated and sales targets
finalized before industry's demand for an improved
copper cathode was tested.
When finally put on sale, the high-quality cathode
was rejected by most domestic customers in favor of
the cheaper, less advanced version that has been used
for years. If the price were reduced by having the
copper cathode recertified at a lower quality level, the
combine would not be able to achieve its sales output
target, which was set on the basis of the higher price.
Thus, for all its trouble to produce a technologically
advanced product, the combine now finds itself in a
no-win situation-unable to sell the more expensive
higher quality copper cathode but also unable to cut
its price and still achieve performance targets. Thus,
the inflexible and formalistic procedures characteris-
tic of centrally controlled prices and output targets
continue to undermine even seemingly sensible mea-
sures to encourage innovation.
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Figure 4. USSR: bureaucracy
come from new construction as well as renovation.
Substantial results cannot be expected for several
years. Even now, signs are emerging that some aspects
of Gorbachev's early initiatives are backfiring and
inhibiting rather than stimulating high-quality pro-
duction (see inset "Reforms To Spur Innovation Back-
fire"). Part of the problem is the intricate layering of
the managerial bureaucracy, which Gorbachev is still
a long way from purging. Decades of bureaucratic
development have created a labyrinth of buck-passing
and indifference that will probably take years and
thousands of key personnel changes to rectify.
Revitalizing Management
Streamlining the bureaucracy, refurbishing its ranks
with his allies, and developing better management
skills are critical to the success of Gorbachev's plan to
stimulate higher productivity. The General Secretary
has already managed to firm up his base of support in
the Politburo, and
he intends to replace t~inisterial officials and
48 to 60 members of the Central Committee with his
own aides between now and the party congress next
February. Nevertheless, his plans to streamline the
industrial ministries, remove unnecessary bureaucrat-
ic linkages between enterprises and ministries, and
increase the autonomy of enterprises will not be
welcomed by many officials whose jobs, and perqui-
sites, will be threatened. In the meantime, Gorbachev 25X1
runs the risk of having his directives ignored, misin-
terpreted, or even reversed (see figure 4).
In addition to cleansing the bureaucracy of redundan-
cy, indifference, and gross incompetence, Gorbachev
must also come to grips with an incentive system that
stifles initiative and fosters corruption. Reducing the 25X1
myriad of success indicators and tying wages closer to
productivity, as Gorbachev has called for, will help.
But the real trick will be to develop a set of success in-
dicators that are beneficial both to the individual and
to the economy. This, however, can only happen as a
result of a major change in the Soviet economic
system that will induce producers to respond to
consumers and allow prices and wages to reflect 25X1
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consumer preferences.' As long as a set of detailed
national preferences (reflected in five-year and annual
plans) is imposed on producers, and prices and wages
are set and changed at the discretion of central
planners, the managerial initiative Gorbachev seeks to
develop-despite some likely early success-will even-
tually succumb to the waste and inefficiency engen-
dered by conflicting interests of enterprise managers
and central planners.4
Tying workers' wages more closely to productivity will
have some beneficial effect in the short run. Wage
incentives, however, will only be effective in the long
term if there is a substantial increase in high-quality
consumer goods available for purchase. Indeed, Gor-
bachev has personally identified himself with an
expanded commitment to consumer-goods production.
A 7-billion-ruble program to modernize and increase
shoe production has already been announced.
faction to bolster output of
household durables and materials for housing con-
struction soon will follow. But much more investment
is necessary to substantially improve the provision of
consumer goods, and, given the strain already being
put on investment resources, it seems unlikely that
consumer-goods sectors will benefit from much addi-
tional investment during the next few years. In fact, a
high-ranking Soviet official recently acknowledged
that problems will continue in the consumer sector,
and few additional resources will be made available to
overcome them.
Gorbachev will be hard pressed to find the resources
necessary to underwrite his goal of developing a
modernized industrial base. The economic dividend
from management reforms and the discipline cam-
paign, while potentially substantial, will not come
or enterprise.
Enterprise managers with increased autonomy, for example, will
place new and perhaps excessive demands on local suppliers for raw
materials and semifinished goods. Suppliers, on the other hand, will
still be functioning under the direct control of central authorities
and may be unable to reconcile the demands of their customers
with the directives and resource allocations of their masters. As a
result, both producers and suppliers may become disillusioned and
may once again resort to the very methods that have led to waste,
close to meeting these resource needs. Increased
discipline, less corruption, greater temperance, and
new management will help to raise labor productivity
but will do little to offset the declining trend in capital
productivity. Given enough time and investment re-
sources, the modernization program could eventually
pay off. While five years may be enough time to make
a substantial dent in the stock of plant and equipment
that needs to be modernized, there is simply not
enough investment to go around.
Although the Soviets have not formally revealed their
investment plans for the 12th Five-Year Plan period
total investment will increase by
about 4 percent annually.s At the same time, Gorba-
chev has indicated that investment in civilian machine
building will nearly double, while agriculture and
related industrial support will maintain a large share.
This will leave little room for increases in other
sectors. The consumer may be especially hard hit in
the nonfood areas. Gorbachev also will have to deal
with pressures to expand investment in other areas as:
? Oil and natural gas exploitation moves farther
northward into the offshore areas of the Arctic and
deeper into the Pricaspian Depression.
? Demand for roads, railways, and other infrastruc-
ture development-projects with heavy up-front
costs and long leadtimes-increases in more costly
and inhospitable regions.
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? Expensive new conventional and strategic weapons
that have completed or are about to complete testing
enter series production on a large scale. These
include the Blackjack bomber, the AS-15 cruise
missile, the SS-X-24 and SS-X-25 ICBMs, and the
SU-27, MIG-29, and MIG-31 fighter aircraft.
Gorbachev's announcement that energy's share of
investment should be stabilized during 1986-90
carries special risks. Oil production has already begun
to fall, and, without substantial increases in invest-
ment, the production decline could become precipitous
(see inset "Implications of Stabilizing Energy's Share
of Investment"). Electric power, too, will need large
increases in investment resources to meet the in-
creased power requirements that will accompany the
modernization effort. Coal production-the USSR's
best long-term source of energy-has been slighted in
investment allocations for years and will need a major
increase to adequately exploit the large Siberian and
Kazakh basins. Thus, if the energy sector has to make
do with the same share of investment it received in
1981-85, likely production shortfalls could knock
Gorbachev's modernization program into a cocked
hat.
The leadership seems to be counting heavily on its
ability to increase energy efficiency enough to offset
any production shortages that might arise. Retooling
and installing more energy-efficient equipment prom-
ises substantial savings, but only in the long run and
after considerable expense. The share of energy con-
sumed by Soviet residential, commercial, and trans-
portation sectors, which present relatively greater
opportunities for immediate cutbacks, is comparative-
ly small. Apartments and stores consume over one-
half of the fuel used residentially, and most of them
burn low-grade coal or firewood. Trains rather than
trucks provide the dominant mode of Soviet commer-
cial transport and are already the most energy effi-
cient in the industrial world. Private automobile use
will remain far below levels in the developed West
through 1990.
Industry and electric power generation are the princi-
pal energy consumers in the USSR. The Soviets are
world leaders in cogeneration-the production of
steam for space heat at thermal electric power
Implications of Stabilizing Energy's
Share of Investment
We estimate that, to keep oil production from falling
below about 11 million barrels per day (b/d) by 1990,
investment in the oil sector alone during 1986-90
would have to increase by about 45 billion rubles
from the 1981-85 level. We estimate that this is more
than twice the investment increment that would be
allocated to the entire energy sector in 1986-90 if
Gorbachev stabilizes energy's share of total invest-
ment. If the needed investment in oil is not forthcom-
ing, production could fall to less than 10 million b/d
by 1990. Such a drop in production would be greater
than total hard currency exports of oil in 1984.
plants-which has raised considerably the total effi-
ciency of those power facilities in comparison with
power plants in the West. Some Soviet basic steel-
making processes are also relatively energy efficient.
Additional major energy savings in industry therefore
must come through massive capital investment for the
production and/or importation of more energy-
efficient equipment.
However, the production of more efficient equipment
is a difficult and time-consuming task. Machine
builders-having had little incentive to produce
energy-efficient machinery in the past, will have to
start virtually from scratch. Payback is uncertain, and
delayed until new equipment can be designed, pro-
duced, and put into operation-often a process of at
least six to eight years. As a consequence, given
Gorbachev's announced growth goals, the mix of
Soviet output over the next five years is likely to
become more, rather than less, energy intensive
Gorbachev probably believes that, if he can kick-start
the ponderous economic machinery hard enough and
sustain the momentum long enough, the early gains
he achieves are likely to stimulate lasting improve-
ment. Indeed, because of the strong interdependence
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among his plans for energy savings, industrial mod-
ernization, managerial renewal, higher productivity,
and an improved work ethic, a large dose of early
success in some areas could promote success in others.
The longer he can sustain the early gains, the better
the chances for long-term progress. This same inter-
dependence, however, increases the risk of failure;
because so many things that have gone wrong for so
long must now go right, the likelihood is high that
some will continue to go wrong and thereby impede
progress.
Reducing waste, fraud, and mismanagement and di-
recting available resources to their most productive
uses will contribute substantially to the modernization
program. But the economic dividend from manage-
ment reforms and the discipline campaign will not
come close to meeting the economy's resource needs.
The key to success will be Gorbachev's ability to cope
with some fundamental paradoxes, and he will have to
do so sooner rather than later:
? Improving management efficiency and worker
morale will require an effective incentive system
and increased availability of high-quality consumer
goods at a time when the investment sector will be
oriented toward producer goods and new defense
programs will be coming on line. On the basis of
Gorbachev's program for redirecting investment, we
project that the increment in consumer-oriented
investment during 1986-90 could be some 60 per-
cent less than that for 1981-85.
? Energy's share of investment is to be held constant
at a time when demand for energy will grow and the
cost of offsetting declining oil production will be
rapidly rising. The implications of a redirection of
investment away from other sectors, particularly
consumer-oriented sectors, may be equally ominous.
? The increased managerial independence necessary
to spur effective technological development and
utilization is inconsistent with a centrally planned
pricing and allocation system, leading to the likeli-
hood of management disillusionment and subse-
quent reversion to the very methods that have led to
waste, fraud, and mismanagement for years.
Gorbachev's approach in resolving these issues could
have strong political and strategic implications; fail-
ure to resolve them will stymie his modernization
effort.
He could, and probably will, seek some relief from the
economic dilemma by demanding that East European
countries, which have benefited from Soviet economic
largess in the past, shoulder a greater part of the
burden. Imports of equipment from Eastern Europe
accounted for one-fourth of total Soviet machinery
and equipment investment in 1983, and Gorbachev
will probably push for an even higher flow in the
future while reducing Soviet deliveries of costly raw
materials. East European leaders, beset with their
own deep economic problems and popular expecta-
tions, are likely to strongly resist such suggestions,
paving the way for growing confrontation between
Moscow and its allied states.
Gorbachev may also increase imports of Western
technology to secure state-of-the-art equipment in key
areas. A marked rise in imports, however, would
require a substantial increase in hard currency expen-
ditures at a time when the USSR is facing a decline in
the production of oil, its major hard currency earner.
While Moscow has the capability to expand imports
by markedly increasing its hard currency borrowing,
such an expansion would create a potential vulnerabil-
ity to Western exporters, lenders, and their parent
governments that past Soviet regimes have sought to
avoid.
Gorbachev could attempt to reallocate resources away
from defense to provide some relief to the civilian
economy, but he probably would encounter stiff oppo-
sition if he attempted major adjustments in defense
allocations. Currently, about 30 percent of all ma-
chinery output probably goes to support defense pro-
duction. Moreover, this share generally represents the
highest quality products and newest technological
processes in Soviet machine building. The military
sector also receives the most capable managers. Some
labor, materials, and components could be readily
shifted to civilian uses, but most defense industrial
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Nikita Khrushchev, during his 11 years at the top
(1953-64), launched his own "revolution" in Soviet
politics. Crude, boisterous, and aggressive by nature,
he bullied and cajoled his colleagues and the bureau-
cracy to adopt his vision of the Communist future. He
made catching up with the United States a major
goal and enshrined it in the utopian party program of
1961. He eliminated terror as an instrument of
everyday politics, brought Stalin's police apparatus
under effective political control, and publicized some
of the crimes and abuses of power of his former
mentor. (These revelations were a tremendous shock
to the Soviet people and to Communist sympathizers
around the world.) He made dramatic changes in
economic policy and management-abolishing the
same central ministries that now so trouble Gorba-
chev, reorganizing the party apparatus that oversees
them, and changing economic priorities almost by
fiat. He dramatically increased Soviet involvement in
the Third World and vigorously stepped up Soviet
competition with the United States for power and
influence around the world. His risky political course
both at home and abroad-along with his nonconsen-
sus style-ultimately led to his ouster by the very
people he brought into power.
The most striking similarity between Gorbachev and
Khrushchev is their informal, populist style of leader-
ship. Like Khrushchev, Gorbachev has made an effort
to show that he is accessible and interested in the
views of normal citizens. He has made forays into the
streets and visits to factories to engage in unre-
hearsed, well publicized exchanges with the assem-
bled crowds. The informal style of both leaders is
also evident in their willingness to make extempora-
neous remarks during their prepared speeches as well
as in the public role for their wives and families. The
similarities between both leaders are particularly
pronounced when compared to the cautious, stiff, and
highly formalized style of Brezhnev that was the
norm for the past 20 years.
At the same time, Gorbachev-more polished and
educated than Khrushchev-appears to have learned
from Khrushchev's mistakes and is using very differ-
ent tactics in pressing his agenda for change. When
Khrushchev was removed, his successors accused him
among other things of "harebrained scheming, imma-
ture conclusions, and hasty decisions and actions
divorced from reality, bragging, and phrasemonger-
ing. " These accusations stemmed from his efforts to
hastily push through major reforms that were not
well thought out and his highly personalized style of
leadership that was based more on confrontation than
consensus.
While Gorbachev appears equally determined to over-
haul the system, he has gone about the task much
more deliberately and cautiously than Khrushchev.
His signals to the bureaucracy are clearer and make 25X1
it easier for lower level officials to calculate what is
expected from them and to respond accordingly.
Instead of presenting specific proposals for reform, as
did Khrushchev, Gorbachev has defined the general
directions of the changes he would like to accomplish
and encouraged further discussion of the optimal
ways to achieve them. At the same time, he is
systematically building political support for his agen-
da by installing loyal officials in key positions and
removing those who might thwart his plans.F
plants would require extensive, time-consuming re-
tooling before they could productively turn out much
civilian production. Nevertheless, in the long run
many defense resources could be applied productively
in the civilian economy.
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committed to programs for modernizing their offen-
sive and defensive strategic forces, as well as their
conventional weapon programs. In addition, the US
defense modernization and the long-term implications
of the Strategic Defense Initiative (SDI) probably are 25X1
being cited by Soviet military leaders as justification
Although military leaders recognize that the long-
term strength of the Soviet military depends largely
on the country's economic health, the Soviets are
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for higher growth rates for defense spending. The rate
of growth of defense spending since the mid-1970s has
been a relatively modest 2 percent, and military
leaders probably already feel that defense has accept-
ed slow growth in resources for as long as it can, given
the extensive requirements for upgrading weapon
systems.
The institution of major economic reforms such as
private enterprise and market-determined prices and
allocations could, over time, markedly improve eco-
nomic efficiency, consumer welfare, and technological
adaptation. They would encounter strong resistance
on political and ideological grounds, but Gorbachev
has already shown that he will aggressively tackle the
problems he has inherited and, like Khrushchev more
than two decades ago, use his considerable power to
force the pace of change (see inset "The Krushchev
Analogy").
Premier Tikhonov almost certainly will be replaced at
or before the congress in February by Gorbachev
himself or an ally. The leadtime to the congress will
also give Gorbachev the opportunity to more thor-
oughly clean out the deadwood from the party and
governmental bureaucracies and bring in a manage-
ment team more sympathetic to his policies and better
equipped to carry them out. Over the next year,
indications that he is moving ahead with his economic
agenda could include:
? A clear delineation of winners and losers in the
1986-90 plan for investment allocations. Besides
machine building, sectors such as ferrous metals
and chemicals must receive a greater share of the
investment pie for the modernization program to
have any chance for success.
? The creation of superministries (for example, by
combining ministries in the agricultural area) with a
concomitant reduction in ministerial control of en-
terprise operations.
? Specific changes in managerial incentives (for ex-
ample, tying bonuses to the share of new equipment
installed) to promote modernization of plant and
equipment.
? The replacement of Gosplan Chairman Baybakov
with an outsider (possibly even Nikolay Ryzhkov)
who would enhance the political stature of Gosplan
and signal increased emphasis on long-term strate-
gic planning rather than detailed annual planning.
? A reduction in reported resistance to the ongoing
industrial management experiment coupled with
measured gains in productivity.
Moreover, with his own people in place, Gorbachev
should be able to build a consensus behind the more
far-reaching proposals that he has only hinted at to
date. Indications that he has decided on and gained
consensus for more radical changes could include:
? New dramatic initiatives to reach accord at Geneva
and concrete proposals for reduced tensions at the
November meeting between the US President and
the General Secretary, which might signal a willing-
ness and desire to reduce the Soviet resource com-
mitment to defense and create an atmosphere for
expanded commerce with the West.
? Select legalization of private-sector activity, partic-
ularly in regard to consumer services, which would
indicate willingness to confront past economic or-
thodoxy in order to improve consumer welfare and
thereby economic performance.
? Breaking the monopoly of the Foreign Trade appa-
ratus, which would signal an increased reliance on
managerial independence at some cost to central-
ized control.
Continued reliance on marginal tinkering, despite
clear indications that the plan for economic revitaliza-
tion is faltering, would indicate that Gorbachev, like
Brezhnev before him, has succumbed to a politically
expedient but economically ineffective approach.
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