INDUSTRIAL SHORTAGES IN THE USSR: A POTENTIAL THREAT TO GORBACHEV'S RENOVATION STRATEGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000700920001-0
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: February 15, 2012
• Sequence Number: 1
• Publication Date: May 1, 1987
• Content Type: MEMO

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Crntral Ir~tdligence Agtncy
May 198 7
Industrial Shortages in the IISSR: A Potential
Threat to Gorbachev's Renovation Strategy
Summary
Shortages of industrial materials--an endemic problem in the
Soviet economy--could hamper General Secretary Gorbachev's
ambitious program to modernize Soviet industry, especially if an
all-out effort to renovate results in production shortfalls that
exacerbate shortages for key industries later in the production
chain. Most shortages occur either because adverse weather
conditions cause transportation tie-ups that delay deliveries, or
because discontinuities between output plane set by central
authorities and the capabilities of individual enterprises lead
to production shortfalls which become shortages?for other
facilities down the line.
To the extent that Gorbachev's emphasis on renovation
creates additional shortages, plant managers will face an
increasingly strained material supply base. Moreover, the new
quality-control system of "state acceptance" introduced in
January will add to the tension and uncertainty in materials
supply as substandard products rejected by inspectors exacerbate
shortages for downstream operations. Increasing uncertainty on
the part of plant managers over the availability of key materials
will tend to stifle initiative to install new equipment for which
spare parts may be in short supply or for which raw material
requirements may necessitate the establishment of new, untested
supply links. Plant managers whose traditional attempts to cope
This memorandum was prepared by Office of Soviet
Analysis. Comments and questions are welcome and can be directed
to Chief, Economic Performance Division,
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with, or offset, shortages have led to "hoarding" of key
materials will be torn between the desire to continue this
practice to deal with deteriorating supplies and the need to
adhere to the leadership's admonitions against hoarding as the
drive to uncover hidden reserves and increase product quality
gathers momentum.
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Introduction
Shortages are endemic in the Soviet economy, often hampering
the reliable supply of industrial materials to manufacturing
facilities. Reducing such shortages is particularly important
now to meet the goals of Gorbachev's ambitious modernization
program for industry. Shortages occur for a variety of reasons,
including adverse weather conditions and poor institutionalized
central planning of production and distribution. The USSR State
Planning Committee, Gosplan, has traditionally used a "materials
balance" technique to allocate raw materials and semi-finished
products, whereby potential sources of supply are set against
proposed demands.l Zf ex post demand for a particular commodity
exceeds the supply, either a new source o.f supply must be found
or users simply do without the goods they need.
In this memorandum, we assess both the current nature of
shortages in civilian industry and how these shortages could
affect modernization plans in light of the current structure of
supply distribution. tie also examine how the industrial sector
has tried to cope with shortages and how specific aspects of
Gorbachev's program may change these efforts.
1 Gosplan is primarily concerned with setting output targets for various
industrial nd nistries and for working out material balances at the economy-
wide level, while the 15 republic planning committees do the same thing on a
regional level.
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Types of Shortages and Their Consequences
Shortages generally occur in the basic materials industries
that support a number of key sectors of the economy, including
machine-building--the core of the General Secretary's program of
modernization. Most of the shortages
raw materials, electricity, and transport rolling stock.
The drumfire of criticism in the Soviet press directed at
the machine-building sector's failure to meet many of its output
goals in 1986 probably reflects, among other things, the
secondary effects of industrial shortages on machine-building
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production.
Reasons for Shortages
Adverse Weather and Transportation
Weather-related shortages have a particularly severe impact
on industrial activity because they are generally superimposed on
endemic shortages that continually plague Soviet production
facilities. The latter result mainly from the high level of
tension inherent in materials supply that results from Soviet
inability to plan an effective materials balance for an economy
as large and complex as that of the USSR.
The winter of 1984/85 in the USSR was described at the time
by Soviet meteorologists as the worst in decades. Unprecedented
low temperatures, high winds, and heavy snowfalls disrupted
transportation, especially railroads, causing numerous production
shortfalls. During the first quarter of 1985, rail deliveries to
metallurgical and chemical enterprises were particularly
affected.
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The 1986/87 winter weather was even more severe than that of
1984/85, and Soviet industry has been plagued again this year by
weather-related shortages. Indeed, poor production figures for
industry overall in early 1987 and Soviet press reporting of rail
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bottlenecks, production stoppages, and frozen cargo suggest that
little progress has been made toward overcoming the disruptions
associated with worse-than-expected winter weather.
Central Planning and Shortages
Many shortages of industrial materials result from the
tension between central planners looking to maximize production
plans and enterprise managers whose interests are best served by
minimizing output plans.
the conflict between centrally set plans
and enterprise production capabilities often leads to unrealistic
output goals being imposed on some enterprises while others
receive targets well below their capacity to fulfill. This
results in shortfalls in production by the former and excess
output by the latter, which create discontinuities in the flow of
industrial materials and, in turn, lead to bottlenecks and
shortages for other industrial facilities involved in later
stages of processing.
As Soviet industry has developed, balancing the flow of
materials has become increasingly complex and more dependent on
the closely coordinated efforts of a myriad of producing
enterprises. According to Soviet economists, Five-Year Plans
attempt to coordinate the production and distribution of roughly
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24 million products. The complexity of planning the economic
relationships that arise on such a large scale has turned the
national planning process into a "Rube Goldberg" archetype of
bureaucratic "buck-passing" that defies efficient administration
(see figure 2).2 Consequently, more and more time and resources
must be devoted to the planning process itself and to devising
ultimately cumbersome and wasteful efforts to overcome the nearly
ubiquitous problem of shortages.
Coping with Shortages: Efforts to Offset Their Effects
At the Enterprise .
Charged with meeting monthly, quarterly, and annual plans,
individual enterprises have adopted unofficial methods of
offsetting chronic supply problems (hoarding, for example).
Participants must be familiar with a variety of techniques to
make a plan acceptable to the political leadership, Gosplan, and
their own ministerial administrators. They present the
ministry's plans in a form reflecting all "bureaucratically
2 This problem is being discussed more openly in Soviet economic cj rcles, the
likely result of Gorbachev's "openness" campaign. An article in the February
1987 issue of Novyy Mir notes the "sheer impossibility" of planning in such a
complex system, and a recent lecturer in Leningrad noted that "in order to
,correctly balance a central plan" (for a single point in time) for 24 million
products produced at 150,000 enterprises, "the entire computing power of the
Soviet Union would be required for 11-1/2 years."
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Figure 2
Practical Operation of the Soviet Planning Systema
Communist Party
?~ Central Committee
USSR Council
---- of Ministers
~ ~
~ ~ ~
? ! .ir
Central
Statistical
Administration
Industry
Branch
De artment
State Committee
for Material and
Technical Supply
GOSSNAB
? Technical Supply
Or anizotion
i
?-----------/ Local Statistical ?~~
Bureau
Economic
Planning
O~anizafion
Planning
Department
--J
Branch
Main
Administration
(Design Buroaus
Industrial
Ente rise
~-~ Oversight
?~~~~ Offletal
di
tl
n on
b
r
o
Official
~-____--- nportin9
~_ Motertal
supply
Th~ dir~cfion of arrows
sl9nifiss, in broad terms,
th? flow of plan direct-
ives from supervisory to
subordinate odors.
a This view of the Soviet planning system is intended to highlight functional
operation, it is not an organizational hierarchy.
?,,,~ State Planning
~ Committee
GOSPLAN
~ ,
~ ~
Industry
De artment
.~~ _
Local Committee
of Communist
Party~P_ AR_ _TKOM~
Manufacturing
ndustry
Minist
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mandated but not necessarily relevant plan indices or control
figures."
Members of shadow Gosplans range from senior scientists or
chief project engineers to heads of departments in research
institutes or design bureaus. Their unofficial role is
essentially a reactive one; they incorporate into plans hidden
features which make monthly and annual plans attainable for the
industrial ministry. An individual enterprise, largely through
the influence of a shadow Gosplan, may come to rely excessively
on "hoarded" production reserves (expressly forbidden by Gosplan)
to fulfill or overfulfill its production plans. This procedure
creates distortions in the already complex system of planning
parameters and compounds the problem of shortages. The common
practice of "storming," or massive end -of-period efforts to
increase output to make up for prior lags, both encourages and is
encouraged by hoarding. Stockpiling reserves of industrial
materials can lessen the overall impact of a temporary shortage
on a particular facility, but generally results in wasted
resources and a disregard for quality control.
and from Above
Gorbachev has publicly recognized the inefficiency inherent
in a system that attempts to plan the production and distribution
of millions of products and has proposed that managers of some
industrial enterprises have more autonomy over planning their
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production and purchasing their material supplies. In addition,
new "incentives" are being introduced to enable workers to
"successfully seek out all reserves and mobilize them for plan
fulfillment without fear of raising production targets for
subsequent years." For example, the 1987 Plan was designed with
an eye to adhering to the existing annual output targets of the
Five-Year Plan for 1986-90. Thus, according to new policy
guidelines, reserves should be used to overfulfill the planned
level of production, and plant managers should not be expected to
meet new, higher production goals in each successive year. Such
"incentives" are not new to Soviet industry, but they have been
given more emphasis under Gorbachev.
Although Gosplan and Gossnab (the State Committee for
Material and Technical Supply) may succeed initially in reducing
the level of hoarded materials, enterprise managers will not
eliminate excessive stockpiles--by normal market economy
criteria--which they view as a cushion against unforeseen
shortages. Moreover, 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--is
likely to succumb eventually to the waste and the inefficiency
engendered by conflicting interests of enterprise managers and
central planners. Enterprise managers with increased autonomy,
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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, fraud,
and mismanagement for years.
Shortages and Quality Control
A new state quality-control system introduced in January at
1,500 of the country's enterprises in 28 different ministries
could aggravate shortages.3 Preliminary reports indicate that
the new system was responsible for rejection of 10 to 20 percent
of the industrial goods inspected, and it follows that downstream
operations now face a new source of shortages of needed
materials. Furthermore, such affected enterprises will be
burdened, at least in the near-term, with continued pressures
from central planners to maintain output while simultaneously
attempting to satisfy the standards of quality-control
3 The new system--gospriyemka--is loosely modeled of ter the long-established
quality-control system in the defense industry. Inspectors can reject the
output of an enterprise if it does not meet quality standards. Rejected goods
cannot be counted in plant output statistics until they are brought up to
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inspectors. Improving quality while fulfilling planned increases
in production are not readily compatible objectives. Although
other factors--including severe weather--also held back
industrial performance early in 1987, the demands of the new
system could continue to affect industrial output at a time when
Gorbachev's program needs extensive support.
Potential Impact on Gorbachev's Program: Looking Ahead
Gorbachev's plan to accelerate renovation of existing
production facilities could exacerbate the tension already
present in planned material balances. Renovation normally
requires shutting down production lines to replace old equipment,
which, in turn, is likely to jeopardize production plans.4 Since
the capacity for renovation is linked to dependable deliveries of
supplies (which are themselves reliant on healthy production in
upstream operations), a "catch-22" could develop which might
foster further managerial resistance to industrial
modernization. Current production will necessarily decrease
during renovation, raising the risk of shortages at downstream
plants. But without renovation, substantial improvements in the
quality of production, or in the efficiency of the production
process, are unlikely. If renovation projects are initiated at
4 To hel offset the effect of renovation on immediate
p production plans, some
industrial enterprises have increased the number of shifts on production lines
not temporarily out of commission. The Central Statistical Administration
plan fulfillment report for first quarter 1987 indicated the shift coefficient
of work at enterprises that had instituted multi-shifts had "increased
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many basic industrial facilities simultaneously without regard to
the potential impact on their production capacity, materials
shortages could increase, affecting downstream operations that
could reverberate throughout industry.
The renovation strategy imposes especially heavy burdens on
industries such as steel, chemicals, and construction materials,
not only to maintain and improve deliveries of existing products
to sectors such as machine-building, agriculture, and retail
trade, but also to develop a wider variety of new and better
products that likely will require an even more reliable supply of
material inputs. For example, the expanded "chemicalization" of
the economy, particularly in the areas of agriculture and
petrochemicals, places rigid demands on the chemical industry to
expand production of advanced materials. The tasks of developing
and producing materials such as engineering plastics requires
inputs of specialized materials, supplies of which in the past
have frequently been erratic and unreliable. Moreover,
competition from military users for advanced chemical products is
extensive.
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Moreover, Gorbachev's call for plant managers to become more
innovative in their approach to production will likely fall on
deaf ears as long as the present system of material balances and
shadow Gosplans remains essentially unchanged. For the plant
manager, familiarity with both the technical characteristics of
material already used as well as the relative reliability of
delivery schedules keep supply difficulties to a minimum.
Uncertainty over the working characteristics of new materials or
processes and the availability of supplies could tend to
discourage innovation. If innovative plant managers must depend
increasingly on new supply linkages with unfamiliar production
facilities (which may be suffering from shortages themselves),
innovation is likely to proceed at a snail's pace. Just as the
pressure to renovate could result in the shutdown of a facility
and aggravate shortages, pressure for innovation is likely to be
met with resistance among managers who fear facing even greater
supply problems.
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SECRET
Distribution for "Industrial Shortages in the USSR: A Potential Threat
to Gorbachev's Renovation Strategy"
Internal
1 - D/BONA (4E58 HQ)
2 - DD/BONA (4E58 HQ)
3 - NIO/USSR (7E47 HQ)
4 - NIO/Economics (7E47 HQ)
5 - NIO/Warning (7E47 HQ)
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13-18 - CPAS/IMC/CB (7G07 HQ) (1 sourced)
19
- SA/BONA
(4E65 HQ)
20
- SA/Dissemination Analysis/CPAS (7G50 HQ)
21
- DDO/SE (5B02 HQ)
22
- SOYA/E5/CIB (4E66 HQ)
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- C/BONA/NIG (4E65 HQ)
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- C/BONA/DEIG (5E56 HQ)
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- C/BONA/RIG (5E25 HQ)
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- C/BONA/SIG (4E31 HQ)
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- C/BONA/DEIG/DED (5E56 HQ)
28
- C/BONA/DEIG/DID
(4E31 HQ)
29
- C/BONA/NIG/DPD
(4E65 HQ)
30
- C/BONA/NIG/EPD
(5E66 HQ)
31
- SOVA/NIG/EPD/EP
(5E66 HQ)
32
- SOYA/NIG/EPD/RM
(5E66 HQ)
33
- SOYA/NIG/EPD/FT
(5E66 HQ)
34-35 - SOYA/NIG/EPD/IA (5E66 HQ)
36 - C/EURA/EE (6G42 HQ)
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External
37 - Paula J. Dobriansky, Deputy Director,
European and Soviet Affairs,
National Security Council (368 EOB)
3 - John Danylyk, Chief, Communist Economic Relations
Division, Bureau of Intelligence and Research,
Department of State (8662 State)
44 - Paul Goble, Office of Analysis for the Soviet
Union and Eastern Europe, Bureau of Intelligence
and Research, Department of State (4844 State)
45 - Robert W. Clark, Deputy Director (Economic Affairs),
Office of Soviet Union Affairs, Bureau of European
and Canadian Affairs, Department of State (4223 State)
46 - Ralph Lindstrom, Director, Office of Economic
Analysis, Bureau of Intelligence and Research,
Department of State (8722 State)
47 - Michael Einik, Acting Economic Counselor, US Embassy,
Moscow, USSR c/o EUR/SOV, Department of State (4223 State)
48 - Robert Gallagher, Deputy Chief, Office of Intelligence
Liaison, Department of Commerce (3520 Main Commerce)
49 - Douglas R. Mulholland, Special Assistant to the
Secretary (National Security), Department of the
Treasury (4324 Main Treasury)
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