THE ATLANTIC COUNCIL OF THE UNITED STATES AND THE INTERNATIONAL ECONOMIC STUDIES INSTITUTE OCCASIONAL PAPER

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The Atlantic Council
of the United States
and the
International Economic
Studies Institute
Occasional
Paper
Western and Eastern Economic
Constraints on Defense
The Mutual Security Implications
by
Timothy W. Stanley
with an Appendix on:
Soviet Economic Constraints to Year 2000
by John P. Hardt
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THE ATLANTIC COUNCIL
OF THE UNITED STATES
The Atlantic Council of the United States, now in its 26th year, is a national
and bipartisan center for the formulation of policy recommendations on the
problems and opportunities shared by the democracies of Western Europe,
North America, Japan, Australia, and New Zealand. Its purpose is to promote
understanding of major international security, political, and economic issues;
foster informed public debate; and make recommendations to the Executive
and Legislative branches of the U.S. Government and to the appropriate inter-
national organizations.
The Council is anon-governmental, educational organization, supported by
tax-exempt contributions from corporations, foundations, labor unions, and
individuals. Directors of the Atlantic Council (listed on the back cover of this
draft paper) are private individuals with internationally recognized experience
in public and private endeavor, including government, finance, business, labor,
academia, the law, and the media. They volunteer their time and expertise to
help forge links of policy and purpose among the developed democracies, and
to improve relations with the developing nations and the communist countries.
The Council's policy papers are the products of working groups and com-
mittees composed of fifteen to sixty persons carefully chosen from among Coun-
cil members and others representing a broad and bipartisan range of opinion
and experience. The conclusions and recommendations of these papers repre-
sent the consensus of these specialized groups, and include dissenting comments
of individual members in footnotes or an appendix as appropriate. The papers
are addressed to decision-makers and decision-preparers in government and the
private sector, and are also disseminated to academic leaders, the news media,
and other interested persons in this country and abroad.
Certain analyses and studies prepared as background papers for discussion
by the Atlantic Council's Working Groups are published as Atlantic Council
Occasional Papers. These papers do not necessarily reflect the collective views
of the Atlantic Council; the positions taken remain solely those of the author.
They are made available to a wider public because of their outstanding merit
and timely interest.
The Atlantic Council of the United States
1616 H Street, N.W.
Washington, D. C. 20006
Telephone: [phone]
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TIC INTERNATIONAL ECON011DC
STUDIES INSTITUTE
The Institute was established in 1974 to cazry out long range analyses of issues
in its broad field which are of concern to Americans. It is a publicly supported,
non-profit and tax exempt research and educational organization under Sec-
tion 501(c)3 of the Internal Revenue Code. Contributions and inquiries are
welcomed from all sources.
The Institute is affiliated with the International Economic Policy Associa-
tion, founded in 1957 as anon-profit business-supported civic league, which
is tax exempt under Section 501(c)4. Information about its programs are
available upon request. Both organizations' boards of directors are listed in-
side the back cover.
The Institute and the Association have jointly undertaken a special two-year
program on "American Business and the International Economy". This will
involve studies by expert outside authors as well as the IEPA-IESI staffs. They
will focus on American business and what is necessazy to maintain and improve
U.S. well-being and competitiveness in the world economy. A central question
will include the needed industrial base (beyond high-tech and the service sec-
tor) and the appropriate trade, investment, exchange rate and tax policies. The
interactions of American national security with economics, including trade com-
petitiveness and the U.S. domestic budget and balance of payments deficits,
will also be addressed.
The overall program will seek, through factual rather than ideological analysis,
to correct some of the widespread public misimpressions, including government,
Congress, academia and the media, about the seriousness of U.S. international
economic problems. The final result will be a book published early in 1988 which
will integrate these interrelated topics.
The International Economic Studies Institute
1400 Eye Street N.W., Suite 510
Washington, D.C. 20005
Telephone: [phone]
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WESTERN AND EASTERN ECONONIIC
CONS ON DEFENSE
'TIS 11ZUTtJAL SEC~JRiTY IlV~LICATIONS
by
Timothy W. Stanley
With an Appendix,
"Soviet Economic Constraints to the Year 2000"
by John P. Hardt
Washington, DC
Fall 1986
Draft published by the Atlantic Council of the United States
and the International Economic Studies Institute
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Additional copies of this Occasional Paper
Western and Eastern Economic Constraints on Defense:
The Mutual Security Implications
may be ordered at $6.00 prepaid from the Atlantic Council or the
International Economic Studies Institute.
The Atlantic Council's Brochure, "Issues and Options, 1986-87"
is available gratis upon request.
Copyright ?1986 by
The Atlantic Council of the United States, Inc.
and the International Economic Studies Institute
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TABLE OF CONTENTS
Page
Preface by Andrew J. Goodpaster ............................. vii
Foreword and Overview by Ronald L. Danielian and George M.
Seignious II .............................................. viii
I. Introduction ................................................ 1
II. The United States ........................................... 3
III. NATO Europe .............................................. 7
IV. The Soviet Union and the Warsaw Pact ....................... 10
V. Conclusions ................................................ 13
Table I .................................................... 15
Table II .................................................... 17
Table III ................................................... 18
Appendix: "Soviety Economic Constraints to Year 2000" by John
P. Hardt ................................................. 19
About the Authors .......................................... 37
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PREFACE
This paper, "Western and Eastern Economic Constraints on Defense: The
Mutual Security Implications" by Timothy W. Stanley, and its Appendix,
"Soviet Economic Constraints on Defense to Year 2000" by John P. Hardt,
grew out of the Atlantic Council's ongoing Policy Projects on "U.S. Policy
towazd the Soviet Union: ALong-Term Western Perspective, 1985-2000" which
I chair jointly with Walter J. Stoessel, and "Defending Peace and Freedom:
Towazd Strategic Security in the Yeaz 2000", under the co-chairmanship of Brent
Scowcroft and R. James Woolsey. The two policy projects aze an integral part
of the Council's overall National Security Policy Program. The two Working
Groups are neazing completion of their work, and anticipate publishing Policy
Papers in early 1987. Because of the substantive merit of this working paper,
and the timeliness of the issues raised, both Working Groups recommended
it be published immediately as part of the Council's Occasional Papers series,
conjointly with the International Economic Studies Institute.
The Occasional Papers aze offered as timely complements to the Policy Papers
and scholazly books published by the Atlantic Council as a result of its policy
working groups. Unlike the Policy Papers, which reflect the collegial views and
recommendations of specific working groups, the views expressed in the Occa-
sional Papers remain the sole responsibility of the individual authors. Like the
Policy Papers, the purpose of the Occasional Papers is to enhance public discus-
sion and debate of the most important international issues.
Over the last several yeazs, it has become strikingly appazent to us, and to
the elected and appointed officials, military and civilian policymakers and policy
planners, businessmen, and academicians who have worked with us, that there
exists a high degree of interdependence among the military, societal, and
economic components of national security, and that these three aspects have
traditionally been treated independently of each other, too often as if in competi-
tion with each other. There is a need for a sustained and comprehensive examina-
tion of the interrelationships among our military security requirements and our
economic security and our socio-political well-being. We urgently need prac-
tical means of replacing policy isolation, competition, and conflict with policy
coordination. As a step toward meeting that need, the Council has undertaken
a new program on "Integrating Economic Policy and Security Policy." This
paper represents the first substantive contribution to that effort. In that light,
we are particularly pleased to publish this draft jointly with the International
Economic Studies Institute, which is collaborating with us on the new program.
The Atlantic Council expresses its continuing gratitude to those contributors
whose financial support has made the National Security Policy Program possi-
ble. The Program was initiated with the support of a major challenge grant
from the J. Howard Pew Freedom Trust, and matching grants from the
McDonnell Douglas Foundation, Exxon Corporation, Exxon Education Foun-
dation, the Texas Association of the Atlantic Council, the International Eco-
nomic Studies Institute, and the Greve Foundation.
Andrew J. Goodpaster
Chairman
Atlantic Council of the United States
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FOREWORD AND OVERVIEW
Much has been and is being written about U.S.-Soviet relations and arms
control; and also about U.S. and world economic problems. What is relatively
unique about this joint Occasional Paper is that it attempts to assess some of
the interactions between defense (and arms control) and economics.
The Atlantic Council has in progress two nearly completed policy papers draw-
ing upon the deliberations of two expert and broadly based working groups,
as noted in the preface. The Council leadership, including most of the co-
chairmen and rapporteurs of the two groups as well as the author of this Occa-
sional Paper, held consultations with NATO Parliamentarians, i.e., MP's from
various European allies, in Luxembourg in late May of this year, which were
followed by discussions in Moscow with leaders from the Institute of USA and
Canada Studies, the Foreign and Defense Ministries and the Central Commit-
tee of the Communist Party.
Originally commissioned as working papers for those two Council groups,
the combined efforts of Dr. Stanley and Dr. Hardt seemed so timely to current
developments in East-West relations that it was deemed a useful public service
to make them available in this form. Ultimately, it is hoped, these preliminary
analyses will become the basis for further Atlantic Council Policy Papers under
the aegis of a Standing Committee on Economic Policy which will guide on-
going work on integrating economic policy and security policy in the light of
future international developments.
The International Economic Studies Institute, together with the International
Economic Policy Association, with which it is affiliated, has published many
analyses over the yeazs of U.S. and foreign economic problems and policy issues,
particularly as they relate to U.S. business and its competitiveness. In addition
the Institute has done considerable analysis of the interactions between inter-
national economics and national security. More and more, the impact of U.S.
budgetary and balance of payments deficits upon national security, and vice-
versa, is coming to the fore. The Institute therefore is pleased to collaborate
with the Atlantic Council in addressing these interactions, in this Occasional
Paper, and in ongoing work.
The basic thesis presented here is that, although U.S.-Soviet relations seem
destined to consist of a mixture of competition and cooperation, and neither
side will, for economic reasons alone, adopt policies or military postures which
it sees as harming its national security interests, the economic constraints now
operating on both sides may create genuine windows of opportunity, through
added incentives to reach otherwise desirable (and verifiable) arms control
regimes. These could not only lower the risks of major conflict but also the
defense burden for both, and for their respective NATO and Wazsaw Pact allies.
With regard to the United States, Dr. Stanley's analysis finds that under the
most likely long term economic growth scenarios and the most realistic assess-
ment of congressional willingness to fund current defense priorities, the coun-
try is unlikely to reach the ambitious strategic and force goals set by the Ad-
ministration. If so, the United States will have to choose between either unde-
sirable or unworkable economic policies, and major re-thinking and restruc-
turing of its basic strategy and force posture for the future, preferably in com-
bination with major new East-West arms control possibilities. Similar ad-
justments may be needed in NATO.
On the Soviet side, Dr. Hazdt documents the analogous constraints and dilem-
mas facing General Secretary Gorbachev and his colleagues, although they take
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the form of allocation of real resources rather than budgets. Options include
a possible shift to a pragmatic, reduced defense burden approach. This would
have to encompass updated assessments of the international environment fac-
ing the Soviet Union, greater political leadership over defense requirements and
programming, and economic constraints on defense stemming from the high
priority being given to modernizing the civilian economy.
Dr. Stanley concludes that if either side sees the other's constraints as a poten-
tial vulnerability to be exploited, i.e. in zero-sum terms, a goal of mutual and
stable security by the year 2000 may be even more elusive. But if both perceive
their common problems as opportunities, in a positive sum context, then much
could be accomplished at the planned U.S.-Soviet Summit and in subsequent
negotiations.
As emphasized in the preface, the views contained in Occasional Papers are
those of the authors alone, and do not necessarily reflect the collegial views
of the Atlantic Council, its working groups, or those of the International
Economic Studies Institute as an organization.
Nevertheless, we consider that the concepts and data in this paper are suffi-
ciently constructive, thought-provoking, and timely that we are pleased to
publish them jointly now.
Ronald L. Danielian George M. Seignious II
Vice President President
International Economic Studies The Atlantic Council of
Institute (and President, The United States
International Economic
Policy Association)
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Western and Eastern Economic
Constraints on Defense:
the Mutual Security Implications*
by
Timothy W. Stanley
President, International Economic Studies Institute
I. Introduction
This paper concentrates on the period between now and the year 2000,
although more immediate economic and budgetary crises, including the effects
of the Gramm-Rudman-Hollings (GRH) legislation, are also considered. It deals
primarily with the United States and the Soviet Union and features an analysis
of the situation in the USSR contributed by Congressional Research Service
Sovietologist John Hardt. (See Section IV and the Appendix.) To a limited ex-
tent the analysis also touches the analogous problems of key allies of the super-
powers in NATO and the Warsaw Pact.
Relations among three separate but interacting variables complicate the search
for strategic stability and affect U.S.-Soviet relations as they influence mutual
threat perceptions and the economic consequences of the armaments programs
of both sides.
One useful, if admittedly simplified way of illustrating these relationships
is shown in the two back-to-back right triangles diagrammed below. Side a,
the altitude, is composed of the mutual threat perceptions, taking the "threat"
as military capabilities discounted by intentions, which dominate U.S.-Soviet
and, to a lesser extent, NATO-Warsaw Pact relations. The base of the triangle
(b) represents the armaments programs in part generated by these mutual threat
'The writer wishes to express his appreciation for the helpful comments made by members of
the Atlantic Council's Strategic Stability and U.S.-Soviet Relations working groups during his presen-
tations to these groups in the spring of 1986. The paper also draws upon consultations held by
an Atlantic Council delegation which met with NATO parliamentarians in Luxembourg on May
25-27, and discussions held with senior Soviet officials in Moscow on May 28-June 1, 1986, as
well as upon insights gained at a U.N. conference of experts from East and West in Italy in April 1986.
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perceptions and includes the arms control desiderata resulting from the
vulnerability of both sides to technologically sophisticated nuclear and conven-
tional weapons of great power, including potential applications in space.
The hypotenuse of the triangle (c) represents the economic costs and conse-
quences and potential economic constraints of both sides' national security pro-
grams. The drawing is intended to be illustrative of the elementazy principle
that strategy (or threat evaluation and response) military programs, and defense
budgets (and their limitations) aze all interrelated. No quantitative compazisons
are intended.
Every math student knows that the square of the hypotenuse is equal to the
the sum of the squares of the other two sides, represented by the formula
a2 + b2 = c2. However, in the world of politics these relationships may or
may not apply. Three basic viewpoints were expressed during the discussions
of the Atlantic Council Working Groups on U.S.-Soviet Relations and Strategic
Stability.
One view takes the "a", or perceptions of threat to national security as a
given; it in turn drives the related armaments programs, limited only by arms
control imperatives and possibilities. The hypotenuse is then treated simply as
a derivative, representing economic consequences which must simply be ac-
cepted, given the high priority both superpowers and their major allies assign
to national security as they perceive it.
According to a second view, the mere existence of large military
establishments, bureaucracies and interlocking industrial relationships generates
its own momentum in the arms race. Thus, quite frequently, the "threat" is
cut to fit the desired pattern of the military-industrial complex. Scholazs of Soviet
affairs note that while economic incentives and constraints may play a somewhat
smaller role in the USSR than in the West, the bureaucratic and political power,
as well as allocation priorities determined by the armaments elements of Soviet
society are of great importance. They reinforce the ideological "threat" from
the West, at once stimulating the military capabilities that the West has developed
in response, and justifying still larger Soviet bloc efforts. This interaction may
be particularly relevant during the current subterranean struggles as General
Secretary Gorbachev seeks to consolidate power and impose his priorities on
the Soviet bureaucracy.
A third view is that under present political-economic conditions, the economic
hypotenuse of the triangle is becoming an independent variable, which at any
shorter length, will alter the dimensions of the altitude and the base of the triad
for both the Western and Eastern alliance systems. This paper will explore the
ramifications of this third viewpoint.
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II. THE UNITED STATES
The United States has recently undergone the largest ever peacetime buildup
and modernization of its defense establishment, initiated in President Carter's
last year of office following the Soviet invasion of Afghanistan, and continued
and expanded under President Reagan.
In part this development reflects a perceived lag in the U.S. strategic posture
vis-a-vis that of the Soviet Union, which continued its own long-term buildup
even while the U.S. had unilaterally capped its strategic offensive forces in quan-
tity, if not quality. Moreover, U.S. modernization and readiness were lagging.
It also reflects a disillusionment with the progress and prospects for arms
control. Some, including former arms limitation advocates, maintained that the
actual effects have been at best neutral, if not indeed harmful, in ratifying (and
thus encouraging) ever more and better nuclear weaponry on both sides. Arms
control opponents claimed that the process has failed to impede Soviet efforts
to gain superiority even as it hindered U.S. efforts to redress a deteriorating
military balance.
Also involved, of course, are the Reagan Administration's political-ideological
campaign to shrink the role of civilian government activities, its staunch anti-
communist, anti-Soviet outlook (though its more extreme rhetoric has now been
muted) and its conviction of the need for expanded defense efforts to catch
up to a perceived higher level of threat from the Soviet bloc.
Under the Reagan Administration, from FY 1981 through 1991 as projected
by OMB, there will have been no real increase in nondefense government spend-
ing because both the FY '81 and '91 figures are $555 billion in constant FY
'82 dollars). But there will have been a 60 percent real increase in defense, which
will have grown from 23 percent to 33 percent of total government (including
off-budget items) outlays, while nondefense will have fallen from 77 percent
to 67 percent. Congress, of course, may or may not act accordingly.
The point of this paper is not to agree or disagree with these viewpoints, but
rather to explore their ramifications in defense economics.
Tables I and II at the end of the text take the Administration's own figures-
bejore mandated Gramm-Rudman-Hollings (GRH) cuts-and compare them
with alternative U.S. economic growth paths and percentages of GNP allocated
to defense.
Table I (inconstant 1982 dollars, which factors out inflation) uses as growth
alternatives ranges of 4 to 5, 2 to 3, and 1 to 2 percent, which are averaged
to 4.5 percent, 2.5 percent and 1.5 percent real annual increases in GNP, respec-
tively. It then applies defense percentages of GNP of S and 6 percent to each.
Since 1970, except during the Vietnam War, the U.S. GNP share for defense
has been either 5 or 6 percent-the latter primarily during the Reagan Admin-
istration buildup, which OMB projects to continue through 1991, as does the
Pentagon.
It should be noted that the table lists or projects actual outlays, as opposed
to appropriations or new obligational authority.
The actual and projected calendar year 1985-91 defense expenditures in Table
I exceed even six percent of real GNP for all years but one, except under a very
high growth scenario of 4.5 percent, which practically no independent forecaster
would predict today.'
'Early hopes that lower energy costs and interest rates would stimulate growth at such higher
rates have yet to be realized due in part to badly damaged sectors of the U.S. economy such as
agriculture, mining, oil and energy and basic manufacturing, and in part to major losses of market
share through massive trade deficits during the high dollar era.
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The gaps between the resources thus projected and the stated requirements
do appeaz manageable under the six percent alternative, on the 2.5 percent
growth assumption, which appeazs to reflect current mainstream thinking in
the economic community. However, over time it may be more realistic to ex-
pect the defense share to run closer to 5 percent of GNP, owing largely to con-
gressional sentiment for deeper defense cuts, the intractable government budget
deficit, and the deficit-related GRH mandate, which is complicated for the mo-
ment by the Supreme Court ruling on the role of the Comptroller General in
the automatic enforcement provisions of the law.
Table I suggests that the gaps will not be manageable (under the medium
growth, S percent of GNP, scenazio) and could average over $50 billion in an-
nualshortfall (in constant 1982 dollars) over the six calendaz yeazs from 1986-91.
Table II confirms this situation and magnifies it as stated in current dollars,
assuming a nominal 6 percent growth in GNP-for example 2.5 percent growth
and 3.5 percent inflation-where the gaps might average $98 billion per year
from FY 87 to FY 91 under a 5 percent of GNP assumption and nearly $47
billion per year even under the 6 percent assumption.
It is not possible at this writing to factor in the impact of GRH on this picture,
given the uncertainties of how both Congress and the Administration will finally
respond to the Supreme Court decision. But assuming that the original GRH
target of reducing the Federal deficit to $144 billion in FY 1987 is met, the Con-
gressional Budget Office has estimated that under across-the-board cuts, a
15-plus percent cut would have to be made in the Administration's FY 1987
defense budget proposal (not outlays) of $320 billion and that such cuts would
likely accelerate in future yeazs.
This $50 billion GRH cut, in addition to any shortfalls projected from the
preceding analysis, looms lazge in a long-range defense program in which Stealth
costs maybe upward of $80 billion; 100 new attack submarines could cost $100
billion; and 5,000 army light combat helicopters might require around $30
billion. Finally, $20-30 billion would be needed for SDI's R&D phases alone,
according to estimates published in Washington Post articles. (Total 10-year
costs of a deployed population defense system have been projected as high as
$770 billion, with more limited, e.g. silo-type defense estimated at $160 billion.')
Shortfalls of such magnitudes would appear to require substantial strategic
and program adjustments beyond the tighter management and procurement
reforms recommended by the Packazd Commission, important as these measures
may be in their own right.
The conclusion, starkly stated, is that under the most realistic political assess-
ment of congressional willingness to fund defense priorities'-and the most
realistic economic scenarios, the U. S. cannot get from here to where the Admin-
istration wants to go in its national strategy and force posture.
If this conclusion proves correct, there aze a number of possible lines of policy
response:
(1) The government could simply ignore the budget deficit problem and let
it grow as it will. Virtually all economists agree that this attitude could lead
to disastrous consequences in the long run as inflation would rise, U.S. interest
'Various articles in The Washington Post, spring 1986; see, for example, March 22, 1986, p.
A8. The SDI estimate is based on a study for the Johns Hopkins Foreign Policy Institute, reported
in the Past, July 23, 1986, p. A12. The Pentagon disputes this or any other cost estimates at the
present stage of research.
'As described in The Secretary of Defense Annual Report to the Congress, FY 1987 (Washington:
Department of Defense) 1986.
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rates would go up sharply-in part to attract more of the foreign capital which
is already financing over half of the deficit. The probable result would be
domestic recession or a return to the stagflation of the seventies, even without
the two crippling oil shocks that disrupted that decade.
(2) The Pentagon could try to muddle through, defemng some big ticket pro-
curement, reprogramming, attempting to live off already appropriated but un-
spent funds, and hoping for the emergence of greater national consensus on
the defense buildup and an economic growth path closer to the 4.5 percent upper
range. Judging from past experience, this is the most likely bureaucratic
response, since all the other alternatives are politically painful and bound to
meet with objections.
(3) "National security" could be given enough priority to wazrant major
revenue increases, for example from income and income surtaxes, consump-
tion taxes, oil import levies or energy or other user fees. This response seems
out of tune with the current climate of "revenue neutral" tax reform, with the
GRH mandate, and with the President's firmly stated opposition to tax increases
of any kind.
(4) The government's nonmilitary expenditures could conceivably be trimmed
even more, although many would azgue that they have already been cut to the
bone and major additional cuts would encounter fierce congressional opposi-
tion. In any case, what could be done in practice would seem faz too little to
meet defense gaps of the size outlined above.
(5) The entire U.S. approach to strategy and force posture could be revised.
The challenge is awesome, to say the least, since among other things, it could
reopen the bloody battles over roles and missions of the four services that raged
in the late forties, call for assigning greater responsibility for European defense
to the other NATO allies, essentially aburden-sharing issue; or require shifting
to a reliance on mobilization as opposed to readiness. This last-mentioned adjust-
ment would tacitly accept the risks inherent in reliance on political (as distin-
guished from strategic or tactical) warning, predicated on the assumption that
signs of a more aggressive Soviet policy or buildup would become evident in
time to employ mobilization' and reserve force assets-and that the U.S. and
its allies could muster the consensus and political will to do so. Major cutbacks
in defense spending would also entail curtailments and cancellations of major
weapons systems, each with its own constituency. It would take a lazge team
of expert defense policy analysts many months to outline such structural alter-
natives and estimate their costs and risks, and no such effort will be attempted
here.'
'There aze, however, major questions about the adequacy of the U.S. mobilization base, as more
and more capacity in certain vital but endangered industries, such as ferro-alloys, are driven off-
shore or out of business, leaving the U.S. dependent on foreign sources for important components
and for strategic materials, many of which the U.S. has stockpiled, but now may sell off over time
under the Administration's July 1985 proposal. These questions will be addressed in a forthcoming
IESI study.
'One such expert, however, has had the courage to tackle the challenge alone. In A Reasonable
Defense, (Washington, The Brookings Institution, 1986), Professor William W. Kaufmann com-
pares alternative U.S. force structures against major combat scenarios. The foreword by Brook-
ings president MacLaury summarizes Kaufmann's finding that "if U.S. forces could be coherently
designed to address major U.S. vulnerabilities, they would not only outperform the currently pro-
grammed force, but would also save at least $200 billion in outlays between fiscal 1986 and fiscal
1990." (p. viii).
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(6) The Administration could actively embrace, rather than struggle against,
the possibility of major East-West azms control regimes in a way that could
lead to significantly lower military requirements. But, it takes two to tango and
past Soviet responses to unilateral U.S. restraints have not been encouraging.
Either the Soviets have proceeded with their own buildup out of sheer
bureaucratic momentum, or they have calculated that U.S. restraints reveal a
weakness that could be exploited to shift the correlation of forces further in
their favor.
Whether the present Soviet leaders, given their current problems at home,
might respond with genuine mutuality will be explored later in this paper.
One must conclude, then, that the United States faces major, growing gaps
between likely available resources for defense and the militazy requirements to
be met.b The problem is postponable for only a short time; and ignoring it will
not make it go away. There is, to pazaphrase Henry Kissinger, a "necessity for
choice"; and any inability in the American polity to face and make such choices
has grave implications for the country's future.
?Articles in the defense-oriented press have implied from time to time that even the spending
goa/s of the Administration are inadequate to meet the actual requirements of its stated strategic
objectives, a question which cannot be evaluated here; but if true, then the mismatch between fund-
ing and strategy becomes even more serious!
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III. NATO EUROPE
Without in any way diminishing the overall importance of Canada to the
alliance, that country's military contribution to the defense of Europe is relatively
small and it has been reduced over the years. Italy, Iberia, and the defense forces
of countries on the northern and southern flanks, while vital to the security
of these regions, are less relevant to the center. This section, therefore, will con-
centrate primarily on Germany, France and the United Kingdom, along with
the Benelux countries as a group.'
Both Britain and France have experienced, on a smaller scale, the superpowers'
dilemma of how to maintain adequate conventional strength while moderniz-
ing and increasing the survivability of their strategic nuclear components. The
choices made have ultimately favored the latter, at the expense of the former.
West Germany has pursued a restrictive monetary and fiscal policy, and
evidently plans to continue this course, despite pleas from her allies, notably
the United States, to shift to a more accommodative, lower-tax, growth-oriented
approach in order to stimulate international trade. Thus real growth in the
Federal Republic should average about 2.5 percent per annum for the next several
years, and while defense will consume some 20 percent of total Federal spend-
ing, real annual growth in defense expenditure is likely to increase only by about
one half of one percent, far below that of the economy as a whole. The Ger-
man government's 1985 White Paper on defense states clearly that no substan-
tial increases in defense are in sight, although an average expenditure of over
3 percent of GDP should continue. In addition, Germany is facing demographic
problems which will, over time, shrink the available manpower pool for com-
pulsory military service to a marginal level.
Britain is plagued with high and rising unemployment, despite substantially
lowered inflation and a return to respectable real growth of about 2.5 percent.
The Thatcher government's medium-term financial plan, with its tight fiscal
and monetary policies, may generate tensions between defense programs and
civilian public expenditures programs, especially as the sharp drop in world oil
prices cuts into government revenues from North Sea oil. Following a few years
of significant increases, mainly for nuclear modernization and the eventual
replacement of Polaris submarine missiles, Britain's defense spending is likely
to level off at or below inflation rates, i.e., with little or no real increases in
the near term.
France is trying to adjust to an unprecedented "cohabitation" between a
socialist President and a conservative Prime Minister and government, and the
resulting strains will intensify as the next national elections approach in 1988.
Both parties have been staunch in maintaining and improving France's indepen-
dent nuclear deterrent, albeit at the expense of some other military programs;
and France will likely continue to allocate about 4 percent of its GDP to a defense
posture which, while increasingly coordinated with NATO, is not integrated
'In 1985, according to NATO data, the United States contributed nearly 75 percent of the total
US$358 billion defense spending by alliance members. Britain contributed 6.2 percent, France 5.4
percent, and Germany 5.3 percent. All the others together only add up to 7.7 percent of the total.
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with it. As elsewhere in Europe, unemployment remains a significant problem,
even with 2-3 percent real growth rates in the economy.'
Despite periodic crises as coalition governments are shuffled, both Belgium
and the Netherlands have been able to allocate close to a 3 percent average of
GDP for defense, even during disappointing economic performances. But the
competition for resources for social welfare programs, especially those aimed
at industrial restructuring and unemployment, will continue to limit defense
expenditures to modest real annual increases at best.
Overall, NATO Europe's defense expenditures in constant prices have re-
mained essentially flat over the years 1970-85, rising only slightly since the late
seventies. And in current dollars (converted at current exchange rates)9 they
have shown a slight downward trend since peaking in 1980.10 The best one can
say, is that, absent some sharp upturn in threat perceptions, NATO Europe
will barely hold its own, while the practically available resources will remain
insufficient for highly ambitious conventional force improvement programs,
let alone high-tech weaponry for some of the newer strategic concepts such as
deep interdiction, air-land battle, and follow-on forces, or for strategic missile
defense beyond limited R&D participation in SDI. This not-too-optimistic over-
view, reached independently by the writer in the course of economic surveys
of Western Europe, is also confirmed by the International Institute for Strategic
Studies reference to "the looming difficulties which will face NATO as its ef-
forts to accelerate conventional defense improvements collide head-on with
stringent resource constraints.""
Certainly, there is no realistic prospect that Europe will fill the gap implied
by the preceding analysis of the U.S. requirements versus resources. This fact
may be increasingly relevant if the U.S. balance of payments deficit remains
intractably high, possibly forcing curtailment of U.S. government foreign ex-
change expenditures for various purposes, including NATO defense. The ef-
fect would be a rerun of the problems experienced by the U.S. and NATO in
the late sixties.
Finally European opinion will remain vulnerable to Soviet "peace" initiatives,
especially if they appear to offer some real substance which might lower defense
burdens and relieve some of Europe's internal political tensions. However, as
outlined in a forthcoming Atlantic Council study, there are other approaches
to burden-sharing in a broader alliance context that ought to be explored.'
It would seem, then, that NATO as a whole faces the same dilemma of how
to use limited resources more effectively in the defense, against a backdrop of
a continuing Warsaw Pact conventional superiority, nuclear parity, and
escalating costs of "smart" and other military technologies.
'A national service requirement is traditional in most nations on the continent. The writer has
tested informed opinion in several European countries about the possibility of supplementing the
cancer and conscripted forces with a voluntcer force designed to utilize the large pools of unemployed
manpower by providing salary incentives for longer tours of service. These could be paid for, in
part, by transferring equivalent resources from social welfare agencies to defense ministries. Despite
some apparent advantages in utilizing the unemployed for national defense functions, the concept
has been coolly received, to say the least, and often simply dismissed as impractical.
'This situation partially reflects the strength of the dollaz against most foreign currencies, until
recently.
'?Source: NATO Press Release, December 1985.
The International Institute for Strategic Studies Strategic Survey, /985-86 (London: 1986), p. 92.
"Sce "Comprehensive Security: Balancing National Contributions to Western Well-Being" by
Leonard L. Sullivan Jr. and Jack A. LeCuyer (forthcoming 1986).
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Something therefore may have to give in the central region of NATO, whether
planned resort to tactical nuclear weapons at an earlier than desirable stage of
conflict; greater reliance on resources and mobilization potential at the expense
of readiness, the use of heavier screening forces backed up by concentrations
of mobile counterattack formations and defined strong points-at the expense
of the "forward defense" which is politically vital to the West Germans; or
bold new efforts on mutual force reductions and anti-surprise attack measures
with the East.
Failing any of the alternatives, the alliance leaders may have to take draco-
nian steps to force economies of scale by improving the division of labor in
defense procurement, intensifying standardization and inter-operability, and
constructing a better two-way procurement street across the Atlantic. Difficult
as such steps may be politically, savings or effectiveness increases of up to 25
percent have been postulated by some experts.
Again, painful choices would be involved, and the instincts of NATO's civilian
and military bureaucracies would be to maintain the flexible response strategy
in effect for twenty years, despite a diminishing "thin blue line", making im-
provements at the margin when possible and in procurement when forced to
do so. The point, of course, is that the U.S. and its allies must try to seek com-
mon solutions to shared problems, rather than unilateral ones.
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IV. The Soviet Union and Warsaw Pact"
In March 1986 the CIA and DIA together submitted to the Joint Economic
Committee of Congress a comprehensive report on "The Soviet Economy under
a New Leader." Much has been written about that leader, General Secretary
Mikhail Gorbachev, including the rapidity with which he has consolidated power,
the concessions he may have made or will have to make to various power centers
and factions, his assertiveness in establishing his agenda, with domestic economic
reform at the top, during the 27th Party Congress and subsequently, and his
supposed flexibility in dealing with the West. Less has been said, however, about
the state of and prospects for the Soviet economy.
Gorbachev inherited an economy that was largely stagnant, with productivi-
ty declining as both investment and growth in the labor force tapered off. Energy
and materials inputs reflected rising costs and the 1981-85 five year plan (FYP)
was well below targets. One of the factors, other than general sluggishness, cor-
ruption and inefficiency, was the direct and indirect costs of the massive military
buildup. That effort increased from roughly 12 percent of GNP in the seven-
ties to about 16 percent in the eazly eighties. Moreover, the recent annual growth
rate of that buildup has outstripped the growth of the economy, which aver-
aged under 3 percent for the FYP just ended, in effect robbing the nonmilitary
sector of vital inputs, although there is a complementarity between the military
and civilian industrial complexes which must be taken into account.''
One must add to these factors the dramatic decline in world oil prices, especial-
ly when priced in cheaper dollars, which may lead to a $5-7 billion loss in hard
currency in 1986, as well as the $2.8 billion estimated costs of the Chernobyl
nuclear accident. It is clear as Gorbachev starts his effort to reform and mod-
ernize the Soviet economy, that he faces an uphill struggle and is unlikely to
achieve his ambitious goals." His objectives envisage GNP growth of 3.5 per-
cent ayear for 1986-90, S percent from 1991-2000, with the agricultural target
at 3 percent and industrial output at 4.5 percent, an increase of 150 percent
in productivity by 2000, higher oil and gas production, and large order of
magnitude increases in both the quantity and quality of consumer goods. Few
Western observers believe such goals are attainable, at least without "unleash-
ing" the economy in ways that could be dangerous ideologically and politically.
Dr. Hardt's analysis of the Gorbachev dilemma (Appendix) postulates three
alternative scenarios:
(1) The projection of past trends, with defense allocation characterized as
incremental, ideological, and institutional;
(2) A defense buildup in response to perceived foreign threats or oppor-
tunities, with defense allocations essentially unconstrained by civilian
needs; and
(3) A pragmatic approach, with reduced defense burdens and a reassessment
of the world environment, strategy, forces and budgets. This would in-
volve the triad of elements in the triangulaz analogy outlined in Section I.
It would appear to be in the West's interest to respond to current Soviet arms
control initiatives in ways that would encourage the third scenario. If the Soviets
"Although this section draws heavily upon the analysis of "Soviet Economic Constraints on
Defense to Year 2000" by John Hardt, which is incorporated into this paper as an appendix, the
evaluations and comments are those of the writer.
"See IISS, Military Balance, 1985-86, pp. 17-18. This source, however, also underscores the many
unresolved methodological problems in assessing Soviet military expenditures.
"See Appendix for details.
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choose to face the hard choices, as Dr. Hardt points out, they will be faced
less in the fiscal-budgetary terms which are the driving constraints in the West
than in the difficult and costly allocation of specific physical resources and plant
capacity, particularly machinery and procurement, manpower, and the ingre-
dients of scientific development. Qualified R&D personnel will be in short sup-
ply, as will computer-literate workers and the owners of other high-tech skills.
Moreover, the Soviet demographic problem is growing; most population in-
creases are occurring in the non-Slavic and Central Asian regions to the point
that the Great Russians may already be a minority in "Russia."
More detailed analysis can be found in the Appendix. It implies, however,
that the West may have available both a carrot and a stick. To choose the latter,
in which case the West would observe no arms control constraints and proceed
to maximize its technological advantages, such as SDI and new subnuclear
military potentials, would probably propel Gorbachev toward the second, or
buildup scenario. He would then be forced to abandon his goals for the civilian
economy, except for its spinoff benefits from military modernization. But this
course would also intensify the West's own dilemma of resources versus require-
ments; and totalitarian states have an inherent advantage over democracies when
it comes to enforced belt-tightening, even though the latter, as wealthier coun-
tries, may have more slack to take up. The political consequences of a renewed
cold war and essentially unconstrained arms buildup on the chances for stable
security by the year 2000 are also formidable, for a high threat perception and
response by one side will almost inevitably produce acounter-response by the
other.
The carrot on the other hand, could offer a lower threat perception, make
possible clear constraints (if verifiable) on defense and especially strategic,
deployments, and hence bring about the shorter economic hypotenuse suggested
in Section I. This prospective easing of their guns vs. butter dilemma would
encourage the Soviet leadership towards Scenario 3, the "pragmatic reassess-
ment," which could prove mutually reinforcing in terms of East-West relations,
and a favorable vector toward stable and mutual security as the century winds
down.16
In purely military-economic terms, the Soviet Union's Warsaw Pact allies
contribute less than 10 percent to the total Pact expenditures of approximately
US$275 billion."This contrasts with the more than 25 percent provided by the
U.S. NATO allies. Nevertheless, their manpower, economic potential, and
geographic location are of great strategic and political importance to the
U.S.S.R. Because of the high degree of Pact military integration and to a lesser
extent, economic integration under CMEA, we need not discuss the six non-
Soviet Pact members individually, after noting that their national interests vary.
(In MBFR negotiations, for example, East Germany hewed closely to the Soviet
line; Poland made known its own interests in achieving a reduction of the Super-
power (read Soviet) deployments in Europe and easing both the manpower and
economic burdens of defense; and Rumania played its customary maverick role.)
For this discussion we can assume that the future options of the other War-
saw Pact countries are tied to those outlined above for the Soviet Union. But
they display even greater tendencies to seek butter over guns in their economic
16For more details of this scenario-and its alternatives, see the writer's article on "Strategic
Stability and Mutual Security in the Year 2000, Getting There From Here" in the U.N.'s Disarma-
ment magazine (forthcoming) in a report on a U.N. meeting of experts in Erice, Italy, April 1986.
"As estimated and converted in the IISS, Military Balance, 1985-86, cited.
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tradeoffs, for with spotty exceptions, the CMEA economic performance in re-
cent years has been plagued by economic reversals and debt problems. Thus
the Soviet Union can expect even less help from its Warsaw Pact allies which,
as the Appendix points out, are a net cost to Moscow in both military and
economic terms, than can the United States from its NATO allies. In neither
case, however, can the superpower concerned look to its alliance system for
significant relief from its own resource squeeze.
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V. CONCLUSIONS
A medium-to-low threat perception on both sides coupled with medium-to-
low economic growth rates, could reinforce other incentives toward arms con-
trol and even limited disarmament. But initially there will not likely be signifi-
cant savings, since nuclear forces are a relatively small part of the whole, and
for the United States, at least, achieving substantial budgetary savings would
require cancellation of entire weapons programs, closing of installations, and
large-scale reductions of personnel-which, however, could be accomplished
on the military side by greater emphasis on reserves. There is always a high
initial cost for such measures, which only pay for themselves over time. Some
rough indications of current budget breakdowns by n-ission are contained in
Table III.
It should be emphasized, however, that potential economic savings of what-
ever magnitude are not enough of a magnet to draw either superpower away
from a course it considers essential for its major national security objectives.
And their mutual relations will be characterized for the foreseeable future as
a mixture of competitive and cooperative elements.
Even though it is unlikely that there will be a substantial detente dividend
in an economic sense, the stresses and strains of coping with a growing divergence
between defense requirements and resources on both sides, as a minimum, may
create incentives to reduce the pressure by easing off on the requirements side,
improving the climate for the third scenario for the USSR in Section IV and
making way for a parallel reassessment for the United States and for NATO.
Arms control negotiators are, by necessity negotiating about each other's in-
tentions as well as capabilities.
Under any but the worst scenazio, however, structural change will probably
have to come to the Pentagon over time; but the real squeeze, one hopes, would
come only after renewed arms control progress is on course and verifiable. As
President Reagan stated in his February 26, 1986 address to the nation, percep-
tions of U.S. weakness or lack of will in defense can only weaken Soviet incen-
tives for arms control concessions. The need for effective dialogue between East
and West is thus apparent.
On the other hand, a high threat perception by either side would generally
produce a reciprocal response by the other, leading to renewed tensions and
higher defense requirements. The Soviet Union would find it easier to cope
politically with such a development than would democracies, especially under
low-growth assumptions. For the United States, this situation could mean a
significant rise in the overall tax burden, unless we also postulate along-term
high growth scenazio, which is without precedent in this country.
Burden-shazing may again become an issue within the alliance unless the U.S.,
European, and Japanese assessments of the threat are more nearly parallel than
they have been traditionally. It is a common assumption that real threats to
the peace are more likely to arise in the Third World than in Europe, and unless
the other industrialized countries feel themselves directly at risk, this attitude
could become divisive, endangering the cohesion of the alliance and impeding
its approach to common problems of resource allocation.
As we look ahead to the yeaz 2000, it appears that both East and West are
likely to face an increasingly painful ends and means dilemma which is parallel
in some respects, and asymmetrical in others. If each'side sees the other's pro-
blem in a zero-sum game context as a weakness to be exploited, then little can
be expected beyond continued mutual insecurity at mounting costs and conse-
quences to the economies of all concerned. But if each side is prepared to look
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at its strained "economic hypotenuse" in positive-sum terms, then perhaps im-
proved mutual security may be obtainable at lower costs-and even more im-
portant, with lower risks of military conflict and escalation to thermonuclear
disaster.
This is the crux of the issue facing both leaders. Some of President Reagan's
advisers are urging that this is precisely the time to maximize the armaments
squeeze on the Soviet Union, hoping thereby to intensify its economic crisis
and force major concessions. The writer believes this misjudges the Soviet
chazacter, which has always responded negatively to perceptions of external
pressure, and underestimates their ability to sustain a gazrison state if necessary.
Additional viewpoints by Soviet specialists aze noted in the Appendix.
Conversely, advisors in Moscow undoubtedly point to the West's economic
constraints as reasons why they should not pay any substantial price, in arms
controls or other concessions, for the more tranquil external environment Gor-
bachev has said he needs in order to concentrate on domestic problems. This,
too, seems to the writer to be a misjudgment of the Western resolve.
Nevertheless, by the end of the decade, the United States is probably going
to have to choose between the difficult options outlined in Section II, specifically
No. 5: major defense restructuring, which would be better done in conjunction
with major arms control measures, not as ends in themselves, but as the other
side of the overall security coin. And here, the Soviet dilemma is quite parallel,
as suggested by new signs of greater civilian control over military spending and
deployments, as in the Far East and Afghanistan.
The possibility of an East-West superpower summit meeting within the next
six months offers the chance to explore and test whether a real window of oppor-
tunity for improved East-West relations is there to be opened, or whether it
is only an illusion created by the so-called "Americanists" who now hold key
positions in the Soviet foreign policy establishment, in order to affect western
public opinion.
With both Secretary Gorbachev and President Reagan self-confident and
relatively secure in the leadership of their respective constituencies, the time
seems ripe for a real dialogue, with all of the cazds on the table, about future
East-West relations and arms control possibilities. Some general and positive
guidelines from the top, for example about SDI limitations and strategic of-
fensive cuts, would then enable the negotiators for both sides to seek real pro-
gress in their various fora.
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ESTIMATES OF REAL GNP GROWTH AND PROJECTED
DEFENSE SPENDING AS A PERCENTAGE OF GNP
(billions of 1982 dollars)
4.5%
Percentage
2.5% Percentage
1.5% Percentage
Projected
Defense
Real
of GNP
Real
of GNP
Real
of GNP
Total
as a % of
GNP
5%
6%
GNP
5%
6%
GNP
5%
6%
Outlays
Defense
Outlays
GNP
1985
3576
179
215
3576
179
215
3576
179
215
846
227
27
6
1986
3736
187
224
3665
183
220
3629
182
218
856
232
27
6
1987
3905
195
234
3757
188
225
3684
184
221
829
238
28
6
1988
4080
204
245
3850
193
231
3739
187
225
824
243
29
6
1989
4264
213
256
3947
197
237
3795
190
228
830
236
30
6
1990
4456
223
267
4045
202
243
3852
193
231
828
266
32
6
1991
4656
233
279
4147
207
249
3910
196
235
830
275
33
6
1992
4866
243
292
4250
213
255
3968
198
238
1993
5085
254
305
4356
218
261
4028
201
242
1994
5314
266
319
4465
223
268
4088
204
245
1995
5553
278
333
4577
229
275
4150
208
249
1996
5803
290
348
4691
235
282
4212
211
253
1997
6064
303
364
4809
240
289
4275
214
257
1998
6337
317
380
4929
247
296
4339
217
260
1999
6622
331
397
5052
253
303
4404
220
264
2000
6920
346
415
5178
259
311
4470
224
268
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TABLE I (continued)
HISTORICAL AND PROJECTED DEFENSE
AND NON-DEFENSE OUTLAYS
(billions of 1982 dollars. Numbers may not add up due to rounding
Percentage of GNP
Total
Outlays
Defense
Non-Defense
For Total
Outlays
For
Defense
1971
509
203
307
38
8
1972
528
191
337
34
7
1973
528
175
352
31
6
1974
529
163
365
30
6
1975
586
160
426
26
6
1976
610
154
456
24
5
1977
623
154
468
24
S
1978
652
155
497
23
5
1979
660
159
501
23
5
1980
699
164
535
23
5
1981
727
171
553
23
5
1982
745
185
560
25
6
1983
777
201
576
26
6
1984
789
210
578
27
6
1985
846
227
619
27
6
1986
856
232
618
27
6
1987
829
238
592
28
6
1988
824
243
582
29
6
1989
830
256
574
30
6
1990
828
266
562
32
6
1991
830
275
555
33
6
Source: Office of Management and Budget, "Historic Tables: Budget of the U.S. Government,"
Table 6.1
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ESTIMATES OF GNP GROWTH AND PROJECTED
DEFENSE SPENDING AS A PERCENTAGE OF GNP
(billions of current dollars)
FY
GNP
estimates'
% Nominal
Growth of GNP
Defense
Spending=
Defense Spending
as % of GNP
1987
4,538.1
8.3
311.6
6.9
1988
4,902.9
8.0
332.4
6.8
1989
5,268.9
7.5
353.5
6.7
1990
5,623.4
6.7
374.7
6.7
1991
5,955.2
5.9
395.5
6.6
'Office of Management and Budget, "Historic Tables: Budget of the U.S. Government," Table 6.2
'Department of Defense, "Annual Report to the Congress-Fiscal 1987, Executive Summary,"
Table 2
ESTIMATES OF 6% NOMINAL GNP GROWTH AND
PROJECTED DEFENSE SPENDING
(billions of current dollars)
GNP Nominal
Percentage
of GNP
Defense
Defense Department
Projections minus
Defense Spending
as % of GNP
FY
Growth of 6%
5% 6%
Spending'
~5%
~6%
1987
4,538.1
226.9 272.3
311.6
84.7
39.3
1988
4,810.4
240.5 288.6
332.4
91.9
43.8
1989
5,099.0
255.0 305.9
353.5
98.5
47.6
1990
5,404.9
270.3 324.3
374.7
104.4
50.4
1991
5,729.2
286.5 343.8
395.5
109.0
51.7
'Department of Defense, "Annual Report to the Congress-Fiscal 1987, Executive Summary,"
Table 2
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TABLE III
PROGRAM COSTS
FY 1986
(Billions of dollars of budget authority)
ProgrAm
Strategic forces
29.9
General purpose forces
132.1
Intelligence and communications
27.9
Airlift and sealift
8.0
National Guard and Reserve
16.9
Research and development
30.4
Central supply and maintenance
26.5
Training, medical and other general personnel activities
35.6
Administration and associated activities
5.9
Support of other nations
0.5
Total budget authority
313.7
Source: Budget ojthe U.S. Government, FY 1986 and estimates of William W. Kaufmann in A
Reasonable Dgjense (Washington: The Brookings Institution, 1986), Table 2.7. Kaufmann estimates
total direct and indirect "strategic nuclear retaliation" costs at SS 1.5 billion, theater nuclear retaliation
at $3.2 billion, and conventional defense of NATO Europe, excluding the Atlantic, as $107.2 billion,
/bid., Table 2-6.
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APPENDIX
SOVIET ECONOMIC CONST'F~AINTS
ON DEFENSE TO YEAR 2000
by
John P. Hardt*
Associate Director for Senior Specialists
Congressional Research Service
July 1986
*Personal views of the author, not necessarily those of the
Congressional Research Service, the U.S. Congress or
any U. S. Government agency
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Defense Economics in Flue
The Soviet Union, like the United States, appears to be at a point of poten-
tial change in the priority and process for economic allocations to defense. While
Gorbachev's focus on the revitalization and reform of the economy as the cen-
tral task of the leadership for the rest of the century suggests that changes in
methods of planning and management may occur throughout the economy, in-
cluding defense support, the outcomes remain uncertain. In this context, we
may see one of several different scenarios developing with respect to both the
way economic decisions are made in the defense sector and the kind of deci-
sions that result.
(1) The first scenario consists of a projection of the past trends established
under Brezhnev. In this case, a defense buildup may be supported in
areas of competition with the United States and in azeas of perceived
opportunity even though requirements for improved economic perfor-
mance could have a dampening effect on defense budgets. This Past
Projection scernario also would seem to find the Soviet defense establish-
ment continuing to dictate the progress of new programs within the policy
framework of the defense philosophy of the past, i.e., responding to
new technological developments in the West and servicing global com-
mitments, while retaining capabilities for the defense of the homeland.
Under this scenario, defense allocation decisionmaking might be describ-
ed as incremental, ideological and institutional.
Under Brezhnev, military allocations were constrained by economic perfor-
mance, but increased sufficiently to support a substantial military buildup, the
policy basis of which was both ideological and pragmatically political. Con-
strained by civil needs and performance, defense allocations were incremental;
although influenced by pragmatic, Great Power politics, the policy framework
was dominated by ideological and institutional criteria. The Soviet Union may
continue to increase its military expenditures in this way. With slowing overall
growth, defense growth (measured in dollars) is estimated to have remained
at a two percent rate from 1974-1985-half the rate of the previous decade.
(Measured in rubles and assuming increasing cost of procurement, the slowdown
would be somewhat less severe.) Even with slower overall growth in the economy,
according to United States intelligence estimates the share of GNP allocated
to defense increased from 13-14 percent of Soviet GNP in the early 1970s to
15-17 percent by the early 1980s; in dollaz equivalents defense was $146.2 billion
in 1985. In this period, the qualitative inputs to the military balance from Soviet
military procurement, manpower and R & D were sufficient to assure attain-
ment of bi-polar parity.
(2) Perceptions of threats or foreign opportunities may dictate an increase
in the growth of allocations to defense. A breakdown in arms negotia-
tions and a decision to confront the U.S., NATO, and other Western
countries more aggressively might lead to an increase at least to the trend
lines of the pre-1974 period that is, 4.5 percent growth per annum. In
this Defense Buildup scenario, decision-making would be largely un-
constrained by needs and performance of the civilian economy and would
be largely ideologically and institutionally driven.
If the Soviet leadership decides to allocate more to defense in response to
perceived opportunities or threats and if the economy grows as planned, the
Soviets might be able and willing to devote twice the increase of resources to
defense without materially changing the defense share of total output. The
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defense procurement rate of the early Brezhnev period (1968-74) of 4-4.5 per-
cent might return or be exceeded. However, assuming economic growth and
constrained defense allocations aze closely related, a high defense budget would
probably have to be pursued at the expense of civilian programs and stepped-
up performance. A resumed buildup of manpower, as occurred during the late
Khrushchev period for manning the China border and replacing Czech forces
in the Warsaw Pact, might not fully return but the pressure to reduce military
manpower might be resisted. Military research and development would likely
be increased, but how effective it would be in meeting the new technological
challenges may be open to question.
(3) A modified, restructured and lower defense claim on the economy might
be an outgrowth of Gorbachev's new strategy. A greater emphasis on
regional over global threat assessments, greater attention to the economic
and political value of the tradeoffs to defense, and an increased Party
involvement in military policy and defense planning could together lead
to a Reduced Defense Burden, Pragmatic scenario. Such a scenario would
be closer to the more pragmatic, politically oriented process of U.S.
defense planning and more likely to produce a reduced economic burden.
If some further restraint on defense were to derive from Gorbachev's
priority to domestic investment and consumption and a perception of
an environment conducive to arms negotiations, the defense shaze would
likely fall.
The late 1980s and 1990s may be a period of change in the trend and level
of growth of resources for defense in both the Soviet Union and the United
States. Economic and political modernization, revitalization and reform are the
central ingredients of the strategy of Gorbachev coming out of his first Party
Congress-the 27th Congress of the CPSU in February-Mazch 1986. With the
possibility of restraints on defense budget growth deriving from budgetary con-
straints and the possibility of a process of arms control negotiations relating
to bilateral Summits, the United States may shaze a prospective down-turn in
defense priority and a reform in the administration of defense, at least in
procurement.
Soviet change under the spirit of the Gorbachev strategy of the 27th Party
Congress would move away from the past resource policy of incremental
growth-an increasing shaze of absolute and relative goods and services devoted
to defense; ideological threat assessment-balancing a global view of Moscow-
centered Communism with a more pragmatic Great Power and regional perspec-
tive; institutionalization in defense planning and programming that relies less
on the decisions generated by the military-industrial complex and rather more
on the broader political view of the top Party. The ideological component would
be less in enforcing a Suslov-Brezhnev type doctrine with the CMEA-Warsaw
Pact and more in flexibility in dealing with Communist parties abroad as similar
to other parties in non-Socialist countries.
The `commanding heights' approach of politicalization takes power for policy
and planning up from the Ministerial and regional party levels to the `super`
Ministries and Politburo and Secretariat of the Central Committee with skilled
staff at the Secretariat level providing the administrative muscle for increased
top Party control. Applied to the military bureaucracy, this would, by analogy,
shift the policy decision-making and key information support and implemen-
tation up to the level of the Party Secretariat.
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Let us explore these three scenarios in the context of the defense decision-
making process with emphasis on the third: a scenario with constrained defense
spending and restructured defense decision-making that moves toward the more
pragmatic, politicized American model. Such a scenario may be considered most
consistent with Gorbachev's rhetoric and his requirements: it would respond
to the incremental burden of rising military costs, address the special require-
ments of space-age research and development, and support Gorbachev's com-
mitment to improved economic performance.
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I. Triad of Dea.9on Malting: Gorbachev's Movement
Toward A Reduced Defense, Pragmatic Model.
Mikhail Gorbachev seems to be interested in changes in the triad of defense
decision-making: a reassessment of the world environment or a revised threat
assessment; a reevaluation of military programs and security strategies; and a
consideration of military programs and budgets in the context of economic con-
straints or burden assessments. It remains a question, however, in just what
sequence these changes may be considered, and whether the institutional im-
peratives of the defense establishment rather than threat or environment assess-
ment still drive military programs.
But just as the leadership in the United States seems constrained by budgetary
limitations that restrict militazy and domestic programs, the Soviet leadership
may feel the burdens of budgetary limitations as the competitive claims of in-
vestment and consumption restrict their defense allocations [Gramm-Rudman
in the USA; Gorbachev-Ryzhkov in the USSR]. The budgetazy constraints may
in turn lead to re-evaluation of the other aspects of decision-making.
A. International Environment Estimate.
(Threat Assessment)
The assessments of the international security environment by the Party leader-
ship and defense institutions are becoming global assessments of requirements
based more on a pragmatic Great Power role rather than on ideological con-
siderations as in the past. The appointment of Anatoly Dobrynin to the Secre-
tariat of the Party, assuming the position occupied for years by Boris
Ponomarev, presents some evidence of this shift from ideology toward prag-
matism by focusing more foreign policy expertise and clout in the Party Secre-
tariat. Power in foreign and security policy (arms negotiations) has shifted
towazd the Secretaziat. Although the regional and global assessments that result
may still be inimical to U.S. interests, they may nevertheless be more pragmatic.
These threat assessments may thus be likened in Gorbachev's calculus to some
political cost-effectiveness scale that would provide a basis for negotiation and
for the limitation of military claims on resources.
B. Requirements Planning and Programming.
Military programs and security strategies that may have been driven in the
past by bureaucratic pressure (from the Defense Council and the Ministry of
Defense complex) may now be coming more under top leadership control. More-
over, the psychology of past defense orientation and post war experience may
be giving way to a new generation's assessment based more on pragmatic Great
Power politics.
Such trends in defense planning might be advanced if the Soviet leadership
applies the same principle of economic reform to the defense economy that is
being adopted in agriculture. In this case, it might centralize key policy analysis
and decision-making for the defense establishment at top Party and govern-
ment levels and decentralize management decisions. A national security unit
created in the Party (such as the Economic Department in the Secretariat of
the Central Committee) could take on a role similar to that of the National
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Security Council in the United States with the Party Secretariat unit develop-
ing its own staff. A Party Politburo member such as Lev Zaikov, who currently
holds the defense industry portfolio in the Politburo, might be Gorbachev's
designated civilian security adviser, with the Defense Council taking on a role
like that of the Joint Chiefs of Staff and with the new Party Secretariat securi-
ty unit staff providing support for Zaikov. On the government side, the crea-
tion of a National Security Committee (such as Gosagroprom for agriculture)
could provide Gorbachev and Ryzhkov a unit above the Ministry of Defense
Industries that could coordinate and oversee both defense and civilian
management.
C. Economic Constraints and Defense Burden.
New strains could be placed on defense spending under the pressures of Gor-
bachev's economic prescriptions: (1) his emphasis on energizing the economy
and using the best cadres for civilian production enterprises; (2) the intensifica-
tion of industry and agriculture requiring lazger shares of growth for invest-
ment and consumption; (3) improvement in the scientific and reseazch establish-
ment to compete in the technological-information revolution. In each case, the
deferral of military claims, an increase in the openness of the military produc-
tion and research establishment, and the sharing of high quality military assets
may be required to bring about improved economic performance.
The Gorbachev Five-Yeaz (1986-1990) and Fifteen Year Plans (1986-2000) call
for higher growth, improved capital efficiency, labor productivity and quality
of output for which a dynamic and productive research and development en-
vironment is essential. The formula for reaching these economic goals, necessary
for the political and military claimants alike, involves short term military sacri-
fices and change. Such changes could be necessary to attain an improved civilian
technological-economic base that will allow for long-term civilian and military
competitiveness (this could be called the larger thrust of SDI).
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II. Gorbachev's Tradeoffs: Guns or Growth
Even more than budgetary pressures, limited physical resources and capacity
may severely constrain growth of Soviet military allocations. Soviet leadership
is not constrained by its state budget but by physical resource limitations. More-
over, the aggregate levels are not the burden, specific physical resource limita-
tions present the tradeoff problems. The hard choices are to be found especi-
ally in procurement, manpower, and research and development:
Procurement-The incremental priority requirements of machinery for ful-
filling Gorbachev's Five and Fifteen Year Plans of modernization squeeze
incremental military procurement demands.
Manpower-The reduction in the available draft age, manpower cohort and
the increasingly non-Slavic character of this cohort will make it difficult
to maintain current military manpower levels without denying increments
to the civilian labor force and without enhancement of the education of
the cadre; there will be more competition for the limited number who are
educated.
R & D-Future military and civilian needs in the age of SDI require open-
ing, diversion or amalgamation of the priority military R & D establish-
ment with the backwazd and less productive civilian scientific establishment.
A. Military-Civilian Tradeoffs: Procurement
To the extent the Soviets have difficulty finding the resources to simultane-
ously meet Gorbachev's industrial modernization goals and satisfy military re-
quirements in the near term, a central problem of choice will arise in the
machinery sector which traditionally has allocated a large portion of its output
to the military.'
As noted by U.S. intelligence assessments, the increased demands for resources
needed for these programs will be centered around several areas:
? Factory Capacity. Implicit in Gorbachev's call for increased output of ad-
vanced machinery is the competition-in the absence of rapid plant expansion-
for modern workspace at production facilities. In this connection, robots,
computer-numerically-controlled machine tools, computer-aided design systems,
flexible manufacturing systems, and other highly automated manufacturing sys-
tems are important for the production of both advanced manufacturing equip-
ment needed for boosting industrial productivity and for producing sophisticated
weapon systems.
? Basic Materials. Chemicals and metals are used in producing both weapons
and advanced machinery. The ferrous metals ministry, for example, has failed
to meet its targets for many types of steel in recent years.
? Intermediate Products. Engineering plastics, advanced composite materials,
electronic components, and microprocessors are currently in high demand in
the defense industry and, as modernization proceeds, will be needed increas-
ingly by civil industry as well. These products, however, are in short supply.
'The Soviet Economy Under a New Leader, A paper prepared jointly by the Central Intelligence
Agency and the Defense Intelligence Agency submitted to the Subcommittee on Economic Resources,
Competitiveness, and Security Economics of the Joint Economic Committee, U.S. Congress, March
19, 1986, 43 pages.
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? Labor. Both the defense industry and modern civil industry require highly
skilled workers, particularly computer technicians and software engineers.
The near-term competition for factory floorspace and investment goods has
been mitigated by the substantial expansion and upgrading of defense-industrial
plants over the past decade. Comprehensive programs to modernize many
weapons production facilities began in the early 1970s. Efforts to modernize
defense industry accelerated in the late 1970s, and we believe a large portion
of the best domestically produced machinery was delivered to defense industry
during this period. In addition, the defense sector was helped by a surge in
clandestine and open acquisition of Western manufacturing equipment=
In the short-run-into the eazly 1990s-competition for additional investment
goods for new capacity will not, they argue, be critical, as the joint CIA-DIA
assessment sees the investment crunch coming in the 1990s:
As a result of this investment in defense industry, almost all of the pro-
duction capacity required to support Soviet force modernization over the
next six yeazs or so is already in place. Our calculations suggest that virtu-
ally no additional investment in the plant and equipment is needed to manu-
facture the military hardwaze that we believe will be in production in 1986-88
and that most of the capacity required to turn out the military equipment
projected to be in production in the eazly 1990s is already available. Moreover,
weapons development and industrial construction indicate that investment
in defense industries will continue at a high level, adding new capacity with
greater capabilities. Thus, military production would not be constrained in
the near term by a reallocation of new fixed investment in favor of civilian
machinery and other priority sectors.
Although the Soviets have the production capacity to maintain or even
increase the current level of weapons production, competition for labor and
material inputs used in the production process could force some trade-offs
at the margin between military and civilian production. The nature of this
competition is shown in the Figure, (p. 30)) which summarizes our judgments
on (a) the degree of need for the particular resource in civilian machinery,
(b) its availability in non-machinery sectors of the economy, and (c) how
easy it would be to shift the resource from military defense industry to civilian
machinery.
High-quality steel and energy, for example, will be in great demand to
manufacture machines needed for both industrial modernization and
weapons production. The high targets the Soviets have set for machinery
production will place tremendous demands on the ferrous metals branch.
This industry, however, has been doing poorly in recent yeazs and appazently
will receive little, if any, increase in investment during the 1986-90 FYP.
Although there is likely to be some growth in the energy sector, the energy
situation may be tight.
Others see the defense claims affecting economic performance in the current
1986-1990 Plan differently in terms of the timing of the difficult choices. Dr.
Jan Vanous notes, "we found that the amount of machinery available for in-
vestment and defense use combined will not be adequate, at least in 1986, under
any reasonable scenario to satisfy both domestic investment and defense needs.
Moreover, except in the case when the growth of domestic defense machinery
production is slashed to 4% per year during 1986-90, which is an extremely slow
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growth rate by historical standazds-the Soviets do not stand a reasonable chance
of freeing enough machinery for investment purposes to achieve their ambitious
investment and capita! modernization target. "'
B. Military-Civilian Tradeoffs: Manpower.
Quantitatively hard choices will have to be made among allotments for the
civilian labor force, the university student cadre and the military. The difficult
decisions on qualitative allocations involve regional, ethnic, and educational
limitations on quality and reliability of current draft age cohorts.
During the 1980s, the `second echo of World War II,' is preventing the Soviet
leadership from maintaining the military manpower level, while increasing the
civilian labor force. (Table 1 left). As indicated by Dr. Murray Feshbach's
analysis of the Soviet census, the U.S.S.R. will not be able to keep up military
force levels and expand the labor force at the same time until the 1990s. Thus,
the short-term competition for human resources could be even more intense
than for investment and material resources. Extensive underemployment exists
in the Soviet economy, and Gorbachev may hope that he can support his moder-
nization program by mobilizing currently underemployed engineers and labor.
But shortages persist in the U.S.S.R. in several skill areas (as indicated in the
Figure, next page). Critical to both defense and modernization, for example,
are systems analysts, computer programmers and selected types of engineers
and skilled machinists. Thus, the most likely immediate source of additional
specialists for the civilian machine building metal working industry is a realloca-
tion ofthe employees already working in the machinery sector through increased
labor productivity.
Soviet additions to the military will be predominantly non-Slavic, especially
youth from Central Asia and Kazakhstan. This change in the draft age, labor
force pool adds a qualitative factor to the quantitative shortage. Rural Central
Asians tend to be less skilled and educated, and many have limited Russian
language facility.
C. Military-Civilian Tradeoffs: R&D
In the past, military R & D has received priority over civilian programs. Well
funded and staffed, with supplementary inputs to its core military programs
gained from effective foreign intelligence, the military R&D program has pro-
vided abasis for keeping up, closing the technical gaps in many traditional
military areas, and moving ahead in some. In the 1990s, military and civilian
technological needs alike will be met only if the Soviet scientific establishment
can join the technical information revolution of the West. The research base
required for the U.S. Strategic Defense Initiative [SDI] is an important factor
in determining the range of likely needs for efficient and effective military and
civilian establishments. The demands of new weapons development, the shift
to an intensive economy and the greater emphasis on innovation, point to the
need for reform in the Soviet approach to defense allocations. The continued
'Jan Vanous and Bryan Roberts, `Time to Choose between Tanks and Tractors: Why Gorbachev
Must Come to the Negotiating Table or Face a Collapse of His Ambitious Modernization Pro-
gram,' Plan Econ, Inc., Volume II, June 27, 1986. [original underlined]
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decoupling of defense and civilian sectors of the economy deprives the total
system of a stronger advanced technological base and reduces prospects for
overall productivity increases.
The U.S. SDI program is organized in five specific research areas. These con-
sist of Kinetic Energy Weapons Technologies (KEW); Directed Energy Weapons
Technologies (DEW); Systems Analysis and Battle Management (SA/BM);
Surveillance, Acquisition, Tracking and Kill Assessment (SATKA); and Sur-
vivability, Lethality and Key Technologies (SLKT). The scope of technologies
embedded in the SDI symbolize the enormous difficulties inherent in preparing
the Soviet military for the next century if the reforms in research and develop-
ment now under consideration by Gorbachev aze not implemented.'
Condoleeza Rice of Stanford University writes:
There are those in the Soviet military who are arguing that it is really in
the area of new technologies, microelectronics, particle beam weapons, and
artificial intelligence that there is a challenge from the West. These people
may be willing to forego short-term acquisition in favor of research, develop-
ment, and investment in militarily promising technologies. Their time horizon
might not be the same as that of those who wish to invest in basic research
and to divert funds from military research, but it could bring about a tem-
porary bazgain between those who seek investment in technology for civilian
purposes and those who seek the same for military use. In the short-term,
this could lead to a less intensive purchase of hardware and investment in
future technologies. Then, should promised reform of the economy bring
an end to the period of economic stringency, the Soviet military would be
well prepazed to acquire forces for the battlefield of the twenty-first century.'
The technologies under development to support the U.S. SDI are creating
a pool of innovative concepts which will have potential applicability to the U.S.
defense industry in strong interaction with the civilian sector. For example, Battle
Management/Command, Control and Communications requires the develop-
ment of computer hardware and software on an unprecedented scale. KEW
systems require research on microelectronic controls, advanced infrared and
radar sensors, compact chemical propulsion devices, and electro-magnetic
launchers which could lead to advanced anti-tactical weapons and propulsion
systems. DEW creates a focal point for laser research, particle beam concepts,
and large space structures. Systems analysis involves studies of large space
transportation systems paving the way for space exploration in the 21st century.
Finally, SDI countermeasure studies are evaluating the vulnerability of defense
systems to possible offensive responses which could drive improvements in
technologies such as nuclear radiation hardened electronic means to counter
a Soviet maneuvering missile threat.
The scale of the U.S. SDI effort will probably incline the Soviets to restructure
their efforts in the reform of research and development planning. The dual
character of SDI technology may require Gorbachev to incorporate technological
reforms for both civilian and military needs. For example, investment in com-
puter technology has a military and civilian commonality. Institutional pressure
'The discussion of SDI is essentially from communication with Bazry Breindel, Manager, Research
and Defense, Washington Operations, AerojeF Telesystems Co.
' Condolezza Rice, `The Development of Soviet Military Power,' The Gorbachev Erq, i~,dited
by A. Dallin and C. Rice, Stanford Alumni Association, Stanford, California, 1986, p. 137.
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may build to force greater cooperation between research institutes and the scien-
tific enterprises, serving both the civilian and military sectors.
It is widely assumed in the West that the Soviet Union can only adequately
compete in the technological information revolution if it opens its advanced
military and civilian reseazch establishments to the effective scientific com-
munication systems successful in the West. Openness with a relevant scientific
community is a requisite for a dynamic, technologically successful R&D
establishment. Foreign imports must be effectively assimilated in a system of
incentives and rewards for a successful innovation system to work. To the
military, such an amalgamation of its research within the civilian establishment
and immediate priority toward developing a new, more dynamic system would
require the deferral of traditional, short-term military claims on their R & D
establishment and along-term sharing of the scientific results. A leading factor
in this new revolution is the civilian economy. Logically, the military cannot
satisfactorily meet its needs from its own privileged, R & D monopoly; how
many in the military hold this view is not known. Furthermore, the require-
ment of openness to foreign research makes the reliance on espionage less effec-
tive. Use of KGB middlemen in an era of space age research is likely to be less
effective and inefficient. The opening of the scientific establishment to provide
results for the entire scientific community also runs directly counter to the
strongly held penchant for secrecy in the Soviet system.
It is easy to say that the militazy and KGB-the powerful institutions in the
Soviet system-will not allow openness of their scientific reseazch and R & D
establishment and broadening of priorities for civilian-military research. But
if they do not, they will probably lose ground, falling farther behind the United
States, Japan and other industrial countries in critical areas. Gorbachev seems
to understand this problem of `neo-backwardness.' Still, he may not appreciate
the full political and economic cost of the tradeoffs in institutional and resource
priority changes, or the resistance of the traditional military support institu-
tions to change.
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III. Gorbachev's Political Tradeoffs:
Cost of Empire and Great Power Status
A. Cost of Empire and Alliances
The Soviet Union provides support to its allies and clients through military
and economic transfers. The value of military deliveries has been increasing
as indicated in Table 2 below. To the extent these are not sales of state of the
art, military equipment for hard currency or `hard' goods [oil], but rather are
military aid of less modern equipment or non marketable, `soft' goods, the
resource burden may be modest; the political risk may be the major factor. Still,
Gorbachev at the Party Congress seemed to be leading Angola, Cuba, and
Ethiopia to expect less support. Certainly Soviet leaders have been telling their
East European allies that they plan to reduce what the Soviets perceive as a
subsidy. How they follow through on limiting aid in hard goods will determine
the incremental economic burden of their global role.
Table 2.
USSR: ESTIMATED VALUE OF MILITARY DELIVERIES, 1974-85
(billion U.S. dollars)*
Recipient
1974-79
1980-85
1974-85
Six Warsaw Pact countries
8.7
9.8
18.5
Syria
4.5
10.3
14.8
Iraq
6.0
8.2
14.2
1 ibya
5.4
5.8
11.2
Vietnam
2.1
4.9
7.0
India
2.0
4.8
6.8
A 1 geria
1.6
3.6
5.2
Cuba
1.3
3.9
5.2
Ethiopia
1.5
2.6
4.1
Ango 1 a
0.7
2.8
3.5
60 other countries
7.7
11.3
19.0
Total
41.5
68.0
109.5
Source: "Soviet Economy Under A New Leader" CIA-DIA Statement, March
19, 1986.
The Soviet Union also provides economic as well as military aid to the same
countries to assist them in pursuing goals of common interest. Oil exports on
barter terms and soft currency accounts provide some measure of the cost.
Various estimates of the implied subsidy of these transfers center on the supply
of oil for reduced hard currency (dollar) imports compared to what may be
obtainable by sale of oil in the world market. There are varying estimates of
the volume of the net transfer but unless increased it may be a tolerable burden.
The question for Gorbachev for the future may be whether the resource costs
of these alliances provide sufficient benefits in usable political terms.
Soviet relations with East Europe have been by far their most important in
political-military terms and the most costly. The Soviet total and relative East
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European contributions to Warsaw Pact and hard goods trade make policy
changes in this region most important. The Soviet Union might like to have
its East European allies take on a larger burden of the Warsaw Pact costs, in-
crease their delivery of high quality machinery and consumer goods to the Soviet
Union and hold down their imports of oil and gas, but it seems very unlikely
that these wishes will all come true. Moreover, East Europeans have always
favored the claims of domestic investment and consumption on scarce quality
resources over fulfillment of Soviet perceived economic needs for the Warsaw
Pact. Soviets also favor revival of East European growth for resultant favorable
trade and political stability. As a result, the least attainable of Soviet hopes
among these competing claims would be an increase in East Europe's military
burden sharing.
B. Cost-Benefit Outlook for Confrontation or Comity.
The policy of Gorbachev's predecessors since 1975, especially Brezhnev, has
been to opt for military augmentation and confrontation in regional issues rather
than economic cooperation and comity. This policy is best illustrated in the
northern flanks of the Soviet Eurasian policy: North Asia and Scandinavia.
In North Asia the policy of military buildup has been costly. Whether the benefits
have been proportional is open to question. Shared development of Soviet East
Siberia and the Far East would certainly be facilitated under a policy of comity,
e.g. with Japan. Likewise, in North Europe the buildup of defense in the Kola
peninsula and elsewhere has been expensive; the benefits may not have been
commensurate. Negotiation of conflicting claims and joint development of oil
in the Barents Sea would seem to be a benefit of a policy of comity with Nor-
way.
In this past policy of Eurasian defense buildup and confrontation the greatest
economic costs have been the foregone benefits of joint development of Soviet
resources.
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IV. Negotiable Lssues
From the assessment of Gorbachev's tradeoffs as he may see them, some im-
provement in benefits and reduction of resource costs or burden seems possi-
ble in three areas of the Great Power agenda:
Strategic Arms Reductions: Mutual need for stability and reduced likelihood
of strategic weapons use or reduced perceptions of external threat could generate
a basis of agreement, especially if tied to constraints on SDI.
Conventional military forces in Europe and Asia: Mutual need to reduce insta-
bility and economic burden through reduction of current order of battle buildup
to maintain control in East Europe.
Global Policy Understandings: Acceptance of some implicit codes of con-
duct, e.g., mutually acceptable levels of support to insurgencies, common op-
position to international terrorism.
Whether and under what circumstances the Soviet leadership feels economic
pressure to reduce the defense burden is a matter of conjecture. Some Western
specialists would argue with scenario one or two that allocations to defense are
not likely to be constrained. Others accept a version of scenario three (reduced
defense, pragmatic scenario), that it is currently imperative for Soviet leader-
ship to reduce the defense burden. Jan Vanous and Bryan Roberts, for exam-
ple, feel that the Soviet General Secretary's view should be that now is the time
for negotiations in order to avoid `collapse' of his ambitious economic mod-
ernization program:
It is apparent that the Soviets will not unilaterally sacrifice what they perceive
to be an adequate defense capability in order to improve the performance
of the economy. They will try to come to the negotiating table and, in all
probability, offer the U.S. unprecedented concessions for economic reasons
outlined below. If they cannot secure a `satisfactory' arms deal, they will
follow the U.S. lead and mount acounter-SDI program, even though this
may well push the Soviet economy perilously close to an unprecedented
economic crisis.?
?Vanous and Roberts, op. cit., pp. 1-2., this Appendix.
35
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ABOUT THE AUTHORS
Dr. Timothy W. Stanley is a lawyer and economist who has combined a career
in government in the national security area with private sector work on inter-
national economic problems. He is Chairman of the International Economic
Policy Association, having been President from 1974-1984, and also founder
and President of its affiliated International Economic Studies Institute.
He has taught at Harvard, George Washington, and Johns Hopkins (School
of Advanced International Studies) universities, and was a visiting research
fellow at the Council on Foreign Relations. He received his education at Yale
(B.A.) and Harvard (LL.B. and Ph.D). He has written widely on both securi-
ty, including NATO, East-West relations and arms control, and international
economic topics, ranging from politico-economic studies of major foreign coun-
tries to the U.S. balance of payments, raw materials, multinational corpora-
tions and foreign economic policy issues. These writings include half a dozen
books (some with co-authors) and numerous articles, monographs, professional
papers, and congressional testimony.
Dr. Stanley's government service has included two tours of military duty and
civilian assignments at the Pentagon, the White House staff, NATO (as Defense
Advisor and Minister at the U.S. Mission in Paris and Brussels) and the U.S.
ACDA, where he was an arms control negotiator in Vienna. He has been award-
ed the Distinguished Civilian Service Medal. He also serves on various U.S.
government advisory bodies, and has been a consultant to the United Nations
Department of Disarmament Affairs. He is a Director of the Atlantic Council
of the U.S. and is active in a number of other professional organizations, in-
cluding the Council on Foreign Relations and the International Institute for
Strategic Studies.
Dr. John P. Hardt is associate director for senior specialists and senior
specialist in Soviet economics of the Congressional Research Service. He is also
adjunct professor of economics at both George Washington and Georgetown
Universities. His doctoral degrees in economics and Soviet area training were
received at Columbia University. Dr. Hardt is a frequent traveler to Eastern
Europe, the People's Republic of China, and the Soviet Union, especially with
Congressional delegations.
He has authored and edited numerous books and articles for commercial,
government and academic publications on East-West commercial relations and
the economies of Eastern Europe, the Soviet Union, and the People's Republic
of China.
He has participated in the annual, bilateral United Nations Association Ex-
change with U.S.S.R. Since 1978 he has been the American representative on
the steering committee of the Panel on East-West Initiatives based in the Insti-
tute of Comparative Economics, Vienna, Austria. He has frequently served on
State and Defense Department Advisory Committees.
Dr. Hardt is an active member of the Council on Foreign Relations, United
Nations Association and American Association for Advancement of Slavic
Studies.
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 1
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International Economic Studies Institute (IESn
Board Of Trustees
David C. Acheson John L. McLucas
Harlan Cleveland Myer Rashish
Ronald L. Danielian James D. Santini
Isaiah Frank Timothy W. Stanley
Jacob J. Kaplan Ib Thomsen
Officers
President and Treasurer, Timothy W. Stanley
Vice President, Ronald L. Danielian
Secretary and Assistant Treasurer, N. Ethelyn Thompson
International Economic Policy Association (IEPA)
Albert L. Baldock
Harry F. Bliss
Juan C. Cappello
James E. Courtney
Ronald L. Danielian
James S. Hearons
H. L. Johnson
James W. Nethercott
W. C. Brian Peoples
H. Chapman Rose
Timothy W. Stanley
Ib Thomsen
Ronald S. Wishart
Richard A. Yudkin
Honorary Directors
John Marshall Briley
Henry H. Fowler
Walter L. Lingle, Jr.
Officers
Chairman of the Board, Timothy W. Stanley
President, Ronald L. Danielian
Vice President, Secretary and Treasurer,
N. Ethelyn Thompson
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The Atlantic Council of the United States
1986 BOARD OF DIRECTORS
Chairman
Andrew J. Goodpaster
Vice Chairmen Treasurer
David C. Acheson William H. G. FitzGerald
Henry H. Fowler
John E. Gray
U. Alexis Johnson President
Carol Laise George M. Seignious II
Wm. McCh. Martin
Eugene V. Rostow Executive Vice President
Kenneth Rush Joseph W. Harned
Directors
David M. Abshire
Martin J. Hillenbrand
Paul H. Robinson, Jr.
Theodore C. Achilles, Jr.
Walter E. Hoadley
Olin C. Robison
Donald G. A~gger
Claire Giannini Hoffman
H. Chapman Rose
Stephen Ailes
Robert D. Hormats
Nathaniel Samuels
Madeleine K. Albright
J. Allan Hovey, Jr.
J. Robert Schaetzel
Dwayne O. Andreas
B. R. Inman
James R. Schlesinger
Willis C. Armstrong
John N. Irwin II
Brent Scowcroft
W. Tapley Bennett, Jr.
Isaac C. Kidd, Jr.
Raymond Philip Shafer
James H. Billington
Lane Kirkland
William E. Simon
George S. Blanchard
Jeane J. Kirkpatrick
Joseph J. Sisco
Gene E. Bradley
Henry A. Kissinger
Helmut Sonnenfeldt
Harold Brown
Juanita M. Kreps
Frank A. Southard, Jr.
L. Dean Brown
Peter F. Krogh
Timothy W. Stanley
Zbigniew Brzezinski
John M. Leddy
George J. Stathakis
Harry F. Byrd, Jr.
Lyman L. Lemnitzer
Walter J. Stoessel, Jr.
Daniel J. Callahan, III
Sol M. Linowitz
Ralph I. Straus
Sol C. Chaikin
Sanford N. McDonnell
Robert S. Strauss
William B. Dale
George C. McGhee
George A. Strichman
Kenneth W. Dam
Donald F. McHenry
Leonard Sullivan, Jr.
W. Kenneth Davis
Robert M. McKinney
John J. Sweeney
Russell E. Dougherty
Robert S. McNamara
James W. Symington
Lawrence S. Eagleburger
Lawrence C. McQuade
William C. Turner
Robert F. Ellsworth
Leonard H. Marks
Stephen L. Van
Sherwood L. Fawcett
Thomas J. Murrin
Cyrus R. Vance
Gerald R. Ford
Edmund S. Muskie
Richard D. Vine
George S. Franklin, Jr.
George R. Packard
Thomas J. Watson
Richard N. Gardner
Edmund D. Pellegrino
Watson Wise
Dale E. Good
Jacques J. Reinstein
Joseph J. Wolf
Lincoln Gordon
Stanley R. Resor
Lawrence M. Woods
Alexander M. Haig, Jr.
Emmett J. Rice
R. James Woolsey
Pamela C. Harriman
Elliot L. Richardson
Honorary Directors
George W. Ball
Ralph C. M. Flynt
Sam Nunn
Edward W. Barrett
Andrew Heiskell
Henry H. ,Porter
Andrew H. Berding
John D. Hickerson
William P. Rogers
Eugene R. Black
Tom Killefer
Robert V. Roosa
Leslie S. Brady
Ruth C. Lawson
Dean Rusk
Harlan Cleveland
Oswald B. Lord
Adolph W. Schmidt
Emilio G. Collado
Jay Lovestone
Cortlandt v.R. Schuyler
C. Douglas Dillon
John J. McCloy
Charles M. Spofford
John Ferguson III
Lauris Norstad
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