SIMULATIONS OF SOVIET GROWTH OPTIONS TO 1985
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National
Foreign
Assessment
Center
Simulations of Soviet
Growth Options to 1985
ER 79-10131
March 1979
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National
Foreign
Assessment
Center
Simulations of Soviet
Growth Options to 1985
Research for this report was completed
on 1 December 1978
Comments and queries on this unclassified report
are welcome and may be directed to:
Director for Public Affairs
Central Intelligence Agency
Washington, D.C. 20505
(703) 351-7676
For information on obtaining additional copies,
see the inside of front cover.
ER 79-10131
March 1979
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Alternative Scenarios Depicting Soviet Policy Options 8
The GNP Costs of Oil Shortages 9
Conservation Required To Avoid Energy Shortfalls 9
Other Domestic Policy Options 9
Sensitivity of Model Results to External Contingencies
15
Model Simulations Involving a Mix of Options and Contingencies
18
A Summary of the Econometric Model of the Soviet Economy
25
2.
USSR: Projected Net Fuel Exports for Baseline Scenario
6
3.
USSR: Projections Under Possible Domestic Policy Options
10
5.
USSR: Assumed Pattern for Reallocation of Nonagricultural
Employment
12
6.
USSR: Model Projections Under Possible Foreign Trade Options
13
7.
USSR: Model Projections Under Major Contingencies
8.
USSR: Alternative Views of Growth Prospects for 1978-85
20
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Figures
Page
2.
Baseline Scenario: Projections of Net Soviet Hard Currency Exports
of Fuels
6
3.
Baseline Scenario: Projections of Net Soviet Exports of Fuels to the
World
6
4.
Baseline Scenario: Projections of Net Soviet Exports of Fuels by
Region
7
6.
Baseline Scenario: Trends in the Debt-to-Export Ratio and Debt
Service Ratio
8
7.
Debt Service Case: Debt Service Ratio When Debt Service
Trigger Is Applied
15
9.
High Oil Case: Net Exports of Oil to Hard Currency Countries
17
10.
Credit Ceiling Case: New Credit Drawings
11.
Credit Ceiling Case: Debt Service Ratio
12.
GNP: Comparative Projections Through 1985
13.
Domestic Oil Use: Comparative Projections Through 1985
22
14.
Net Hard Currency Oil Exports: Comparative Projections
Through 1985
22
15.
Hard Currency Debt Service Ratio: Comparative
Projections Through 1985
Al.
General Flow Diagram of the Soviet Economic Model
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Simulations of Soviet
Growth Options to 1985
In Soviet Economic Problems and Prospects * pub-
lished in 1977, we argued that the USSR faces a period
of unusual economic strain over the next decade.
Rising costs of raw materials, impending energy
shortages, slowing labor force growth, and sluggish
productivity gains pointed to a continuing slowdown in
Soviet growth in the 1980s.
That assessment still stands, in our view. The 1977
paper, however, used a very aggregative analytical
framework and dealt with a relatively small range of
policy options that might be adopted by the Soviet
leadership in an effort to avert a slowdown or cushion
its effects. In this paper we employ a large-scale
macroeconomic model of the Soviet economy-put
together over the past year-to study a wider selection
of the tradeoffs and contingencies that Soviet
policymakers face. Analysis using the model involves a
more integrated view of the Soviet economy than was
possible in our earlier study and allows us to examine
explicitly issues-such as the effects of energy short-
falls and foreign trade constraints-that could not be
fully considered before.
The model is still at an early stage of development and
some of the scenarios introduced rest on thinly
supported assumptions. Therefore, the present findings
should not be taken as a revision or modification of our
earlier estimate. Instead, we put this paper forward to
elicit discussion and criticism both of the scenarios
examined and the usefulness of a model-based ap-
proach in this kind of analysis.
* Soviet Economic Problems and Prospects, ER 77-10436U, April
1977, Unclassified.
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Simulations of Soviet
Growth Options to 1985
Recently CIA's macroeconomic model of the Soviet
economy was described at some length in an unclassi-
fied report.' That report identified a period of experi-
mentation as the next step in the development of the
model as a tool of economic analysis. An essential part
of learning the uses and limits of the model is the
application of the model in scenario analysis-the
process of examining the possible effects of different
policy choices and alternative external economic events
on Soviet economic development. The present paper
reports on a series of experiments conducted to test the
model-summarized in the appendix-and to improve
the realism of the scenarios run through it. Because the
model was specifically designed to deal with the effects
of energy shortfalls and foreign trade constraints,
many of the scenarios have to do with attempts to
provide enough energy to the economy while keeping
the foreign trade sector in reasonable shape.
Since it is convenient to analyze the implications of
various scenarios against a common reference point,
we first develop a baseline case for the period 1978-85.
The baseline projection clearly is a point of departure,
not an estimate, because it assumes that policy
choices-for example, in the allocation of manpower
and investment-are frozen in the pattern revealed
through 1977. In other words, historical trends are not
continued, nor do policymakers change their minds
when bad news accumulates.
With the baseline backdrop in hand, the paper then
suggests a number of policy options open to a Soviet
leadership determined to prop up rates of economic
growth while maintaining a viable position in trade
with hard currency countries. First, we estimate Soviet
growth potential if energy supplies were sufficient to
meet projected demand. Then we examine a series of
alternative domestic policies keyed to higher labor
force participation rates and reallocation of manpower
and investment resources. In the foreign arena, we
assess the impact of cutting oil exports to Eastern
Europe, diverting gas exports for hard currency to
domestic use in place of oil, belt-tightening with
respect to imports other than oil or grain, and the
observance of a ceiling on the Soviet debt-service ratio.
Finally, the model's response to changes in the overall
economic environment is tested by considering differ-
ent trends in domestic oil production, world oil prices,
growth of Western markets for Soviet exports, and
Western lending policies toward the USSR that are
beyond the control of Soviet policymakers.
The main purpose of this paper is to exercise the model
and gain experience in scenario analysis. Therefore, we
made no attempt to put together a most likely set of
Soviet policies or external contingencies, since such an
assessment goes beyond the limited scope of the
present study. In addition, the simulations are carried
out only through 1985. A paper intended as a new
estimate of Soviet economic prospects would have to
deal with a longer span of years because the manpower
crunch becomes most severe in the mid-to-late 1980s
and because many of the policies affecting domestic
investment in the early 1980s have most of their
consequences in the second half of the decade.
Nonetheless, the implications of some of the scenarios
go right to the heart of the problems confronting the
Soviet leadership. The "what if" analysis seems to say
that the Politburo cannot stave off a reduction in rates
of economic growth by simply exercising the tradi-
tional policy levers under its control.
As we argued in Soviet Economic Problems and
Prospects, current growth prospects reflect an unusual
coincidence of factors that sharply restrict Soviet
growth potential. Demographic trends will prevent
much growth in the labor force during most of the
1980s. The likely peaking of domestic oil production
'SOPS/M: A Model of the Soviet Economy. ER 79-10001,
February 1979, Unclassified.
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will bring about a dramatic shift in the Soviet energy
balance. Difficulties caused by traditional inefficien-
cies in the investment process are already being
accentuated by the rising capital costs of developing
new sources of raw materials. The results of this
analytical study of Soviet growth options simply serve
to reinforce our earlier assessment that the USSR is in
for a prolonged period of shrinking growth prospects.
The central purpose of our analysis is to suggest how
policy shifts and uncertain events could change the
picture of Soviet economic growth projected by our
macroeconometric model of the Soviet economy. This
requires a reference against which to judge the impacts
of these changes. We have chosen as a reference a
projection of Soviet growth through 1985 that reflects
present policies-in such areas as manpower, invest-
ment, foreign trade, energy, and defense-in a stable
domestic and international environment.' Later we will
examine the impacts that changes in both policies and
the economic environment would have on growth
prospects.
Key Assumptions
This baseline outlook is based upon several key
assumptions. They are described here in some length so
that later scenarios, which often involve modifications
of these assumptions, can be more easily understood.
? Investment. New fixed investment is distributed
among producing sectors as it was in 1977.
? Fuels Production. Oil production peaks at 590
million metric tons in 1980 and falls to 500 million tons
in 1985.' The output of gas grows at an annual rate of
about 6 percent, a little more than twice the rate for
coal.
'The assumptions underlying the baseline projection are a matter of
convenience. They certainly do not reflect the most likely set of
policies that Soviet planners might advocate over the next decade.
' The production figure of 500 million tons represents the high end of
the range for Soviet oil production in 1985 estimated in Prospects for
Soviet Oil Production ER 77-10270, April 1977, Unclassified.
Production in 1985 could be as low as 400 million tons.
? Defense. Personnel expenditures grow by 1.5 percent
a year, nonpersonnel expenditures by slightly more
than 4 percent, and military manpower is stable.
? Total Factor Productivity. Total factor productivity
(average output per unit of labor and capital com-
bined) in nonagricultural producing sectors is flat over
the 1978-85 period, and in agriculture it rises slowly.
Both assumptions are consistent with the general
historical record. The productivities of capital and
labor taken separately vary over time based on
estimated production function relationships.
? Energy Allocation Policy. Energy-producing sectors
and public and private consumption are given priority
when oil deliveries are insufficient to meet the full
demands of all users. Under all circumstances, they are
allocated 100 percent of their nominal requirements.
? Fuels Trade. Net exports of oil, coal, and gas for
hard currency are the residual left from domestic
production after domestic deliveries and net exports to
Communist and other countries have been met-
unless import floors are reached first. Soviet exports of
oil to Communist countries are assumed to increase to
95 million tons by 1980 and to hold at this level
through 1985. The real export/import price of Soviet
oil remains constant through 1980, then rises at 5
percent a year.
? Hard Currency Trade. Soviet exports to the devel-
oped West of commodities other than fuels grow 9
percent annually in real terms. We also assume that
grain imports are given priority in Western trade and
that there is a minimum level of other hard currency
imports acceptable to policymakers. We take half the
1977 ratio of Western imports of manufactured goods
and nongrain foodstuffs to gross national product
(GNP) as a floor below which such imports are not
allowed to fall in any single year. As for trade
financing, new medium- and long-term credit
drawings are assumed to increase 11 percent per year
in nominal terms (5 percent in real terms).
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? Population and Employment. The able-bodied popu-
lation grows by 1 percent annually through 1980, with
the rate declining to essentially zero by 1985 as the
demographic effects of an aging population take hold.
Participation rates are almost flat through the entire
period. Agriculture's share of the total labor force falls
from about 24 percent in 1978 to 20 percent in 1985, a
rate of decline consistent with trends of the last 10
years. The distribution of the nonagricultural labor
force among producing sectors is based on 1977 sector
shares.
? Weather. Normal weather conditions based gener-
ally on the last several decades are assumed for all
years throughout the 1978-85 period.'
Patterns of Production and Final Demand
In the baseline projection, a continuation of present
Soviet policies, even in a stable economic environment,
leads to serious economic difficulties in the early
1980s. These problems are reflected in annual average
projected growth rates of all major economic categor-
ies as follows:
1976-80
1981-85
GNP
3.6
2.5
Industrial Output
3.8
3.0
Agricultural Output'
2.8
0.9
Consumption
3.2
2.1
New Fixed Investment
4.0
2.4
Per Capita Consumption
2.3
1.2
These projections are sensitive to analytical assump-
tions in two key areas: the linkage between energy
deliveries and capital utilization, and the linkage
between capital utilization and the utilization of labor
services. The baseline reflects midrange assumptions
regarding the elasticity of capital utilization in the face
' This is not to say that these conditions are necessarily expected for
1978-85. Some basis exists for arguing that Soviet weather patterns
will return by the 1980s to conditions that prevailed before 1965 (See
USSR: The Impact of Recent Climate Change on Grain Production
ER 76-10577U, Unclassified). An assumption of normal weather-
neither unusually good nor unusually bad by recent standards-is a
reasonable reference for this study.
' The baseline projections of agricultural output are based on normal
weather conditions and measure agricultural output in terms of
value added. Growth rates for net agricultural output average about
I percentage point higher.
of energy shortfalls (the percentage change in active
use of a given stock of capital divided by the percentage
change in energy supplied to it).' Similar analyses with
alternative assumptions give a range of GNP growth
rates of about 0.5 percentage point, with the midrange
elasticity assumptions giving results generally in the
middle of the range. However, the trends remain
unchanged.
The baseline also assumes that capital and labor inputs
are independent, so that the level of labor services is
maintained in the face of any incremental losses in
capital utilization. This is an optimistic assumption
that leads to the highest output whenever growth is
constrained by energy supplies. The opposite, pessimis-
tic assumption of fixed proportions between capital
and labor inputs would impose an equal penalty on
both capital and labor use whenever energy is in short
supply. This assumption would reduce the baseline
average growth of GNP in 1981-85 by as much as 0.8
percentage point, if all other conditions were kept
constant.
The annual projections suggest not only a general fall
in growth rates over the entire period but also a sharp
acceleration of this trend toward the later years. This
acceleration is caused in the simulation by oil short-
ages interacting with problems in financing hard
currency trade. During the early part of the 1978-85
period, the simulation indicates that the Soviets would
be able to afford all of their basic hard currency import
requirements-grain, at least a minimum level of
manufactured goods, and even oil when it becomes
necessary to import it from the West. But, because of
falling domestic oil production, rising domestic re-
quirements, and assumed maintenance of oil exports to
Eastern Europe, this situation no longer holds true in
the last three years.
6 Assumptions of baseline capital elasticity vary among sectors to
reflect the capital stock used in each sector. In those sectors where
equipment is a large share of total capital, capital utilization is
assumed to be very sensitive to energy supplies. In other sectors
where structures dominate the capital stock, we assume that capital
use is less sensitive. Baseline elasticity values ranged from 0.6 to 1.0.
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In 1983-85 a choice has to be made since import needs
in all three areas cannot be fully met. We assume that
hard currency oil imports will be cut back when
necessary to allow full imports of grain,' to keep
imported manufactured goods at least at their assumed
minimum level, and to maintain oil exports to Eastern
Europe. This means that domestic oil deliveries fall as
a percent of nominal domestic demand:
1980 100
1981 100
1982 100
1983 93
1984 87
The consequence of this forced reduction in domestic
oil allocations is sharply reduced growth rates for 1983
and beyond in all aggregates projected by the model.'
The projected average annual rate of growth (AARG)
of GNP during 1981-85 is then only 2.5 percent, more
than 1 percentage point below the comparable figure
for 1976-80. During 1981-85, increases in per capita
consumption could be sustained at little more than 1
percent per year, only half the rate projected for the
earlier period.
The baseline scenario also leads to shifts in the
structure of both production and final demand. The
' Hard currency grain imports projected by the model are in the
range of 25-30 million tons per year for 1981-85, which is consistent
with our assessment in USSR: Long-Term Outlook for Grain
Imports, ER 79-10057, January 1979, Unclassified.
' The rate at which growth in GNP falls in response solely to a
decrease in domestic energy deliveries is equivalent to a pure energy
elasticity-the percentage change in GNP which results from a
given percentage change in energy supply, all other factors
remaining constant-of about 0.4 under the optimistic assumptions
of the baseline. This implies some substitution of labor for capital in
the face of energy shortfalls and assumes that capital utilization is
cut back first in the least efficient capital stock in each sector. The
figure could rise to as high as 0.8 under alternate assumptions, which
would simply make the deceleration in growth much sharper once
the energy constraint takes hold. In particular, the larger elasticity is
consistent with the periodic shutdown of full plant operations for all
plants regardless of their relative energy efficiencies. We also
assume throughout that the USSR has sufficient flexibility to
substitute fuels at the margin. To the extent that this is not the case,
GNP would be reduced still further by a given drop in domestic
energy deliveries and the elasticity could approach 1.
share of government expenditures would rise by about
1 percent-from 13.8 percent in 1978 to 14.8 percent
of GNP in 1985-because the assumed annual growth
in defense spending of about 4 percent is substantially
above the average GNP growth of less than 3 percent
for 1981-85. This forces the share of GNP devoted to
private consumption to fall by 1 percent between 1980
and 1985.
On the production side, industry's share in GNP rises
from 42.1 percent to 43.6 percent between 1978 and
1985 at the expense of an almost equivalent fall in
agriculture's share. The underlying causes of this shift
are best seen by looking at projected patterns of
average annual growth rates for labor and capital
inputs:
Employment
Agriculture
-0.8
-0.5
Nonagriculture
2.1
1.6
Active Capital
Agriculture
7.8
2.4
Nonagriculture
7.0
5.0
We have assumed a fall of 0.5 percent per year in
agricultural employment. Superimposed on other de-
mographic and labor force parameters-slow growth
in the able-bodied population, stable participation
rates-this still leads to a marked deceleration in the
growth of nonagricultural employment. Capital use
shows a similar trend. Because capital utilization rates
depend on the level of energy deliveries to each sector,
the growth in active capital-the gross capital stock
adjusted by the utilization rate-falls sharply with
reduced oil allocation during 1983-85. The effect on
agriculture is particularly acute because it is a heavy
oil consumer.
The growth of active capital in nonagricultural sectors
holds up much better because (1) these sectors rely
relatively more on gas and coal, which are not
projected to be in short supply, and (2) energy and fuel
producing sectors in industry are given 100-percent
allocations of energy and fuels on a priority basis.
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Baseline Scenario:
Trends in Oil Production
and Use
Net Hard Currency Exports
USSR: Projected Fuel Balances
for Baseline Scenario
Domestic
Domestic
Net
Production
Consumption Exports
1980
Oil (million metric tons)
590
458
132
Coal (million metric tons)
769
746
23
Gas (billion m')
420
384
36
1985
Oil (million metric tons)
500
464
36
Coal (million metric tons)
854
825
29
Gas (billion m')
560
500
60
after 1980 but remain positive through 1985 on the
strength of heavy exports to Eastern Europe and the
restraint imposed on hard currency imports by foreign
exchange considerations.
The projected fuel balances for 1980 and 1985 under
the baseline assumptions are shown in detail in table 1.
The model projects net oil exports to fall from 27
percent of domestic production in 1978, to 22 percent
in 1980, and to only 7 percent in 1985. The rapid rise in
coal and gas exports partially offsets the slump in oil
exports (table 2). Net hard currency exports of oil fall
substantially by 1980, but net earnings on total trade
in fuels are much more stable because of a combination
of rising prices and increased quantities of coal and gas
exports. After 1980, though, even these factors fail to
keep net hard currency exports of fuels from falling to
a large deficit position.
Figure 1
Table 1
i i i i i i I
i
-1001978 79 80 81 82 83 84 85
Patterns of Fuels Use and Trade
Developments in the energy sector shape much of the
story summarized in the economic aggregates. These
simulations assume that oil production peaks in 1980
at 590 million tons and then falls back to 500 million
tons by 1985. The baseline projections based on this
output profile show a steadily rising domestic use until
the hard currency constraint is hit in 1983 (figure 1).
In order to meet export obligations to Eastern Europe,
net hard currency oil trade would have to shift from a
strong net export position in 1980 to a large net import
position in 1985. Oil imports based on assumed
foreign-exchange priorities are insufficient to meet
domestic needs after 1982, as the hard currency
constraint in 1983-85 forces a sharply reduced growth
in hard currency oil imports. This then causes domestic
use to fall slowly after 1982 under the combined
impact of reduced domestic production and insuffi-
cient imports. Overall Soviet net oil exports fall sharply
Over the full 1978-85 period, the net value of hard
currency fuel exports in the baseline case follows the
general trend of net oil exports (figure 2). Because of
rising fuel prices and increases in the net volume of gas
and coal exports, the net value of Soviet fuel exports
changes little through 1980, after which it plummets
quickly to a persistent deficit level. However, the
influence of growing gas and coal exports holds the net
hard currency trade deficit in fuels to about $4 billion
in 1985.
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USSR: Projected Net Fuel Exports
for Baseline Scenario
Hard Communist
Currency
Other Total
1980
Total (million 1977 US $)
4,900
7,000
Negl,
11,900
Oil (million metric tons)
34
95
3
132
Coal (million metric tons)
11
11
1
23
Gas (billion m')
20
31
-15
36
1985
Total (million 1977 US $)
- 3,900
9,600
-700
5,000
Oil (million metric tons)
- 59
95
0
36
Coal (million metric tons)
15
13
1
29
Gas (billion m')
48
43
-31
60
Baseline Scenario:
Projections of Net Soviet
Hard Currency Exports of Fuels
I I I I I I I Oil
8 1978 79 80 81 82 83 84 85
The picture for overall Soviet fuels trade is much
different in the baseline simulation (figure 3). The
value of net oil exports falls dramatically after 1980,
and so does the value of net fuel exports. The net
volume of oil trade in 1985 is considerably above zero
(see figure 1) because exports to Eastern Europe are
maintained at a substantial level. Nevertheless, the net
value of oil trade is in deficit by 1985 because volume
traded in the higher priced hard currency oil market
shifts sharply to a net import position while that in the
lower priced CEMA (the Council of Mutual Economic
Assistance) market holds steady at a net export of 95
million tons.' Unlike oil exports, though, net exports of
total fuels level off after 1982 in value terms because
the prices and volumes of net gas and coal exports rise
strongly over time for all regions.
' We have assumed that CEMA oil prices remain below world
market levels through, 1985. If they reach world levels by then, this
projected deficit could be reversed.
Baseline Scenario:
Projections of Net Soviet
Exports of Fuels to the World
-8 1978 79 80 81 82 83 84 85
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The regional patterns of fuels trade shown in figure 4
highlight the projected turnabout in hard currency
trade that would result from pursuing current and
announced policies for the 1980s. The net value of fuel
exports to Eastern Europe just about doubles between
1978 and 1985, while net exports to the West fall from
about a $5 billion surplus to a $4 billion deficit. After
1981, net exports to Communist countries are greater
than net exports to the world, which means that net
Soviet fuels trade with non-Communist countries is in
deficit.
Hard Currency Trade and Finance
The projected shift in net oil trade with the West in the
baseline simulation implies a major restructuring of
hard currency trade over the next decade (figure 5).
The slow fall in net oil exports to 1980 serves to break
the growth in hard currency exports and, consequently,
in affordable imports. Once the USSR is forced to
Baseline Scenario:
Projections of Net Soviet
Exports of Fuels by Region
To Hard Currency
Countries
I 1 I I I I I I
-8 1978 79 80 81 82 83 84 85
move from being a net oil exporter to being a net oil
importer in the hard currency arena, growth in total
exports and therefore total imports reflect the
underlying trends in nonoil hard currency earnings and
net credit availability. After 1982, oil imports from the
West would compete directly with nonoil, nongrain
imports for scarce foreign exchange. The only way to
maintain these imports at the level assumed to be the
acceptable minimum is to restrict oil imports, as the
break in the net oil exports profile indicates.
Figure 5 also illustrates very clearly the projected
conflict in the mid-1980s between oil and nonoil
imports paid for in hard currency. After 1982, the
Soviets could not afford to meet oil, grain, and nonoil,
nongrain import requirements simultaneously. Trade-
offs would have to be made, and our analysis assumes
one way of making them. The trends in figure 5 suggest
Baseline Scenario:
Trends in Hard Currency
Exports and Imports
-8 1978 79 80 81 82 83 84 85
\Non-oil Non-Grain Imports
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the volume of Soviet trade with hard currency coun-
tries is likely to grow little through the early. 1980s.
The longer term prospects for imports other than oil
and grain look particularly dismal under the conditions
of the simulation, since oil imports would displace
about half of the current level of nongrain imports by
1985. Without our assumed floor on these other
imports, the situation would be even worse.
The baseline case in turn implies a slowly rising Soviet
trade imbalance with the West. Through 1980, the
hard currency trade deficit holds steady at about the
current level. Total exports would be essentially
unchanged because the fall in net oil exports of almost
$2 billion would just about offset the rise in nonoil
exports allowed for by extrapolating recent trends.
Imports would also be flat because flat export earnings
mean little growth in import capacity. The situation
would shift during the 1980s; export growth between
1980 and 1985 would then stem solely from sales of
commodities other than oil. Although imports would
fall in 1980 and 1981, subsequent import growth would
reflect not only growth in nonoil export earnings but a
growing share of credits in financing total Western
imports.
The fall in oil exports leads to a sharp rise in the debt-
service and debt-to-export ratios (figure 6).10 The rise
in these ratios is unavoidable with total exports stable
or rising slowly and Western debt projected to
accumulate at a steady rate. The debt-service ratio
would exceed 40 percent by the early 1980s as oil
exports to the West fall. It falls back somewhat after
that, but debt service would still represent more than
one-third of commodity export earnings by 1985,
about a 10-percentage-point rise above present levels.
The debt-to-export ratio-the ratio of medium- and
long-term debt to commodity exports to the West-
shows a similar pattern with first a sharp rise in the
later 1970s and early 1980s as debt rises even in the
10 The debt-service and debt-to-export ratios involved the use of data
for Soviet export earnings in hard currency trade. In this paper, we
have used only earnings in commodity trade, which excludes gold
sales, hard currency arms sales, services, and transfers. Defining the
ratios based on the more inclusive earnings concept would lead to
lower values for both ratios in a given year. For example, in 1977, the
debt-service ratio based only on commodity exports was 24 percent,
while based on all hard currency earnings, it was 19 percent. For the
debt ratio, comparable figures were 96 percent and 78 percent.
Baseline Scenario: Figure 6
Trends in the Debt-to-Export Ratio and
Debt Service Ratio
I I I I I I I I
0 1978 79 80 81 82 83 84 85
face of steady export earnings, and then a partial
recovery to more reasonable levels by 1985 as the
export earnings situation improves somewhat. None-
theless, the level of hard currency debt would represent
around 130 percent of annual merchandise exports by
then, a full 30 percent above recent historical stand-
ards, but 20 percent below the peak in the early 1980s.
The baseline simulation projects Soviet growth under a
static set of policies and a static economic environ-
ment. Since Soviet policymakers are likely to consider
policy shifts in the face of the economic difficulties we
foresee, we can use the model to estimate the
improvements that might result. Below we explore the
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impacts that a selection of domestic and foreign trade
policy options might have on the basic Soviet growth
trends we project.
The GNP Costs of Oil Shortages
Growth. under the baseline scenario leads to major
dislocations by 1985 as the Soviet economy runs up
against a combined oil - hard currency constraint. As
the baseline simulation suggests, falling oil production
after 1980 would eventually force the Soviet need for
Western oil to unaffordable levels. By 1985, imports of
manufactured goods from the developed West would
be at minimum acceptable levels, with domestic oil
deliveries still below nominal requirements. We can
use our econometric model to estimate the economic
costs of these constraints in terms of lost production.
The cost of this constraint can be viewed as the
difference between the level GNP would have reached
if nominal domestic oil requirements were fully met
and the level projected under the constraint. Our
calculations indicate that the assumed oil production
profile costs the Soviets about 18 billion rubles or 3
percent of GNP by 1985 when compared with poten-
tial GNP under full oil allocations. The average annual
rate of growth for 1981-85 would be 0.6 percentage
point higher if the required allocations were achieved.
Conservation Required To Avoid Energy Shortfalls
One way to interpret this analysis is by hypothesizing
the energy conservation required to eliminate the
energy bottleneck. The description of energy demand
in the model already reflects trends in improved
efficiency that are embodied in historical data on
production and consumption in the 1970s. Simulations
of extraordinary conservation indicate that the USSR
would have to improve energy efficiency slightly more
than 1 percent per year during 1978-85 to allow full oil
allocations and thus avoid hitting the hard currency
and oil constraints.
The impacts of this extraordinary conservation case on
key economic variables are given in table 3. Conserva-
tion reduces nominal domestic demand for all fuels. In
so doing, it releases more coal and gas for export to
hard currency countries and makes it possible to
import more oil from the West to compensate for
shortfalls in domestic production after 1982.
Greater conservation would of course raise potential
GNP and growth even further but additional incre-
ments would be small. Conservation up to the point
that prevents shortages has a big marginal impact. It
would be "high powered" conservation because it
raises capital utilization rates; the growth in active
capital stock increases by an average of almost 2
percent per year during 1981-85 under the extraordi-
nary conservation scenario. Conservation over and
above the "high powered" conservation of 1 percent
per annum would be "low-powered" conservation
because it would simply free more fuels for export. To
the extent these new exports helped finance capital
imports they would lead to additional increments in
production. But this process of capital formation
through trade occurs with a lag and is also subject to
leakage of import capacity into noncapital goods.
Consequently, marginal impacts on output of conser-
vation above 1 percent per year would be small through
1985.
This analysis also supports the position that the
deceleration in Soviet growth we foresee for the next
decade is much more than a reflection of difficulties
with energy production. Removing the energy and
subsequent hard currency constraints still leaves the
projected average growth of GNP in 1981-85 at 3.1
percent per year, half of a percentage point below the
comparable figure for 1976-80. The underlying causes
of the growth slowdown are a reduction in the labor
force growth rate, diminishing returns to a more slowly
growing capital stock, and our projections of little
growth in factor productivity. Energy problems simply
serve to aggravate the underlying difficulties, by
reducing the rates of capital utilization and accelerat-
ing downward trends already projected for the 1980s.
Other Domestic Policy Options
The Soviet leadership could certainly react to slower
growth by changing ongoing policies-those focusing
on the domestic economy and those centered in the
foreign sector-and by instituting new ones. The key
question is whether these options would have a
significant impact on growth when compared with the
baseline simulation.
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USSR: Projections Under Possible
Domestic Policy Options
Baseline
Level
Extraordinary
Conservation
Manpower
Defense
Resource
Reallocation
AARG 1976-80 (percent)
3.6
0
0.1
0
Negl
AARG 1981-85 (percent)
2.5
0.6
0.1
Negl
0.2
Level 1980 (billion 1970 rubles)
554
0
2
0
- I
Level 1985 (billion 1970 rubles)
627
18
6
1
4
Active Capital Stock
AARG 1976-80 (percent)
7.1
0
0
0
0.1
AARG 1981-85 (percent)
4.5
1.8
0.1
0.1
0.5
Employment
AARG 1976-80 (percent)
1.3
0
0.2
0
0
AARG 1981-85 (percent)
1.1
0
0.2
0.1
0
Domestic Oil Use
1980 (million metric tons)
458
-17
0
0
1
1985 (million metric tons)
464
52
4
1
29
Net Hard Currency Imports
1980 (million metric tons)
34
17
1
0
4
1985 (million metric tons)
- 59
- 48
-1
1
-13
Net Oil Exports
1980 (million metric tons)
132
17
1
0
4
1985 (million metric tons)
36
-48
-1
1
-13
Hard Currency Imports
Excluding Fuels and Grain
1980 (billion 1977 US $)
11.6
3.8
0.2
0
0.9
1985 (billion 1977 US $)
6.4
0
0
0
0
Debt-Service Ratio
1980 (percent)
33
-8
Negl
0
-3
1985 (percent)
37
-13
-1
Negl
-5
' The difference between the value of the variable under the given
policy option and its value in the baseline case.
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To gauge the possible impacts of policy initiatives on
growth possibilities through 1985, we resimulated
Soviet growth under alternative policy conditions. We
have chosen to examine the effects of three domestic
policy options that would probably be open to the
Soviets during this period:
? Manpower. Participation rates rise by one percent-
age point for the able-bodied population by 1985 and
by 2 percentage points for pensioners.
? Defense. Military manpower is reduced by a half
million men between 1980 and 1985. Nonpersonnel
defense expenditures grow at about 2 percent per year,
half their baseline rate.
? Resource Reallocation. The shares of new fixed
investment and employment going to the energy
sectors (oil, coal, gas, and electric power), chemicals,
machinery, transportation and communication, con-
struction, and industrial materials are increased
gradually at the expense of investment in trade and
services, consumer goods, housing, and employment in
consumer goods.
We resimulated Soviet growth through 1985 with each
option separately modifying the baseline conditions.
By comparing the results of these simulations with the
baseline case itself we can judge the potential change
in key economic variables due solely to the particular
option considered (table 3).
Manpower policies have the virtue of directly attack-
ing a major growth bottleneck. Increments to the able-
bodied population are established by longstanding
demographic factors and respond only very slowly to
policy changes. The participation rate can be more
directly manipulated through incentives and legisla-
tion setting retirement ages. However, Soviet partici-
pation rates have been among the very highest in the
world and leave little room for further increases. The
gains assumed in the Manpower Case would-we
suspect- require substantial changes in incentives and
regulations. Yet, as table 3 shows, the economic gains
probably would be modest. Soviet GNP and consump-
tion would be about 1 percent higher by 1985, and
growth rates would remain essentially unchanged from
those achieved without the policy changes.
The Defense Case reflects more than a 10-percent
reduction in military manpower and an equivalent
0.3-percent increase in the civilian labor force by 1985.
It also reflects a halving of the growth in Soviet
nonpersonnel defense spending. At the aggregate level,
this defense slowdown has little perceptible impact on
the Soviet economy. The extra increment in investment
made possible by slower growth in military claims on
the output of capital goods industries is very small,
especially when compared with the total Soviet stock of
productive capital. Therefore little extra production is
available through 1985.
Of course, important sectors of the economy could still
benefit from reduced competition with defense for key
resources, and this could have greater potential for
improving growth beyond 1985. Slower defense growth
does have an immediate impact on the side of final
demand as a portion of GNP is freed to meet civilian
needs. Projections show that an increase in consump-
tion of more than 1 percent would be possible by 1985
through the assumed reductions in the personnel and
operating and maintenance portions of defense expen-
ditures and the subsequent redirection of resources.
Reallocation of labor and investment resources is a
policy option the Soviets certainly would consider.
Reallocations of various kinds have been mentioned in
the Soviet press, but no hard information exists on the
changes, if any, that might be in the offing. The
specific reallocations we simulated are therefore
purely speculative, although they do reflect our judg-
ment of what might be feasible given the time frame
considered and the broad range of existing and
emerging problem areas (tables 4 and 5).
For the reallocations we looked at, GNP growth in
1981-85 increases by about 0.2 percentage point (table
3), and GNP in 1985 is less than 1 percent higher.
GNP is lower, however, in 1980 because the value of
the output lost from the sectors losing resources is
slightly more than the value gained from the sectors
receiving extra resources. This is a reflection of two
factors in the calculations: the estimated marginal
products of capital and labor, and the value weights
given output indexes for each sector.
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USSR: Assumed Pattern for
Reallocation of New Fixed Investment
Estimated
Change (1970-77)
Baseline
Change (1977-85)
Assumed
Change (1977-85)
Assumed Change -
Baseline Change
Agriculture
10.67
7.09
7.09
0
Construction
2.25
1.46
1.96
0.50
Transportation and communication
6.32
3.94
4.35
0.41
Trade and services
4.81
5.35
2.67
-2.68
Industrial materials
2.68
2.66
3.99
1.33
Consumer goods
1.56
1.43
0.71
-0.72
Machinery
4.90
3.08
4.62
1.54
Chemicals
1.89
1.20
1.80
0.60
Gas
0.91
0.55
0.83
0.28
Oil
1.77
1.21
1.82
0.61
Coal
0.34
0.52
0.78
0.26
Power
0.93
1.12
1.40
0.28
Housing
3.67
4.82
2.41
-2.41
Other
0.59
0.54
0.54
0
Total
43.29
34.97
34.97
0
USSR: Assumed Pattern for Reallocation
Of Nonagricultural Employment
Estimated
Change (1970-77)
Baseline
Change (1977-85)
Assumed
Change (1977-85)
Assumed Change -
Baseline Change
Construction
1,803
1,791
1,941
150
Transportation and communication
1,815
1,841
1,991
Trade and services
6,625
6,023
6,023
0
Industrial materials
374
714
828
114
Consumer goods
504
1,412
504
-908
Machinery
2,616
2,445
2,745
300
Chemicals
287
307
350
43
Gas
1
8
3
Oil
10
45
70
25
Coal
-81
150
250
100
Power
93
117
140
23
Other
-58
0
0
0
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USSR: Model Projections
Under Possible Foreign Trade Options
Baseline
Level
Oil
Exports
Substitution
Western
Imports
Debt
Service
AARG 1978-80 (percent)
3.6
0
0
0
0
AARG 1981-85 (percent)
2.5
0.3
Negl
0.1
Negl
Level 1980 (billion 1970 rubles)
554
0
0
0
0
Level 1985 (billion 1970 rubles)
627
8
2
4
1
Active Capital Stock
AARG 1978-80 (percent)
7.1
0
0
0
0
AARG 1981-85 (percent)
4.5
0.8
0.2
0.4
0.1
Domestic Oil Use
1980 (million metric tons)
458
0
0
0
1985 (million metric tons)
464
48
-12
22
Net Hard Currency Oil Exports
1980 (million metric tons)
34
1985 (million metric tons)
-59
Net Oil Exports
1980 (million metric tons)
132
0
0
0
0
1985 (million metric tons)
36
-48
13
-22
-3
Hard Currency Imports
Excluding Fuels and Grain
1980 (billion 1970 US $)
11.6
0
0
1985 (billion 1970 US $)
6.4
0
-3.1
Debt-Service Ratio
1980 (percent)
33
0
0
0
1985 (percent)
37
NegI
Negl
-5
' The difference between the value of the variable under the given
policy option and its value in the baseline case.
The marginal impacts of extra capital and labor in the
energy sectors, especially oil, are low until the oil
shortages occur late in the period, but are much higher
afterwards. Domestic oil deliveries are up by 1985 in
this case but are still not enough to meet nominal
domestic requirements. The increased oil deliveries
reflect both extra domestic production and additional
hard currency imports financed by extra gas and coal
exports. Because of increased fuel production, the
debt-service ratio falls substantially as exports to the
West of surplus coal and gas increase while debt is
fixed by assumption at baseline levels.
Foreign Trade Options
The economic strains we project for the 1980s have a
number of strong linkages to the foreign sector,
especially to hard currency trade. We therefore
analyzed the possible impacts of four policy options in
the foreign trade area to see what additional flexibility
these might provide the Soviets (table 6):
? Oil Exports. Oil exports to Eastern Europe fall from
95 million tons in 1980 to 45 million tons in 1985.
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? Substitution. Half of the hard currency gas exports
projected under baseline conditions are redirected to
domestic use in place of oil, and domestic oil require-
ments are reduced accordingly.
? Western Imports. The floor on hard currency im-
ports other than grain and oil is cut in half to 25
percent of the current import-GNP ratio.
? Debt Service. A trigger point of 35 percent is
assumed for the debt-service ratio, which leads to
restrictions on borrowing by the Soviets. In each year
that the ratio exceeds 35 percent, actual new credit
drawings are only one-half the corresponding levels in
the baseline case.
Lower oil exports to Eastern Europe could have a
strong impact on the Soviet economy because capital
utilization rates would be immediately raised when oil
is in short supply. This would add more than 1 percent
to GNP and consumption by 1985 compared with a
baseline projection and would postpone the emergence
of domestic oil shortages for a couple of years. By
assumption, all oil diverted from export to Eastern
Europe is consumed domestically, not exported to the
West, unless the nominal domestic demand for oil is
fully met. Therefore, this policy's impact on hard
currency trade is negligible.
Substitution ofgasfor oil holds some attraction for the
USSR since it is expected to be a major gas producer
with a large domestic surplus over the next decade.
With the export value of a standard fuel unit of gas
projected to be less than that of oil through 1985,"
there is an advantage in substituting gas for oil in
domestic use. Diversion of half the hard currency gas
exports of the baseline case to domestic use would
reduce domestic oil requirements by an equivalent
amount in energy terms. Since the oil saved would be
worth more in trade than the gas lost to export, there is
a net gain to the economy through this substitution.
But, the boost to GNP of 2 billion rubles is quite
modest, especially considering that the analysis does
" This is consistent with recent unit value data. If the relative price
between gas and oil at the point of use is proportional to energy
content, then the relative price in terms of Soviet f.o.b. prices must
shift against gas, because it is more expensive to transport than oil.
The observed trends in unit value data, which are based on Soviet
f.o.b. prices, may reflect this relationship.
not account for the cost of converting from oil to gas in
specific industries. Moreover, the debt-service ratio
would rise substantially as export earnings fell with
increased domestic use of gas.
Cutting hard currency imports other than grain and oil
would be a bonus for the Soviet economy in 1978-85,
adding as much as 4 billion rubles to GNP by 1985.
This gain comes from the additional oil imports-22
million tons in 1985- that can be obtained by
diverting scarce hard currency import capacity away
from other commodities. As long as oil is in short
supply, this substitution has a large immediate impact
on production. At issue here is the trade-off between
more output now and more output in the future. The
drop of almost $3 billion in imports from the West by
1985 would represent a severe blow to longer term
growth prospects in crucial sectors like oil, chemicals,
and machinery-where imported capital goods are a
significant share of new, high technology investment.
The post-1985 economic consequences of sacrificing
imports of Western capital goods in favor of more oil
and therefore more domestic production during 1978-
85 could be substantial indeed, but are not accounted
for in our analysis.
Moscow's attitude toward the Soviet debt-service ratio
reflects its desire to borrow on favorable terms and to
convey an image of economic strength to the rest of the
world. High debt-service ratios are generally viewed by
potential lenders as indicators of high risk and
therefore lead to higher costs of borrowing funds to
finance Western imports. Our simulation of a simple
35-percent trigger rule shows that it would have little
impact on Soviet GNP. It would, however, have a
significant impact on the Soviet hard currency trade
picture. In part, because of the fall in oil exports, the
debt-service ratio soars above 40 percent in 1981,
triggering two successive years of credit restraint
(figure 7). This is more than sufficient to send the
debt-service ratio below the 35-percent trigger point by
1983 and to keep it in the vicinity of 30 percent, 5
percent below the baseline level by 1985.
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Debt Service Case: Debt Service Ratio Figure 7
When Debt Service Trigger is Applied
We decided to examine the effects of six contingent
events-three involving the domestic economy and
three concerned with foreign trade-by resimulating
Soviet growth under changed underlying conditions."
1. Flat Oil. Soviet oil production peaks at 590 million
tons in 1980 and holds flat at this level through 1985.
2. High Oil. Soviet oil production peaks at 600 million
tons in 1981-82 but falls to the baseline level of 500
million tons in 1985.
3. Low Oil. Soviet oil production peaks at 590 million
tons in 1980 but falls to 400 million tons in 1985.
10 1978 79 80 81 82 83 84 85
The cost of this debt-service control is the hard
currency imports forgone during the 1981-85 period.
Since this amounts to only about 5 percent of the
projected hard currency imports for those five years,
the Soviets would be in a position to control potential
debt servicing problems while maintaining a flow of
most crucial imports from the West. Nonetheless, the
decision to cut back on Western credits would not be
an easy one under the multitude of economic pressures
that are likely to coexist in the early 1980s, and the
impact on the consumer or certain investment pro-
grams could be considerable.
Sensitivity of Model Results to External Contingencies
Our baseline case assumed a rather stable economic
environment in the form of a straightforward extrapo-
lation of recent trends. Shifts in the assumed economic
environment would of course change our projections of
Soviet growth. From the standpoint of this study,
however, the interesting issue is how sensitive our
baseline projections are to possible changes in the
conditions that we have assumed.
4. Lower Western Growth. Soviet nonfuel exports to
the West grow at only one-half the baseline rate,
reflecting slower growth in the developed West and,
hence, lower levels of Western demand for Soviet
exports.
5. Higher Oil Prices. World oil prices in the 1980s rise
at an annual rate 5 percent faster than under the
baseline conditions, implying a tighter world oil
market during this period.
6. Credit Ceiling. Baseline credits are taken whenever
they fall below a ceiling consisting of 70 percent of
Soviet imports of hard currency capital goods plus a
smaller amount of general purpose credits. Ceiling
credits are taken whenever baseline credits are higher.
The results of these six simulations are compared with
the baseline simulation in table 7.
" Soviet agriculture is an additional source of major uncertainty in
our analysis. All of the projections in this study are based on normal
weather conditions and therefore normal performance in agricul-
ture. Simulations of other performance patterns in agriculture-a
three-year cycle composed of good, bad, and normal years; a
succession of bad years in the early 1980s; a succession of good years
in the early 1980s-had little perceptible effect on growth trends in
the major economic aggregates. While the potential impacts on
earnings in hard currency trade and finance were substantial in
certain years, the overall hard currency trade situation appeared to
be manageable.
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USSR: Model Projections
Under Major Contingencies
Variations Due to
Domestic Contingencies'
Variations Due to
Foreign Trade Contingencies'
Baseline
Level
Flat Oil
High Oil
Low Oil
Lower
Western
Growth
Higher
Oil
Prices
Credit
Ceiling
AARG 1976-80 (percent)
3.6
0
0
0
0
0
0
AARG 1981-85 (percent)
2.5
0.5
0
-0.6
-0.1
-0.1
Negl
Level 1980 (billion 1970 rubles)
554
0
0
0
0
0
0
Level 1985 (billion 1970 rubles)
627
17
0
-19
-3
-2
-1
Active Capital Stock
AARG 1976-80 (percent)
7.1
0
0
0
0
0
0
AARG 1981-85 (percent)
4.5
1.5
0,
-1.7
-0.3
-0.2
-0.1
Domestic Oil Use
1980 (million metric tons)
458
0
0
0
0
0
0
1985 (million metric tons)
464
88
0
- 96
-17
- 11
-6
Net Hard Currency Oil Exports
1980 (million metric tons)
34
0
0
0
0
0
0
1985 (million metric tons)
- 59
3
1
-4
17
11
6
Net Oil Exports
1980 (million metric tons)
132
0
0
0
0
0
0
1985 (million metric tons)
36
3
1
-4
17
11
6
Hard Currency Imports Other
Than Fuels and Grain
1980 (billion 1977 US $)
11.6
0
0
0
-0.7
0
0
1985 (billion 1977 US $)
6.4
0
0
0
0
0
0
Debt-Service Ratio
1980 (percent)
33
0
0
0
2
0
0
1985 (percent)
37
1
0
Negl
8
0
-8
' The difference between the value of the variable under the given
contingency and its value in the baseline case.
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Alternative
Oil Production Profiles
3001978 79 80 81 82 83 84 85
Figure 8 High Oil Case: Net Exports of
Oil to Hard Currency Countries
Unclassified
578670 3-79
The plausible range of Soviet oil production over the
next decade is wide and this uncertainty naturally has
an important impact on the range of possible Soviet
economic performance to 1985. Figure 8 shows four
alternative production profiles: high oil from our 1977
study of Soviet oil prospects," the baseline assumption
reflecting perhaps a most likely situation under present
conditions, flat oil as an extreme possibility on the high
side, and low oil as an extreme on the low side."
Flat oil production between 1980 and 1985 is, we
believe, not in the cards. However, if it were to occur
and all the extra oil went to meet domestic needs, our
simulations indicate that energy would not be a
constraint on Soviet growth during the period. Both the
rate of GNP growth in 1981-85 of 3 percent and the
1985 GNP of more than 640 billion rubles are both
consistent with the potential performance we esti-
mated earlier in the absence of an energy constraint.
Even in 1985, almost 100 percent of domestic energy
demand can be met. This means that capital utilization
rates could be held at or close to 100 percent during the
11 Prospectsfor Soviet Oil Production.
14 The production figure of 400 million tons in 1985 is the low end of
the range estimated in our 1977 study.
I i i i I i i i
-1001978 79 80 81 82 83 84 85
Unclassified
578671 3-79
full period, and the growth rate for the active capital
stock would rise an average of 1.5 percentage points.
Hard currency imports would nudge the acceptable
floor by 1985, but would be kept above the assumed
minimum level in all other years. Nonetheless, flat oil
production itself would in no way reverse the deteriora-
tion in growth prospects in general and hard currency
trade in particular that our simulations clearly
indicate.
The effects of the high oil scenario would be primarily
to delay the inevitable and to provide an additional
year or two for adjustment. But the impacts on the
aggregate economy by 1985 would be minimal. High
oil would allow substantial hard currency oil exports
through 1981 and would delay the need to import oil
from the West until 1983 (figure 9). This means
several extra years of high imports of Western capital
goods and full domestic oil allocations. With oil
production assumed to drop eventually to the same
500-million-ton level as in the baseline case, though,
the effects on GNP in 1985 would be very small.
The low oil case, like the flat oil case, is not likely to
occur. However, if recovery rates continue to fall and
peak production of Samotlor is not held for more than
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a couple years, Soviet oil production could indeed
approach the levels of the low oil case. Simulation
results show that the impacts on the Soviet economy
would be severe. Average growth in 1981-85 would fall
more than one-half a percentage point, with even more
serious reductions on an annual basis in the later years.
With oil production down, little additional import
capacity available, and export commitments to Eastern
Europe fully met, domestic oil use would have to fall by
more than 20 percent. The Soviets would certainly take
steps to avoid such dire consequences if oil production
as low as 400 million tons in 1985 seemed a real
possibility. The mix of reactions-resource
reallocations, export reduction, greater conservation,
larger imports-can be only conjectural now.
Slower Western growth means that the Soviet hard
currency import capacity would grow more slowly. Oil
imports during the 1980s would have to be reduced
accordingly and this would have an adverse effect on
capital utilization. Oil imports from the West in 1985
fall from 59 million tons to 42 million tons in the face
of a more binding hard currency shortage. During
years like 1980, when energy is not a constraint on
trade, reduced exports to the West would lead to a
substantial fall in affordable nongrain imports from
the West. Lower hard currency exports also mean
higher debt-service ratios; a peak figure of more than
50 percent is reached in the early 1980s. Even with
reduced capital imports and lower domestic oil use in
the later years, slower Western growth has only a small
effect on realizable levels and rates of growth of GNP.
The effect of higher oil prices (in real terms) on Soviet
growth would shift as the Soviets moved from being a
net exporter to being a projected net importer on a hard
currency basis. In 1980, when the USSR is still a
major net oil exporter to all regions, higher oil prices
increase foreign exchange earnings and ultimately
hard currency imports. By 1985, the Soviets are
projected to be substantial importers of Western oil. As
a result, higher prices for imported oil exacerbate the
projected hard currency problems and lead to a smaller
import volume in the face of a floor on other hard
currency imports. Again, the aggregate trend effects
on such broad aggregates as GNP and consumption
would be small through 1985.
The possibility of a credit ceiling exists because most
Western lending is correlated with Soviet imports of
Western capital goods. The model shows that the
Soviet capacity to import Western capital goods is
likely to fall in the early 1980s as domestic energy
needs restrain the growth in export earnings. We
assume, therefore, a coincident fall in the availability
of Western credits at terms acceptable to the USSR.15
Simulation of such a credit ceiling leads to a projection
of new credit drawings that is very different from the
baseline case (figure 10). Through 1981, credit levels
assumed available in the baseline case are consistent
with the credit ceiling. After 1981, they are substan-
tially above the level that would correspond to the
projected volume of hard currency capital imports, and
actual drawings are constrained to the lower ceiling
figure. These lower drawings mean lower debt and
debt service during the last few years of the period
(figure 11). The debt-service ratio falls below 30
percent by 1985, a full 8-percentage-point improve-
ment over the baseline case. The credit ceiling would
reduce potential GNP in 1985 only slightly-a result
of somewhat lower affordable oil imports and therefore
lower capital utilization rates in the 1982-85 period.
Model Simulations Involving a Mix
Of Options and Contingencies
It is easier to understand the possible effects of policy
shifts and contingent events by examining them
individually as we have done above. However, isolated
changes are not realistic; Soviet growth prospects are
instead a complex reflection of a mix of policies and
contingent events operating simultaneously. The final
step in our analysis is to examine Soviet growth
possibilities under a mix of options and contingencies.
The econometric model is particularly useful in this
kind of analysis, for it provides an integrated analytical
framework for looking at the interactions of many
simultaneous events, whose effects would otherwise be
considered separately.
" This implies that a credit constraint would exist on the supply side
because of the particular structure of imports projected for the
1980s. Alternatively, the Soviets could voluntarily ration credit
themselves; this may already be reflected in present Soviet behavior.
This credit constraint on the demand side would have the same
analytical implications as an equivalent constraint on the supply
side, and the distinctions become somewhat arbitrary.
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Credit Ceiling Case:
New Credit Drawings
0 1978 79 80 81 82 83 84 85
We have looked at Soviet growth prospects under three
separate sets of conditions:
? Composite Options. This case begins with the
baseline economic environment but assumes the So-
viets exercise (a) the manpower option because it is the
most direct attack on the labor supply problem, (b) the
oil exports option because cutting oil exports to
Eastern Europe is the most feasible way of realizing
short-term gains in oil supplies, (c) the debt-service
option because of the Soviet history of a conservative
approach to trade finance, and (d) the resource
reallocation option because it has beneficial effects on
energy and investment in both the short and long term.
The other options were taken to be less attractive or
less feasible for a variety of reasons. Lower defense
growth gave little aggregate gain by 1985 and would
face strong political opposition; the floor on Western
imports in the baseline case already implies severe
restrictions on even high-priority imports; gas substitu-
tion would entail considerable conversion costs; and
there is little technological or organizational basis for
expecting extraordinary conservation.
? Composite Contingencies. This case incorporates the
base case assumptions except that it assumes that the
three foreign trade contingencies-lower Western
growth, higher oil prices, and lower hard currency
credits-do occur. High oil was considered the most
Credit Ceiling Case:
Debt Service Ratio
10 1978 79 80 81 82 83 84 85
likely of the alternative oil production profiles and was
also included.
? Composite Projection. This case combines the four
policy options and the four contingencies into a
composite view of Soviet growth prospects that can be
compared with the baseline simulation.
The results of these three composite simulations are
compared with the baseline case in table 8 and figures
12 to 15 to indicate the sensitivity of the model's
forecast of Soviet economic performance to some fairly
complicated mixes of assumptions.
The combined options would add about 3 percent to
both GNP and consumption by 1985 and around one-
half a percentage point to the average rate of growth in
the first half of the 1980s. As we showed earlier, much
of this gain comes from reduced oil exports to Eastern
Europe. In fact, this case indicates that the Soviets
would be net importers of oil by 1985 with increased
domestic use and lower exports to Eastern Europe.
This simulation implies more of a Soviet reluctance to
dip aggressively into Western credit markets, leading
naturally to a substantial decrease-to 30 percent-in
the debt-service ratio by 1985.
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USSR: Alternative Views of
Growth Prospects for 1978-85
Baseline
Level
Composite
Options
Composite
Contingencies
Composite
Projection
AARG 1976-80 (percent)
3.6
Negl
0
Negl
AARG 1981-85 (percent)
2.5
0.6
-0.2
0.4
Level 1980 (billion 1970 rubles)
554
1
0
1
Level 1985 (billion 1970 rubles)
627
18
-5
14
Active Capital Stock
AARG 1976-80 (percent)
7.1
0.1
0
0.1
AARG 1981-85 (percent)
4.5
1.4
-0.4
1.0
Employment
AARG 1976-80 (percent)
1.3
0.2
0
0.2
AARG 1981-85 (percent)
1.1
0.2
0
0.2
Domestic Oil Use
1980 (million metric tons)
458
1
0
5
1985 (million metric tons)
464
84
- 28
56
Net Hard Currency Oil Exports
1980 (million metric tons)
34
5
0
5
1985 (million metric tons)
- 59
-16
29
13
Net Oil Exports
1980 (million metric tons)
132
5
0
5
1985 (million metric tons)
36
-66
29
-37
Hard Currency Imports Other
Than Fuels and Grain
1980 (billion 1977 US $)
11.6
1.1
-0.7
0.4
1985 (billion 1977 US $)
6.4
0
0
0
Debt-Service Ratio
1980 (percent)
33
-3
2
-2
1985 (percent)
37
-7
-6
-3
' The difference between the value of the variable under the given
policy option or contingency and its value in the baseline case.
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GNP: Comparative
Projections Through 1985
Contingencies
Options
5001978 79 80 81 82 83 84 85
On the other hand, the combined contingencies have a
much smaller negative effect on growth, except in the
hard currency trade area where slower growth of
exports to the West and a credit ceiling cause a
substantial fall in affordable imports and a decrease of
6 percent in the debt-service ratio. The contingencies
would also imply a sharp increase in net oil exports
because of lower affordable imports of Western oil.
The combined effects of the policy options and
assumed contingencies-given by the Composite Pro-
jection-are still strongly positive. They suggest that
the Soviets could maintain growth at about 3 percent
per year during 1981-85 and reach a GNP of about
640 billion rubles by 1985. Under the conditions of our
analysis, this would also imply some improvement over
the baseline case in the international financial position
of the Soviet Union, as the lower debt-service ratio
indicates. Under this composite view, Soviet oil trade
would be in overall balance by 1985, with exports to
Communist countries essentially offset by imports
from the West.
These observations are amplified in the following
charts showing the projected time paths for important
variables:
? GNP (figure 12). The projections are sensitive to the
assumed conditions only toward the end of the 1978-85
period when the oil and trade constraints come into
play. The effects of the policy options strongly domi-
nate those of the contingencies and result in a range for
expected Soviet GNP in 1985 of about 620-640 billion
rubles.
? Domestic Oil Use (figure 13). There is a year or two
swing in the expected break in the trend of domestic oil
use, depending on assumptions. Eventually, though, oil
allocations must be held below nominal requirements
under all conditions we examined. The range of
possible domestic oil use in 1985 is considerable-
about 100 million tons or almost 20 percent of the
baseline case-because the shifting analytical assump-
tions have strong impacts on net oil exports. However,
the difference between the baseline case and the
Composite Projection is only about 10 percent.
? Net Hard Currency Oil Exports (figure 14). The
timing of the Soviet shift from a net oil export to a net
oil import position with the West is somewhat sensitive
to the particular conditions analyzed. The option of
lower exports to Eastern Europe and the contingency
of high oil both stretch out the period of potential oil
surplus and together delay the need to import Western
oil to 1983 or later. But this shift seems inevitable by
1985, given the Soviet oil production profile underlying
the analysis.
? Hard Currency Debt-Service Ratio (figure 15). The
debt-service ratio seems destined to rise in the late
1970s and early 1980s, primarily due to the expected
slowdown in growth of Soviet export earnings in the
West. The peak figure could exceed 40 percent,
especially if the drop-off in oil exports from one year to
the next is particularly severe as it is in the Composite
Projection in 1983. The simulations other than the
baseline scenario all involve a form of credit re-
straint-either voluntary or involuntary. Restraint of
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Domestic Oil Use: . Figure 13 Net Hard Currency Oil Exports: Figure 14
Comparative Projections Through 1985 Comparative Projections Through 1985
Options and Contingencies Options
500
Baseline
Contingencies
I I I I I I I I
3001978 79 80 81 82 83 84 85
Unclassified
578675 3-79
the kind simulated effectively corrects any debt-
servicing problems implied by the debt-service ratio
and, under all three conditions, brings the figure back
into the 30-percent range by 1985.
Any analysis of the prospects for Soviet economic
growth is very speculative. This uncertainty is simply a
reflection of the many unknown events and reactions-
some under the control of Soviet policymakers and
some not-that are likely to have a profound influence
on growth over the next decade. The analysis in this
paper, especially in the preceding section, suggests a
way of looking at some of these uncertainties in a
consistent and integrated manner. While the likelihood
of the sets of events and policy decisions we have
analyzed cannot be established precisely, measures of
their potential quantitative impacts on the Soviet
economy can be calculated. From this analytical
process emerges, then, not a single forecast of Soviet
economic growth, but a range of possible performance
depending on specific conditions. This range is itself a
measure of the degree of uncertainty inherent in the
analysis, and serves as a preferred guided for apprais-
ing the development of Soviet economic potential into
the next decade.
Options
I I I I I I I I
-1001978 79 80 81 82 83 84 85
The econometric model is a central tool in assessing the
uncertainties in Soviet growth possibilities and sizing
the possible effects of policy options and contingent
events into the 1980s. In particular, the model simula-
tions suggest that:
? Falling oil production could lead to an accumulated
3-percent loss in GNP by 1985 compared to potential
GNP without an oil constraint.
? Resource reallocations on the scale of the recent past
are not likely solutions to the basic problems
underlying future Soviet growth.
? Drastic reductions in oil exports to Eastern Europe
may be the only effective way to contain the potential
domestic damages of energy shortages likely to emerge
by 1985.
? The USSR will become a net importer of Western oil
by 1985, unless prospects for domestic oil production
move sharply upward over the next few years or
exports to Eastern Europe drop substantially.
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Hard Currency Debt Service Ratio: Figure 15
Comparative Projections Through 1985
I i I i i I i i
10 1978 79 80 81 82 83 84 85
? Soviet hard currency imports other than grain and
eventually oil are likely to fall in real terms by 1985 as
hard currency export earnings and credits become
increasingly unable to meet all trade financing
requirements.
Considering both Soviet policy options and contingent
events that are likely to influence Soviet growth, the
range of our projections suggests that the Soviets have
surprisingly little economic maneuverability. The
model simulations indicate that they will be hard
pressed to maintain growth at an average of 3 percent a
year in the first half of the next decade; growth could
fall nearer to the 2-percent range if the necessary
policy adjustments are not taken. The assumptions we
made in several key areas-labor productivity holding
up in the face of energy shortages affecting the use of
capital, full substitutibility of fuels at the margin,
smooth adjustment to policy shifts, the absence of
short-term bottlenecks-were very optimistic from the
Soviet standpoint. Therefore, actual growth is more
likely to be even below, rather than above, these
projections.
Since the problems we foresee become acute only as
1985 approaches, it is unlikely that these trends will be
reversed by the late 1980s. Prospects after 1985
depend on such issues as the strength and timing of
improvements in demographic factors affecting the
supply of labor, the institution of effective policies to
improve the use of investment resources, and the
discovery and development of new oil reserves. Even if
developments in these areas in the next few years prove
favorable, their full impacts will not be felt until the
late 1980s and early 1990s. The basic shape of Soviet
economic growth over the next decade seems already
set by events currently being played out both within
and outside the USSR.
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Appendix
A Summary of the Econometric Model
Of the Soviet Economy
Our model of the Soviet economy reflects the funda-
mental nature of a centrally planned economy (CPE).'
A CPE is supply oriented in both economic activity and
economic institutions. The supply of labor and stock of
productive capital are more or less fully employed in a
range of productive activities determined by labor and
investment allocation policies. Output is divided
among competing uses according to both availabilities
and relative priorities, with private consumption gener-
ally taken as the residual claimant.
All projections from the model are conditioned by
assumptions regarding six groups of external or
exogenous variables:
? Energy. These variables include projected outputs of
the energy sectors, the energy allocation policy, and
the capital flexibilities for each producing sector.
? Population and Manpower. The pattern of popula-
tion growth, participation rates and the structure of
labor allocations are inputs to the model.
The general structure of the Soviet model is shown in
figure Al. The model can be used to project five groups
of economic variables-the model's endogenous
variables:
? Production. In this group are the outputs of each
producing sector measured in terms of value added. It
also includes private consumption as the residual
claimant on output once deductions are made for
public consumption, investment and foreign trade.
? Capital Formation. The model computes investment
in each producing sector plus housing, and projects the
capital stock in each sector from knowledge of past
investment levels.
? Employment. This involves projections of the labor
force and ultimately the level of employment in each
producing sector.
? Energy. The model calculates an energy balance
between domestic production, producing sector de-
mands, final demand and net exports. It also estimates
effective or active capital stock.
? Foreign Trade. In this group are variables describing
Soviet trade with communist countries and with the
West. It also includes measures of hard currency debt
and debt service.
'The model is described in detail in SOVISM: A Model of the Soviet
Economy, ER 79-10001, February 1979, Unclassif ied.
? Weather. Indexes of temperature and rainfall are
used to calculate agricultural production.
? Foreign Trade. Nonfuel exports to the West depend
primarily on external economic conditions and are an
input to the model. Energy exports to Eastern Europe
are considered a function of both political and eco-
nomic factors and are therefore set outside the model.
Gold sales also fall in this category.
? Investment. The allocation of available investment
resources among competing uses is set by policy
decision.
? Government Spending. This group includes the levels
of personnel and nonpersonnel expenditures for de-
fense and the shares of administration and research
and development in GNP.
Two hundred and seven equations connect a like
number of endogenous variables with 67 exogenous
variables. Thirty-five of the equations involve econ-
ometric estimates of parameters. The other 172 either
use nonstatistical procedures to estimate structural
parameters or are accounting identities.
The functional relationships among model variables
shown in condensed form in the figure A2 define the
variables and parameters appearing in these equations.
These linkages can be described as follows:
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? Production. There are constant-returns-to-scale,
Cobb-Douglas production functions for each non-
energy producing sector (equation 1).1 Value added in
the energy sectors is scaled from gross output, which is
exogenous for these sectors. GNP is obtained by
summing value added in the 13 producing sectors
(equation 2).
? Consumption. Government expenditures (equation
3) include exogenous defense spending and an endog-
enous component scaled from the level of GNP.
Private consumption (equation 4) is calculated as the
residual claimant of GNP.
? Investment. The supply of capital goods available for
domestic investment is the residual of deliveries of
machinery and construction output to final demand,
after deductions are made for deliveries to defense,
exports, consumption, and capital repair (equation 5).
Equation 6 distributes new fixed investment to each
producing sector and housing with shares set outside
the model.
? Capital Formation. Net additions to the productive
capital stock are estimated from past investment and
assumed depreciation rates (equation 7). Identity
equations then link capital stock to the previous year's
capital stock and net capital formation (equation 8).
? Employment. The labor force is estimated from the
able-bodied population and participation rates (equa-
tion 9). Total employment (equation 10) depends on
the labor force and employment rates, and sector
employment levels (equation 11) follow from the total
employment and labor allocation shares.
'Statistical estimation with a conventional Hicks-neutral specifica-
tion of disembodied technological change proved unsuccessful. The
constant-returns-to-scale assumption, made in order to obtain
statistically acceptable results, picks up some of the technological
change effect because actual returns-to-scale are probably below
unity in most sectors. The absence of a disembodied technology term
on the sector level is consistent with Soviet development, which has
been characterized more by extensive rather than intensive applica-
tion of technology. This would be reflected in the general rise of the
capital stock in each sector, not in a separate trend of improvement
in total factor productivity.
? Energy. Equation 12 estimates nominal demands for
oil, gas, coal, and electric power in each consuming
sector from the capital stock and energy-use coeffi-
cients tied to the capital stock of the given sector.
Actual deliveries (equation 13) are determined by a
combination of nominal requirements and assumed
allocation policy. Equation 14 calculates domestic
energy residuals by subtracting domestic deliveries
from gross domestic output. Depending on its sign, the
residual indicates either a capacity for next exports or
a need for net imports. Equation 15 calculates the
fraction of sector energy requirements, in terms of
standard fuel units, actually met by deliveries. To-
gether with an elasticity of active capital with respect
to energy input,' this fraction determines the rate of
capital utilization and thus the active capital stock in
each sector (equation 16). Any shortfall in meeting
nominal domestic requirements for energy leads to a
reduction in capital utilization. The degree of reduc-
tion for a given shortfall varies by sector depending on
the value of the capital elasticity and the relative
contribution of the type of energy in short supply to the
particular sector's energy consumption.
? Foreign Trade. Net exports of fuels to hard currency
countries (equation 17) are the difference between the
domestic energy residuals and exogenous net exports to
Communist and other countries. Net exports of fuels to
hard currency countries, along with other variables
that represent sources of hard currency, feed into a
calculation of the hard currency import capacity
(equation 18), which in turn drives imports from hard
currency countries (equation 19). If these imports fall
below a specified floor, domestic energy use is reduced
by reducing e1j and energy exports are increased (or
energy imports are reduced) until sufficient import
capacity exists to meet the import minimum.
' This elasticity is the percentage reduction in capital utilization that
follows if energy deliveries fall one percent below nominal sector
demand.
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Figure A2
Condensed Model Structure
A. Equations
Production
1. X;=f(K;,N;)
2. GNP=EX;
i
Capital Formation
7. KF;=f(I;,I(-1);,r;)
8. K.=K;(-1)+KF;(-1)
Employment
9. LF = p X POP
10. N = er X LF
11. N.=c;XN
Energy
12. E;.J = K; X d;,J
13. E;.J = E.J X e;.J
14. RJ=QJ - E0 - Efd.J
Consumption
3. G=tXGNP+DF
4. C = GNP - I - G - (Ex - M)
5. I=aXXk - Ck - Gk - Exk - Rk
6. I. = b, X I
15. D.= (E E,,XhJ)/(I E,.JXhJ)
j j
16. K;=K,X(1 -g,X(1 -D;))
Foreign Trade
17. EHJ = RJ - ECJ
18. MH,=EHJ+T
j
19. MH = f (MH, , MH)
C
Private consumption
Exk
Machinery exports
MHO
Hard currency import capacity
Ck
Expenditures on consumer durables
G
Government expenditures
N
Total employment
Di
Deliveries of fuels and power to sector i as a
Gk
Defense expenditures on capital goods
Ni
Employment in sector i
percent of nominal requirements
GNP
Gross national product
POP
Able-bodied population
DF
Defense Spending
I
Total investment
Qj
Gross output of energy type j
E,,j
Nominal requirements of energy type j in
I;
Investment in sector i
Rj
Residual of domestic production of energy
sector i
K;
Nominal capital stock in sector i
type j after deduction for domestic
E ;,j
Deliveries of energy type j to sector i
K;
Active capital stock in sector i
deliveries
r fd,j
Deliveries of energy type j to final demand
KF;
Net capital formation in sector i
Rk
Capital repair
ECj
Net exports of energy type j to Communist
LF
Civilian labor force
T
Net earnings of hard currency (other than
and other countries
M
Imports
through trade in fuels) and net credit
EHj
Net exports of energy type j to hard currency
MH
Imports from hard currency countries
drawings
countries
MH
Minimum imports from hard currency
Xi
Value added in sector i
Ex
Exports
countries
Xk
Value added in machinery and construction
sectors
C. Parameters
a
Ratio of deliveries to final demand of machin-
er
Employment rate
p
Participation rate
ery and construction to value added in these
e,,j
Deliveries of energy type j to sector i as a
ri
Depreciation rate of capital in sector i
sectors
percent of nominal requirements
t
Share of output devoted to administration
b;
Share of total investment going to sector i
Elasticity of active capital with respect to
and research and development
c;
Share of total employment in sector i
input of energy in sector i
d .,j
Input of energy type j per unit of capital in
hj
Units of standard fuel per unit of energy type j
sector i
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