THE SOVIET ECONOMY SHOWS SOME IMPROVEMENT, BUT HARD CHOICES REMAIN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00591R000100040005-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: March 1, 2010
• Sequence Number: 5
• Publication Date: January 1, 1985
• Content Type: REPORT

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Secret
SOV 85-10005
January 1985
Copy 4 8 5
Directorate of Secret
Intelligence
The Soviet Economy
Shows Some Improvement',
but Hard Choices Remain
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Directorate of Secret
Intelligence
The Soviet Economy
? Shows Some Improvement,
but Hard Choices Remain
This paper was prepared by
SOYA.
Comments and queries are welcome and may be
directed to the Chief, Econometric Analysis Division,
Secret
SOV 85-10005
January 1985
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The Soviet Economy
Shows Some Improvement,
but Hard Choices Remain
Key Judgments Recent Soviet economic performance has been mixed. Average annual
Information available growth of GNP since 1982-slightly under 3 percent per year-is up from
as of 20 December 1984 the unusually low rates of 1979-82. It is still below the moderate rates of
was used in this report.
increase posted in the early 1970s, however, and substantially below the
relatively high rates of the late 1960s.
In 1983, growth in most sectors of the economy speeded up from the slow
rates of the previous four years. This acceleration reflected improvement in
several major factors:
? Warmer winter weather helped transportation and slightly eased the
demand for energy, while better growing conditions contributed to an
increase in farm output.
? Discipline and anticorruption initiatives seem to have generated greater
effort in both labor and management, including their more efficient use
of resources.
? Substantial growth in new plant and equipment helped reduce raw
material and transportation bottlenecks.
? Stable military procurement since the mid-1970s may have eased the
pressure on the machinery industry, which also supports investment.
? Productivity improved substantially because of these changes.
Although difficulties in agriculture pulled GNP growth down to about
2 percent this year, the higher rate of growth in industry and key service
sectors has continued. Agricultural production fell slightly in 1984-the
output of several major crops was down from the 1983 level, even though
livestock output reached new record levels. Outside agriculture, growth for
the year should equal the 1983 rate of 3 percent.
Growth in 1983 was most rapid in investment-the key to modernizing the 25X1
economy-while consumption grew at a rate somewhat below that of GNP.
The rate of investment growth in 1984 is hard to establish, but
consumption has grown at roughly the 1983
rate, or perhaps a little faster. There have been no clear signals about 25X1
changes in the level of outlays for defense, but recent increases in overall
growth in the economy suggest that Soviet planners could have increased
growth in defense spending while still allowing somewhat higher growth in
investment and consumption. Major changes in the shares of these uses,
however, can be made only slowly. 25X1
Secret
SOV 85-10005
January 1985
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 The annual plan recently announced for 1985 implies a growth rate target
for GNP of 31h to 4 percent-a rate we think is optimistic. Assuming that
crops recover somewhat and that recent improvement in nonagricultural
economic performance continues, GNP growth probably will average about
3 percent over the next year or two. This outlook for GNP could worsen,
however, if new transport or industrial bottlenecks arise, or if the gains
from improved labor discipline are not sustained. On the up side, unusually
good weather could lead to a surge in growth.
Over the second half of the 1980s we expect GNP growth to average 11h to
2'h percent per year. This is below the rate of the last half of the 1970s,
when the Soviet industrial growth slowdown first became evident. This
somewhat lower outlook for growth over the long term reflects our
judgment that the special factors contributing to improved performance in
1983 and 1984 probably will be hard to sustain or expand beyond the next
year or two. Two fundamental factors will continue to constrain growth, as
they have since the late 1970s. These are the slowing growth of the labor
supply and the rising costs of extracting, processing, and transporting raw
materials. In addition, energy supplies could become a drag on growth if
export levels are kept high and the Soviets do not meet their aggressive en-
ergy conservation plan. Clearly, the drag on growth exerted by slow labor
force growth and rising costs of raw materials will get worse later in the
1980s, before possibly easing a bit in the next decade.
The potential for easing these constraints on growth through greater
investment is limited, however. Machinery output cannot expand fast
enough to support high growth in deliveries for defense and investment
without limiting growth in consumer durables, and this would work against
recent policies to improve worker incentives. Given the need to step up the
replacement of obsolete equipment, problems with assimilating new tech-
nology, and the Soviets' highly centralized management and incentive 25X1-
system, overall productivity probably cannot do more than hold steady.
Overall, recent speeches on the 1985 plan and budget seem to reaffirm the
policy that the leaders have been following for the last few years. This has
been an effort to provide at least some growth in living standards,
continuing growth in fixed investment near recent rates, and some growth
in resources committed to defense. Given the reaffirmation, we believe the
recently announced 12-percent increase in the official defense budget is a
political statement rather than an accurate guide to planned defense
spending.
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Although these growth prospects do not suggest that. the Soviets are facing
an economic crisis, this growth is too low to enable the Soviet leadership to
meet ambitious goals for modernizing industry and the military while
raising living standards at perceptible rates. Even if the economy grows in
the second half of the 1980s at an average rate of 3 percent a year (above
the average rate we believe likely), it would not enable Moscow at one and
the same time to improve living standards at past rates, to meet rising
investment requirements, and to return defense spending growth rates to
those before the mid-1970s. Our analysis indicates that, at current rates of
growth in investment and defense spending, growth in per capita consump-
tion would slow further during 1986-90, meaning little perceptible gain for
the average consumer. Moreover, any substantial shift toward defense
would endanger consumer programs. With present per capita consumption
in the USSR substantially below even most East European standards, such
limited prospects suggest little likelihood for gains in worker morale that
would have important implications for growth in general.
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Key Judgments iii
Key Sector Performance
Agriculture 5
Implications for Leadership Policy Options 10
1. USSR: Growth of GNP and Nonagricultural GNP
2. USSR: Growth of Output of Key Industrial Materials
4. USSR: Growth of Output of Consumer Nondurables
5. USSR: Growth of Transportation Activity
6. Linkage Between Future Growth in Defense and Per Capita 11
Consumption, 1986-90
Secret
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1.
USSR: Growth of GNP and Selected Sectors of the Economy
2
3.
USSR: Growth of Industrial Output and Factor Productivity
7
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The Soviet Economy
Shows Some Improvement,
but Hard Choices Remain
than in 1983, partly because the gain in that year
included a rebound from the very poor performance in
1982. Figures for Soviet economic growth are present-
The rate of Soviet economic growth declined fairly
steadily from the late 1960s for more than a decade,
with a sharp drop after 1978. Performance was
particularly bleak during 1979-8 1, when unusually
cold and snowy winters snarled transportation and
interrupted industrial production and poor-to-
mediocre grain harvests held agricultural output
down.
The Soviet Union is now in a period of improved
economic performance, but we believe the scope of the
recovery is limited and its longer term implications
are probably small. This paper reviews the perform-
ance in 1983 and 1984 and identifies the major
factors responsible for the upturn in growth. Taking
account of this recent record, we also give a range
within which future Soviet growth is likely to fall and
examine major influences on that projected range.
Last, we consider the consequences of these prospects
for Soviet policy options.
Soviet economic growth accelerated in 1983 from the
unusually slow rates of 1979-82, when GNP growth
averaged only about 1'h percent per year. In 1983,
GNP increased by 3'h percent-somewhat faster than
we had projected for the 1980s. Performance in
industry, transportation, and agriculture improved
markedly. Production of key basic materials turned
upward, railroads operated more effectively, and agri-
cultural production reached a new high.
In 1984, growth outside agriculture has continued at
about last year's rate. In agriculture, however, a
downturn in crop output in 1984 is likely to cause
GNP growth for the year to slip to about 2 percent.
Industrial growth through the first 11 months appears
to be at least as high as in 1983, and retail trade also
has done well. Transportation growth has been slower
ed in table 1.
Although General Secretary Chernenko noted a re-
cent acceleration in national income growth in his
November 1984 address to the Politburo, this better
performance does not suggest a return to the rapid
(over 5 percent) growth of the late 1960s, nor even to
the brisk (nearly 4 percent) growth of the early and
mid-1970s. It does show that Soviet managers have
had some success in fine-tuning the economy. They
have corrected some of the problems that were slow-
ing growth and reducing productivity-shortages of
key raw materials, railroad tieups, lax labor disci-
pline, and weak links between production responsibil-
ity and results. While recent Soviet growth is respect-
able by Western standards, it does little to lessen the
tight internal competition for resources. It also gives
little hope for much improvement in average Soviet
living standards.
Key Sector Performance
In any consideration of Soviet economic growth, it is
useful to separate agriculture from the other sectors
because it is so volatile, being heavily affected by
weather. Performance in nonagricultural areas-in-
dustry and key services-has shown slow but im-
proved overall growth in both 1983 and 1984, at an
annual rate of about 3 percent (figure 1). This is well
below the average annual rate of the late 1960s and
early 1970s, though it approaches that of the mid-
1970s.
Industry. Soviet industry, which accounts for over
one-third of GNP and is a key source of growth over
the long term, showed stable growth in both 1983 and
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Table 1
USSR: Growth of GNP and
Selected Sectors of the Economy
a Preliminary.
b Projection based on 11-month performance indicators.
Value added at 1970 factor cost.
Table 2
USSR: Growth of Industry
5.9
5.2
5.4
5.9
a Preliminary.
b Projection based on 11-month performance indicator for civilian
industry.
This index of total industrial production (a weighted average of 10
industrial branch indexes) measures industrial output by branch as
value added at 1970 factor cost.
d Includes production for military use for 1971-83, excludes
military-related production for 1984.
d Excludes intra-agricultural use of farm products but does not
make an adjustment for purchases by agriculture from other
sectors.
e Civilian industry only.
e The rate shown reflects a tentative estimate of growth in military
machinery production, which is subject to change as our estimates
of military procurement are revised.
r Includes civilian machinery component only. The indicators fqr
the output of military machinery are too uncertain for even a
tentative estimate at this time.
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Figure 1
USSR: Growth of GNP and
Nonagricultural GNP, 1971-84
1971-75
Overall GNP
-
-
^
Nonagricultural
GNP
1976-78
-
-
-
^
1979-82
-
^
1983-84
-
-
^
-
-
Figure 2
USSR: Growth of Output of
Key Industrial Materials, 1971-84
Ferrous 1971-75
metals 1976-78
1979-82
1983-84
Nonferrous
metals
=
Chemicals
Wood
products
Construction
materials
1984 at over 3'h percent (higher than the rate for
nonagricultural GNP as a whole). Performance by
branches within industry changed in 1984, however
(table 2). In 1983, average growth was higher than in
1984 in branches of industry producing industrial
materials. The energy and consumer goods sectors
were less dynamic in 1983, but machinery growth
increased; in 1984, machinery production is leading
overall industrial performance, but problems in fuels
have continued.
Industrial Materials. In the recent production upturn,
the most significant improvement in growth has been
in branches producing industrial materials-the raw
materials'and intermediate products used throughout
Soviet industry. These branches faltered in the last
half of the 1970s (figure 2). Their sluggish perform-
ance transformed some of these industries into bottle-
necks, as they were unable to supply the materials
required by the plan. Production in these branches
grew by almost 4 percent in 1983 and 3.3 percent in
1984 and was well above their average annual growth
(0.7 percent) during 1979-82.
Energy. Growth of electric power has increased since
1982, but growth in the fuel industry has continued to
fall (figure 3). The contribution to GNP of the
combined output of fuels grew by a little over 1
percent per year in 1983 and 1984, whereas this
figure had been about 2 percent during 1979-82.' Oil
production in 1984 may show its first yearly decline
since World War II. Coal production too continues to
fall slowly. Offsetting the decline in production of
these types of energy, however, is the robust growth in
gas output, which is likely to increase by 10 percent in
1984. Electric power also is showing improvement:
growth in output of electric power in 1984 will be
higher than in any other year since the mid- I 970s. F_
Machinery. Growth in total machinery production-
the source of consumer, investment, and defense
' In standard fuel units, fuel output grew by 2.4 percent in 1983 and
2.9 percent in 1984; it grew by 2.8 percent per year during 1979-82.
25X1
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Figure 3
USSR: Growth of Output of
Fuels and Electric Power, 1971-84
F
els
u
1971-75
1976-78
-
1979-82
1983-84
Coal
Oil
Gas
Electric power
durables-traditionally has been well above the Sovi-
et industry average. It picked up in 1983 and acceler-
ated further in 1984, led by the increased production
of high-technology equipment and other producer
durables.2 Nonetheless, growth in production of
much-needed transportation equipment and oil equip-
ment has remained slow.
Consumer Nondurables. Overall growth in consumer
nondurable goods did not turn up in 1983-84 (figure
4). Recent growth has continued at the average
annual rate. for 1979-82-less than 2 percent. The
continued decline in growth of soft goods was offset in
1983 by a step-up in annual growth of processed food.
To a large extent, performance in the latter sector is
the result of larger harvests of vegetables and fruit
and of Moscow's continued large imports of grain
(instrumental in spurring growth in the output of milk
and meat).
7 Our estimates of defense spending for 1983 are tentative, and our
estimate of the growth of machinery production for that year may
change as the defense estimates are revised. Our estimates of
machinery growth in 1984 include civilian production only.
Figure 4
USSR: Growth of Output of
Consumer Nondurables, 1971-84
All nondurables
1971-75
1976-78
1979-82
1983-84
Processed foods
Soft goods
Transportation. Transportation-a key service sec-
tor-was another of the economic sectors that re-
bounded in 1983 from a very poor performance in
1982 (figure 5). Freight traffic in ton-kilometers grew
by 5 percent in 1983, 4 percentage points above the
rate of the previous year. Rail transport was the major
factor in the 1983 upturn, more than picking up the
slack caused by a decline in the volume of traffic
carried on highways and rivers. Railroads, which
carry 70 percent of nonpipeline traffic, carried 4
percent more traffic in 1983 than in 1982 and another
2 percent more in 1984. The amount of gas transport-
ed by pipelines has averaged a growth of 13 percent
per year since 1980. Although preliminary indicators
point to a somewhat lower rate of increase for the
sector in 1984, the rate still remains high enough to
accommodate a continued stronger pace for industrial
growth.
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Figure 5
USSR: Growth of Transportation
Activity, 1976-84
Rail 1976-78
1979-82
1983-84
River
_
Highway
Oil pipelines
Gas pipelines
-
-
-
~
Agriculture. Farm output rose by 6'h percent in 1983,
spurred by record production of livestock products-
meat, milk, and eggs. The recent emphasis on increas-
ing the tonnage and quality of such forage crops as
hay and silage-aided by longer and more favorable
growing seasons in 1982 and 1983-boosted feed
supplies and led to higher milk yields and heavier
slaughter weights well into 1984. A mild fall (which
brought the forage crop close to the 1983 record)
helped sustain meat and milk production, and we
expect new livestock production records again in
1984. Nonetheless, farm output as a whole will be
down slightly from the 1983 peak, as production will
slip below its 1983 level for several major crops. The
grain crop in particular is estimated to be only 180
million metric tons this year; this is 15 million tons
below the 1983 level and 25 million tons below the
average level during 1976-80.
Recent Trends in Resource Policies
Although two recent leadership changes have created
some opportunity to adjust policies, it is difficult for
Moscow to make sudden large-scale shifts of re-
sources among the three major categories of uses-
investment, consumption, and defense. In the 1983
upturn of overall economic growth, the share of
investment in GNP rose slightly, while the share of
defense remained roughly constant; consumption's
share of GNP slipped slightly. Preliminary informa-
tion for 1984 does not indicate any meaningful change
in these shares. Despite some acceleration in growth
over the last two years, competition for resources in
the economy remains tight.
Investment. During the 1981-85 Plan period, new
fixed capital investment is taking a slowly rising share
of GNP, and this suggests that planners have recently
given it higher priority. Investment increased at an
average rate of over 4 percent a year during 1981-83,
and the 1984 economic plan called for a similar
increase. Fragmentary information on actual 1984
investment, however, suggests that it is below plan.F_
Consumption. Chernenko, like Brezhnev and Andro-
pov before him, has shown considerable concern for
the welfare of the Soviet consumer through some of
the policies he has supported. To increase the avail-
ability of meat, dairy products, fruits, and vegetables,
about one-third of Moscow's total hard currency
outlays were spent on farm products in 1983. The
Soviets also have stepped up the construction of new
housing; the increase in 1983 in new housing comple-
tions was the largest rise in more than two decades.
Nonetheless, during the 1980s per capita consumption
levels have risen quite slowly-remaining flat in 1982
and increasing by only about 1'h percent in 1983. Our
preliminary estimate is that the gains in 1984 will be
about the same as in 1983 or perhaps slightly greater.
Despite growth through most of the postwar period,
however, Soviet consumption per capita remains low
by Western standards, less than half the US level and
even below the level in most of Eastern Europe. F_
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Defense. Since the mid-1970s the USSR has in-
creased defense spending more slowly than in the
previous decade (1966-75). From 1976 to 1982, out-
lays on military activities grew on average by about 2
percent, and procurement of military equipment was
about flat (albeit at a very. high level). Our estimates
for 1983 are very preliminary, but they suggest some
growth in procurement spending in that year. With
both the economy and defense spending growing more
slowly since the mid-1970s, the share of GNP allocat-
ed to defense has stayed at about 13 to 14 percent-
about double the 7-percent figure for the United
States.
Some key industries, however, must devote a large
share of their output to support defense programs. For
example, more than 25 percent of all machinery .
production is allocated to military procurement. In
the process, resources are denied to the civilian sector
that otherwise could be used to promote economic
growth through investment or to bolster consumer
morale by improving the standard of living. Obvious-
ly, recent improvements in industry do provide the
regime with somewhat more leeway to increase
growth in defense without reducing growth in con-
resulted from changes in policies affecting resource
allocations and the productivity of the economy, then
our projection of growth must be revised upward and
our view of Soviet policy options becomes wider. F_
Our analysis suggests that the recent, more rapid
growth reflects temporary influences. We do not
believe the Soviet leaders have dealt adequately with
the long-term constraints holding down economic
growth in the Soviet Union-slow growth in labor and
capital inputs, rising resource costs, and fundamental
shortcomings in the economic system itself. Rather,
the upturn has followed temporary changes (for exam-
ple, a certain amount of luck with the weather) and a
greater effort to "fine-tune" the economy through
greater discipline, better management, and better
planning of additions to industrial capacity to ease or
prevent bottlenecks.
sumption and investment.
The faster growth in 1983 and so far in 1984 in the
nonfarm elements of GNP could represent either a
temporary recovery from the slowdown in their
growth that began in the latter half of the 1970s or a
more lasting break from the long-term trend of
deceleration in the rate of increase in nonfarm pro-
duction. To assess the likely rate of future Soviet
economic growth, it is essential to understand why
growth outside agriculture accelerated recently. If
this acceleration resulted from temporary influences,
it does not alter the judgments reached earlier about
the fundamental constraints on Soviet economic
qrowth through the remainder of the decade and the
limits that these constraints impose on Soviet policy
choices.' On the other hand, if the improvement
to wait for the materials they needed.
Weather
Among the factors that accelerated economic growth
recently, weather is perhaps the most obvious. Aside
from its effect on agricultural production, extreme
cold and heavy snow during the winters of 1979/80
and 1981/82 increased the demand for electric power
and disrupted transportation. Transport problems in-
terrupted the delivery of supplies, forcing many plants
The much warmer winters of 1982/83 and 1983/84
substantially helped the production of livestock prod-
ucts. Transportation had fewer weather-related inter-
ruptions, and a reduction of the initial demand for rail
capacity to support the Afghan operations may also
have helped transportation performance. Warmer
winters also eased the demand for fuel, and, as more
electric power was generated, the rate of use of
production capacities climbed.
time to decrease.
Furthermore, the breaking of supply bottlenecks
(through better transportation and greater use of
existing labor and plant and equipment) had a ripple
effect throughout the economy. The earlier imbal-
ances among economic sectors had spread negative
effects throughout the economy, and their reduction
enabled production to run more smoothly and down-
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Discipline
The discipline and anticorruption initiatives begun by.
Andropov and reaffirmed by Chernenko seem to have
spurred both labor and management to greater effort.
Spot checks for unauthorized leave and other meas-
ures have increased the average number of hours
worked per person. In the railroad sector, manage-
ment changes have improved performance, discipline
has been tightened, and new programs-such as
requiring enterprises to repair any freight cars that
are damaged-are being. tried.
A tougher line with the officials responsible for
bringing new plant capacity onstream has also appar-
ently yielded some results. Commissionings increased
by a hefty 5 percent each year in 1982 and 1983, up
sharply from the rate of the late 1970s, but growth of
commissionings in 1984 appears to have slowed. Some
of the new plant capacity went to industries producing
industrial materials, and this helped to ease supply
bottlenecks in the industries that relied on them.
Higher growth in new capacity for railroads probably
helped their 1983 performance, while increased ca-
pacity in the trade and supply sector may have
facilitated the distribution of raw materials and con-
tributed to reducing shortages in 1983-84.
Increased Investment
Growth in new plant and equipment was also acceler-
ated by a leadership decision to push investment
markedly above plan levels. The 11th Five-Year Plan
(1981-85) had called for investment to grow more
slowly than the overall economy. That decision-to
slow down planned investment growth to the lowest
rate in Soviet postwar history-was made on the
assumption that economic growth could be stimulated
by more efficient use of existing plants and workers.
Apparently the leadership abandoned that aspect of
the 1981-85 Plan from its very outset. Investment has
been accelerated to about 4 percent per year in order
to provide more balance between the renovation and
reconstruction of existing facilities-the cornerstone
of the original plan-and the expansion of existing
facilities and building of new ones. During 1981-83,
for example, reconstruction of "productive" capital
stock grew by about 6'h percent a year, while con-
struction of new "productive" facilities grew by ap-
proximately 4'h percent a year. If Moscow had speed-
ed up the growth in military procurement during the
Table 3
USSR: Growth of Industrial Output
and Factor Productivity
Average annual
percentage growth
Industrial production
5.9
3.8
2.4
3.8
Combined inputs b
5.2
4.8
4.2
3.8
Man-hours
1.5
1.5
0.8
0.6
Capital
8.7
7.9
7.4
6.9
Overall productivity
0.7
-1.0
-1.8
0.0
Man-hour
productivity
4.4
2.2
1.6
3.2
Capital
productivity
-2.6
-3.8
-4.7
-2.9
a Figures for 1984 are preliminary for civilian industry.
b Inputs of man-hours and capital are combined (using weights of
48 percent and 52 percent, respectively) in a Cobb-Douglas (linear
homogeneous). production function. These weights represent the
distribution of labor costs (wages and social insurance deductions)
and capital costs (depreciation and a capital charge) in 1970, the
base year for all indexes underlying the growth'rate calculations.
same period, it would have been difficult for invest-
ment to grow at that rate and would have increased
the overall demand for the resources most needed for
investment-metal products, machinery, and energy.
25X1
Stable Productivity
The faster growth of GNP as a whole in 1983 and of
most sectors outside agriculture in 1984 seems not to
have been primarily the result of faster growth in
inputs (labor supply or industrial capital) to produc- 25X1
tion. Rather, it seems to reflect improvement in the
productivity of the available labor and other re-
sources. After years of steady decline, overall produc-
tivity in industry stabilized in 1983-84 (table 3).F---]
Much of this stabilization echoes the more efficient
use of available capital stock and labor force because
of factors already mentioned-the breaking of supply
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bottlenecks, better weather, and restraint in the
growth of military procurement. The discipline cam-
paign helped, not only by increasing the number of
hours worked but also perhaps by fostering a stronger
sense of purpose among both workers and managers.
In any case, the official crackdown on corruption and
inefficiency resulted in firings for incompetence and
even execution for "illegal speculation." This may
have led to better management.
Short Term
In our judgment, annual growth of Soviet GNP could
continue at about 3 percent for another year or two,
provided that short-term swings in agricultural output
are moderate. If a given year were favorable for
agriculture, GNP growth could even rise above
3 percent, but it probably would not actually reach
4 percent per year. A number of favorable conditions
would have to coincide for growth to reach even
3 percent, however, and the rate probably could not be
Longer Term
Even if it continues another year or two, the stronger
showing in much of the economy in 1983 and 1984
would not foreshadow, for the longer term, an average
growth rate substantially higher than we have previ-
ously projected-1 to 2 percent a year. The recent
growth record has led us to increase by approximately
half a percentage point our projection of average
growth through the remainder of the decade (we now
estimate it at 1'h to 2'h percent a year). Such an
increase is too slight to significantly lessen competi-
tion between civilian and military claims on resources
or to expand the leaders' policy options.
Our revised projection is still lower than the 2'h- to 3-
percent average annual growth that we projected for
the first half of the decade. The special factors that
affected 1983-84 will be hard to depend on or to
sustain in the future. Moreover, the gains from partial
relief of some bottlenecks in areas like transportation
and industrial materials will have to expand as the
more fundamental factors that have constrained
growth since the late 1970s continue to tighten.F__
sustained.
Until we have more information to confirm any
change in the recent Soviet growth trend outside
agriculture, we assume that in 1985 industry and
other key sectors will continue their improved growth
performance of the last two years, and that agricul-
ture will post some moderate gains. We expect the
most promising sources of sustained near-term growth
to be the same influences that contributed to the
apparent stabilization of productivity in 1983 and
1984:
? Relief of supply bottlenecks.
? More effective use of labor.
? Continued healthy increases in new capacity-
especially as needed to ease or prevent bottlenecks.
Nevertheless, even the short run has a number of
uncertainties. Whether the labor discipline campaign
has run its course is a major unknown, although so far
Chernenko apparently has been able to sustain the
momentum created by Andropov. Managers will have
to continue eliminating old bottlenecks, avoiding new
ones, and raising the rate of use of their capital. This
is necessary, but difficult: the railroads, for instance,
are currently operating at near capacity, and serious
We expect the energy constraint to be less severe than
was implied in our earlier projections, however.' This
is due partly to our current assumption that in the
long run the planners will shift some of the available
energy from exports to the domestic economy and
partly to the Soviet success in the last few years in
slowing the growth in overall domestic energy con-
sumption. Nevertheless, energy remains a likely drag
on growth by the end of the decade, especially as oil
and coal supplies tighten. The constraint will be worse
than we expect if progress in conservation is not
adequate or if gains in substitution of gas for other
fuels slow down.
In looking at longer term growth prospects, Soviet
planners recognize that past demographic trends will
limit additions to the labor force. Therefore, they are
seeking ways to boost growth of capital inputs and to
raise productivity in general, but without stretching
investment resources too thin. As plans for 1986-90
begin to take shape, Soviet economists are proposing
transport tieups could occur at any time.
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at least two distinct growth strategies, which we can
loosely term "consumption oriented" and "investment
oriented." Both address the key issue of productivity,
but their approaches to raising productivity differ:
? The consumption-oriented strategy would attempt
to increase growth of labor productivity by supply-
ing more and better consumer goods as incentives.
? The investment-oriented strategy would attempt to
raise labor productivity by producing more and
better new machinery. This strategy would require
the late 1970s. Such improvement is unlikely because
of systemic problems and the low probability that
these problems will be remedied or eased.
Several fundamental and as yet unchanged factors
limit Soviet longer term growth prospects:
? Additions to the working-age population will be
lower in the next several years than at any time
since the early 1960s, and the full impact of these
changes will not be.felt until the late 1980s.
substantial increases in investment.
It is difficult to foresee what the-Soviet leaders will do
(as yet they have released little official information
about their plans for 1986-90), but they have already
adopted two costly programs that will continue into
the next plan period. Investments for the Food Pro-
gram are expected to cost as much as 265 billion
rubles, and for the long-term Energy Program, about
170 billion rubles. These two alone commit the leaders
to maintaining a relatively high rate of investment
growth. In addition, a Soviet planner has stated
informally that investment will continue to grow at
about the current rate of 4 percent per year in the
next plan period. Anything less than 4 percent-
assuming continued investment in the food and energy
programs-would leave little room for growth of
investment in areas needed to support future econom-
ic expansion-machine building and transportation.
Even if the recent improvement in growth were linked
to factors operating over the longer term,. the average
annual rate of increase over the remainder of the
decade is not likely to exceed 11h to 21 percent. Only
a fundamental improvement in productivity appears
to offer the potential for moving longer term growth
in the 1980s above 3 percent. Unless the Soviets
develop growth strategies S that lead to a sustained
return to the productivity trends of the 1960s or early
1970s, growth will flatten or decline again, as it did in
' Changes in growth strategies that might sustain growth at its
recent rate include higher growth in investment in the machinery
sector, faster retirement of obsolete capital, successful conservation
of energy and basic materials, and stable or even reduced military
procurement. The leadership also could try to force greater efficien-
cy by limiting supplies of inputs, increasing output plans, and using
both administrative incentives and penalties to force management
and labor to greater or more effective effort.
? Growth of capital stock will probably hold steady at
recent rates, despite some improvement in invest-
ment growth.
? The costs of industrial and agricultural raw materi-
als -especially energy-almost surely will continue
to rise. Even though the Soviet Union has great raw
material reserves, the cost of exploiting them has
risen sharply with the depletion of the most readily
available sources. Opening new sources requires .
that more money be spent to provide transportation
links and worker amenities. Moreover, if the quality
of reserves is low, money also must be spent on .
equipment for enriching the ore or other raw mate-
rial being produced.
Economic growth will also be held back by the
USSR's highly centralized system of planning and
management. The greatest potential for economic
gain over the longer term continues to lie in economic
reform. However, nothing in Chernenko's background
or past pronouncements indicates an inclination to-
ward reforms involving systemic change. The inflexi-
bility of the Soviet system has contributed to its
technological backwardness, and the gap between the
USSR and the developed West continues to grow in
those technologies that are not directly related to.
weapon systems. The Soviets have been particularly
unsuccessful in stimulating the advance in the tech-
nologies that, underlie the resurgence of Western
productivity growth-microelectronics, computers,
robotics, and advanced materials. They concentrate
on copying Western developments, a time-consuming
process that impedes rapid development.
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The most important of the economic innovations
carried over from Andropov is the economic experi-
ment introduced on a limited basis in January 1984. It
seeks to spur productivity by giving enterprise manag-
ers more latitude in using investment and wage funds
and to promote efficiency by stressing contract fulfill-
ment as the main indicator of performance success. It
has had some limited success, but analysis suggests
that the experiment itself is too limited at this time to
have much potential for improving industrial perfor-
mance. Its reported success so far probably has
resulted more from the priority given to the needs of
participating enterprises than to the new operating
procedures themselves.
Implications for Leadership Policy Options
In the future, Moscow's ability to satisfy both the
military and the nonmilitary claimants for resources
will be limited by slow economic growth. This pros-
pect (even the slow projected trend rate of 2-percent
growth per year) does not suggest that the Soviet
economy is in desperate straits. It does indicate that
the leaders will have to make choices among their
ambitious goals-or make them all somewhat less
ambitious. The lower the rate of overall growth in the
economy, the harder the choices become. At the
growth rates we project, the USSR cannot
simultaneously:
? Increase consumption substantially in order to
stimulate labor productivity.
? Modernize the economy rapidly to incorporate
more efficient plant and advanced technology.
? Make across-the-board increases in defense pro-
grams in response to a US military buildup.
At 2- or 3-percent growth per year, there will have to
be trade-offs. A major commitment could be made in
one of these areas, but that would probably require
little or no gain in one or both of the others. If,
instead, efforts in defense, investment, and consump-
tion are all allowed some growth, none is likely to
grow enough to meet the full range of challenges
faced. The decisions will be tough to make and the
results probably not satisfying to any particular seg-
Future linkages in growth between defense spending,
per capita consumption, and investment depend on
future trends in productivity and the future availabil-
ity of key resources like fuels. Obviously, the more
success the Soviet leaders have in keeping up produc-
tivity and resource supplies, the more flexibility they
will have in choosing among competing goals. If, as
we think likely, they were to choose to maintain the
respectable recent growth in investment (about 4
percent a year), and if overall growth reached the high
end (about 3 percent) of the range we think is possible,
the leaders could continue to increase defense spend-
ing at recent rates and still have something left over
for modest improvements in living standards.
Figure 6 illustrates these variables. If Moscow shifted
the rate of defense growth up toward the rate of the
1960s and early 1970s (4 to 5 percent) while maintain-
ing investment growth at its present level, any falter-
ing in overall economic growth would cause living
standards to stagnate or even decline. Such a failure
of living standards to improve (from a level that is
already low compared with those in other developed
countries and much of Eastern Europe) would be a
cause of concern for political leaders, at least as it
would be likely to affect workers' morale-and there-
fore their work effort.
Given our outlook for Soviet economic growth in
1986-90, we expect the competition between defense
and civilian uses of output to be particularly acute in
the machinery sector. If growth fell toward the low
end of the range we expect, machinery output could
not grow fast enough to maintain 4-percent-per-year
growth in investment, plus increased growth in de-
fense spending, plus continued delivery of consumer
durables at current levels: Production of consumer
durables would have to decline, as machinery output
would be increasingly directed to investment and
defense; or investment would have to be increased by
imports.
The leaders could choose to slow their industrial
modernization drive, although we think this is less
likely. By cutting investment growth to 2 percent (half
of the recent investment growth rate), they could
make room to increase growth in consumption or
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Figure 6
USSR: Linkages Between Defense Spending and Per Capita
Consumption in Terms of Future Growth, 1986-90
Above average
productivity'
and full use of
capital a
Average
productivity
(1976-82) and
constrained
use of capital
2 3 4 5 6
Defense growth (average annual percentage)
a The use of capital is assumed to vary primarily on the basis of energy interfuel substitution and energy efficiency; constrained use assumes
consumption. Full use assumes that growth of energy is at the high end of smaller gains in these areas. Investment is assumed to grow at 4 percent
the range we consider likely and that the Soviets make substantial gains in per year in all cases.
defense modestly; but they would require generally
good luck or very effective policies to maintain overall
economic growth at close to 3 percent a year. And the
pursuit of this option would seriously threaten the
prospects for GNP growth in the 1990s by limiting
the introduction of new plant and equipment during
the rest of the 1980s.
Overall, the leadership will probably try to continue
recent policies, with:
? A fairly high commitment to investment in econom-
ic modernization.
? Defense growth at about the rate of GNP growth.
? Improvement in living standards, but at a rate
slower than the rate of growth for the economy as a
whole.
The pressure to raise defense spending substantially is
certainly strong, as acknowledged in Chernenko's
November 1984 speech and as hinted at in the
announced 1985 defense budget. But a decision to
actually increase the rate of growth for defense will
constrain investment and, therefore, the prospects for
growth and future consumption.
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