JEC BRIEFING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00274R000300150014-9
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 20, 2016
• Document Release Date: May 17, 2007
• Sequence Number: 14
• Content Type: REPORT

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JEC BRIEFING
I. INTRODUCTION:
A. Mr. Chairman, in your request that we brief your
subcommittee on Soviet economic prospects, you noted the
"unusual amount of confusion in Congress and the general
public today as to where the Soviet economy stands." You
also suggested that our briefing be built around an
assessment of "the capabilities and vulnerabilities of
the Soviet economy."
1. We agree that confusion regarding the Soviet economy
abounds.
2. We believe, however, that this confusion results not
so much from disagreement over Soviet economic
performance as from uncertainty as to how to
interpret that performance.
3. Western observers have tended to describe Soviet
economic performance as "poor" or "deteriorating" at
a time when Soviet defense spending continues to grow
rapidly, overall Soviet gross national product in
real terms continues to increase, and Soviet GNP is
second in size only to that of the US.
B. These characterizations are not wrong.
1. Given past rates of economic growth, the
gap between Soviet performance and plans and
expectations and the marked departure from standards
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of economic efficiency, the record compiled by the
Soviet economy in recent years has indeed been poor.
2. Results that are unsatisfactory when measured by this
yardstick, however, do not mean that the Soviet
economy is losing its viability as well as its
dynamism.
C. In fact, we do not consider an economic "collapse"--a
sudden and sustained decline in GNP--even a remote
possibility.
1. Our projections indicate that growth in GNP will
remain slow but positive.
2. Growth is being retarded by a combination of
factors. Some are beyond Soviet control, and some
reflect the weaknesses of the Soviet economic system
that even the new Andropov regime is not likely to
change. Other factors holding down economic growth
represent policy choices--for example, the allocation
of resources to defense--that could be modified but
are unlikely to change much in the near term.
3. Nevertheless, we expect annual growth to average one
to two percent for the foreseeable future. Per
capita consumption could level off or even fall
slightly.
D. Returning to your initial questions, we will try to give
as balanced a picture of the Soviet economy as possible.
We will summarize and assess its basic capabilities and
vulnerabilities.
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1. We will, however, first identify the goals that
economic activity is designed to serve in the USSR
and then describe Soviet success in meeting these
goals.
2. As a final piece of stage-setting, we will discuss
how the 11th Five-Year Plan is faring, judging by the
results of the first two years, 1981. and 1982.
II. Soviet Economic Objectives and Priorities
A. Turning first to Soviet economic objectives and
priorities, we believe that Soviet economic activity has
always focus d on building military power.
..r
1. But the Soviet leadership has also always placed
great stress on rapid economic growth.
2. The good life for the Soviet populace, in the form of
a rising standard of living, has been of importance
to Moscow too for almost 30 years. At least until
quite recently, however, Soviet consumers have been
"residual claimants" with improvement in their
material wellbeing subordinated to the demands of the
military and to the high rate of capital investment
necessary to insure fast GNP growth.
3. In pursuit of these national objectives, successive
regimes have given heavy industry priority status
because it is the source of military and investment
goods.
4. Meanwhile, despite some experimentation with
decentralized forms of economic administration, the
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Soviet leadership has remained firmly committed to
strict central planning and management of most
economic activity.
B. Soviet economic performance in terms of the objectives
and priorities established by the leadership has been
mixed.
1. The Soviet Union has built an exceedingly powerful
military force. Under Khrushchev the emphasis was on
strategic nuclear programs, but Brezhnev presided
over an across-the-board expansion and modernization
of all Soviet forces.
2. While developing its military power, the USSR has
been able to maintain a rapid rate of economic
growth.
a. Soviet GNP, as measured by CIA, grew at an
average annual rate of 4.6 percent from 1950
through 1981. During the same period US GNP
increased by 3.4 percent per year.
b. Soviet growth, however, has steadily slowed
during this period--especially after 1978. The
deceleration can be seen in Figure 1. The
average annual rate of increase in GNP was about
6 percent during the 1950s, 5 percent during the
1960s, and nearly 4 percent between 1970 and
197-x. In 1979-81, yearly growth averaged less
1~ than 2 percent. This year we expect GNP growth
to be about 1.5 percent.
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c. To a remarkable degree, the slowdown in Soviet
economic growth has a parallel in OECD
countries. During the first three years of the
seventies, OECD GNP increased at the rate of 5
percent per year. The crisis induced by OPEC oil
prices brought OECD growth to a halt in 1974-
75. Then in 1976-79, GNP resumed a respectable
rate of growth of 4 percent per year. In 1980-
81, however, GNP growth in the OECD collapsed to
1.2 percent per year.
d. The slowdown in the USSR in part reflects four
consecutive poor or mediocre harvests. But most
sectors of the economy have been sluggish,
especially in industry.
(1) In large measure, industrial performance has
been held back by the emergence of serious
bottlenecks unconnected with agriculture.
Growth in industrial output, which averaged
almost 6 percent a year in 1971-75, fell
abruptly in 1976 and in 1976-81 averaged just
slightly over 3 percent annually.
(2) The decline in growth has been steady.
Industrial production grew by only 2 percent
in 1981 and is expected to rise by slightly
less than 2 percent this year.
3. The higher priority accorded to military strength is
suggested by the continued rise in defense spending
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at the average annual rate of 4 percent that has
prevailed since the mid-1960s.
a. Growth in defense spending has not yet been
trimmed to provide resources that might ease
strains in the rest of the economy.
b. Defense spending is now about 13 to 14 percent of
GNP, as our next graphic (Figure 2) on the
composition of Soviet GNP by end use shows.
4. At the same time, leadership concern about consumer
welfare seems to have somewhat diluted the commitment
to growth.
a. The share of Soviet GNP allocated to fixed
capital investment--the driving force behind
Soviet economic growth--has more or less
stabilized in the last few years at about 26
percent, compared with about 20 percent in 1960.
b. Slowing investment growth is explained partly by
bottlenecks in sectors providing building
materials and machinery. But it probably also
stems from a political decision to protect Soviet
consumers in a time of tightening economic
constraints.
c. Nonetheless, consumption still accounts for only
55 percent of Soviet GNP, far below the share in
most non-communist industrialized countries.
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III. The 11th Five-Year Plan So Far
A. Turning to recent developments, the results of the last
two years must have been most disappointing to Soviet
leaders. It is already clear that most of the important
goals of the 11th Five-Year Plan cannot be met.
1. The plan was excessively ambitious from the start and
performance has been far below plan. The small
increase in agricultural output this year will do
little more than offset the decline in 1981.
2. The slump in steel is particularly damaging to
machinery production. Along with shortfalls in the
output of building materials, it also threatens to
curtail growth in construction. Even the moderate
1981-85 investment targets could be in jeopardy.
3. From the beginning the 11th Five-Year Plan goals
depended on large productivity increases.
Underfulfillment of the productivity plans has been
striking, however. The rise in industrial labor
productivity, for instance, averaged only 1.4 percent
a year in 1981-82, far below the 4.5 percent-per-year
increase called for by the plan.
4. The unrealistic, almost fantasy-like character of the
plan can be illustrated by comparing production goals
with investment plans. As our next chart (Figure 3)
shows, incremental capital output ratios--that is,
the amount of additional capital needed to produce an
additional unit of output--have been rising steadily
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and steeply in the USSR for many years, with little
prospect that the rise will soon end. Yet, based on
little more than admonitions that productivity must
rise, capital investment targets in conjunction with
output goals imply a decline in these ratios.
B. Bright spots in economic performance in 1981-82 are hard
to find. But there have been a few.
1. On the production side, natural gas continues to rise
at a rapid rate--7 percent in 1981 and nearly 8
percent this year.
2. Overall energy production might be considered a
plus. In 1982 at least, output of all major forms of
primary energy rose. Oil production continues to
inch ahead--by about 0.7 percent this year. And coal
output, reversing a three-year decline, evidently
will rise by about 2 percent. At best, however, it
will barely exceed the 1980 level.
3. The USSR has also substantially improved its hard
currency balance of trade this year. Our next chart
(Figure 4) illustrattes the point.
a. The hard currency trade deficit last year was
about $4 billion, causing some anxiety in Western
financial circles. Judging by first half 1982
results, the deficit this year will be reduced to
perhaps $2 billion.
(1) The central authorities, with their total
monopoly of control over foreign trade and
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the allocation of key resources, sharply
raised the volume of oil exports to the West,
despite softening prices in world markets.
At the same time, they held the value of hard
currency imports steady.
(2) The result was a trade deficit in the first
half of 1982 that was almost $4 billion lower
than in the same six months of 1981. The
already relatively small hard currency debt--
$11.5 billion at the end of 1981--will rise
little if at all.
b. The Soviets have paid a price for this success,
however.
(1) The increase in oil exports to the West came
at the expense of deliveries to Eastern
Europe and domestic consumption.
(2) In holding the value of imports steady,
Moscow also accepted a reduction in the
volume of hard currency imports. In
particular, it scaled back purchases of
Western equipment and consumer goods needed
to help modernize Soviet industry and meet
consumer needs.
IV. Basic Strengths of the Economy
A. We turn now to our discussion of the strengths and
weaknesses of the Soviet economy. We will look first at
the USSR's economic strong points, starting with those
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attributes that shore up the economy as a whole, and then
move on to identify specific sectors that are performing
in a particularly effective fashion.
B. The sheer size of the economy, reflecting the substantial
growth since World War II, is one of its strengths. As
the next chart (Figure 5) indicates, Soviet GNP in 1982
will equal about $1.6 trillion, roughly 55 percent of US
GNP this year. Per capita GNP is almost $6,000.
C. The population is also large, currently numbering about
270 million. The labor force totals about 147 million
and, by world standards, is well-trained and well-
educated.
1. Literacy is by now almost universal in the USSR. The
educational level of the population has been rising
rapidly.
2. The emphasis on mathematics, engineering, and science
in Soviet schools is also a plus for the
technologically oriented Soviet society. About one-
third of total instruction time in secondary schools
is devoted to math and science.
D. Another of the strengths of the Soviet economy is the
tremendous accumulation of capital assets that has
occurred since World War II.
1. The value of Soviet capital assets expressed in
constant prices increased almost 11-fold between 1950
and 1980--about 4.4-fold from 1960 through 1980 long
after completion of economic recovery from the
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devastation of the War.
2. This phenomenal expansion reflects the allocation of
a large and, until recently, rising share of Soviet
resources to capital investment. The rapid growth of
capital assets has resulted in a more than three-fold
increase in the amount of capital per worker.
3. Two-thirds of the stock of capital assets is
concentrated in industry, agriculture, transportation
and communications, and construction. Only about 15
percent of total gross fixed capital consists of
housing or is used to provide services to the
population such as health care and education.
E. The USSR is exceptionally well endowed with natural
resources, as the reserve estimates in Table 1 indicate.
1. Beginning with energy, the Soviet Union has about 40
percent of the world's proved reserves of natural
gas.
a. Soviet reserves of coal account for 30 percent of
the world's total recoverable reserves and are
sufficient to insure over 200 years of output at
current rates of production.
b. The Soviets do not publish figures for oil
reserves, as they do for gas and coal. Our
estimate is that oil reserves, at least in West
Siberia, are substantial, though increasingly
difficult to exploit.
2. The USSR is abundantly stocked with other important
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raw materials.
a. According to Soviet studies, iron ore reserves
amount to about 60 billion tons--some 40 percent
of the world's total.
b. With as much as one-fifth of the world's forest
resources, the USSR has a virtually inexhaustible
source for producing wood and wood products.
c. In addition, the Soviets claim--and may well
have--the world's largest reserves of manganese,
nickel, lead, molybdenum, mercury and antimony.
They also say that reserves of chromite, gold,
platinum-group metals, zinc, and copper are among
the largest in the world and sufficient to
support Soviet mine production for many decades.
F. With its wealth in human, cap
tal, and material
resources, the USSR is highly self-sufficient--another of
the economy's major strengths. Our next chart (Figure 6)
illustrates this.
1. The high degree of Soviet self-sufficiency in the
vital raw materials sphere is shown by its position
as a net exporter of a large number of these
materials. Net exports of energy--mostly of oil and
natural gas--now total about 4 million barrels a day
equivalent or about 15 percent of total energy
production.
2. The Soviets are major exporters of precious metals,
ferrous and non-ferrous ores and metal products,
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chemicals, and timber. Because of expected gains in
output the Soviets will be able to expand sales of
key minerals such as platinum group metals, nickel,
cobalt, manganese, chromite, and gold during the
1980s.
3. Though highly self-sufficient, the USSR is not
autarkic. Indeed, for at least the last decade,
trade with the West has been an important element in
the USSR's efforts to modernize the Soviet economy
and render it more efficient.
a. I will develop this point in detail later, but
let me mention here that the Soviets now must
rely on Western imports of capital and technology
to increase or maintain production of some of the
raw materials in which they are abundantly
endowed and self-sufficient.
b. I would also like to note that imports from the
West have become critical to Soviet efforts to
improve, or simply maintain, the quality of the
Soviet diet. In 1981, imports of grain and other
agricultural products reached almost $12 billion,
or about 40 percent of the USSR's total hard
currency purchases.
c. But despite the large-scale expansion in
agricultural imports, the Soviet Union remains
basically self-sufficient with respect to food.
(1) These imports are intended mainly to prevent
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a decline in meat consumption and are not
essential to maintaining an adequate quantity
of food consumption.
(2) At 3,300 calories--see our next chart
(Figure 7), which compares the composition of
the US and Soviet diets--average daily food
intake is equivalent to that in developed
Western countries. Grain production is more
than sufficient to meet consumer demand for
bread and other cereal products.
4. To summarize, when we say the USSR is self-
sufficient, we do not mean that the Soviets neither
need nor benefit from trade.
a. Imports, particularly from the West, can play an
important role in relieving critical shortages,
spurring technological progress, and generally
improving Soviet economic performance.
b. What we do mean is that the ability of the Soviet
economy to remain viable in the absence of
imports is much greater than that of most,
possibly all, other industrialized economies.
G. In considering fundamental strengths, the highly
centralized, rigid system of administering the economy--
while perhaps the Soviet Union's major economic
millstone--has had its advantages in enabling the
leadership to mobilize resources in crash programs to
achieve priority objectives.
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1. The prime example of this capability has been
Moscow's success in building up its military might.
This has been achieved through centrally-directed
mobilization and allocation of the USSR's highest
quality human and material resources and a rigorous
system of quality control in military production that
prevents the shoddiness so characteristic of Soviet
civilian output.
H. We turn now to specific areas where Soviet economic
performance has been especially strong.
1. As we mentioned, natural gas has been a major Soviet
success story. It will play a pivotal role in
meeting the energy needs of the economy in the 1980s,
particularly as a substitute for crude oil in
industry and in home use but also as a potential hard
currency earner.
2. The nuclear power industry, although it has not met
the full expectations of the leadership, has also
done quite well. We estimate that the annual
increase in nuclear-generated electricity will
increase by about 17 percent a year during 1981-85
and supply about 11 percent of the country's
electricity by the end of the period.--
3. Development and production of some Soviet natural
resources are proceeding at respectable rates despite
the obstacles of remote location and conditions that
make extraction exceedingly difficult.
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a. The USSR is second only to South Africa in the
production of gold. Production in 1981 was about
325 tons. Its stock of gold is about 1900 tons,
worth over $25 billion at current prices.
b. Soviet production of platinum-group metals,
nickel, and cobalt will jump sharply during the
1980s.
V. Basic Weaknesses of the Economy
A. We will now look at the weaknesses or vulnerabilities
represented on the Soviet economic ledger. We will focus
first on problems stemming from circumstances beyond
Soviet control and then turn to the shortcomings and
vulnerabilities of the economy that are inherent in the
USSR's system of economic planning and administration.
Then we will consider specific weaknesses.
B. Soviet economic performance has been hurt in recent years
by declining increments to the labor force and by the
increasing difficulty of extracting and transporting
vital energy and other raw material inputs.
1. Because of lower birth rates in the 1960s, an
increase in the number of workers reaching retirement
age and a rising mortality rate among males in the 25
to 44 age range, increments to the working-age
population have been declining since the mid-1970s.
The falloff became particularly sharp starting in
1980, and--as our next chart (Figure 8) shows--
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increments will remain very low throughout this
decade.
a. From 1971 to 1981, the working-age population
grew by about 23 million. In 1981-91, it will
increase by only about 4 million people.
b. Other factors will aggravate the labor
shortage. Large-scale migration from the
countryside to urban areas, formerly a rich
source of labor supply to the rest of the
economy, has slowed considerably in the past This
decade. This problem is compounded by the fact
that rural residents in the Central Asian
republics, where increments to the working age
population will be highest and where there still
is substantial redundant labor, are reluctant to
migrate.
2. As we noted earlier, the Soviet Union is blessed with
enormous quantities of a large array of raw
materials. But in many instances these materials are
increasingly inaccessible, and thus the cost of
exploiting them has been rising sharply.
a. With the decline in production in the Volga-Urals
oil fields in the mid-1970s, growth in Soviet oil
production has come from West Siberia, much of it
from the giant Samotlor field. However,
production in this field has peaked, compelling
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the Soviets to seek oil in even more remote and
forbidding regions.
b. Decades of mining have depleted the underground
coal mines of the European USSR. The Soviets
must tunnel deeper shafts and mine thinner seams
just to maintain coal output at current levels.
During 1976-80, for example, more than 80 percent
of new mine output was needed to offset depletion
at older underground operations.
c. Even the extraction and distribution of natural
gas--production of which has been rising very
rapidly--has grown considerably more expensive.
(1) More and more gas must be piped from central
Asia and Siberia, especially Tyumen oblast.
(2) Such long-distance transmission requires
construction of lengthy pipelines and
compressor stations, a very expensive
operation.
d. Easily accessible supplies of many non-energy raw
materials have also been exhausted.
(1) The Soviets have largely depleted reserves of
copper, nickel, and bauxite in the Ural
Mountains and are beginning to tap deposits
in northern Siberia or, in the case of
bauxite, are exploiting non-bauxite ores and
boosting imports.
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(2) In the case of iron ore, the Soviets have
depleted their richest deposits in the
Western USSR. To compensate for declining
ore grades, increasing amounts of investment
must be devoted to ore-enriching facilities,
raising both production costs and manpower
requirements.
(3) The Soviets are also faced with the depletion
of forests in the traditional logging areas
of the north-western USSR.
3. As our next chart (Figure 9) shows, the increase in
fixed capital investment has also slowed markedly in
recent years. This deceleration can be seen as both
forced upon the leadership by shortages of key inputs
and--as I noted earlier--as a conscious policy
choice.
a. The 11th Five-Year Plan calls for investment in
1981-85 to rise by less than 2 percent a year, by
far the lowest planned rate of increase in the
post World War II period. The rise from 1971-75
to 1976-80 was nearly 30 percent.
C. Because of tightening demographic, investment, and
resource constraints, the traditional Soviet economic
growth formula of relying on lavish use of labor,
capital, and material inputs is no longer applicable.
1. The Soviets themselves have long recognized the need
for a new approach. For at least a decade they have
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been stressing the necessity of switching from an
extensive to an intensive pattern of growth. This
means essentially that growth must largely spring
from productivity gains--from more efficient use of
resources for any given level of technology and from
faster technological progress.
2. But the productivity of capital has actually been
falling for several years, and labor productivity--
see our next chart (Figure 10)--has been rising at
steadily declining rates. For this, shortcomings in
the Soviet system seem largely to blame, a matter to
which I will now turn.
D. The Soviet economic system is peculiarly ill suited to
promote efficiency and technological progress. Four
features of the system help to explain why.
1. First, economic planning and management are highly
centralized, with much allocation of resources by
administrative fiat. Reforms aimed at increasing the
degree of enterprise autonomy have generally come to
naught.
a. Indeed, central control over economic activity
has been on the increase for the last several
years.
2. Along with overcentralization,he goals the central
authorities impose on the economy have generally been
unrealistic. Faced with a gap between what they want
to do and what is possible, Soviet leaders have
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tended to call for productivity gains and material
savings that are beyond the system's capacity.
a. The economy thus chronically operates under
conditions of strain and shortage.
b. With inputs regularly hard to come by,
enterprises have a strong incentive to hoard.
This intensifies bottlenecks and leads to more
hoarding, in a depressing circle of waste.
3. Over centralization coupled with unrealistic planning
has meant that the behavior of factory directors is
largely dictated by the urgency of meeting the plan
imposed by higher authorities.
a. Fulfillment, however, is generally measured by
multiple and often inconsistent "success
indicators" of varying degrees of priority, such
as physical volume of output, gross value of
output, value added, material savings, and
productivity.
b. The principal drawback of this system is that
managers often strive to meet the targets even at
the expense of what is economically rational from
the standpoint of the central authorities and
society as a whole.
c. For example, if gross value of output is a prime
goal, waste is encouraged, as managers seek to
make their production as material-intensive as
possible.
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4. Finally, Soviet economic performance has long been
impaired by the separation of research, development,
and production into different organizations.
Organizations in each of these categories operate
according to different planning targets.
a. There is little stimulus to innovation since the
Soviets have no competitive marketplace to force
both developer and producer to introduce better
products and technologies.
b. Indeed--as Andropov told the Central Committee of
the Party last week--producers tend to view
technological change with hostility. This is
true because the introduction of new products at
a plant initially disrupts serial output,
jeopardizing plan fulfillment and resulting
rewards.
E. Moving from generalizations to particulars, we will look
now at the areas in which the USSR seems particularly
weak or vulnerable.
F. Historically, agriculture has been the economy's leading
problem sector. Its performance over the past four years
has strengthened its claim to that dubious distinction.
1. After peaking in 1978, farm output fell steadily
through 1981, when it stood over 10 percent below the
1978 level. This year production is expected to rise
but by only one or two percent.
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2. Bad weather has had much to do with the decline in
agricultural production since 1978, but harsh weather
and unfavorable geographical conditions constitute a
permanent threat and obstacle to agriculture and only
partly explain why Soviet efforts over the years to
boost farm output have not yielded more dividends.
a. Mishandling of the sector by the Soviet
authorities has also had much to do with its
disappointing performance.
b. Management and planning processes are much too
centralized. Farm efficiency is seriously
handicapped by constant intervention of
unqualified officials regarding what to plant,
when to plant, when to harvest, and the like.
c. Prices of both farm inputs and outputs set by the
central authorities are encouraging an assortment
of output that is inconsistent with the national
plan.
d. Though investment in agriculture has been heavy--
over a quarter of total investment outlays has
gone to the farm sector for many years--much of
it has been misdirected.
e. Deliveries to the agricultural sector of needed
material inputs, such as fertilizers, have been
insufficient while the proportion of aged and
unskilled workers in the farm labor force--which
accounts for about 20 percent of the total labor
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force--is high.
3. In recognition of the rising popular demand for
quality food, Brezhnev told the Central Committee in
late 1981 that food was the most important "political
and economic problem" of the 11th Five-Year Plan.
a. The increase in demand is a reflection of both
rising consumer expectations and incomes. The
inability to satisfy that demand is a function of
both stagnant output of most livestock products
and the regime's unwillingness--reinforced by
Poland's experience--to raise prices in state
stores.
b. The leadership has attempted to ease the
imbalance between supply and demand by allowing
various local rationing schemes under which
customers may purchase only limited amounts of
certain foods in state stores. But long lines
for meat, milk and milk products remain
widespread. To soften the impact of shortages on
the work force, the regime has redirected
substantial amounts of quality foods from public
state retail outlets to factories and other
economic enterprises.
4. Against this background Brezhnev last March unveiled
his Food Program--in preparation for a year and a
half. The objective of the program was to boost
Soviet food production and reduce dependence on
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imports--quickly.
5. For the most part, however, the Food Program
represents relatively minor variations of old
policies.
a. The basic defect of the Program lies in its
omissions. It does nothing to reduce day-to-day
bureauratic interference in agriculture, and it
fails to restructure prices or to change the
incentive system so that rewards are directly
keyed to performance.
G. As the recent meetings of the Communist Party Central
Committee and the Supreme Soviet made clear, there are
very serious problems in other sectors as well.
1. The Soviet steel industry, for example, has become a
major bottleneck.
a. Shortages of steel, especially high-quality
products, are holding back the growth of civilian
machine building and other priority sectors of
the civilian economy.
b. The appetite of the Soviet economy for steel is
probably unparalleled--and a reflection of its
relative technological backwardness. Last year
the USSR with little more than half the GNP of
the United States used 103 million metric tons of
rolled steel products compared with US
consumption of 94 million tons.
c. The shortages of steel won't be remedied
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quickly. Investment requirements to cope with
the declining quality of ore are escalating
rapidly, and new capacity requires long gestation
periods before it can be brought on stream. In
addition, supplies of coking coal and iron ore
are likely to continue to be tight in the next
several years.
2. Transportation is another sector responsible for
recent poor economic performance. Snarls on the
railroads--the backbone of the system--have disrupted
economic activity across the board, but most
particularly in the delivery of raw materials such as
coal, iron ore, timber, scrap-metal, and chemical
fertilizer.
a. The railroads, however, appear to have reached
their capacity ceiling with present technology
and facilities.
3. In the energy field the leadership faces rather
different problems in the coal and oil industries.
a. Coal production, which dropped during 1979-81,
has been hampered by deteriorating underground
mining conditions at larger, established mines,
by shortages of labor and declining labor
productivity, and by insufficient capital
investment.
b. Oil production continues to increase, though
slowly. Even the very small growth of the last
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few years has required an enormous effort. I
would like to note at this point, Mr. Chairman,
that the Agency is in the process of a complete
reassessment of Soviet oil prospects in the
1980s. Our judgments here are thus
preliminary. Nevertheless, in our view, growth
in production beyond the mid-1980s would impose
prohibitive costs. Output in the latter half of
the 1980s, therefore, seems very likely to at
least level off and could well fall.
4. Finally, shortages of raw materials and depletion of
fuel and power supplies have caused a marked slowdown
in the production of construction materials.
H. As I emphasized earlier, the Soviet economy does not
depend on trade for survival. Total imports equal about
12 or 13 percent of GNP, those from the West--only about
5 percent. But, because of the difficulties just
enumerated, the elimination or easing of critical
bottlenecks and the achievement of key elements in Soviet
development plans are closely tied to imports from the
West.
1. The USSR will have to import a broad range of Western
oil and gas equipment if it is to minimize the fall
in production in fields where depletion is at an
advanced stage, increase output elsewhere, and help
locate and develop reserves.
a. Pipelaying equipment capable of handling large-
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diameter pipe is produced only in the West, and
we estimate that the Soviets will need to import
at least 3 million tons of steel pipe per annum
during the 1980s to build the pipelines they have
scheduled. The cumulative cost, at current
market costs, would be about $16 billion.
b. They will also continue to need sophisticated
exploration eqipment, high capacity submersible
pumps for the oil fields, and probably high-
powered turbines for gas compressor stations.
2. Soviet requirements for quality steel should result
in annual imports of steel other than pipe of about
$2 billion, at least until the mid-1980s.
3. Imports of chemical equipment and technology probably
will continue to be large, reflecting the still
antiquated character of some parts of the chemical
industry and the importance of the industry for
agricultural production.
4. Imports of grain and other agricultural commodities
have soared in recent years and almost certainly will
remain high. Grain purchases in 1979-82 averaged
more than 30 million tons a year.
I. The USSR's ability to earn the hard currency it needs to
pay for its Western imports is, however, already under
pressure and may well diminish in the future.
1. The main reason is the leveling off and possible
decline in Soviet oil production.
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a. Because domestic consumption will continue to
rise and because of ongoing demands from Eastern
Europe, we expect oil exports to the West--which
account for about half of Soviet hard currency
merchandise export earnings--to fall.
b. According to our projections the rise in hard
currency earnings from stepped up exports of
natural gas will only partially offset the
anticipated decrease in receipts from oil.
2. Other factors also have restricted Soviet hard
currency earning capacity.
a. Primarily because of the softening of energy
prices, Soviet terms of trade vis-a-vis the West
will be less favorable in the 1980s than they
were in the 1970s, when the upward spiraling in
and gold prices brought the USSR windfall gains.
b. In addition, demand for Soviet raw materials will
be weak if Western economic activity fails to
pick up.
c. Soviet manufactured goods, which are generally
not competitive in Western markets, are unlikely
to take up the slack.
d. Finally, less developed countries, including OPEC
countries, probably will be less able to pay cash
for Soviet arms.
3. The Soviet capacity to buy from the West is of course
backstopped by the USSR's huge stock of gold. But
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the USSR is reluctant to undertake massive sales of
gold in an uncertain market because of the downward
pressure that Soviet sales exert on prices.
4. On balance, the unpromising export outlook suggests
that the USSR may have to make do with little if any
increase in real imports in the 1980s.
J. The USSR's relations with Eastern Europe add another
dimension of strain. Because it wishes to maintain
political and social stability in Eastern Europe, the
Soviet Union has given favorable economic treatment to
five of the six Warsaw Pact countries--Czechoslovakia,
East Germany, Bulgaria, Poland, and Hungary. The
exception has been Romania.
1. This special treatment, or "assistance", has taken
two basic forms: Subsidization and credits.
a. Subsidies have not been given directly. They
have instead been extended through preferential
terms of trade. That is, Eastern Europe's terms
of trade vis-a-vis the Soviet Union are more
advantageous than those that would prevail if
Eastern Europe conducted that same trade with the
non-communist world.
b. In essence, the USSR sells energy, mainly oil,
and other raw materials to Eastern Europe for
less than world market prices and pays more than
world prices for the manufactured goods it buys
from Eastern Europe.
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c. Estimates of the cost to the Soviet Union of
giving preferential terms of trade to Eastern
Europe are rough--and controversial. According
to the highest Western estimate we know of, these
subsidies totaled almost $70 billion in 1960-80,
with about 90 percent of this amount accumulating
after 1974. The huge jump implicit in subsidies
reflects the explosion in world oil prices in
1973-1980 and the large rise in opportunity costs
to the USSR of its oil exports to Eastern Europe.
d. The credits come mainly from the trade surpluses
the USSR has consistently run vis-a-vis Eastern
Europe since the mid-1970s, although the Soviet
Union has also given some direct hard currency
assistance to Poland.
2. Eastern Europe, battling severe economic problems of
its own, continues to depend on Soviet assistance.
But economic stringencies in the USSR have increased
greatly the cost to the Soviets of aiding Eastern
Europe.
3. The USSR apparently has decided to give reduced
priority to Eastern Europe's economic needs in the
future. Soviet oil exports to Eastern Europe were
cut this year, and the USSR's trade surplus with the
area apparently declined. Soviet subsidies will
probably fall too. But a drastic cut in exports of
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evVI"
raw materials and trade credits and subsidies is
unlikely.
VI. Uncertainties Attached to the Growth Forecast
A. Before summing up our main points, Mr. Chairman, I would
like to note that Andropov's advent to power has not
altered our assessment of Soviet economic prospects.
1. The exogenous factors impeding economic growth are
not affected by the change in leadership.
2. Moreover, Andropov's comments to the Central
Committee last week point to no significant changes
in economic policy.
B. Andropov is, however, in an extremely early point in his
reign. Thus major policy changes could lie ahead. For
this reason--and for reasons unrelated to leadership
changes--our forecast of average annual growth in real
GNP of 1 to 2 percent could be off the mark.
1. Growth could be more rapid, for example:
a. If the USSR enjoyed a run of good luck with the
weather, leading to a succession of good
harvests.
b. Growth would also be higher if the new leadership
were willing to undertake a substantial
reallocation of resources from defense to
investment.
c. If the new regime were able somehow, perhaps by
diverting resources from defense to consumption,
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to improve morale, labor productivity might
benefit.
d. Above all, the Soviet economic future would be
brighter if efficiency could be boosted by
mitigating some of the most detrimental features
of the existing system. Productivity might be
raised, or example, without a drastic overhaul
of th system through
(1)
more balanced allocation of investment to end
the neglect of such vital sectors as
transport, and by
(2) stopping the proliferation of success
indicators and of overlapping lines of
authority that has characterized the so-
called "reforms" of past years.
e. If Andropov--his rule securely established--
undertook basic changes that significantly
reduced centralization and gave substantially
greater play to market forces, the prospects
would be even better.
2. Growth could be less rapid
a. If the bad weather of the last few years
continues, causing a permanent depression in
agricultural output. There is indeed a theory
that the generally favorable weather that
prevailed between the early 1960s and mid-1970s
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was an abberation that has now given way to a
more typical pattern.
b. If the new leadership decides to accelerate the
growth in defense spending at the expense of
investment, it will be difficult to sustain much
growth at all.
c. Moreover, if the ripple effect of current
bottlenecks intensifies, GNP growth could level
off.
d. Finally, if public cynicism and apathy deepened
markedly or active unrest developed, economic
growth could halt or go into reverse.
3. Of these possibilities, serious widespread unrest--as
the Polish experience suggests--is the one most
likely to hit aggregate output the hardest. However,
we consider such an eventuality unlikely. It would
probably require a steep and prolonged drop in living
standards in the first instance. Large-scale labor
disturbances might also occur if Andropov pursued
with excessive zeal his promised campaign to impose
greater discipline in the work place.
VII. Concluding Comments
To sum up our presentation, then
A. Soviet economic growth has slowed markedly in recent
years. The slowdown partly reflects declining increments
to the supply of labor and the stock of capital and
sharply increased costs in producing and transporting
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vital energy and raw materials. But it also stems from
the inability of the system to offset these constraints
by bringing about substantial increases in efficiency and
productivity. Indeed, economic growth has sharply
decelerated even before the labor and energy shortages
have reached their maximum severity.
B. The consequences of the slowdown are first of all:
1. Much harder choices for the leadership in allocating
resources to consumption, investment and defense.
2. Second, the Soviet economy has for all practical
purposes lost its attractiveness as an appropriate
model for the rest of the world, particularly the
third world.
C. In spite of its disappointing performance, the Soviet
economy, however, is not going to collapse. Indeed, we
expect GNP to continue to grow, although slowly.
Furthermore, so far, defense spending has continued to
grow at an undiminished rate.
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