QUARTERLY BULLETIN ON SOVIET ECONOMIC GROWTH ANNUAL EDITION 1985

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T01363R000200260009-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: September 7, 2011
• Sequence Number: 9
• Publication Date: April 1, 1986
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Directorate of Confa^?4'?l
Intelligence V25X1
Quarterly Bulletin on
Soviet Economic Growth
SOV SEG 86-001
April 1986
co, 5 0 6
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Intelligence
Quarterly Bulletin on
Soviet Economic Growth
This bulletin was prepared by
25X1
25X1
the Defense and Economic and National Issues
--
Groups. F
1
25X1
Comments and queries are welcome and may be
directed to the Chief of the Defense Economics
Division, SOVA~
Confidential
SOV SEG 86-001
April 1986
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Preface
Information available
as oft April 1986
was used in this report.
Soviet Economic Growth 25X1
Quarterly Bulletin on
Because we have shifted the price base for our measures of Soviet economic
performance from 1970 to 1982, the estimates of gross national product
(GNP) and its several components presented in this paper differ from our
previous estimates. The move to a more recent price base culminates a
three-year research effort and allows us, we believe, to give a more
accurate assessment of the resources associated with Soviet production.
Although the basic trends have not changed, the use of 1982 prices has re-
sulted in somewhat different estimates of historical growth rates for the
Soviet economy, as well as the share of GNP devoted to consumption,
investment, and defense. These findings are discussed in more detail in the
appendix.F_~
Confidential
SOV SEC 86-001
April 1986
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
Confidential
The Soviet Economy in 1985: A Year of Transition (foldout) vii
Industry Recovers
2
Impact on Estimates of Defense Spending
14
1.
USSR: Growth of GNP and Selected Sectors of the Economy
1
2.
USSR: Industrial Growth by Branch
3.
USSR: Growth in Industrial Output and Factor Productivity
in 1981-85
4
4.
USSR: Growth in Energy Production
5.
USSR: Freight Turnover by Transport Mode
6.
USSR: Growth of Farm Output
7.
USSR: Total Trade, 1981-85
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
8.
USSR: Indicators of Capital Formation Growth
9.
USSR: Growth in Per Capita Consumption
10.
USSR: Comparison of Average Annual GNP Growth at Factor
Cost in 1970 and 1982 Prices
14
11.
USSR: Shares of GNP by Sector of Origin at Factor Cost, 1982
14
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
The Soviet Economy in 1985:
A Year of Transition
In the USSR, 1985 was a year of transition, a bridge
to new leadership and to a new economic planning
period. The old generation of leaders, personified by
the dying Chernenko, was replaced by a younger,
better educated, more technically oriented generation,
represented by General Secretary Mikhail Gorba-
chev. Almost immediately this leadership expressed
its dissatisfaction with the state of the economy and
persisted in revisions of the new Five-Year Plan, then
in draft, to set a challenging course for economic
development in the 1986-90 period. F_-]
The year 1985 also was the link between the 11th and
12th Five-Year Plans-both the concluding year of
the disappointing 11th Five-Year Plan and the base
from which achievements in the 12th will be mea-
sured. It was a year when overall performance was
Table 1
USSR: Growth of GNP and
Selected Sectors of the Economy
lackluster, but ambitious plans were announced and
new promises made to get the economy moving at a
faster pace.F___1
Gorbachev devoted much of his attention last year to
putting forward his blueprint for reviving the econo-
my during the latter part of the 1980s. But, as he
focused on the future, the economy was turning in
another pedestrian performance. Disappointing farm
output held GNP growth to about 1'h percent in 1985,
about the same as in 1984 (table 1). Meanwhile,
nonfarm output rose by about 2'h percent. Industrial
output increased by nearly 3 percent, but slightly
below the 1983-84 pace. Efforts to move to a pattern
Average 1981
Annual
1981-85
a Preliminary.
b Value added at 1982 factor cost.
This measure for agricultural output excludes intra-agricultural
use of farm products but does not make an adjustment for
purchases by agriculture from other sectors. Value added in
agriculture grew at an average annual percentage rate of 1.8 in
1981-85, and at an annual percentage rate of -1.5 in 1981, 7.4 in
1982, 7.4 in 1983, -1.7 in 1984, and -2.1 in 1985.
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Gorbachev has made it clear, almost since the day he
became General Secretary, that revitalization of the
Soviet economy is a top priority. He has acknowl-
edged that, without improved economic performance,
the USSR will have trouble simultaneously meeting
requirements for defense, boosting consumer welfare
sufficiently to improve labor productivity, and mod-
ernizing the economy. Focusing his efforts squarely
on increasing efficiency, he has adopted a two-step
approach. Initially, Gorbachev is relying on a combi-
nation of measures to strengthen party discipline,
improve worker attitudes, and weed out incompe-
tents-what he refers to as the "human factor." Over
the longer term, he is counting on achieving major
productivity gains as a result of a series of organiza-
tional changes, reform initiatives, and, most impor-
tant, an extremely ambitious campaign to modernize
the country's stock of plant and equipment.=
At the recently concluded 27th Party Congress, party
leaders hailed Gorbachev for the economy's improved
performance since he took over. On the surface, their
praise seems justified. After a miserable first quarter
in 1985, nonfarm output rebounded strongly. Indus-
try, in particular, did well.
Much of the rebound is attributable to improved
weather during the last three quarters of the year.
Milder spring weather allowed transportation and
power supplies to return to normal and equipment to
function properly. Modest improvements in industry
and rail transport since 1982 also supported an
upturn in the latter half of 1985. Another factor was
the postponement of two holidays during the second
half of 1985, so that there were two more workdays
during the last six months of 1985 than in the same
period in 1984. F__]
Gorbachev's vigorous campaigns to increase worker
discipline and cut alcohol abuse also probably paid
some dividends. His campaigns for discipline and
against corruption and alcoholism, like those pushed
less vigorously by Andropov, received widespread
public support. According to Soviet figures, purchases
of alcohol at state stores declined 25 percent during
the second half of 1985 "compared with those of the
last six months of 1984. Soviet press statements
indicate that, as a result, there was a marked de-
crease in absenteeism, fewer industrial accidents, and
increased productivity overall. By reducing alcohol-
related absences and unauthorized leave, Gorbachev
sought to raise the number of hours worked by the
labor force.
At an April plenum, Gorbachev issued an urgent call
for better economic performance. Although acknowl-
edging the severe winter weather, he blamed lack of
discipline and passive management for the poor first-
quarter results and told workers and managers, in
effect, to shape up or "move aside. "
of intensive growth based on productivity gains con-
tinued to be frustrated by the many economic prob-
lems Gorbachev inherited.)
Despite the relatively slow growth in the economy
overall, Gorbachev could take some satisfaction from
the 1985 results (see inset). Through a combination of
factors, a year that started out very badly became at
least respectable. Certainly, improved weather, after
the first quarter, eased pressures throughout the
economy. (A similar situation during 1982-when
harsh weather also disrupted production-did not
result in nearly the same turnaround.)F---]
Industry Recovers
After showing a moderate improvement in 1983-84
from the depressed levels of the previous two years,
Soviet industrial performance worsened abruptly in
first quarter 1985. The USSR was hit by the coldest
winter of the last 20 years. Industrial growth slumped.
Output of several industrial products was so low that
customary data on their production were omitted
from official monthly plan fulfillment reports. Cold
and snow snarled transportation-rail freight traffic
25X1
25X1
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
Table 2
USSR: Industrial Growth by Branch
Average 1981
Annual
1981-85
Preliminary.
b Value added at 1982 factor cost.
fell sharply, apparently causing shortages of raw
materials throughout industry. The severe weather
also caused equipment breakdowns and cut power
supplies to industry. Nonetheless, for the year as a
whole, industrial production rose by nearly 3 percent,
roughly on a par with the previous two years. By the
end of 1985, quarterly industrial output was growing
at an annual rate close to 3'h percentF_~
Within industry, the performance of all branches
improved during the course of 1985, but not all
branches performed better than in 1984 (table 2). The
most substantive recovery was in the branches produc-
ing industrial materials-steel, chemicals, cement,
and the other basic products used throughout Soviet
industry. After registering a 2'h-percent decline dur-
ing first quarter 1985 (compared with first quarter
1984), output of industrial materials rebounded to an
increase of more than 2'h percent for the year. As
usual, growth in machinery production outstripped
growth in most industrial branches, although there
was little acceleration during the year. Output of
consumer nondurable goods increased enough during
the year to raise the rate for 1985 above that for 1984.
On an annual basis, productivity in industry slipped
slightly in 1985 as it had in 1984. Even though growth
in labor productivity-the only productivity measure
for which quarterly data are available-improved in
the course of the year, such growth did not offset a
continuing decline in capital productivity (table 3).F__
Industrial Materials. In branches producing industri-
al materials, output grew a little faster in 1985 than in
1984. Continued expansion in these branches is need-
ed to avoid the shortages that have led to bottlenecks
in other sectors. That such shortages did not prevent
recovery from the setbacks of the first quarter is a
sign of resilience in 1985 performance.
25X1
25X1
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Table 3
USSR: Growth in Industrial Output and
Factor Productivity in 1981-85
Average 1981
Annual
1981-85
Growth in the output of ferrous metals was slightly
less than 1 percent in 1985-the same as in 1984.
Steel plants struggled to overcome the paralysis
caused in the first quarter by energy shortages and
the railroads' failure to transport about 8 million
metric tons of raw materials. Output of nonferrous
metals also grew at the same rate in 1985 as in 1984,
thanks to additions of new capacity and moderniza-
tion of equipment at aluminum, copper, and nickel
plants.
Shortages of railcars and raw materials, as well as
delays in construction, were problems for the chemi-
cal industry throughout the year. Even so, growth
increased in 1985. Fertilizer output rose by 8 percent,
and the four new ammonia plants that came on
stream should boost fertilizer production again in
1986. Disruptions in supplies of ethylene feedstock
stemming from below-plan refinery output held down
output of plastics and synthetic resins. Sluggish
growth in caustic soda output constrained production
of artificial fibers and dye, both key inputs to textile
manufacturing.
Growth in the production of wood products in 1985
slowed because of the severe weather early in the
year. Because 90 percent of the USSR's timber is
harvested in remote northern and eastern parts of the
country, felling and transport are extremely difficult
even under average weather conditions.
Construction materials was the branch hit hardest by
the abnormal cold. In the first quarter, output
dropped by more than 5 percent. By yearend, howev-
er, production of cement and precast ferroconcrete
exceeded 1984 levels. Some progress in using second-
ary materials and wastes, such as slag, ash, and
broken glass, has been made in this branch
Energy. Growth in the Soviet energy sector slowed in
1985 (table 4). A drop of nearly 3 percent in oil
production dampened the effect of a sizable increase
in natural gas output and smaller increases in coal
and electricity production. The Soviets coped with
declining oil output by cutting exports and shifting
some oil users to natural gas. F_~
In 1985, growth in production of energy from primary
sources dropped to 2.7 percent from 3.1 percent in
1984. Oil production declined for the second consecu-
tive year, resulting in declines in exports and, thus, in
hard currency earnings of about $3.5 billion. The gas
industry achieved a 9'h-percent increase in output in
1985. Gas exports to Western Europe increased by 10
to 15 percent; however, soft market demand forced
the Soviets to lower prices by roughly 10 percent. As a
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
Confidential
Table 4
USSR: Growth in Energy Production
Average 1981
Annual
1981-85
a Preliminary.
b Data are for coal, crude oil, natural gas, natural gas liquids, and
hydroelectric and nuclear elec'ric power expressed in terms of oil
equivalent, and exclude minor fuels such as peat, shale, and
fuelwood.
result, hard currency revenues from gas of about
$4 billion in 1985 were roughly unchanged from the
previous year. Coal production increased about
2 percent but was still less than 2 million tons above
the previous 1978 high. Moreover, the energy content
of coal continued to decline.)
Electricity production in 1985 grew by 3.6 percent
over that in 1984. Output was just under the original
target, with above-plan results at fossil-fueled power
plants making up for most of the shortfalls at nuclear
plants and hydroplants. The surge of natural gas to
the power industry accounts for most of the improved
performance at the fossil-fueled plants. Ample gas
supplies have meant that power stations, previously
under fuel-use restrictions, could generate at full
capacity.
Machinery. The source of consumer durables, invest-
ment goods, and military hardware, machine building
traditionally has been a fast-growing branch. But in
1985 growth slipped below the 4-percent increase in
1984. Civilian machinery grew about half a percent-
age point less than in 1984, while military machinery
grew at roughly its 1984 rate. Growth was fastest in
production of computers, high-tech machine tools,
other types of automated equipment, and chemical
equipment. Output of petroleum equipment picked up,
but production of transport equipment stagnated.
Consumer Nondurables. Overall growth in consumer
nondurable goods rose by 3 percent in 1985, a sub-
stantially better performance than in recent years.
Within light industry, textile production increased
moderately, although the 1984 cotton crop was poor,
and production of chemical fibers was down compared
with that in 1984. Knitwear did better, and the rate of
increase in sewn goods remained healthy. Lower-
than-planned output of footwear partly reflected con-
tinuing problems with the timely supply of usable
leather.
The overall performance of the.food processing indus-
try in 1985 was good. Milk and fish products did
particularly well. The trouble spots of the industry
remained vegetable oil and margarine, largely be-
cause of poor oilseed crops.
Transportation Rebounds
Like industry, transportation rebounded during 1985
from a disastrous first quarter. Overall freight traffic
(measured in ton-kilometers) grew by only 1.6 percent
in 1985, but the results represented a respectable
recovery when compared with the 1-percent decline
recorded in the January-June period (table 5).F-
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363ROO0200260009-5
Confidential
Table 5
USSR: Freight Turnover by Transport Mode
Average
Annual
1981
1981-85
Rail
3,585
3,503
3,465
3,600
3,639
3,719
River
264
256
262
273
264
262
Highway
141
140
143
142
138
142
Oil pipelines
1,321
1,263
1,307
1,353
1,370
1,313
Gas pipelines
889
681
772
863
997
1,131
The railroad recovery was the top story in Soviet
transportation in 1985. After the rail sector staggered
under a 5.5-percent drop in freight traffic during the
first quarter, railroads rebounded faster than they did
in a similar situation during 1982. Measures adopted
over the last several years to improve railroad perfor-
mance appear to have paid off. Management has
squeezed additional capacity out of the system over
the last three years-primarily through increased
discipline and strategies to get more tonnage on
crowded lines by boosting train weights. This added
capacity allowed the railroads to expedite backlogged
shipments later in the year, spurring their own recov-
ery and that of their customers in the industrial
materials branches. Railways Minister N. S. Konarev
kept the discipline campaign alive during the year by
issuing severe reprimands and forcing the retirements
of several officials, including a first deputy minister.
Agriculture Disappoints
Farm output fell by about a 'h percent in 1985. Crop
production actually declined, and growth in output of
the livestock sector slowed (table 6). Generally im-
proved weather conditions in many of the major
grain-producing areas raised grain production to an
estimated 200 million tons-the best harvest since the
record of 237 million tons in 1978 and 20 million tons
above the 1984 estimated outturn. This-together
with increased production of sunflower seeds, fruits,
and cotton-was countered by lower output of key
crops (such as potatoes, sugar beets, and vegetables)
caused in part by disease and insect infestation. The
improved grain crop enabled Moscow to cut grain
imports during second half 1985 by nearly 60 percent
from the record 28 million tons imported during
January-June.
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363ROO0200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Table 6
USSR: Growth of Farm Output
Average
Annual
1981
1981-85
Potatoes
78.3
72.1
78.2
82.9
85.5
73.0
Sugar beets
76.3
60.8
71.4
81.8
85.3
82.0
Sunflower seeds
4.9
4.7
5.3
5.0
4.5
5.2
Milk
94.4
88.9
91.0
96.4
97.6
98.2
Eggs (billions of units)
74.3
70.9
72.4
75.1
76.0
77.0
a Preliminary.
b Net of feed, seed, and waste.
Net of seed and waste.
d Excluding changes in inventory and net of feed and waste.
e Estimate.
The slump in the livestock sector was largely the
result of a decline in herd and flock inventories-
reflecting the culling of unproductive cows and above-
normal slaughtering of hogs, sheep, and goats to
reduce winter feed requirements early in the year.
The output of livestock products increased slightly.
Meat production was up by less than 1 percent, an
unexpected result in view of the higher monthly
increases reported for meat produced on state and
collective farms, roughly two-thirds of total meat, and
the perceived improvement in the overall feed supply.
The implied reduction in the share of meat produced
by the private sector, however, may reflect a shift of
private production to production under contract with
state or collective farms, a practice the leadership is
encouraging, and one that reportedly guarantees feed
to the private producer. Officially, meat produced
under such contracts is used to meet state and
collective farm targets for sales of meat to the state.
The small increase in meat output, taken together
with output of other livestock products, suggests no
progress in the long-run goal of improving feed effi-
ciency. Overall, per capita availability of farm prod-
ucts declined for the second year in a row.
Hard Currency Trade Deteriorates
The fall in Soviet oil exports to the West precipitated
an estimated slight decline in overall Soviet trade
from the 1984 level. An erosion in trade with non-
Communist countries was responsible for all of the
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
Confidential
Table 7
USSR: Total Trade, 1981-85 a
Annual
Average
1981
1981-85
Developed countries
24.6
25.4
26.2
25.4
24.2
23.2
Less developed countries
9.4
10.6
9.1
9.6
9.1
8.9
a Includes both hard currency trade and trade conducted with soft
currency partners on a clearing account basis.
b Preliminary.
decline. Soviet trade data for 1985 show that exports
to these countries dropped by 15 percent from the
previous year-largely because of a 20-percent de-
cline in oil exports and a 30-percent fall in Soviet
arms deliveries. Almost all of the decline was due to
lower export volume compounded somewhat by soft-
ening prices. Imports from the West were down by 4
percent from the 1984 level (table 7). To offset the fall
in hard currency earnings from lower oil prices and
production, the Soviets stepped up borrowing, in-
creased gold sales, and postponed some planned pur-
chases. In 1985 the Soviets sold nearly twice the
amount of gold sold annually in 1982-84. Overall,
Moscow ended 1985 in a much less comfortable
Eastern Europe's trade deficit with the USSR com-
pared with that in 1984 was the result of slower
growth of Soviet exports and of Moscow's pressure to
balance trade. Poland was the only country with a
larger deficit, which reflected special treatment by the
Soviets in consideration of Warsaw's economic diffi-
culties. The boost in Soviet imports from Romania,
Hungary, and Czechoslovakia at the same time that
exports by these countries to the West dropped sug-
gests the strength of Soviet pressure to reduce its
trade surplus with Eastern Europe
financial position than it started with.
In contrast with trade with the West, Soviet trade
with the Communist countries in 1985 continued to
increase. Soviet imports from Communist countries
have grown faster than exports, reducing Moscow's
trade surplus with these countries, especially its East
European partners. Overall, the share of Soviet trade
with the Communist countries increased to 61 per-
cent, the highest level since 1972. A sharp drop in
Soviet economic priorities can be evaluated by exam-
ining how resources are distributed among the three
major categories of uses-consumption, investment,
and defense. During the 1981-85 period, investment
in the productive capacity of the economy took a
slowly rising share of GNP, while the share of goods
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5 -
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Table 8
USSR: Indicators of Capital Formation Growth a
Average 1981
Annual
1981-85
Gross additions of new 2.8
fixed capital c
Backlog of unfinished con- 3.0 2.8
struction (current prices)
a Unless otherwise noted, rates of growth are based on official
Soviet series valued in constant 1984 prices.
b Preliminary.
The term "gross additions of new fixed capital" differs from "new
fixed investment" in that it counts only those investment projects
that were completed.
The 1981-85 Plan originally called for investment to
grow more slowly than the overall economy. The
decision to slow down planned investment growth to
roughly 2 percent per year was made on the assump-
tion that economic growth could be stimulated by
more efficient use of existing plant and equipment. It
was tied to a strategy that concentrated on replacing
obsolescent machinery and equipment rather than
building new capacity on "green field" sites. For the
1981-85 Plan period as a whole, investment increased
at an average annual rate of 3'h percent, about a
and services used for consumption slipped slightly.
The share going to defense remained largely un-
changed. The small shifts in resource allocation dis-
cernible in 1985 showed the same basic pattern.
Although Gorbachev probably deserves some credit
for the economy's showing in the latter part of 1985,
the programs and decisions involving resource alloca-
tion resulted from policies that predate his selection as
General Secretary.F_~
Higher Priority for Investment
Investment in reproducible fixed assets now takes
more than one-fourth of Soviet GNP, in comparison
with one-fifth of US GNP. Investment grew by
slightly over 2'h percent in 1985-about 1 percentage
point below plan for the year because the harsh winter
delayed many construction projects, but up from the
rate in 1984 (table 8). Even when the weather im-
proved, however, problems bringing new production
facilities on line continued despite repeated calls by
Gorbachev and other top officials to reduce the
backlog of unfinished construction during the year.
Nonetheless, by yearend the pace of growth of both
investments and additions to capacity had speeded up.
percentage point faster than GNP.
Mixed Results for the Consumer
In 1985 per capita consumption grew less than 1
percent, continuing the very slow progress of recent
years (table 9). Food supplies-the main indicator by
which consumers judge their well-being-probably
slipped slightly on a per capita basis as total availabil-
ity of farm products declined somewhat in 1985. Meat
production, for example, increased only marginally
over the 1984 output levelr___1 25X1
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Table 9
USSR: Growth in Per Capita Consumption a
Soft goods
Durables
Services
a Established 1982 prices.
b Preliminary.
Average
Annual
1981-85
1981
1.2
2.0
-1.5
0.6
2.4
2.6
2.9
6.3
-2.6
1.7
4.6
4.9
1.5
1.4
1.5
1.0
1.9
1.5
Meanwhile, personal incomes continued to grow, con-
tributing to the mismatch between purchasing power
and supplies of some goods and services. Average
monthly wages of workers and employees grew by
nearly 3 percent in 1985.
Because of an official policy to maintain prices un-
changed in state retail outlets, we depend on price
movements in the collective farm markets (CFMs) to
signal inflationary pressures. Reporting from our Em-
bassy in Moscow indicates that CFM prices, following
a rapid increase in the late 1970s and early 1980s, had
leveled off in 1984 and the first half of 1985. Prices
began to climb again, however, in second half 1985,
suggesting another tightening of food supplies.
On the brighter side, supplies of nonfood goods-soft
goods and consumer durables-showed improvement
in 1985. In addition, per capita consumption of
personal care and repair services grew about 4 percent
in 1985. Construction of new housing reached 113
million square meters, the largest increment to the
housing stock in two decades. Larger volumes of new
apartments will be necessary to keep up with new
family formation, however. In 1984, for example, 1.3
million more household units were created than new
apartments.
Gorbachev's campaign against alcohol achieved some
success in 1985. Sales of alcohol in state stores fell by
25 percent in the second half of the year as compared
with the same period in 1984. At least some of the
drop in official sales probably was offset by an
increase in homebrew. Nonetheless, the campaign
has, at a minimum, reduced drinking on the job and
probably has contributed to the upswing in economic
performance in the second half of 1985.
Slow Defense Growth
We have a fairly good sense of consumption and
investment trends in 1985, but our information on
Soviet defense spending is much less solid, and we
have not settled on an estimate for 1985. What is
certain is that the Soviets continued the broad-based
modernization of their military forces during 1985.
They augmented their strategic nuclear strike capa-
bility by beginning to deploy new bases for the mobile
SS-25 ICBM. At the same time, they added new units
of both the Typhoon and Delta-IV classes of ballistic
missile submarines.)
25X1
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
Confidential
Modernization of general purpose forces also contin-
ued apace, with many of the programs-especially
those in the ground forces-apparently intended to
make them more capable of extended operations. As
part of this effort, for example, Moscow continued to
field new tanks, an improved tracked infantry vehicle,
and a new wheeled armored personnel carrier. Mean-
while, Soviet air force units received their initial
complement of SU-27 Flanker fighters, as well as
other aircraft already in serial production. Finally, the
Soviets continued their commitment to a blue water
navy with the addition of a new Oscar-class cruise
missile submarine and the fitting out of both the
fourth Kiev-class aircraft carrier and a new large
aircraft carrier.)
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89T01363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Appendix
Nature of the Revision
The economic growth rates presented in this paper are
based on a major revision of the estimates that have
been published annually in CIA's Handbook of Eco-
nomic Statistics and described in detail in USSR:
Measures of Economic Growth and Development,
1950-80 (issued in December 1982 under the aegis of
the Joint Economic Committee). The purpose of the
revision is to base the estimates on prices of a more
recent year-1982 instead of 1970. The results should
be regarded as preliminary and subject to further
revision as more information becomes available.F_
The shift to a new price base affects estimates of
GNP and its growth rates in three major ways when
compared with previous estimates:
? Values of output are higher, because prices in
general increased between 1970 and 1982.
? Rates of real growth-excluding price effects-are
lower for GNP and most key components. This
result is to be expected when prices of a more recent
year are used to calculate growth rates (see inset for
explanation of the "index number" effect). In con-
verting estimates of US GNP from 1972 prices to
1982 prices, the Department of Commerce obtained
similar results (see inset).
To understand why measured economic growth is
likely to be lower the more recent the price base used
in the calculation, consider an example. Suppose you
want to estimate the real growth in output of preci-
sion instruments, a group of products ranging from
clocks to automation equipment to computers. The
prices of new products (computers), whose production
is growing fastest, tend to fall relative to other prices
because of more rapid gains from advances in tech-
nology and economies of scale. Therefore, the fastest
growing products will have smaller weights-and less
impact on average growth of the group in a later base
year than they would in an early base year.
Estimates of real GNPfor the United States are now
based on 1982 prices rather than 1972 prices. The
changes in the rate of increase of US GNP as a result
of this shift resemble changes in our estimates of
Soviet GNP growth:
? Shares of key components of GNP are different US a USSR
(1973-84) (1971-82)
because the components experienced diverse rates of Old price base 2.7 3.0
change in both real growth and prices.
The estimates of Soviet GNP are calculated first by
using prevailing 1982 prices and then adjusted to
measure more accurately the actual allocation of
resources in the economy and changes over time in its
potential to produce goods and services. Official Sovi-
et prices give quite a distorted picture of the true costs
of economic resources, largely because the prices
include huge sales taxes, levied mostly on consumer
goods, and subsidies, which affect mainly food and
services. Moreover, the profits included in the prices
US estimates are reported in the US Department of Commerce
journal, Survey of Current Business, December 1985, p. 13. Only
changes due to the shift in price base are shown here. Other
revisions of the estimates, including new definitions and a new price
index for computers, partly offset the effects of this shift. Another
article on the revised US estimates appears in the October 1985
issue, pp. 19-28.
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Table 10
USSR: Comparison of Average
Annual GNP Growth at Factor
Cost in 1970 and 1982 Prices
Table 11
USSR: Shares of GNP by
Sector of Origin at
Factor Cost, 1982
1983
3.5
3.5
1984
2.0
1.5
1985 8
2.1
1.6
do not accurately reflect the differences in efficiency
among producers. To correct for such distortions in
official prices, a so-called factor cost adjustment is
made in which profits and indirect taxes are subtract-
ed, and subsidies and charges on fixed and working
capital are imputed. The resulting values give a much
better picture of patterns of resource allocation by
producing sector and by final end use than the
distributions shown by official prices. Also, estimates
of changes in GNP using factor cost valuations give
more accurate measures of growth in production
potential over time.
Results of the Revision
With both prices and real output rising, Soviet GNP
increased by nearly 90 percent between 1970 and
1982, to a level of 720 billion rubles. Prices accounted
for over a third of this increase, implying a rate of
inflation of a little more than 2 percent per year. In
contrast, official Soviet statistics for measures similar
to GNP imply an inflation rate of less than half a
percent per year during that period. Most Western
specialists believe that these official statistics serious-
ly understate the extent of price increases and there-
fore overstate Soviet economic growthF___1
Annual growth rates of Soviet GNP in real terms as
measured in 1982 prices are, with few exceptions,
lower than previously estimated rates measured in
Shares in
1970 Prices
Shares in
1982 Prices
Services
20.2
18.2
Military personnel
1.6
1.8
Other branches
0.3
0.7
1970 prices (table 10). Shifting the price base reduced
annual rates of increase by a few tenths of a percent-
age point in the 1980s. The differences between rates
are a little larger in earlier years-half a percentage
point or more in the 1970s.
The shift to a new price base had a significant effect
on the relative shares in total output coming from the
two largest producing sectors-industry and agricul-
ture (table 11). The share of industry is smaller when
measured in 1982 prices, because average wages in
industry increased much less during 1971-82 than
average incomes in agriculture, and the capital-output
ratio increased more rapidly in agriculture than in
industry. The shares of the trade and services sectors
dropped somewhat, while the shares of the remaining
sectors are little affected by the change in the price
base.
Impact on Estimates of Defense Spending
Moving Soviet defense spending estimates from a
1970 to a 1982 price base affected assessments of
defense spending and its components in four major
ways:
? The overall level of spending rose.
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
? The share of GNP allocated to defense spending
increased from 12 to 14 percent in the early 1970s
to about 15 to 17 percent in the early 1980s.
? Estimates of the rate of real growth decreased
slightly.
? The shares of major resource categories in total
defense spending changed.
The estimates of defense spending in 1982 prices show
a higher overall level of spending than did the 1970
series. The new series averages almost 50 percent
higher for the period since 1970 than the series in
1970 prices, indicating that military costs increased
about 3 percent per year. When both price change and
growth in real output are taken into account, the
growth in defense spending averaged over 5 percent
annually during 1971-84. Price changes accounted for
more than half of this increase.
The change to a 1982 price base shows a somewhat
higher share, than the earlier series, of GNP allocated
to defense. This result implies that prices for defense
goods and services increased faster than those for
civilian goods and services. During 1966-84, total
defense spending increased on average by about 3
percent annually-somewhat less rapidly than the
series in 1970 prices. The direction of this change in
relative growth rates is what index number theory
predicts, but it is not a large effect. In the conversion
to 1982 prices, the share of defense spending devoted
to procurement increased, while the shares of the
RDT&E (research, development, testing, and evalua-
tion) and personnel categories-which experienced
less price increase than procurement-fell.
0
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
 Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5
Confidential
Confidential
Sanitized Copy Approved for Release 2011/09/07: CIA-RDP89TO1363R000200260009-5