ESTIMATING MILITARY HARDWARE PRODUCTION FROM SOVIET INDUSTRIAL DATA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000602090002-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 33
• Document Creation Date: December 27, 2016
• Document Release Date: March 16, 2012
• Sequence Number: 2
• Publication Date: June 1, 1974
• Content Type: REPORT

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Estimating Military Hardware Production
.from Soviet Industrial Data
Confidential
ER RP 74-11
June 1974
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ESTIMATING MILITARY HARDWARE PRODUCTION
FROM SOVIET INDUSTRIAL DATA
1. The Soviet Union has not published details of its expenditures on national
defense since the 1930s. National income and budgetary data released by the Soviet
government since World War II have provided only one summary figure for Defense,
and published data on industrial production have not explicitly included the output
of the defense industries. There have been large, unexplained residuals in official
Soviet budgetary and national income data, however, and authoritative Soviet
statements have suggested that defense expenditures are included in apparently
civilian budgetary and national income accounts.
2. Western interest in determining the size and trend of Soviet defense
spending originally stemmed from the issues of Soviet military capability during
the post-World War II period. In the late 1960s the question of using financial
data to monitor an arms control agreement heightened the interest in establishing
the magnitude of Soviet defense expenditures.
3. A report prepared by the Stanford Research Institute (SRI) in 1968 for
the Arms Control and Disarmament Agency surveyed the feasibility and explored
the methodologies to be used in monitoring an arms limitation agreement from
financial reporting.1 This report developed several defense-related residuals in an
attempt to estimate Soviet military hardware procurement. The estimates in the
SRI report (the work of William T. Lee) gained additional exposure when Professor
William R. Kintner introduced them at the hearings of the Joint Economic
Committee of the Congress in 1969.2 Then, in 1970, a compendium of papers
submitted to the Joint Economic Committee contained a report on "The
Technological Base of Soviet Military Power" in which Michael Boretsky presented
his estimates of military hardware production, which were also derived from residual
Soviet industrial data. More recently, a 1971 SRI publication3 included an update
of Lee's estimates, and in 1973 a group of SRI economists and consultants presented
1. William T. Lee and Sally Anderson, Potential of Economic Data for Verification of an Arms Control
Agreement with the USSR, Stanford Research Institute, SRI Project 5536, 16 February 1968,
Prospects, Stanford Research Institute, July 1971,
1969,
2. The Military Budget and National Economic Priorities; Hearings of the Joint Economic Committee, 91st
Congress. Part 3. The Economic Basis of The Russian Military Challenge to the United States, Washington,
be directed to the Office of Economic Research,
Note: Comments and queries regarding this publication are welcomed. They may
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estimates attributed to Lee in a paper prepared for the Joint Economic Committee
of the Congress.4
4. This publication assesses these attempts to estimate the production or
procurement of defense hardware from official data on the machine building and
metalworking (MBMW) branch of industry. The reasonableness of the basic
assumption of the Lee and Boretsky studies -- that production of defense hardware
is included in official MBMW data -- is examined first. Then, the validity of
estimates made by Lee, presently at General Electric - TEMPO, Center for
Advanced Studies, and Boretsky, of the US Department of Commerce, is assessed.
In a final section, the lessons learned from the review of the work of Lee and
Boretsky are applied to determining residual machinery output in 1959, 1966, and
1967.
5. Several estimates of Soviet military hardware production have been based
on a widely accepted proposition -- that Soviet data on the MBMW sector of the
economy include the output of the defense industries.
Western analysis of Soviet data support this proposition. Thus, defense production
should be obtainable as a residual of MBMW output after subtracting estimates
of non-defense production.
6. Published Soviet data on MBMW output, however, do not permit a
straightforward determination of defense production by subtraction of non-defense
output. Western analysts have tried to use Soviet data on total machinery
production and the purchases of machinery for civilian uses to obtain defense'
purchases as a residual. Data on neither production nor purchases can be used
without adjustment because they are reported in different prices, and Soviet
descriptions of economic data are so imprecise that substantial error remains in
any adjustment. Moreover, Soviet data collected for specialized purposes - foreign
trade or interindustry analyses -- must be introduced into the calculations because
of the paucity of published Soviet data on uses of machinery. Reliance on such
data, compiled from different statistical systems and in different prices, weakens
the estimates to an uncertain degree. Also, published Soviet growth indexes, which
contain well-known sources of possible upward bias, must be used. The use of
such indexes, of course, will distort trends in the residual. Finally, in using data
on production and purchases to derive residual machine building (MB) purchases,
Western analysts must deal with the time lag between production and sale.
7. Two quite different calculations of an MBMW residual show in sharp
relief the inconclusiveness of the residual technique. In a 1968 SRI publication,
William T. Lee estimated Soviet procurement of military hardware by a residual
calculation. Michael Boretsky in 1970 presented a series of military hardware
4. Robert W. Campbell, M. Mark Earle, Jr., Herbert S. Levine and Francis W. Dresch, Methodological
Problems Comparing the US and USSR, Joint Economic Committee of the Congress, A Compendium of Papers,
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residuals that resembled Lee's residuals conceptually, but whose values were
substantially different from the Lee estimates. Indeed, Lee and Boretsky derived
quite different values for each of the important steps of the residual process -
the calculation of (1) gross value of output of MB, (2) final output of MB, and
(3) the presumed military residual left after civilian uses are deducted from the
final output of MB, as follows:
Gross output of
machine building
Final output of
machine building
Residual
Lee
Boretsky
Lee
Boretsky
19.5
17.4
48.6
42.5
14.6
10.8
33.1
23.8
5.0
1.8
15.4
6.3
8. Lee ran afoul of most of the pitfalls cited above. He mixed data prepared
for specialized interindustry studies with other data prepared for the Soviet Central
Statistical Administration (CSA) without reconciling the two sets of data for
differences resulting from (1) the accounting concepts used (CSA data include some
non-machinery production, but does not include all machinery produced) or (2) the
prices used (retail prices versus factory or producer prices). In estimating the trend
in his defense-related residual, moreover, Lee did not use Soviet growth indexes
where their application seemed appropriate - as in estimating a time series for
the gross output of MB and for consumer durables - and instead created his own
indexes. Lee also erred in subtracting all unfinished production from annual gross
output of MB instead of merely the change, and in failing to deduct MB shipments
to other industries, which are not counted as "final" output. His separate estimate
of Soviet research-and-development expenditures is also suspect because (1) he did
not include social security payments in production costs, and (2) his assumption
that MBMW employment data exclude all R&D workers is open to question.
9. Michael Boretsky employed a methodology similar to Lee's in obtaining
his estimate of Soviet spending on military and space programs. Boretsky derived
a measure of total machinery output in the economy for a single benchmark year.
The estimates for other years were then made using the CSA index of MBMW
output, which includes some non-machinery output and which does, not include
all machinery output.
10. Boretsky eliminated indirect taxes and trade-distribution markups from
producer and consumer durables to put machinery production and civilian purchases
on the same price basis, but his adjustments were incorrect. He also used data
that included imports in order to make estimates from data that did not include
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imports. Although Boretsky recognized that he had to subtract interindustry uses
of machinery in deriving his residual (unlike Lee), he used arbitrary estimates of
the growth of such uses between 1959 and 1965 that led to substantial errors.
Finally, Boretsky bridged gaps in Soviet data with other estimates - as in his
treatment of the machinery components of investment and working capital - which
weaken the reliability of the residual.
11. Both Lee and Boretsky argue that even if their defense-related residuals
of MB output are wrong, the errors are not large and the trend in the residuals
is valid. The Lee and Boretsky estimates of annual growth between 1958 and 1965
in the defense-related residuals are nearly the same - 18% and 19%, respectively.
Both rates far exceed the average annual growth in the gross value of output of
MB for the same period -- 14%. They also far exceed the trend of arms procurement
estimated by US analysts inside or outside the government. In addition, erratic
year-to-year fluctuations in the Lee-Boretsky results are too drastic to be plausible.
A careful analysis of their procedures reveals that the gaps in data affecting the
trend of the residuals are as serious as those affecting its base year value. To derive
a respectable time series, the following data (presently unavailable to Western
analysts) would be necessary at a minimum:
a. an index of interindustry uses of machinery, including
double-counting within the machinery sector;
b. measures of the effect of overpricing of new machinery products
on the values used in the residual calculations;
c. measures of changes over time in the ratio of production classified
on a "commodity" basis to production classified on an "establishment"
basis;
d. price indexes for machinery output and its various uses, so that
residual values can be calculated from consistent data;
e. values' for the non-machinery component of investment and for
changes in inventories of machinery; and
f. reasonably accurate coefficients to convert foreign trade in
machinery into domestic prices.
12. In an attempt to apply the lessons learned from the review of Lee and
Boretsky, residuals were calculated independently for 1959, 1966, and 1967. In
each case, remaining uncertainties as to key parameters outweighed the effects of
improvements in procedure. To show, for example, the error embodied in such
estimates, a band of plausible residuals was sketched out for 1967. The possible
outcomes ranged from 3.9 billion to 18.3 billion rubles.
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13. The prospects for using residual output of MB to determine Soviet
expenditures on military hardware are therefore dim. While some of the estimative
and accounting errors in the work of Lee and Boretsky can be corrected, data
are still insufficient and Soviet explanations of their national statistics still too
vague to enable estimates to be made with confidence. Crude estimates will continue
to be needed in calculating the residual. Moreover, a small percentage error in
such crude estimates made at high levels of aggregation - e.g., in deducting
metalworking output from total gross output of MBMW -- can lead to a very large
percentage error in the much smaller, supposedly defense-related residual. In short,
the data and information gaps are too formidable with present information to
produce either a plausible value or trend of military-space hardware output from
Soviet data on the MBMW sector of industry.
The Basic Assumption -- Defense Production
and National Economic Accounts
14. Western efforts to use Soviet national accounts to obtain estimates of
defense spending assume that these accounts include defense expenditures. The
rationale for this assumption is as follows: Soviet national accounting practice
follows the Marxist division of economic activity into spheres of material and
non-material production. Accordingly, the Soviets claim that their statistics on
"national income" include only material production - the production of tangible
goods, as opposed to the production of intangible services. Moreover, all material
production is presumed to be in Soviet national income. As a result, the production
of uniquely military hardware (missiles, ships, tanks, etc.) is therefore assumed
to be included in the sphere of material production and in official Soviet data
on national income.
15. The Soviet statistical construct "national income" apparently does include
only material product. The derivation of this construct in the Soviet statistical
yearbooks includes consumption and accumulation, 25X1
subtotals which are consistent with other Soviet data on retail sales of material
products and capital investment.
16. In addition, the assumption that all material production is included in
published Soviet national income data seems acceptable. The CSA could compile
Soviet economic data net of defense production. But this argument would imply
that the CSA keeps two sets of national accounts and withholds the set including
defense production from publication. Most Western observers have concluded that
the CSA does not maintain two such sets of books, but rather simply does not
publish sensitive, defense-related data.5 Hence, the existence of large, unexplained
residuals in Soviet data and the occurrence of apparently irreconcilable data.
5. For example, see Abraham S. Becker, Soviet National Income 1958.64, University of California Press,
1969, p. 157, 25X1
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17. Soviet descriptions of the contents of national accounts and the
administrative subordination of the defense industries to the MB ministries suggest,
that defense hardware production is included in MBMW, the USSR's largest
industrial branch. Major support for this supposition. .comes from the list of MBMW
industries enumerated in the forms used for drawing up the seven-year plan
(1959-65).6 In this classification, shipbuilding, a branch of MBMW, includes
warships, and another branch designated "defense industry" includes.-MBMW
enterprises for the "production and repair of military equipment and munitions,
including all aircraft plants but excluding naval, shipyards, and specialized plants
for the production of instruments and electronics." In the classification, it is: also
noted that general explosives and some nuclear , materials for military use are
included in the chemical industry. Except for shipments to stockpiles, these
materials should be embodied in the final output of the warhead assembly plants
included in MBMW.
18. That the published Soviet data on gross value output (GVO) of MBMW
do, indeed, include output of military hardware is supported by the behavior of
the MBMW index in the immediate post-World War II years. The output of MBMW
fell by 34% during 1945-46. This sudden decrease (compared with a 29%J ncrease
during 1940-45) probably reflects the drop in military-related production as the
economy retooled for civilian production.
19. Thus the published MBMW index almost certainly includes the production
of military hardware. Insofar as the reported gross outputs are consistent with
the published growth indexes, values for the GVO of MBMW would also include
the value of military hardware. If the GVO of MBMW includes output of the defense
industries, it should then ,be possible to estimate -- at some level of accuracy --
the production or procurement of uniquely military products , of MBMW by
subtracting the value of civilian production from total MBMW production.
Lee's Estimate of a Machinery Purchases Residual
20. A Stanford Research Institute report by William, T. Lee in 1968 analyzed
the possibilities of financial verification of Soviet .military expenditures.? One of
the approaches to verification used in that study was a machinery purchases residual
(MPR) that has also appeared in subsequent SRI publications:
Military space procurement of durables (hardware) is estimated as a
residual in the final value of output of the Soviet machine building and
metalworking industries.8
6. Gosplan, Formy i pokazeteli k sostayleniyu proyekta perspektivnogo plans razvityya narodnogo
khozyaystva SSSR na 1959-65 gody, Moscow 1959. Since this publication was approved, additional official
classifications have included defense industries in their descriptions of the MBMW branch: Gosplan,
Metodicheskiye ukaz6niya, Moscow, 1969, pp. 719-20; and V.I. Guryev, Klassifikatsiya otraslevy narodnogo
khozyaystva SSSR, Moscow 1971, p. 112.
7. W.T. Lee and Sally Anderson, op. cit.
8. W.T. Lee, Soviet National Security, op. cit.
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A paper prepared by several SRI economists and consultants for the 1973
compendium of the Joint Economic Committee of the Congress also included
estimates of total defense spending attributed to Lee.9
21. The methodology that Lee used was based on official Soviet growth
indexes of the output of the MBMW sector. These indexes contain well-known
sources of possible bias -- new product pricing10 and changing amounts of
double-counting11 - which can distort trends. The first step in the methodology,
after converting the indexes into values, called for the subtraction of the GVO
of metalworking (including repair) from the GVO of MBMW in 1950-65. The result
is a series of GVO for MB which are then adjusted for double-counting and changes
in unfinished production to estimate the final output of the MB branch. The final
output series represents output available for investment, consumption, export, and
defense. Lee subtracts his estimates of producer and consumer durables from final
output to obtain the residual. This residual, which is assumed to be defense-related
production, grows from 790 million rubles in 1950 (10% of the GVO of MBMW)
to 15.4 billion rubles in 1965 (25% of the gross output of MBMW).
22. The purpose of this section is to evaluate Lee's methodology in some
detail. Table 1 presents each step, and the discussion which follows considers these
steps under three general headings: (a) the derivation of the GVO of MB from
the GVO of MBMW; (b) the derivation of the value of the final output of MB;
and (c) the subtraction of producer and consumer durables to derive a military
hardware residual.
Derivation of the Gross Value of Output of Machine Building
23. Lee found official Soviet estimates of the GVO of MBMW in 1955 prices
for 1955, 1958, 1960, and 1965 and calculated values for other years by means
of the Soviet index of growth in MBMW gross output. Next, he subtracted annual
estimates of output of the metalworking sectors (metal articles and capital repair)
to obtain the gross output of MB.
24. The time series for the GVO of MB, which Lee estimates by this
methodology, contains many errors which together result in an overstatement of
the value of the GVO of MB ranging from 270 million rubles in 1955 to 2 billion
9. Robert W. Campbell, et. al., op. cit.
10. In any constant price growth index, the introduction of new products for which no base year price
is available distorts the calculated -growth index. In the Soviet case, this distortion is accentuated by the
use of "temporary" prices for new products. These temporary prices are based on limited production runs
and overstate the price which would apply after the product enters series production. The result is an upward
bias in the growth index.
11. Increasing specialization within the MBMW branch results in an increase in the sale of subassemblies.
Since each sector of the industry counts the value of these subassemblies in its calculation of gross output,
their value is entered twice in the total gross output of the branch (first as the output of the sector which
produced them and second as part of the gross output of the sector which incorporated them in a final
product).
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Gross value of output of the
MBMW sector
7.87
12.7
17.4
20.0
22.6
25.5
29.6
34.0
39.16
45.1
51.0
55.9
61.0
Minus
Metalworking
0.96
1.48
2.0
2.2
2.4
2.64
2.90
.3.17
3.47
3.81
4.17
4.57
5.01
Capital repair
1.76
2.16
2.49
2.74
3.0
3.32
3.75
4.18
4.61
5.24
5.84
6.57
7.36
Equals
Gross value of output
of machine building
5.15
9.06
12.91
15.06
17.20
19.54
22.95
26.65
31.08
36.05
40.99
44.76
48.63
Minus
Unfinished production
0.53
1.028
1.52
1.81
2.10
2.38
3.18
3.22
3.79
4.33
4.38
5.77
6.23
Interplant transfers2
0.55
1.04
1.59
1.86
2.27
2.57
2.97
3.98
4.91
6.34
7.69
8.19
9.33
Equals
Final value of output
in the machine
building sector
4.06
6.99
9.79
11.40
12.84
14.59
16.80
19.45
22.38
25.38
25.53
30.80
33.07
(28.92)3
Minus
Producer durables
2.97
3.16
4.58
5.94
7.18
8.36
9.21
939
10.14
1 1 .08
12.355
14.059
15.189
Consumer durables
0.300
0.600
0.87
0.98
1.12
1.27
1.31)
1.53
1.68
1.85
2.04
2.24
2.48
Equals
Machine building residual
0.79
3.23
4.34
4.48
4.54
4.96
6.20
8.53
10.56
12.45
14.13
14.50
15.40
(14.52)3
I. W.T. Lee & Sally Andervm, PotenBal of Ecos,n,er c l)ata for Verification of an Arms; Control Agreement with the USSR, 16 February 1968.
2. The value series for interplant transfers does not appear in the source cited. The values were calculated by the methodology presented in the source by subtracting the
estimate of unfinished production from the gross output and multiplying the result by the percentage indicated for that year, as follows:
1950 12% 19611 17%
1953 13% 1961 18%
1955 14% 1962 20%
1956 14% 1963 21%
1957 15TH 1964 21'i.
1958 15% 1965 22%
1959 15%
3. The 1963 values for the final output and the machine building residual were apparently miscalculated in the source cited. The correct values, based on Lee's
methodology, are given in parentheses below the values found in the source cited.
rubles in 1965. Specifically, Lee failed to recognize the differences between the
commodity-based Soviet data used in their input-output (1-0) table12 and the
establishment-based data used in other Soviet reporting systems; he subtracted
turnover taxes13 and trade and distribution markups and transportation costs in
the metalworking industries from MBMW which did not include such markups;
and he ignored a published Soviet index of growth in MB and created an index
of his own.
Commodity-Establishment Problem
25. The values for GVO of MBMW that Lee uses are compiled by Soviet
statistical agencies on an "establishment" basis. The GVO of MBMW -- the sum
of the value of output of all enterprises whose primary production is machinery,
metal articles, or machinery repair work - does not include machinery produced
as a secondary product in other branches of the economy. These data do include,
however, the value of non-machinery products produced in MBMW.
Commodity-based data, on the other hand, classify data into similar product groups.
Thus, machinery produced outside the MB industries would be included with the
12. An input-output table is a tool of economic analysis which depicts the flow of goods and services between
productive units as a matrix.
13. The turnover tax is a discriminatory indirect tax on trade turnover levied chiefly on consumer goods.
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machinery output of MB industries, but the non-machinery output of MB industries
would not be included. To convert GVO of MBMW from an establishment basis
to a "commodity" basis, non-MBMW production must be removed from the
establishment output and MBMW-type production carried out elsewhere must be
added. Two Soviet authors have stated that in 1959 commodity-based gross output
of MBMW was 92% of the establishment-based gross output.14 This was the result
of removing the 14.5% of the establishment-based gross output that represented
non-MBMW products and adding secondary MBMW output equal to 6.5% of the
establishment-based gross output. In 1959 the commodity-based gross output of
MBMW can be calculated as 27.2 billion rubles. Lee's establishment-based value
of 29.6 billion rubles, therefore, overstates the gross output and the resulting
residual by 2.4 billion rubles.
26. Because the commodity-establishment adjustment involves both an
addition and a subtraction, the possibility that it varies over time is enhanced.
The net adjustment for 1959 is the only one known; the commodity-establishment
adjustments for other years have not been published. The inability of a Western
researcher to make the proper commodity-establishment adjustment over time is
another stumbling block in this type of methodology.
E~ v
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Purchaser vs Producer Prices
27. The Soviets have never released data on the value of output of the MB a a
11 11
branch of MBMW. To reduce his MBMW series to MB output alone, Lee subtracts ti " v
the gross outputs of the metalworking and repair sectors available in the 1959
1-0 table. But the gross outputs in the Soviet 1-0 tables are in purchaser prices,
and hence are not comparable with the gross outputs reported in constant enterprise
(producer) prices. Therefore, when Lee fails to adjust the 1959 GVO of
metalworking for the turnover tax collected and the transportation, trade, and
distribution costs incurred in marketing the product, he is subtracting from MBMW
gross output a value that is at least 500 million rubles too large.
Incorrect Index for Metalworking GVO
28. Although an index of metalworking output exists for all years between
1958 and 1965,15 Lee used only 1959 and 1965 values - derived from the
"differential" between the MBMW and MB indexes reported in the Soviet statistical
yearbooks - and assumed that the index grew at a constant rate in the intervening
years. This index was applied to a 1959 base value for three MW sectors from
the 1-0 table, that include sanitary engineering equipment which may not be in
14. Ya. M. Shvyrkov, Klassifikatsii otraslei v narodnokhzyaystvennom plane, Moscow, 1965, pp. 32, 40.
A.N. Efimov and L. Ya. Beni, eds., Melody planirovanitya mezhotraslevykh proportsii, Moscow, 1965,
p. 81,
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metalworking. This procedure distorts the trend in the GVO of.MW that, Lee
estimates between 1958 and 1965 and therefore distorts the residual.
The Problem in Capital Repair
29. The index of "production of repair work", which is part of MBMW,
is published in the Soviet statistical yearbooks, but Lee could find. no ruble value
for a benchmark. Instead, he used the commodity-based gross output for ';repair
of all machinery" from the 1959 1-0 table as his benchmark and, applied the
establishment-based growth index to this value to generate a ruble series. for
"production of repair work." The coverage of the two repair branches is not
comparable and the differences go beyond the commodity-establishment
adjustment. The establishment-based gross output of "production of repair work"
is about 400 million rubles less than the value Lee used for the benchmark
output.16 This means the residual is understated by this amount in 1959.
The Indexes for MBMW and MB
30. The establishment-based GVOs which Lee estimated for 1950 and 1953
may be in error on their own account. The GVO of MBMW is based on' a
constant-price index published in official yearbooks. The price weights of this index
have changed over time as the Soviets have linked constant-price segments together.
The prices used have been 1949-51 current wholesale prices in 1950-51 constant
1 January 1952 prices in 1952-55; constant 1 July 19.55 prices in 1955-67; and.,
constant 1 July 1967 prices in 1967-73. The error introduced by the use of
different price weights cannot be determined but could be sizable, particularly for
1950. In addition, any extension of the series beyond 1967 could also generate
sizable errors. Lee's procedure for converting the published MBMW index into value
terms resulted in overestimates for the value of MBMW output in all years except
1955 and 1958. The overestimates ranged from 200 million rubles in 1956. to
600 million rubles in 1964 and were the result of using the Soviet values of GVO
in 1960 and 1965 (which were published with two-digit accuracy) as the base
for the index rather than the 1955 and 1958 Soviet values (which were published
with three digit accuracy).1 7 The sum of Lee's errors in estimating the GVO of
MB can be seen in Table 2, where Lee's series and the index derived from it are
compared with a series based on the official index. The indexes grow quite
differently in several years, and the value error resulting from errors in, estimating
the GVO of MB grows from 270 million rubles in 1955 to almost 2 billion rubles
in 1965.
Derivation of the Value of Final Output of Machinebuilding
31. In moving from the GVO of MB to an estimate of the value of final
output of MB, it is necessary to subtract the changes in the amount of unfinished
16. The weights implied by the growth indexes of GVO of MB, GVO of metalworking, and GVO of repair
suggest that the value of repair in 1958 is 3 billion rubles.
17. The 1955 and 1958 values, when projected at the rate indicated by the official index, produce values
for 1960 and 1965 which round to the values published by the Soviets for these years.
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Comparison of Lee and Official Soviet Machine Building
Indexes and Values
Indexes
Values
(Billion Rubles)
Leel
Official2
Leel
Corrected
Lee3
Official4
Errors
1955
66.1
64.4
12.91
12.91
13.18
-0.27
1956
77.1
75.1
15.06
14.86
15.37
-0.51
1957
88.0
87.4
17.20
17.00
17.88
-0.88
1958
100.0
100.0
19.54
19.54
20.46
-0.92
1959
117.5
115.5
22.95
22.65
23.63
-0.98
1960
136.4
134.0
26.65
26.35
27.42
-1.07
1961
159.1
155.5
31.08
30.72
31.82
-1.10
1962
184.5
180.0
36.05
35.65
36.83
-1.18
1963
209.8
204.5
40.99
40.49
41.84
-1.35
1964
229.1
223.4
44.76
44.16
45.71
-1.55
1965
248.9
245.0
48.63
48.13
50.10
-1.97
4. The 1958 value for MB was derived from official Soviet growth indices for MB, two metalworking sectors,
and repair. Values for other years estimated from the index in Column 2.
5. Corrected Lee value less official index value series.
1. Table 1.
2. TsSU, Narodnoye Khozyaystvo SSSR v 1967 godu, Moscow, 1967, p. 256
3. Values in Table I corrected for Lee error in estimating GVO of MBMW.
production and the value of transfers between enterprises. Lee, however,
overestimates unfinished production and underestimates interindustry transfers. The
net result is an overstatement of final output by 2.3 billion rubles in 1959 that
is then carried down to the residual.
The Treatment of Unfinished Production
32. Because MB gross output includes the increase in the value of unfinished
production during the year, Lee makes adjustments to exclude such changes. In
doing so, however, he overestimates the necessary adjustments by. from 2 billion
to 6 billion rubles in 1959-65. In 1959 the gross output of MB from Table 1
is 22.95 billion rubles, from which Lee subtracts 3.18 billion rubles, the total cost
of unfinished production on hand at the end of the year. He should have subtracted
only 800 million rubles, the difference between the value of unfinished production
at the end of 1958 and the end of 1959. Similarly, Lee should have subtracted
only 40 million rubles in 1960 instead of 3.22 billion rubles. By 1965 the
overstatement of this adjustment amounts to 5.8 billion rubles.
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Interindustry Deliveries
33. Lee estimates that transfers between ..machinebuilding enterprises as a
percentage of the gross output of machinebuilding vary from 12% to 22% in the
period 1950-65. These figures are based on fragmentary MBMW data, for the years
1955, 1956, and 1959, which indicate that the rate was constant in that period
and "accounted for no more than 15% of MBMW GVO."18 Lee notes that "the
most precise figure available is 13% to 14% for 1959 which is based on data from
the interindustry matrices."19 Nevertheless, Lee uses a figure of 15% for the year
1959. The percentages which appear in Table 1 are based on this single observation
and Lee's notions as to the direction of change. Lee believes that intraindustry
deliveries have increased as a proportion of total output because the proportion
of material purchases in MBMW prime costs has risen.
34. The intraindustry data used by Lee was taken from the published,
incomplete version of the 1959 matrix which omitted two MB sectors.20 The
percentages of interplant transfers in the completed version of the table are: 16.4%
for MBMW and 15.7% for MB. Both percentages exceed the 15% limit inferred
by Lee ? from the data in the published table. Data from' the 1-0 table, however,
should not be directly used in making this adjustment because of the
commodity-establishment problem and because input-output data reflect purchaser
prices rather than producer prices. The net effect of these differences would be
a 12.4% correction for double-counting in 1959, instead of the 15.7% implied by
the input-output table.
35. The error in calculating interplant deliveries based on the incorrect ratio
would have been significant (nearly 500 million rubles in 1959) if Lee had not
subtracted far too much unfinished production from gross output before applying
the percentage of interplant transfers. Because changes in unfinished production
almost certainly were included in gross output when the base year percentage was
calculated, this procedure led to an understatement of interplant deliveries. 'Because
of these errors, the error in the value derived by Lee for interplant deliveries in
1959 is small. In other years, however, the error is large - an overestimate of
1 billion rubles in 1965.
36. Lee also failed to take account of deliveries of MB enterprises toy other
sectors of the economy. This value is available for 1959 (3.4 billion rubles)' and
for 1966 (7.7 billion rubles) from the reconstructed Soviet 1-0 tables.21 This
correction alone would reduce the Lee residual from 16.2 billion to 2.8 billion rubles
in 1959. This oversight is partly offset by errors in estimating 'deliveries among
MB enterprises and in handling the value of unfinished production. Thus, for 1959,
Lee does not deduct the 3.4 billion rubles of interindustry deliveries, but. he
18. Lee and Anderson, op. cit., p. V-128.
19. Ibid.
20. This was not clearly stated in the source that Lee used but can be deduced from a comparison-of
the data in the source with the published table.
21. Vladimir Treml, et. al., The Structure of the Soviet Economy: Analysis and Reconstruction of the 1966
Input-Output Table, New York, 1972.
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subtracts 2.4 billion rubles more than he should have in the adjustment for
unfinished production.
Subtraction of Producer and Consumer Durables
37. The final steps in the derivation of a machinery purchases residual are
the subtraction of estimates of deliveries of producer and consumer durables. In
making these estimates, Lee adjusts the producer durables component of investment
for imports but not for its non-machinery element or for the trade, distribution,
and transportation charges, which are also included. The chief problem in Lee's
treatment of consumer durables is that he accepted an estimate for a single year
(1955) and relied on arbitrary growth rates with no link to Soviet data to generate
his series.
The Producer Durables Adjustment
38. Lee uses the value of equipment included in published data on capital
investment to estimate domestic production of producer durables. Lee notes that
Soviet investment data include (1) some non-machinery products, (2) imports, and
(3) trade, distribution, and transportation costs. All three elements should be
removed to derive domestic production of producer durables in producer prices.
However, Lee removes only the surplus of imports over exports, converted to
domestic prices. This procedure removes imports from the investment data and
implicitly includes exports in the producer durable category so that these two
components of final use are subtracted together. Lee explains his failure to remove
the other elements by stating that these "adjustments are purposely not made in
an attempt to keep the producer durables entry conservatively on the high side
so as not to exaggerate the military/space residual."2 2 Lee acknowledges that the
difference between producer and purchaser prices overstates the value of equipment
in capital investment by "almost 10%" In addition, 25X1
non-machinery products may account for at least 5% of equipment data. According
to these crude factors, Lee may have understated his residual by 1.4 billion rubles
in 1959 and 2.5 billion rubles in 1965.
39. Lee assumes zero lag between production and purchases of both producer
and consumer durables. However, if this year's purchases include part of last year's
production, the resulting residual represents neither output nor purchases of
military/space hardware.
The Consumer Durables Adjustment
40. Lee calculates the output of consumer durables by inflating a CIA
estimate of consumer durables purchased in 1955 by 25% to account for the items
not included in the CIA sample and then moves this value over time at the rate
of growth of the GVO of MBMW in 1955-58 and at a constant 10% per year
thereafter. Lee rejects the CIA growth index for consumer durables because it does
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not include consumer electronics. Neither of the growth rates that Lee uses can
be supported as indexes of growth in ' consumer durables. For at' least a five-year
period (1959-63), he could have used the comprehensive official index of deliveries
of consumer durables.23 For the entire period he could have derived an index
from sales data available yearly in the statistical 'handbooks for consumer'durables.
Summary
41. The methodology which Lee used to derive his ' estimates incorporated
most of the pitfalls in Soviet data that were cited at the outset. In his `attempts
to estimate some of the missing Soviet data, he committed a number of errors.
He mixed input-output data with other data prepared for the CSA without (1) `first
estimating' total machinery output in the economy by removing non-machinery
production from the CSA data and including machinery produced outside the
MBMW branch or (2) removing turnover taxes and trade distribution markups from
the input-output and Soviet investment data. In confronting the trend problem,
moreover, Lee did not use Soviet indexes where their application seemed
appropriate - as in estimating a time series for the gross output of MB and for
consumer durables - and instead created his own indexes, often with no basis
in fact. Lee also erred in subtracting all unfinished production from gross output
of MB instead of merely the change, as even Western accounting practice would
do, and in failing to deduct MB shipments to other industries. Lee's inflation of
the CIA estimate of the value of consumer durables in 1955 to obtain a base-year
estimate for consumer durables is a crude adjustment for the omission of consumer
electronics from the CIA sample.
42. Finally, Lee seems to estimate the value of his residual without
conducting sensitivity tests on his estimates. Estimates made at very, high levels
of aggregation in the data, such as in the value of metalworking, for example,
may have a small percentage error, but the ruble equivalent of that error can be
a large percent of the residual -- that is, the error of 980 million rubles which
Lee made in estimating the machinery component of MBMW is only 3.3% of the
value of MBMW, but it is 16% of the residual value of machinery which Lee shows
for 1959.
Lee's Estimate of Research and Development Expenditures.
43. Lee's 1968 study also presented a calculation of the value of research
and development (R&D) expenditures included in MBMW output. This estimate
was based on the following hypothesis: the gross output of, R&D. projects is included
in the published value of MBMW output, but MBMW employment statistics do
not include R&D personnel.24
23. TsSU, Narodnoye khozyaystvo SSSR v 1964 godu, p. 589. The 'published index, based on Soviet
input-output work, grows at 8.4% per year in 1960-63 while Lee's index increases at 10% per year. The
former is generally accepted as an accurate measure of consumption of consumer durables.
24. The hypothesis had been examined in an earlier work: W.T. Lee, Trends in'Soviet RDT&E and Space
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44. The procedure can be illustrated by a simple formula:
MBMW employment x average wage in MBMW
Labor payments as percentage of cost
+ MBMW profits
Gross output excluding R&D is thus defined as cost plus profit and is subtracted
from the official Soviet gross output value (see Table 3). The difference is labeled
Official Soviet.GVO
of MBMW
Lee estimates of costs
plus profits
Residual (GVO of R&D
institutions)
Final output of R&D
Table 3
Lee Estimates of the Value of Soviet Research and Development
Billion Rubles in 1955 Prices
1955 1959 1960 1961 1962 1963
17.52 29.6 34.0 39.16 45.10 51.0
(70%0-85% of residual) 1.41-1.72 2.99-3.63 3.39-4.11
4.16-5.05 5.69-6.91 6.34.7.69
the R&D component of MBMW. Since the residual represents gross output, Lee
adjusts it to exclude unfinished production and intraindustry use so as to obtain
an estimate of "R&D final output." Although the methodology appears
straightforward, the residual obtained can be questioned on several points:
(1) Social security payments were not included in Lee's wage calculation
but are part of the wage portion of Soviet cost data. Inclusion of these
estimates alone would reduce the residual in 1959 by 2.1 billion rubles.
(2) The estimate of employment begins with published data on the
number of workers. in MBMW. To obtain total employment, Lee uses
the fragmentary data on the number of engineers and support staff in
MBMW that were then available. Although Lee allows for a high and
low estimate of employment, and averages the result, figures for total
employment data that were published later indicate the actual
employment for 1955 to be 50,000 men higher than Lee's highest
estimate for that year, while the actual employment for 1960 was 60,000
men lower than his low estimate for 1960. The estimates for other years
would be similarly distorted, and the actual figures indicate a much flatter
trend. in employment than implied by Lee's estimates.
(3) In calculating the share of labor costs in total costs, Lee adds 70%
of what the Soviets designate as "other costs" in their cost breakdown
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for MBMW. While it is true that these costs are partly labor and, partly
material costs, the "other cost" category is a catchall including costs
that are difficult for the Soviets to assign to labor or material cost
categories. The labor component of "other costs" would not be included
by the Soviets in calculating the annual wage bill. Therefore, when Lee
adds 70% of "other costs" in deriving a labor cost percentage, the total
costs are understated. An_ overstatement of the residual results.
(4) On the basis of Lee's hypothesis that MBMW data do not include
R&D personnel, if the industrial gross output of scientific organizations
is added to branch gross output, then employment data should also
include the workers in these establishments. While, inconsistencies in
Soviet reporting techniques are numerous, a direct statement from a
Soviet source confirming Lee's hypothesis on the exclusion of R&D
personnel would be necessary for most Western analysts to accept an
inconsistency as gross as that which he is assuming. What Lee may have
rediscovered is an inconsistency between the prime cost data and the
gross output data, which may or may not be related to R&D production.
Boretsky's Estimate of a Machinery Purchases Residual
45. Michael Boretsky presented a residual for machinery purchases, which.
he equated with military hardware procurement, in a 1970 article.25 His
methodology, as set out in Table 4, can be summarized as follows:
Table 4
Boretsky's Estimate of the Residual Final Value of Output') in Machine Building'
Billion Rubles in 1955 Prices
1958
1959
1962
1963
1965
1967
1968
I. GVO of MBMW, establishment basis
....
27.60
....
....
....
....
2. GVO of MBMW, commodity basis
....
25.39
....
....
....
....
....
3. GVO of MB, commodity basis
20.06
....
....
4.
Extrapolation of the 1959 benchmark
value for GVO of MB
17.37
20.06
31.27
35.51
42.53
54.06
60.62
5.
Intraindustry uses in MB
2.62
3.21
5.94
7.14
10.21
.13.57
15.52
6. Value of intermediate products sold
to sectors other than MB
3.94
4.49
6.69
7.49
8.49
10.33
11.34
7. Value of final output of MB
10.81
12.36
18.64
20.88
23.83
30.16
'33.76
8. Value of consumer durables
1.45
1.60
2.14
2.39
2.88
3.90
4.57
9. Value of producer durables (less imports).
6.92
7.29
9.89
10.99
13.49
15.39
16.74
10. Value of inventories
0.27
0.33
0.51
0.50
0.50
0.78
0.84
11. Exports
0.31
0.45
0.47
0.57
0.65
0.82.
0.93
12. Residual (Military and Space Programs)
1.85
2.68
5.62
6.42
6.31
9.28
10.69
I. Boretsky, op. cit., pp. 227.229
25. Michael Boretsky, "The Technological Base of Soviet Military,"` 91st Congress, Economic Performance
and the Military Burden in the, Soviet Union, . Washington, D.C., 1970,. p. 189-231.
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(1) The GVO for MBMW (establishment definition is estimated for 1959
in I July 1955 prices by means of the official indexes of GVO growth
and a Soviet-reported figure of 24 billion rubles for 1958;26
(2) This value is reduced to a commodity-based estimate using the 1959
commodity-establishment ratio previously discussed (0.92);27
(3) The MB portion of this output is estimated by using the MB-MBMW
relation in the reconstructed 1959 1-0 table (0.79);
(4) The benchmark value estimated in step (3) is extrapolated to other
years in the 1955-68 period by means of the official Soviet index of
MB growth;
(5) Intraindustry use in each year is estimated as a changing share of
the estimates made in step (4);
(6) The value of intermediate products sold to non-MB sectors is
determined from the 1959 1-0 table and the share of this value in total
MB;
(7) The value of the final output of MB is derived by subtracting the
estimates of steps (5) and (6) from the estimates of step (4);
(8) Private and public consumption of durables are estimated from
Soviet data on retail trade sales;
(9), (10) Soviet data on investment in fixed capital and inventories are
used to adjust the series for producer durables;
(11) Estimates of exports and imports are made and exports are
subtracted from final output while imports are subtracted from producer
durables;
(12) The residual remaining is identified as "military and space
programs."
46. Boretsky's methodology is superior to Lee's in its treatment of
commodity-establishment conversions, turnover taxes, and trade and distribution
costs. However, it still employs benchmark estimates which are moved forward
? and backward through time by inappropriate official indexes or by his own rough
estimates of growth.
26. This is not the methodology described by Boretsky in his paper. His methodology does not produce
the value he uses. The methodology described above does result in the GVO that Boretsky has for 1959.
27. See paragraph 25.
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Derivation of the Gross Value of :Output of Machine Building
47. Like Lee, Boretsky first had to derive a GVO of MB from the GVO
of MBMW. Boretsky's estimate of the GVO of MBMW, however, is in error, as
is the division of MBMW output between MB and MW. While aware of the
commodity-establishment problem, Boretsky nevertheless used the official Soviet,
establishment-based index of growth in MB.
The Value of the GVO of MBMW
48. Boretsky's derivation of a 1959 base year value of MBMW gross output
(establishment basis) is unclear. The value of MBMW output in 1959 that Boretsky
starts with is 27.6 billion rubles. But this value is not the result of the methodology
that he sets forth and is 2 billion rubles less than Lee's estimate.28 Moreover,
Boretsky's estimate of 27.6 billion rubles is inconsistent. with other Soviet data
for this time period. the GVO of MBMW in 1958
as 25.5 billion rubles,29 a value which is consistent with the growth index and
other values published by the Soviets for the years 1955, 1960, and 1965.30
Application of the reported increase of GVO- of MBMW in 1959 to the 25.5 billion
ruble figure for 1958 yields 29.3 billion rubles for 1959, which is close to the
value of 29.8 billion rubles that can be calculated using Boretsky's stated
methodology. Boretsky's GVO for MBMW in his benchmark year, therefore, is
understated by at least 1.7 billion rubles.
The Division of MB and MW Output
49. To derive the GVO of MB, Boretsky calculates the ratio of MB to MBMW
in an early reconstruction of the Soviet I-O table for 195931 and applies the ratio
to his estimate of the GVO of MBMW on a commodity basis (line 3, Table 4).
In doing so, he is on shaky ground:
a. The data of the early 1-0 reconstruction were based on a GVO that
included imports, whereas the adjusted establishment data to which
Boretsky applies the ratio cover domestic output only;
b. The 1-0 data include turnover tax, trade and distribution costs, and
transportation costs, whereas the adjusted establishment data to which
the ratio is applied are in enterprise . wholesale prices;
28. In his article, Boretsky indicates that this value was calculated as a percentage of the gross output of
industry for 1959, But application of this methodology produces
an estimate of 29.8 billion rubles (0.21 x 141.7 billion rubles).
29. A.N. Gavrilov, Sovremenoye sostoyaniye napravleniye razvitiya teknologii mashinostroyenlya i
priborostroyeniya, Moscow, 1960, p. 304.
30. The 1955 figure of 17.4 billion rubles is from Pravda, October 18, 1961; the 1960 figure of 34 billion
rubles is from Materialy XX!!-S EZDA KPSS; the 1965 figure of 61 billion rubles is from Materialy
XXIII-SEZDA KPSS, Moscow, 1966.
31. Vladimir G. Treml, The 1959 Soviet Intersectoral Flow Table, Research Analysis Corporation, November
1964, p. 93.
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c. The 1-0 data are in 1959 prices and the adjusted establishment data
are in July 1955 prices.
50. Boretsky's estimate of the GVO of the MW sectors (including repair)
in 1959 is 5.33 billion rubles. The value based on the reconstruction of the 1959
1-0 table adjusted to producer prices, is 5.99 billion rubles. Thus, the sum of
Boretsky's errors is a 660 million ruble underestimate of GVO of MW.
The Growth Index for Machine Building
51. To calculate MB output for years other than 1959, Boretsky used the
published index for establishment-based GVO of MB, thus implicitly assuming that
the commodity and establishment GVOs grow at the same rate. Because this is
unlikely,3 2 the GVO of MB so derived can not be relied on to generate accurate
values for a commodity-based residual.
Derivation of the Value of Final Output of MB
52. Adjustments to derive the value of final output of MB from the GVO
of MB center on the elimination of interindustry and intraindustry uses of output.
Intraindustry Uses of MB in 1959
53. Boretsky calculates the intraindustry use of MB as 16% of sales in 1959
by multiplying the ratios of (a) interindustry use to GVO (0.394) and (b)
intraindustry use to interindustry use (0.417), both derived by Soviet authors from
the 1959 1-0 table. This apparently straightforward calculation contains three errors
which together produce a net overstatement of this adjustment equal to 280 million
rubles in 1959.
a. The ratios that Boretsky assumes are calculated from data on MB
were demonstrated in Vladimir Treml's reconstruction of the Soviet 1-0
table to be based on data for all MBMW;33
b. Boretsky assumed that the ratios were calculated from the same
table and could therefore be used together. But the ratio of interindustry
use to GVO (0.394) was calculated from a table in producer prices (net
of turnover tax and transportation and trade costs) while the ratio of
intraindustry use to interindustry use (0.417) was based on a table in
purchaser prices;
c. The ratio of interindustry use to GVO (0.394) was based on total
domestic consumption. Boretsky knew that gross output in this
calculation excluded exports, but lie did not realize that imports had
been added and that the adjustment made was a net foreign trade (imports
32. See, for example, Vladimir G. Treml, et. al., Structure, pp. 123-146,
33. Vladimir G. Treml, op. cit., Vol. II, pp. 100-101,
25X1
2bAl
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minus exports) adjustment rather than a subtraction of exports.
According to Boretsky's own estimates of the foreign trade balance, his
adjustment is overstated by 300%.
54. All these errors affect the accuracy of his calculation, and the percentage
of intraindustry use should be rejected., The value of intraindustry sales of MB
in 1959 in producers prices is 2.93 billion rubles. Boretsky's estimate is 3.21 billion
rubles, an overstatement of 280 million rubles.
Intraindustry Uses of MB in 1965
55. Boretsky estimates intraindustry use of MB in 1965 by increasing the
1959 intraindustry percentage use by a factor of 50%. This factor was based on
what he believed were expost. data from the 1965 Soviet 1-0 table. The. 1965
table, however, was an exante planning table whose price base is unknown; the
ratios derived from it represented planned (or expected) changes in interindustry
relationships, not actual changes.34 Also, the data from which the increase was
calculated were based on material costs rather than GVO. Only if the ratio
of material costs to gross output did not change during 1959-65 would the change
in the ratio based on material. costs reflect the change in the ratio based on' gross
output. Comparison of the 1959 and 1966 10 tables shows that this was not the
case. The value for 1965 is therefore of questionable realiability, and the values
interpolated for 1958-68 are even less reliable because there is no reason to assume
a uniform trend in the rate of change in intraindustry use. Intraindustry use of
MB in 1966 in producer prices is 9.37 billion rubles. Boretsky's value for 1965
is 10.21 billion rubles. After adjusting, for price differences, Boretsky's 1965
estimate is overstated by about 1 billion rubles.
Interindustry Deliveries in 1959
56. To derive MB interindustry deliveries to other branches in 1959, Boretsky
multiplied the GVO of MB by 0.224, an adjustment factor derived by subtracting
the share of intraindustry uses of MB (0.16) from the interiridustry-use ratio (0.394
reduced to 0.384 to allow for the exclusion of exports). As noted above, this
factor was based on data for total MBMW in 1959 producer prices (with the net
foreign trade balance added). Boretsky applied this ratio, adjusted only for exports,
to MB measured in 1955 prices. The value derived by Boretsky (4.49 billion rubles)
is I billion rubles higher than the value in the 1959 Soviet 1-0 table, thus
understating the residual by at least this amount.
Interindustry Deliveries in 1960-68
57. To estimate sales of MB to other sectors. of the economy, Boretsky cites
a Soviet statement that "In 1965 the proportion (relative importance) of repair
in the overall volume of machine building output declined by almost 9% in
Structure, op. cit., pp. 402-404,
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comparison with 1958. In the current 5-year period this proportion will decline
by 10% more." Boretsky applies these declining ratios to his estimate of
interindustry use in 1959. In so doing, Boretsky assumed analogous trends in sales
of MB to other productive sectors and in the proportion of repair in MB output.
58. The declining proportion of repair, however, has little to do with
interindustry use of MB. The repair GVO referred to in the Soviet statement is
the gross output of specialized enterprises whose primary function is repair. The
relative weight of purchases by these enterprises from the MB sector (part of
interindustry use) would be influenced by the declining share of repair in gross
output of MBMW. However, changes in current and capital repair performed by
enterprises on their own equipment and MB sales to other sectors of subassemblies
and tools would not be reflected in the declining share in total MBMW output
of repair enterprises. The magnitude of the error is indicated by an examination
of the data in the 1966 Soviet 1-0 table. According to the Boretsky projection,
sales of MB to sectors other than MB were 19.6% of gross output in 1966, and
in the reconstructed 1-0 table for that year they were 16.8% of gross output.
The error amounts to 1.3 billion rubles in the year 1966.
The Subtraction of Producer and Consumer Durables
59. The final step in deriving a residual value of MB final output is the
subtraction of estimates of producer and consumer durables. Here, Boretsky
overestimated the turnover taxes and used an average value for investment in his
benchmark year that probably understates investment. His inventory series is also
weak. As a consequence, the residual is overstated. Boretsky also assumes a zero
lag between production and purchases of producer and consumer durables. If a
lag exists between the purchases data and the output data, then the residual
calculated is neither the purchases nor the output of military and space hardware.
Producer Durables: Equipment and Inventories
60. The machinery investment data used by Boretsky can be criticized on
a number of points. Boretsky cites the Soviet statistical yearbooks for his gross
investment data, but the 1968 yearbook that he cites does not have data in the
form in which it appears in Boretsky's paper. Investment in 1958-60 (key years
in the Boretsky calculations) is not given separately but as part of a five-year
aggregate figure for the period 1956-60. The value used by Boretsky for 1958
appears to be a simple average of the five-year total. The margin for error in such
a calculation is sizable: when the same method was applied to the total for 1961-65,
a period for which separate yearly values are available in a later yearbook, the
average annual investment is 200 million rubles greater than the actual value for
1963.
61. Boretsky does not show his calculation of investment values for the year
1959. However, if his source. and methodology are used, the value for 1959
investment appears to be understated. Given the value of investment in 1961 and
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his estimate for 1958, the value of investment in 1959 would have been at least
9 billion rubles, whereas the gross investment value implicit in Boretsky's net value
is 8.78 billion rubles.35
62. Boretsky derived a series for investment in inventories of MB products
by assuming that working capital grew at the same rate as gross output. Using
a single published value of 10 billion rubles for 1960 to generate a series for
working capital in MBMW, he assumed that 80% of this working capital was the
working capital of MB - probably on the basis of gross output of MB as 'a
proportion of GVO of MBMW. Working capital is then divided into inventories
and unfinished production with the help of the published percentage distribution
of working capital. Because this percentage distribution is available only for ;recent
years, he had to estimate it for the earlier years in his series (1958-64). His values
for investment in inventories are the yearly changes in these derived series for
inventories and unfinished production.
Consumer Durables: Private and Public Consumption
63. Boretsky uses Soviet data on private and public consumption in 1958-63
to estimate the value of consumer durables. In the conversion of the data from
retail prices to enterprise wholesale prices, the turnover tax and the cost margins
for retail trade, distribution, and transportation must be removed.
64. In removing the turnover tax, Boretsky uses a turnover tax rate of 45%
for the entire period.36 This rate, a crude weighting of many individual rates,
appears to be high on the basis of other sources of information: Vladimir Treml
estimates a rate of 33% in the reconstruction of the 1959 Soviet 1-0 table, and
the 1966 1-0 table has an implicit rate of 37.4% for MB.3 7 In addition, the turnover
tax collections from MBMW in 1959 and 1964 are known: 1.1 billion and 1.5
billion rubles, respectively. These values are equal to the Boretsky estimates for
just MB, indicating that the Boretsky values are overstated by about 25%.38
65. Boretsky's estimates of the retail trade margins and transportation costs
are based on their share in total material costs in MBMW for 1959 and 1965.
The use of this overall MBMW ratio for private and public consumption is wrong
because retail margins and transportation costs are not distributed proportionally
among either the MBMW sectors or among the various final demand and
interindustry uses. Boretsky's adjustment for retail margins and transportation costs
combined in 1965 is 5.1% of retail trade sales. The implicit rate calculated from
the 1966 1-0 table in producer prices was close to 10%. He has therefore understated
these charges by almost 50%.
35. Net investment of 7,292 million rubles plus imports of 608 million rubles divided by 0.9.
36. Turnover tax rate from Phillip Hansen, The Consumer in the Soviet Economy, London, 1968, p. 116,
Reconstructed Table, BEA, Foreign Economic Reports No. 1, Washington, D.C., 1973
38: Based on the distribution of the turnover tax, in the 1966 1-0 table (producer prices) between the MB
and MW sectors.
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Foreign Trade
a. He failed to take into account machinery products classified as
cultural goods: therefore, not all machinery and equipment traded are
included in his totals;
b. The domestic price of an exported good excludes turnover tax,
whereas the domestic price of an import includes turnover tax. Therefore,
the conversion ratios of foreign to domestic prices can not be equal
(as Boretsky assumed) for exports and imports;
c. Foreign trade prices used by the East European countries are
calculated on the basis of "world prices" for commodities traded. Despite
the differences observed by Boretsky between these prices and the US
prices, it is doubtful that world prices of MB products average only 80%
of US domestic prices.
66. Values for imports and exports are published by the USSR in foreign
prices converted to rubles at the official exchange rate. Boretsky's conversion of
these values to domestic prices is based primarily on his estimated dollar-ruble
ratio of 2.75. This ratio is generally believed to be high.39 If it is high, then
Boretsky has understated the domestic price of exports and imports. Because
imports exceed exports, this procedure would understate the residual.
67. The Boretsky foreign trade calculations are suspect on other counts:
Summary
68. Michael Boretsky used a methodology similar to Lee's in obtaining his
estimate of Soviet spending on "military and space programs." Unlike Lee, Boretsky
derived a measure of total machinery output in the economy, but for only one
year. The estimates for other years were made using the official Soviet index of
MBMW output which includes some non-machinery output but which does not
include all machinery output.
69. Boretsky eliminated turnover taxes and trade distribution margins from
producer and consumer durables to put machinery production and civilian purchases
on the same price basis, but his adjustments were incorrect. He also used data
that included imports to make estimates from data that did not include imports.
Although Boretsky recognized that he had to subtract interindustry uses in deriving
his residual (unlike Lee), he used arbitrary estimates of the growth of interindustry
uses between 1959 and 1965 that led to substantial errors. Finally, Boretsky bridged
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gaps in Soviet data with other estimates -- as in his treatment of the machinery
components of fixed investment and working capital - which weakened the
reliability of the residual.
70. The Lee and Boretsky estimates have been reviewed in detail - often
on quite technical points. A more important criticism is that any estimate of this
kind encounters too many imponderables to justify a firm calculation of a
magnitude as important as production of "military and space' hardware."
Calculations of machinery residual still produce inconclusive results, even when
the calculations can build on the Lee and Boretsky studies and have the benefit
of more recent information. Some object lessons are described below.
71. The year 1959 is one of the most promising for a residual estimate
because the Soviets prepared their first 1-0 table for that year. Vladimir Treml
and his associates have reconstructed the 1959 1-0 table on the basis of a great
deal of research. This reconstructed table offers a seemingly unmatched opportunity
to derive a residual for military-related machinery.
72. But not all of the reconstructed table can be used. The GVO of the
Soviet MBMW sector of industry compiled on an establishment basis was reported
as 25.5 billion rubles in enterprise wholesale prices in 1958. A value for 1959
can be estimated by using the announced growth of 15.1% for MBMW in 1959.
Converting the result to a commodity basis (by multiplying by the
commodity-establishment ratio of 0.92 for 1959) provides a value of 27.0 billion
rubles.40 This value in enterprise wholesale prices, however, exceeds the Treml
estimate of 26 billion rubles, which is in purchasers' prices. Since the 1959 1-0
table was exploratory, something could have been excluded in its preparation.
Moreover, the announced GVO of 25.5 billion rubles for 1958 (establishment
definition) is consistent with other Soviet data. Therefore, we begin with the
establishment-based figure and convert it to a commodity basis before bringing
the 1-0 data to bear on the residual problem (Table 5).
73. The reconstructed 1959 1-0 table reports data for the GVO of
metalworking and repair (6.65 billion rubles), total interindustry deliveries by MB
(6.54 billion rubles), and consumption of- MB products (2.69 billion rubles). These
values include turnover taxes and trade distribution markups. The sum of these
three items must be subtracted from the GVO of MBMW. But these deductions
are too large because they are valued in purchasers' prices. Therefore, 1.21 billion
rubles for turnover taxes and. 1.3 1 billion rubles, representing distribution markups,
must be added at this stage of the calculation.41 The remainder - 13.64 billion
40. In enterprise wholesale prices of 1 July 1955.
41. Except for turnover tax collections, these data are from the reconstructed Soviet I-0 table for 1959
(see Treml et. al., op. cit.). Turnover tax collections are from S.V. Borovik and N.A. Plashchinskiy, Obrazovaniye
Fundy proizvodstvennogo nakopleniya v promyshlennosti, Minsk, 1972, p. 179,
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Table 5
Residual Machinery Output, 1959
GVO of MBMW, commodity basis)
27.00
Less
Gross value of MW and repair output (PP)2
6.65
Total interindustry uses deliveries by MB2
6.54
MB output used for consumption2
2.69
Plus
Turnover taxes on MBMW output
1.21
MBMW trade-distribution markups
1.31
Equals
Deliveries of machinery to fixed investment,
machinery exports, and deliveries to
other uses2
13.64
Less
Machinery component of investment
8.96
Machinery exports
1.20
Plus
Machinery imports
1.38
Equals
Residual MB deliveries)
4.86
1. Enterprise wholesale prices.
2. Purchasers' prices.
rubles - represents output used for investment, exports, and other purposes such
as defense and additions to inventories of machinery.
74. Investment and net exports of machinery are not identified in the
reconstructed 1-0 table. Indeed, Soviet investment data for 1959 are incomplete
and include distribution charges and some investment in furniture, plumbing, and
the like. The value for investment originating in MB shown in the tabulation is
the sum of (1) the published value of state investment in machinery and other
equipment, (2) collective farm investment in machinery and equipment (derived
by subtracting the value of construction and other types of investment from total
collective farm investment) and (3) a deduction of 5% (Boretsky's factor) to allow
for equipment such as furniture that did not originate in MB.
75. The determination of the domestic value of Soviet exports and imports
is uncertain because they must be converted from foreign trade prices to domestic
prices. There is little reason to choose among the several conversion ratios that
Western researchers have developed; the tabulation uses the values of imports and
exports from the 1959 1-0 table as reconstructed by Vladimir Treml and associates.
76.. The residual of 4.86 billion rubles includes production of military
hardware and any items unaccounted for in the calculation of the residual. For
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example, the residual certainly includes' changes in inventories and machinery
losses.4 2 More important, it may well include the value of capital repair performed
by MB enterprises on their "own account."43
77. The residual also reflects any errors made in estimating the various values
used in the tabulation. The primary source of error is the commodity-establishment
ratio. Although published by the Soviets for 1959, the ratio was based on sample
survey data and may therefore be incorrect. It is impossible to quantify this
uncertainty. Price differences undoubtedly are another source of error. Gross output
of MB is 'reported in 1955 prices; the 1-0 data are in 1959 prices. Although it
has often been assumed that average MB prices did not change in 1956-59, this
remains an assumption and a possible source of error.
78. The overall error in the Lee and Boretsky estimates is further illuminated
by a comparison with the 1959 residual from Table 5. This residual''is 2.18 billion
rubles larger than Boretsky's estimate and 1.34 billion rubles lower than Lee's
estimate.
79. The CSA put a second 1-0 table together for 1966. The quality of
the research reflected in this table is believed by Western experts 'to be vastly
superior to that supporting the 1959 table. The full table, like the 1959 table,
was reconstructed by the Research Analysis Corporation. Thus, 1966 is another
vintage year for the calculation of residuals, although the procedure followed is
somewhat different from that used in finding a 1959 residual (Table 6).
Table 6
Residual Machinery Output, 1966
Billion Rubles in 1966 Enterprise Wholesale Prices
Value of final output of MB
25.48
Less
MB output used for consumption
3.36
Machinery component of investment
16.65
Machinery exports
1.37
Plus
Machinery imports
Equals
Residual MB deliveries
are losses not included in material expenditures for production and compensated from national
income. They include losses from cancellations of construction projects. These are determined by the amount
of the expenditure up to the discontinuation of the projects, plus expenditures for dismantling the unfinished
project, and minus the value of salvaged materials.
43. Capital repair conducted "in house" should have been removed from MB with the
commodity-establishment adjustment. The Soviets are ambiguous in their description of this adjustment,
however, and state conclusively only that such repair was reported as part of the repair sector in. the 1966
I-0 table.
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80. The methodology, shown in Table 6, uses data on final output and
consumption directly from the reconstructed portions of the 1966 Soviet table
in producers' prices (enterprise wholesale prices).44 Hence, difficulties arising from
converting establishment-based data to commodity-based data are avoided while
turnover taxes and trade distribution margins have been removed from both the
value of MB output and the value of deliveries of MB output to consumption.
81. Investment in machinery (16.65 billion rubles) is estimated by reducing
the published value of investment in machinery and equipment by 10% - 5% to
allow for non-machinery products (Boretsky's factor) and 5% for distribution
charges (the average distribution charge on MB deliveries to final demand in 1966).
Data on foreign trade in machinery from the Soviet foreign trade yearbook are
converted to domestic prices by coefficients of 0.75 for imports and 0.80 for
exports. These coefficients were developed by the Foreign Demographic Analysis
Division of the US Department of Commerce as a result of research on the Soviet
1-0 tables.
82. Unfortunately, this new estimate of the residual is not as solid as it looks.
Because a substantial difference was observed between the gross values of MBMW
output calculated for 1959 from establishment-based data and from 1-0 data, the
1966 data should be tested for the same discrepancy. But the required information
does not exist for 1966.45 Moreover, the residual (a) is affected by all of the
inevitable errors in reconstructing the MB portion of the 1966 1-0 table and (b)
includes losses and inventory charges.46
83. To illustrate some of the pitfalls encountered in estimating residual
machinery output for years when corollary 1-0 data are not available, an attempt
was made to estimate a machinery residual for 1967 (Table 7). Because the
underlying assumptions are so critical to the estimate of the machinery residual,
the results are presented in terms of low, central, and high estimates. The central
estimate is based on the best available point estimate for each value in the
calculation of the residual. The high and low estimates use values in each of the
steps that reflect a reasonable range of uncertainty. For the high estimate all of
the values chosen tend to drive up the residual while for the low estimate the
reverse is true. In addition, three different price deflators are used to permit
comparison of the residual with that found for 1959.
84. The large differences in the estimates shown in Table 7 reflect difficulties
in: (1) estimating the ruble value of commodity output of MB, (2) estimating
interindustry deliveries of machinery, (3) converting foreign trade in machinery
44. Foreign. Demographic Analysis Division, Department of Commerce, Conversion of Soviet Input-Output
45. For example, no ratio of commodity-based to establishment-based values has been reported, as it was
in connection with the 1959 1-0 table.
46. "In house" capital repair, however, seems to be excluded, in contrast to the 1959 residual.
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Table 7
Alternative Estimates of the Machinery Output Residual in 1967
Billion Rubles in 1 July 1967 Prices
Range of Estimates
GVO of MBMW, establishment basis
Low
59.6
Central
59.6
High
59.6
GVO of MBMW, commodity basis
54.8
59:6
63.2
GVO of MB, commodity basis
'44.9
49.5
53.1
Less
Interindustry use
18.0
18.8
19.1
Exports
1.9
1.5
1.1
MB output for consumption
3.7
3.7
3.7
Machinery component of investment
18.5
18.0
17.4
Plus
Imports
1.5
2.0
2.5
Equals
Residual MB deliveries (in 1967
enterprise wholesale prices)
4.3
9.5
14.3
Residual MB deliveries
in 1955 prices, assuming:
(1) 10% increase in prices, 1955-67
3.9
8.6"
13.0
(2) no change in prices, 1955-67
4.3
9.5
14.3
(3) 22% decline in prices, 1955-67
5.5
12.2
18.3
from the foreign trade rubles in which it is reported to domestic prices, and (4)
estimating consumption and investment data in enterprise wholesale prices.
85. Data published for the first time in 1973 permit a calculation of the
GVO of MBMW in 1967 prices (59.6 billion rubles). A least-squares exploration
of the relation between indexes of growth in the GVO of MBMW, MW, and capital
repair can be used to estimate the share of GVO of MB in that of MBMW (83%).
The analysis suggests a narrow margin of error of this estimate - from a low of
82% to a high of 84%.
86. There is no commodity-establishment ratio for any year other than 1959,
nor is there reliable information about changes in this ratio over time. This ratio
changes according to changes in the importance of production of non-machinery
products by machinery enterprises and in the amount of machinery produced by
non-machinery enterprises. Soviet policy has been to increase the degree of
enterprise specialization. Because of the uncertainty about the success of this policy,
three different assumptions about the 1967 ratio are used: (1) the ratio equals
its 1959 value of 0.92, which implicitly assumes that the two components of the
ratio did not change or experienced offsetting changes; (2) the ratio equals 1.0,*
which implies that the Soviet specialization policy was so successful that the
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commodity- establishment problem has disappeared, and (3) the ratio equals 1.06,
which implies that the Soviets succeeded in eliminating non-machinery output at
machinery enterprises but could not reduce the relation between machinery
produced by non-machinery enterprises and the production of MBMW enterprises.
Although higher or lower ratios could be assumed for sensitivity testing, they
would be even more arbitrary. But the higher the ratio, the greater would be
the machinery residual.
87. Interindustry use is estimated as 38% of GVO, based on recently available
data.47 This share agrees closely with that embodied in the 1966 1-0 table in
producers' prices. Therefore, the range of uncertainty in Table 7 is limited to 40%
for the low estimate and 36% for the high estimate.
88. Soviet imports of machinery in 1967 were 2.65 billion rubles in foreign
trade rubles, while exports of machinery were 1.91 billion rubles. The best available
ratios for converting these values to domestic prices are those used for the 1966
residual (0.75 for imports and 0.80 for exports). There is a great deal of uncertainty
in these ratios.4 8 A range for the low and high estimate is calculated by assuming
an error of ?25% in the ratios.
89. The value of MB production allocated to consumption in 1967 was
extrapolated from the 3.36 billion rubles in the 1966 1-0 table (producers' prices)
using the Soviet production index "household and cultural products." This index
includes non-MB products but is dominated by consumer durables manufactured
in MBMW.
90. After 1967 the machinery component of investment is reported in
"delivered" prices of "I January 1969" (19.9 billion rubles). Although these prices
reflect the general price changes in mid-1967, the CSA claimed that average
machinery prices changed very little. In any case, the 1969 prices are almost
certainly closer to the true 1967 prices than the 1955 prices in which investment
had been reported.
91. The average trade and transportation share of the value of final products
calculated from data in the 1966 1-0 table (5.0%) was used to remove these charges
from the "delivered" price of investment. Non-machinery products are netted out
using Boretsky's factor of 5% and allowing a 3% margin on either side for
uncertainty.
92. The residual in 1967 prices has a range of 10 billion rubles, 5 billion
rubles above and below the "central" estimate of 9 billion rubles. The low value
of 4.3 billion rubles is less than the 1966 residual calculated in Table 6, while
the high value is almost 2-1/2 times as large as the 1966 residual.
48. The ratios calculated for heavy industry products in the 1966 producers' prices table (FDAD, op. cit.)
are 1.73 for imports and 1.25 for exports.
47. A. Lalayants, "Determining the Materials Intensity of Social Production", Moscow, Planovoye
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93. Converting residual output of machinery in a given year's prices to
constant prices is essential to obtain results that are comparable over time. The
official Soviet price index for MBMW declines by 22% between 1955 'and 1967.
In contrast, some Western (and some Soviet) analysts' believe that machinery prices
have actually been increasing.4 9 Insofar as the residual represents military hardware,
the appropriate deflator could be quite different from either the official or
unofficial price indexes for MBMW as a whole. Therefore, the upper limit for price
increases between 1955 and 1967 was arbitrarily limited to 10%. A lower limit
to price changes was assumed to be the 22% drop in the official Soviet index
for MBMW. No price change was taken to be a third alternative.
94. The values for residual MB output in 1967 (in 1955 prices), shown in
Table 7, range from 3.9 billion to 18.3 billion rubles. Even the central estimate
ranges from 8.5 billion to 11.9 billion rubles.
Lee 15.4 ....
Boretsky 6.3 9.3 10.7
Table 7 .... 3.9-18.3
The range in these values is more than enough to encompass the. Lee estimate
for 1965 and the Boretsky estimate for 1968.
95. The-residual, calculated by comparing the 1959 estimate with the central
estimate for 1967 (assuming no price change), increases at 8.7% per year, compared
with the Lee estimate of 18% per year in 1959-65 and the Boretsky estimate of
17% per year in 1960-67. Their higher growth can be matched only by making
the extreme assumptions involved in the highest estimate in 1955 prices.
96. The low level of reliability of present estimates of MB residuals seems
apparent. A single answer is not possible, and the range of results obtained from
reasonable sensitivity tests is too wide. These considerations, and the fact that
residuals still contain non-defense elements of machinery production, demonstrate
the inconclusiveness of the residual approach, given the, existing state of the .art
and of the statistics.
49. See, for example, Abraham S. Becker, Ruble Price Levels and Dollar-Ruble Ratios of Soviet Machinery
in the 1960s, RAND, R-1063-DDRE, January 1973
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