ALLOCATION OF RESOURCES IN THE SOVIET UNION AND CHINA
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April 12, 1974
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ALLOCATION OF RESOURCES IN THE
SOVIET UNION AND CHINA
HEARING
SUBCOMMITTEE ON
PRIORITIES AND ECONOMY IN GOVERNMENT
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-THIRD CONGRESS
EXECUTIVE SESSION
APRIL 12, 1974
Printed for the use of the Joint Economic Committee
FOR kiLEASE
FRI JUL19 AM
, . OR r t(LUA'E
I.
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ALLOCATION OF RESOURCES IN THE
SOVIET UNION AND CHINA
HEARING
SUBCOMMITTEE ON
PRIORITIES AND ECONOMY IN GOVERNMENT
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-THIRD CONGRESS
EXECUTIVE SESSION
APRIL 12, 1974
U.S. GOVERNMENT PRINTING OFFICE
32-730 0 WASHINGTON : 1974
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JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79thCong.)
WRIGHT PATMAN, Texas, Chairman
WILLIAM PROXMIRE, Wisconsin, Vice Chairman
RICHARD BOLLING, Missouri
HENRY S. REUSS, Wisconsin
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
HUGH L. CAREY, New York
WILLIAM B. WIDNALL, New Jersey
BARBER B. CONABLE, JR., New York
SENATE
JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
ABRAHAM RIBICOFF, Connecticut
HUBERT H. HUMPHREY, Minnesota
LLOYD M. BENTSEN, JR., Texas
JACOB K. JAVITS, New York
CHARLES H. PERCY, Illinois
JAMES B. PEARSON, Kansas
BEN B. BLACKBURN, Georgia RICHARD S. SCHWEIKER, Pennsylvania
JOHN R. STARK, Executive Director
LOUGHLIN F. MCHUGH, Senior Economist
RICHARD F. KAUFMAN, General Counsel
ECONOMISTS
WILLIAM A. Cox Lucy A. FALCONS SARAH JACKSON
JERRY J. JASINOWSKI JOHN R. KARLIK L. DOUGLAS LEE
COURTENAY M. SLATER LARRY YUSPEH
MINORITY
LESLIE J. BANDER GEORGE D. KRUMBHAAR, Jr. (Counsel) WALTER B. LAESSIO (Counsel)
SUBCOMMITTEE ON PRIORITIES AND EOONOMY IN GOVERNMENT
WILLIAM PROXMIRE, Wisconsin, Chairman
JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
HUBERT H. HUMPHREY, Minnesota
CHARLES H. PERCY, Illinois
JAMES B. PEARSON, Kansas
RICHARD S. SCHWEIKER, Pennsylvania
HOUSE OF REPRESENTATIVES
WRIGHT PATMAN, Texas
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
HUGH L. CAREY, New York
BARBER B. CONABLE, JR., New York
CLARENCE J. BROWN, Ohio
BEN B. BLACKBURN, Georgia
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CONTENTS
WITNESSES AND STATEMENTS
FRIDAY, APRIL 12, 1974
Proxmire, Hon. William, chairman of the Subcommittee on Priorities and Page
Economy in Government : Opening statement_____________ ------------------------- 1
Colby, Hon. William E., Director of Central Intelligence, CIA, accompanied
by Douglas B. Diamond, Office of Economic Research ; John A. Paisley,
Office of Strategic Research ; Arthur G. Ashbrook, Jr., Office of Economic
Research ; William B. Newton, NIO staff ; and George L. Cary, legislative
counsel ----------------------------------------------------------- 2
SUBMISSIONS FOR THE RECORD
FRIDAY, APRIL 12, 1974
Colby, Hon. William E., et al.:
Response to Chairman Proxmire's request to supply for the record a
breakdown showing the comparisons of United States and Soviet
military operating costs----------------------------------------- 33
Prepared statement----------------------------- ---------------------------------------------- 49
Chart entitled "U.S., U.S.S.R. and China: Estimated Military Procure-
ment in 1973"-------------------------------------------------- 80
POINTS OF INTEREST
FRIDAY, APRIL 12, 1974
Colby, Hon. William E., et al.:
Prepared statement:
Introduction_____________ 49
Sources of information on the Soviet economy____ _ _ _ _ _ _ _ _ _ 49
The Soviet economy-------------- _-__-___- 50
----------------
Overview---------------------------------------------
50
Industry
55
Energy 58
A gr*culture ------------------------------------------- leadership's attitude---------------- ------------------------------- 61
The need for technology_______________________ 62
The Soviets face their problems________________________ 63
Prospects--------------- --------- 66
---------------
Military expenditures----------------- -- 67
The Chinese economy ---------------
Overallperformance----------------------------------- 70
Performance by sector__________________ _-_ 72
Prospects-Mid and long range------------------------- 75
Expenditures for military programs ---------------------- 76
Proxmire, Hon. William-Colloquy and interrogation:
Colby, Hon. William E., et al.:
Soviet economy:
Economic intelligence and economic analysis______________ 3
U.S.S.R. published data______________ 4
U.S.S.R. world's second largest economic power----------- 4
Growth rates----------------------------------------- 5 arge share of GNP in investment----------------------- 5
Soviet pricing system---------------------------------- 6
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I IIITI III IIIIIIII1III 111 !I III 1
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Proxmire, Hon. William-Colloquy and interrogation-Continued
Colby Hon. William E. et al.-Continued page
oviet economy-continued
United States and Soviet productivity compared---------- 6Source of data on fixed investment----------------------- 8
United States and Soviet consumption compared ---------- 8
Health services---------------------------------------- 8 8
Durables---------- --------------
-------------------
---------------------------------------- 9
Sources of data -------_ ----- 9
9
Industrial production---------------------------------- 19 9
Low technology----------------------------------- 10
Oil--------------------------------------------------- 10
Cement---------------------------------------------- 10
Electronics----------------------------------------
Computers-------------------------------------------- 10
Energy resources-------------------------------------- 11 11
Metals and minerals -----------------------------------
United States and Soviet energy resources compared------- 11 12
Soviet exaggerations----------------------------------- 13
Oil--------------------------------------------------- 13
Agriculture------------------------------------------14
Soviet Union far behind United States--------------- 14
Source of data ------------------------------------
in data--------------------------------- 15 15
Growth of GNP--------------------------------------- 16
Productivity------------------------------------------
Managerial problems------------------------------- 17 16
China compared-----------------------------------
_ _ _ _ - _ _ _ _ 17
Lack of Chinese statistics---------------------------
United States and Soviet productivity compared---------- 1
Technological gap-------- ---------------------- 18
Soviet imports of military technology-------------------- 29
Effects of detente-------------------------------------- 20
Agriculture------------------------------------------21
Purchase of U.S. grains--------------------------------
21
Trade with the West-----------------------------------
21
Prospects for the Soviet economy------------------------
Effects of military spending on growth-------------------
21
22
Economic ties with the West----------------------------
22
Negotiations with Japan over coal project ----------------
23
Soviet economic relations with West Germany and France__
d
-----------
Soviet possibilities for increased trade improve
24
4
Long-term problem of managing a complex economy-------
2
Soviet military programs------------------------------
Spending growth rate------------------------------
25 25
- _: _ _ _ _ _ - - -
Definition of military ------------------------------
Organization of Soviet military forces----------------
26
26
------------------------------
und forces
G
ro
-------
Sources of data------------------------------------
2
6
27
CIA cost estimates------------------------ -`----
27
Expenditures for military investment--------------------
28
Expenditures for space---------------------------------
74
29
-------------
Defense outlays estimated to increase in 19
-
29
Missile production------------------------------------
29
Military R. & D-------------------------------------
Estimates of dollar cost of Soviet defense- - - - - - - - - - - - - - - - -
30 30
Weaknesses in estimates---------------------------
Approach to health costs compared----------------------
30
30
Allocations to meet U.S.threat -------------------------
31
------------___--31
Dollar evaluations------------------- -
---
-
-
Structure of defense efforts-------------------------
31
Military manpower------------------------------------
Operations and maintenance costs-------------------
32 33
Military R. & D--------------------------------------
33
Net assessment-------------
United States and Soviet military R. & D. compared------
34
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r
Proxmie, Hon. William-Colloquy and interrogation-Continued
Colby, Hon. William E. et al.-Continued
Soviet economy-dontinued page
Soviet imports of military technology-------------------- 36
Military R. & D---------------------------------- 37
Soviets trying to catch up to United States----------- 37
Estimates of United States and Soviet space spendingcompared_ 37
Procurement-------------------------------------- 39
Operations and maintenance--------------------- - 39
Uncertainty of Soviet defense spending estimates---------- 79
Chinese economy:
Chinese economic growth----------------------- 39
Source of data------------------------------------ 39
Industrial production------------------- 40
Slowdown in military expenditures_______________________ 40
Agriculture---------------------- 41
--------------
Foreign trade----------------------- ------
Energy resources --------- ----------------- 41
------------ 41
Metals--------------- --------------
42
Textiles-------------------- ----------
Machinetools ---------------- ----------
--------------
Transportation_______________ -------- 42
------ 42
Foreign trade-----------_ ----------------- 42
Trade with Soviet Union and United States compared----_ 43
Prospects of growth--------------------
Foreign trade ------------------ ----------- 43
Relative size of Chinese econom -------- 45
China's defense program-------------------- _ 46
Lack of published data----------------------------- 46
Defense operating costs-------------------
Procurement costs-------------------- -_________ 46
Relative capability with that of the United States or the
Soviet Union______________ 46
Procurement trends____________________________________ 47
Trade-off between military and economic development --- __ 47
Procurement trends------------------ - 48
Defense outlays--------------------------------------- 48
Space program---------------------------------------- 78
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ALLOCATION OF RESOURCES IN THE SOVIET UNION
AND CHINA
FRIDAY, APRIL 12, 1974
CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON PRIORITIES AND
ECONOMY IN GOVERNMENT OF THE
JOINT ECONOMIC COMMITTEE,
Washington, D.C.
The subcommittee met, pursuant to notice, 10:10 a.m., in room
S-407, the Capitol, Hon. William Proxmire (chairman of the sub-
committee) presiding.
Present : Senators Proxmire and Schweiker.
Also present: Richard F. Kaufman, general counsel; and Ronald
Tammen, legislative assistant to Senator Proxmire.
OPENING STATEMENT OF CHAIRMAN PROXMIRE
Chairman PROXMIRE. The subcommittee will come to order. We
welcome this morning the Director of Central Intelligence, Mr. Wil-
liam Colby. The subcommittee wishes to express its appreciation to
the openness shown by the Director as demonstrated by his appear-
ance here today and his willingness to encourage the exchange of
information between the Agency and this subcommittee.
As requested by Mr. Colby, this hearing will be in executive ses-
sion in order to have a free and open exchange of views, unlimited by
the need to separate classified from unclassified information.
Mr. Colby has agreed to quickly review the transcript of this ses-
sion and sanitize everything he can within the limits of national se-
curity for public release in accordance with our long standing tradi-
tion for providing economic data to Congress and the American
people.
tet me add at this point, Mr. Colby, that I hope you will make
every possible effort to release as much of this material as possible.
Our committee has an obligation to the rest of the Congress to pro-
vide economic data and analysis of high quality. As a matter of fact,
this committee has no other purpose except to report to the other
committees of Congress and to the Members of Congress on our eco-
nomic policies. As you know, we cannot recommend legislation, we
cannot amend legislation. Our function really is a fact-finding func-
tion and a reporting function, so that if we simply have a meeting
and nothing comes out of it, we waste your time and our time and
serve no useful purpose.
(1)
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!'I
Mr. Cor.BY. I think we will be able to declassify a substantial amount
of this, Mr. Chairman.
Chairman PROXMIRE. Very good.
The CIA is in the unique position of being able to supply us with
many of the answers we are seeking. You have a reputation for
unbiased analysis, of which you are proud, and properly so. It seems
particularly important, therefore, that you make a special effort to
declassify the economic, budgetary, and military information to be
discussed at the hearing. While I fully understand the need for
classified information, in some cases there may be a higher respon-
sibility. We cannot make the all-important decisions in Congress on
the military budget, on the domestic priorities without accurate, up-
to-date information.
Therefore, I call upon you to keep this in mind and find a way to
make your data public.
I might just stress one other point. It seems to me that it is a mistake
to feel that we cannot make any more information public than the
Soviet Union. We have an open society; they have a closed society.
They have strength in a closed society; they can conceal information.
But they have great weaknesses, too, because they cannot have the
degree of criticism and evaluation by the public and by any number
of interested people because they do have a closed society. And in my
view they do not correct their mistakes as readily as an open society
does.
The subcommittee agrees to confine its questioning to substantive
issues rather than to the specific sources and methods of the intelli-
gence community. That is not our purpose, to get anything about how
the CIA functions at all, and we will not ask about that. If we stray
off the line in any way, of course, you are perfectly correct in not
repl ing.
The subject of today's hearings is the comparison of the economic
strength of the Soviet Union, the People's Republic of China, and the
United States, and specifically, the relative allocation of resources by
sector.
Mr. Colby, I have a list of the men in your Agency, and you gra-
ciously introduced me to them, who are present today.
Would you identify them and then proceed with your opening
remarks?
Mr. COLEY. Thank you, Mr. Chairman.
STATEMENT OF HON. WILLIAM E. COLBY, DIRECTOR OF
CENTRAL INTELLIGENCE, CIA, ACCOMPANIED BY DOUGLAS B.
DIAMOND, OFFICE OF ECONOMIC RESEARCH; JOHN A. PAISLEY,
OFFICE OF STRATEGIC RESEARCH; ARTHUR G. ASHBROOB,
JR., OFFICE OF ECONOMIC RESEACH; WILLIAM B. NEWTON,
NIO STAFF; AND GEORGE L. CARY, LEGISLATIVE COUNSEL
Mr. Cor.BY. I am accompanied today, Mr. Chairman, by Mr. Cary,
our Legislative Counsel ? Mr. John Paisley, of our Office of Strategic
Research; and two gentlemen from our Office of Economic Research,
Mr. Douglas Diamond and Mr. Arthur Ashbrook. Mr. Newton is
with me to help on this presentation.
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Mr. Chairman, it is a pleasure to be here this morning. As you
requested in your letter inviting me to appear, I will discuss the econ-
omies of the Soviet Union and the People's Republic of China. I will
make comparisons with the United States economy where these are
meaningful, or help to put the economic performance of the other two
powers into perspective with the use of charts.'
In separate sections, I will deal with the commitment of resources
to military and space functions, and describe how we arrive at our
estimates of Soviet and Chinese expenditures in these areas.
I have a prepared statement that will take about an hour, and I
will of course be glad to respond to your questions.
Chairman PROxMIRE. Do you have a copy of the prepared statement,
or do I have one here?
Mr. Corer. Well, I just think I finished it overnight.
Chairman PRoxMIRE. Well, if you want to distribute it to us, fine,
that is quite all right.
Mr. COLBY. Thank you, Mr. Chairman. Before moving into substan-
tive matters, I would like to say a few words about economic intelli-
gence, and its relationship to open and unclassified economic reporting
and analysis.
CIA started economic intelligence to help measure the strategic
strength of the U.S.S.R. and China. It built a corps of economic ana-
lysts for this purpose.
As the importance of foreign economic developments for the U.S.
economy and the U.S. Government policy has grown, demands in-
creased on CIA and this well equipped analyst corps for intelligence
support on other parts of the world.
The National Security Council, the Council for International Eco-
nomic Policy, the Departments of State and Treasury, and other De-
partments and Executive Staffs frequently request information, analy-
ses, and estimates on foreign economic developments from CIA.
Intelligence support to these policymakers requires an integrated
view of political, military, and economic events. Even when the events
in question are mainly economic, they often impact on U.S. security
as well as economic interests, and must be looked at in the overall
context.
In the past 6 months, for example, information concerning eco-
nomic threats to our access to key natural resources, such as petroleum,
have taken on increasing importance.
To produce such reports, CIA has the unique capability to incorpo-
rate into its analyses economic information which can only be
obtained through highly sensitive collection programs.
This is especially true of information on the intentions and negotiat-
ing strategies of foreign officials. Senior U.S. policymakers and negoti-
ators have found such information invaluable on critical international
trade, finance, and energy issues that impact directly on U.S. national
security and U.S. political and economic objectives.
l .The charts used throughout Mr. Colby's statement have been footnoted at point of
reference as to their respective page and may be found in his prepared statement.
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Classified collection programs are also essential to economic intelli-
gence on denied areas. In the analysis of economic activities highly
classified sources help to substantiate the analysis and conclusions.
[Deleted.]
CIA's economic intelligence production is normally classified be-
cause it includes information from classified sources. However, the
ultimate analyses or general conclusions sometimes do not need to be
classified.
Such unclassified products are from time to time made available to
scholars and Government components outside the intelligence com-
munity. As you are aware, CIA economic intelligence analysts have
contributed studies to the almost annual issuance on the Soviet or
Chinese economies put out by this committee, the most recent of which
is titled "Soviet Economic Prospects for the Seventies," dated June 27
of last year.
The transcript of this hearing will be carefully reviewed to declas-
sify any part which would not reveal sensitive intelligence sources and
methods.
[Deleted.] Each year the U.S.S.R. publishes a wealth of informa-
tion in an official economic handbook that is similar *to, although much
less inclusive than the Statistical Abstract of. the United States.
Additional data appear in specialized statistical handbooks on
trade, industry, consumer welfare, labor, and agriculture. Population
censuses are also published at irregular intervals. Finally, much use-
ful information is gleaned from books, journals, newspapers, radio
broadcasts, speeches, and the like.
We feel that the data on physical quantities are generally reliable.
Unfortunately, official indexes of industrial production, consumption,
prices, and economic growth incorporate considerable bias. Moreover,
while much economic data is released, vast areas of relative silence
remain.
Defense-related producing sectors are conspicuous in this regard,
following long-standing Russian tradition. Money and banking data
are also scarcely reported. A third bothersome area concerns the Soviet
balance of international payments. Ample data on commodity trade
have come available in the last decade, but Soviet international finan-
cial relations are still unreported.
In constructing estimates of the Soviet economy our analysts care-
fully examine the Soviet data, testing, verifying, adjusting in some
cases to make them comparable with Western concepts, and making
independent estimates where necessary.
[Deleted.]
Although our perception of some aspects of the Soviet economy
remains less certain than we would like, in general we think we have
a good understanding of their economic strengths and weaknesses and
their position vis-a-vis the United States.
U.S.S.R. WORLD'S SECOND LARGEST ECONOMIC POWER
Mr. Chairman, the Soviet Union has become the world's second
largest economic power. It has achieved this status by a longstanding
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stress on industrial development. The country now has a gross national
product equivalent to $660 billion, slightly more than half that of the
United States.'
Senator PROXMIRE. Can we have copies of the charts for the record?
Mr. COLBY. We will make them available with the prepared state-
ment, Mr. Chairman.
Soviet economic growth was especially rapid in the 1950's, as the
nation recovered from wartime devastation. The pace gradually
slowed after 1958, and since 1970, the rate of growth has been lower
than in the United States. In absolute terms, the gap between the
United States and Soviet economies has increased in recent years.
Chairman PROXMIRE. Is there any period when the absolute gap-
I realize they have been gaining in proportionate terms, but was there
any period when they were gaining in absolute terms ? .
Mr. DIAMOND. Well, between 1969 and 1970, there was a small decline
in the absolute gap.
Chairman PROXMIRE. I see, that line.
Mr. COLEY. There was an increase in the absolute gap from 1960 to
1969. Then the gap went down and came up.
Mr. DIAMOND. It went down and came u again.
Mr. CO BY. That is a U.S. gain, is it not
Mr. DIAMOND. Yes, sir.
Mr. COL.BY. In other words, from the Soviet point of view, they are
losing when this goes up. When it goes down, they are gaining.
Chairman PROXMIRE. We had a recession, of course, in 1970-71, and
that explains part of that. I am a little surprised at the 1969 to 1970
figure. They must have had quite a spurt for some reason.
Mr. DIAMOND. 1970 was a record agricultural year. It was a large
jump over 1969.
Chairman PROXMIRE. Very good.
Mr. COLBY. The major support for Soviet economic growth has been
the leadership's willingness to devote increasing shares of national
output to investment.2
For instance, the share of GNP devoted to investment in new build-
ings and equipment has grown steadily since the 1950's. The U.S.S.R.
now spends over one-fourth of its national product on new buildings
and equipment, as opposed to less than one-fifth in the United States.
This policy of achieving economic growth by favoring investment
has forced the Soviet population to accept a smaller share of the na-
tional product than its U.S. counterpart.
Chairman PROXMIRE. How is investment defined?
Mr. DIAMOND. Well, in this chart, it is strictly new plant and equip-
ment. It does not include research and development. It does not include
changes in inventory from one year to another, or capital repair. Those
extra ingredients are often included under the rubric of investment
See chart entitled GNP," p. 50.
2 See chart entitled "U.S.S.R.-U.S.: New Fixed investment," p. 51.
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Iii III ! Il l111111uIil l L i II II .I 1 1
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for national income accounting, but in this case it is strictly repro-
ducible fixed assets.
Chairman PRO%MIRE. Are you quite confident in the comparability
of the investment H
Mr. DIAMOND. Yes, in coverage we are. In the productivity of an
asset we are less sure.
Now remember, Senator, this is expressed
Chairman PROXMIRE. When you.say the comparability of produc-
tivity of an asset, you mean they are putting in a machine tool system,
for example, that might cost say $10 million in a particular plant,
and that might be a certain proportion of the GNP for that reason,
but it might not be as productive as ours or might be more productive.
Is that it $
Mr. DIAMOND. That is right, sir.
Now, remember, these shares are expressed in their national cur-
rencies; that is, the first bar is of course, in U.S. dollars. The second
bar is expressed as shares of 6NP in rubles.
Chairman PROXMIRE. In view of the arbitrary nature of their pricing
system, they do not have a market system as we have, and in view of
the fact that they use their pricing system to provide their priorities
or determine their priorities, how can you be confident that this re-
flects the proportionate investment 4
Mr. DIAMOND. A perceptive question. We are not confident. We have
to assume that the relative prices, which as you just correctly pointed
out are not market prices, do reflect relative scarcities of resources.
But they are in fact synthetic prices set by the center, by the plan-
ners, and the Russians claim they reflect cost of production; that is,
scarcity in that sense. They reflect planners' preferences, so, of course,
in most cases they do not reflect preferences of the consumers as they
would in a U.S. type economy, a market economy. We just assume that
this relative scarcity as projected by the ratio of, say, machine tool
and wheat prices has something to say about the opportunity cost or
alternative return of resources used in the production of the machine
tool or ton of wheat.
Chairman PROXMIRE. One of the things that makes me skeptical
about this is that you have 30 percent of the gross national product
in new fixed investment. This is a fantastic concentration.
Now, we are told-maybe I am badly misinformed-that something
like 30 percent of their manpower is in agriculture, compared to about
4 percent of our manpower in agriculture.
Mr. DIAMOND. That is correct.
Mr. COLBY. But remember the productivity factor of the manpower,
too. This is particularly true in agriculture.
Chairman PROxMTRE. Our productivity is much greater.
Mr. COLBY. It is fantastic. They are something like 11 percent of
ours.
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Chairman PROXMIRE. That is why it would seem to me that in the
rest of their operations, the military, and they have some service sec-
tor, admittedly far less than ours, it would seem and people occupy-
ing various Government offices which I imagine are fairly comparable
to ours, maybe even greater, it is hard to-
Mr. COLBY. It does reflect conscious decisionmaking, policymaking
the way they run their society. The way we run our society, this re-
flects our decisionmaking
Chairman PROxMIRE. But this does not necessarily mean they have
got 30 percent of their manpower or their man-hours or man-years or
however you want to put it, in investment.
Mr. DIAMOND. Not necessarily. Now, remember in that bar, the 30-
percent bar, more than a fourth of the total investment is in agricul-
ture, and this includes not only productive facilities but housing and
other nonproductive facilities on farms. [Deleted]
Chairman PROxMIRE. Well again, that is-again, I do not want to
take too long on this because we could go on and on and on-it was
my understanding that they had 30 percent of their people on the farm,
working on the farm, not working producing tractors or working pro-
ducing other agricultural equipment, but on the farm.
Mr. DIAMOND. That is correct.
Chairman PROXMIRE. And I construe what you say as a quarter or so
of their investment here is in agricultural equipment, but that would
be in industry.
Mr. DIAMOND. Well it is, 20 percent is in so-called productive invest-
ment as you think of in U.S. farms. Another 5 percent is in so-called
nonproductive, made up of housing, communal services and so on on
the farms.
Now, the manpower cannot be separated out in separate boxes. That
30 percent figure was comprised of people that are principally occu-
pied in producing crops and livestock. Other times of the year when
crops are not growing, some of them are building barns, producing
other kinds of construction that would be classified as investment. So
what I am saying is, it is a messy accounting thing. Some of that man-
power does re roduce
Chairman PROXMIRE. That is why I am saying man-years would be
a more useful comparison. If you have students, or if you have indus-
trial workers, for that matter, taking a weekend out and going out to
bring a crop in, that is undoubtedly a contribution which we ought to
consider in terms of the amount of time they spent, the man-years. But
if because they spend two or three weekends a year, consider them as
farmworkers because they did work on the farm part of the time, it
distorts the figures badly.
Mr. DIAMOND. Well, incidentally on the critical issue of how
many people are actually involved at some time during the year in
farming, I have calculated that the number would be doubled, that is
about 34 million people working as a principal occupation in agri-
culture. The number of people that sometime during the year cultivate
plots and take care of livestock is on the magnitude of 68 million.
Chairman PROXMIRE. I see.
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1I
Mr. DIAMOND. So when you sort that accounting out, which is very
difficult, you get a much larger share.
SOURCE OF DATA ON FIXED INVESTMENT
Chairman PROXMIRE. Where did these fixed investment figures come
from? Are they from published sources or are they independently
derived?
Mr. DIAMOND. A published statistical handbook.
Chairman PROXMIRE. Do you have any system of verifying that,
knowing whether it is consistent, or do you just accept the figures as
published?
Mr. DIAMOND. This is where we have to accept their aggregated
statistics.
UNITED STATES AND SOVIET CONSUMPTION COMPARED
Mr. COLBY. Mr. Chairman, we were talking about the population
receiving a smaller share of the national product than they get in the
United States. In 1973 the average Soviet citizen consumed about one-
third as much goods and services as a U.S. consumer, but even this
comparison does not tell the whole story. The Soviet consumer is also
plagued by an inferior quality, assortment, and styling of clothes and
durables, chronic shortages, and long queues at retail stores.
Even compared with Eastern Europe, the level of living in the
U.S.S.R. is markedly low.
Chairman PROXMIRE. And they consume only 60 percent of the
food. They consume only three-fifths the amount of food we consume.
Mr. DIAMOND. In value terms.
Chairman PROXMIRE. In value terms but not in caloric terms.
Mr. DIAMOND. In caloric terms they are almost the same, 3,300
calories per day.
Chairman PROXMIRE. It seems to me that comparison would be more
valid. In the dollar-ruble you can get awfully confused, can you not?
Mr. DIAMOND. Yes.
This is one of the problems of measuring the two at a different set
of prices.
Chairman PROXMIRE. How do you compare the health figure?
Mr. DIAMOND. Now this is again a mean, a geometric mean of health
services priced out in dollars in both economies, and also priced out in
rubles in both economies. The share in dollars would be 60 percent;
in rubles the Soviet share would be 18 percent. Then we take a geo-
metric mean of that or 32 percent.
Chairman PROXMIRE. If you allocated military there, would that be
over 100 percent? In other words, per capita; in other words, it would
not be consumption, of course, you would have to use another concept,
but say per capita expenditure.
Mr. DIAMOND. Well, in dollars, yes, we are about the same absolute
amount of dollars in both economies now. Their population is higher,
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so I am saying it would be a little bit less, it would be about 90 percent.
Chairman PRO%MIRE. It would be a little bit less, about 90 percent?
OK.
Mr. COLBY. Except for sewing machines, Soviet consumers enjoy
only a fraction of the durables readily available in the United States.
Many items, automatic washers, dryers, and freezers, simply are not
manufactured or sold in the U.S.S.R.,
The situation is gradually improving, particularly for those on the
bottom rung of the economic ladder. In the last two years, the new
Togliatti plant has increased passenger car output substantially.
Chairman PRoxMIRE. I am astonished. They do pretty well on that.
I am astonished on that.
Mr. COLBY. The waiting period for a new car is now around two or
three years, which is better than the previous six-year wait.
Chairman PRoxMIRE. As you go along, would you give us your
sources on this?
Mr. DIAMOND. All of the data in the charts for both economies are
official figures from statistical abstracts.
Mr. COLBY. Mr. Chairman, the Russian people get enough to eat in
terms of daily calories, but their diet is heavily weighted in starches
and low in meat, vegetables and fruit.'
Under Brezhnev, the U.S.S.R. has made meat consumption the basic
plank in its consumer program, and per capita consumption has in-
creased by one-fourth since 1965. Nevertheless, the average Soviet
citizen still eats only about 40 percent as much meat as his U.S.
counterpart.
With this brief introduction, let us now look in detail at various
sectors of the Soviet economy. I will begin with industry, which has
been the showpiece .3
During most of the postwar period, industrial production grew
faster in the U.S.S.R. than in the United States. But the emphasis was
on heavy industry, and producer goods have been favored over con-
sumer goods.4
Although the growth of Soviet industrial production has been im-
pressive, the quality and variety have been deficient. The leadership
has been striving to overcome these shortcomings.
I See chart entitled "U.S.S.R.-U.S.: Stocks of Consumer Durables, 1972," p. 53.
2 See chart entitled "Composition of Diets, 1972." p. 54.
See chart entitled "U.S.S.R.-U.S.: Industrial Growth," p. 55.
' See chart entitled "U.S.S.R.-U.S.: Output of Producers' Goods, 1973," p. 56.
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Low Technology
Soviet industrial managers, however, are hampered by the relatively
low technological levels of their plants and equipment. Also, the plan-
ners criticize their inefficient use of industrial materials.
The managers in turn blame the shoddy equipment turned out by
domestic machinery enterprises and failures in industrial supply.
Efforts to upgrade domestic machinery and economize on the use
of industrial raw materials during the past 2 years have had only
limited success.
Soviet industrial strength has been based above all on abundant
raw materials and energy sources. These resources are still available,
but are more expensive now.'
Chairman PROXMIRE. Do they export-I see 92 percent crude oil
compared to ours. They must export some of that.
Mr. COLBr. They export some of that.
Mr. DIAMOND. They export about a fourth of it. Their production
is about 8.4 million barrels per day, and they export about 2.2.
Chairman PROXMIRE. In cement, they produce substantially more
than we do. We must produce a whale of a lot for our highway
program.
Mr. DIAMoND. They are very heavy cement users in prefabricated
building sections.
Chairman PRoxrIRE. For housing?
Mr. DIAMOND. Housing, apartment buildings, factory buildings.
They are very big in this method of construction. Moreover, the qual-
ity of their cement leaves something to be desired; that is, the aver-
age quality is less than ours. They have a lot of difficulty in making
a given ton of cement last very long. They have to do an awful lot
of capital repair.
Chairman PROXMIRE. In view of the fact they are so far behind us
in electronics, radio and television, I take it a great deal of the elec-
tronics oes into the military.
Mr. DIAMOND. Yes, sir.
Chairman PROXMIRE. On the other hand, their computers are very,
very backward, and that is a very, very vital military resource. Appar-
ently they are just behind us in that.
Mr. DIAMOND. They are just entering the computer age.
Mr. COLBY. Very badly behind us.
Mr. DIAMOND. That is why they are mounting such a campaign, to
get access to computers in the west.
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Chairman PRoxMIRE. I am surprised they have so little natural gas.
I thought that was one of the
Mr. CoisY. They have large reserves. It is a question of output.
Chairman PROxMIRE. I see.
Mr. DIAMOND. Later, a chart will show the various components of
the total energy balance.
Chairman PROXMIRE. I do not see coal there.
Mr. DIAMOND. We are about the same in coal; 610 million tons is the
net production in the Soviet Union. The United States produces some-
what less. The U.S. coal has a higher average caloric content, so we
come out about the same.
Mr. COLEY. Mr. Chairman, production of metals and minerals is
sufficient in most cases to provide for both domestic requirements and
Eastern European needs. The major exception is tin, which has to be
imported in large quantities.
Nevertheless, the Soviet Union has already exploited many of its
most accessible mineral deposits. Most of the remaining reserves are
in Siberia or the Far East, where the severe climate and lack of trans-
portation and local labor hinder development.
Energy, now such an important word in the United States, is also
very much on the minds of the Russian leaders. Just as in our country,
Soviet economic growth has depended on the exploitation of huge
energy resources. There are, however, substantial differences in the
pattern of energy consumption in the two countries.'
Nevertheless, the shift toward oil and gas in the Soviet energy bal-
ance has been rapid. Also, growing quantities of petroleum have been
sent to Eastern Europe and the west.2
It may be comforting to know that in recent months Soviet petrole-
um officials have complained about the headaches the world energy
crisis has given them.
Chairman PROXMIRE. Their reserves are 262 percent of ours?
Mr. DIAMOND. That is their claim.
Chairman PROxMIRE. Well, I thought our claim, we were supposed
to have a third of all the coal in the world. Is that wrong, in our re-
serve?
Mr. DIAMOND. I am not aware of that statistic, Senator. The arith-
metic could be parallel, but-now, remember, there are various types
of coal.
Chairman PROXMIRE. We define reserves, of course, in the amount
of coal or oil that you could bring up at a particular price. I raised
hell about what the American Petroleum Institute did in basing our
1 See chart entitled "U.S.S.R.-U.S.: Primary Energy." p. 58
2 See chart entitled "U.S.S.R.: Imports and Exports," p. 59
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present reserves on 1972 prices, for instance, utterly unrealistic and
I think ridiculous. However, it seems to me that in a nonmarket econ-
omy such as theirs, again to base it on price would be-unless they
do it on some kind of a world price, would be very difficult.
Mr. DIAMOND. There are caveats that should be added to that chart,
one of which you alluded to. The Soviets traditionally have never
been very rigorous about defining what they mean. The Bureau of
Mines has a more rigorous statement on reserves, that is, proved re-
sources. The Soviets are very loose about this, and we have reason to
doubt some of the statistics. The largest caveat about those data have
to do with whether these are actually accessible sources of energy.
Chairman PROXMIRE. How thoroughly have they explored their
territory for coal and oil? Comparable to ours ?
Mr. DIAMOND. Well, they work at it very hard, but let me give you
an ancedote to show you how elusive these statistics are. As you know,
the Japanese and the Soviets have been discussing for some time ex-
ploitation of the Continental Shelf around the Sakhalins and the gas
deposits right on the island. Here is an example of ongoing negoti-
ations where you would think they would bring their best geological
talents to bear. So they claim a very large amount of gas and other
types of energy in the area, running-they could have taken care of v
percent of Japanese needs for about 20 years, a large percentage 15 to
20 percent. And these talks even got to the Prime Minister level, and
finally Kosygin had to say they had looked at the arithmetic again. He
said they had made a mistake by the magnitude of four. That is,
instead of 60 billion cubic meters of gas, there are only 16 billion cubic
meters. The Japanese were horrified that they had gone as far as they
had in these negotiations without a better Soviet estimate.
Chairman PROXMIRE. Is there not a penchant for overstating, tend-
ing to boast about the success of the socialist economy compared to
the bourgeois capitalist economy?
Mr. DIAMOND. Oh, Yes.
Chairman PROXMIRE. Do they not tend to exaggerate their growth,
exaggerate their reserves, their progress and so forth, so that statistical
material is likely to show larger rather than smaller gains than the
actual case?
Mr. DIAMOND. Generally that is true.
Chairman PROXMIRE. Are you able to take the published sources and
try to reconcile them so that you find that ther claims for a certain
amount of sewing machines, and the automobiles and the television
sets and the radio and so forth, and their military claims, military
equipment of various kinds, and their agricultural reports, and re-
construct a fairly consistent picture, coherent picture of their whole
economy so that it does square out roughly at least?
Mr. DIAMOND. Yes, sir, roughly. Scholars working independently
in this country and abroad have done this for important commodities
in physical terms. That is, if they claim to have produced 125 million
tons of steel, the claim is reasonably consistent with the end use of that
metal in the economy. Things roughly check out in this context.
Chairman PROXMIRE. So you do have that overall discipline.
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Mr. DIAMOND. That's right, in most sectors. Let me emphasize, in
industry this is true; in agriculture it is much less true, and we have
real problems of reconciliation there.
Chairman PROXMIRE. Because they tend to exaggerate their
production.
Mr. DIAMOND. Yes, sir.
Chairman PRoxMIRE. Thank you.
Mr. COLBY. They claim, for instance, that the U.S.S.R. does not have
enough oil to simultaneously meet its own requirements, fill the needs
of other socialist countries and continue to expand deliveries to estab-
lish markets in capitalist countries.
Although crude oil output was below plan in 1972 and 1973, short-
ages similar to those in the United States did not and will not occur.
The U.S.S.R. is a net exporter of about 2 million barrels per day of
oil, almost one-fourth of total domestic production. About one-half of
these exports go to the West, especially Western Europe.
Moscow has little, if any, uncommitted oil from domestic sources
with which to expand sales to the West and take advantage of the
present prices.
The expanding demand for oil and gas comes at a time when pro-
duction from existing Western fields is leveling off. The develop-
ment of Siberian and offshore deposits must fill the gap.
Exploitation of these new sources will require a huge investment.
Moreover, without foreign, especially United States. help, develop-
ment will be delayed. The U.S.S.R. lacks some of the critical tech-
nologies needed to drill at great depths and offshore, or to pipe gas
across the Siberian permafrost.
Annoying as these energy problems may be, the real economic
headache in the Soviet Union is agriculture. Despite massive invest-
ments under both Khrushchev and Brezhnev, assuring an adequate
food supply for a growing population has been a constant problem.
Of all sectors in the United States and Soviet economies, agricul-
ture offers the greatest contrast in terms of organization and efficiency.
For example, the Russians employ 31 percent of their labor force
in agriculture, as opposed to 4 percent in the United States. The
Soviet output per worker, however, is only 11 percent as much as is
achieved in the United States.
A measure of Soviet production methods can be gleaned from
the fact that they have only 5 percent as many trucks per 1,000 farm-
workers as we do.
Finally, the U.S.S.R. has been expanding sown acreage in an effort
to increase production, while the United States, until recently, had
been reducing the area under cultivation and struggling with farm
surpluses.
Soviet agriculture is handicapped by a. short growing season and
an extreme continental climate. As a result, production is highly
variable. The crop failure of 1972 was followed by a record harvest
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in 1973, only the most recent example of the large swings in the crop
yields.
Soviet farm production has climbed far above the level of a decade
ago, but still cannot provide the quality diet that the Soviet popu-
lation desires. The demand for meat is rising faster than incomes,
placing a severe strain on the Soviet grain-livestock economy.
Changes in the size of the Soviet grain crop have worldwide reper-
cussions, especially since Brezhnev's program to provide the Soviet
people with a better diet has pulled up the demand for feed grain.
Through 1971 grain production did not keep pace with demand,
and deep inroads were made into government stocks. Then, con-
fronted by the poor 1972 harvest, the regime imported massive quan-
tities of grain, over 24 million tons in fiscal year 1973, rather than
abandon its livestock goals. Of this total, 18 million tons were wheat
to replace the Russian wheat that had been fed to livestock.
The United States supplied most of these grain imports, 10.5 million
tons of wheat, 3.7 million tons of corn and a little rye and barley.
In 1973 the gross Soviet grain harvest was a record, about 222 mil-
lion tons. After discounting for unusually high moisture content, we
estimate the net usable grain at about 170 million tons. This harvest
should reduce grain imports in fiscal year 1974 to perhaps 12 million
tons, about half wheat and half other grains.
The record crop and continuing imports will permit a rebuilding of
stocks and continued exports to client states. Also, the Soviet Union
will be able to offer grain for political purposes, such as the loan of 2
million tons of wheat to India last year.
Sensitivity to the economic situation is characteristic of the Soviet
leaders. The leadership, for example, is well aware of the variations
in grain output and the ever present possibility of having to increase
grain imports. On the whole, they view the past economic record with
a sense of accomplishment, but are not entirely pleased.
Soviet Union far behind United States
The fact that troubles Soviet leaders, despite great progress, is that
the U.S.S.R. remains far behind the United States in a number of
key areas. The emergence of Japan as a major economic rce has
added to this concern.
The slide in the GNP growth rate naturally worries the leadership,
because catching up with the West depends on vigorous economic
growth. Declining rates of growth in productivity are causing the most
concern. Past growth was based on large increases of productive farm
land, new plants and equipment, and workers. Except for labor, the
rate of growth of these factors has declined sharply.
Source of Data
Chairman PROxMIBE. I take it that all of your statistics on agricul-
ture production are published figures.
Mr. COLBY. I think most of them.
Mr. DIAMOND. With the exception of grain and the major vegetable
oil crop--sunflower seeds-and two minor technical crops. All of the
other statistics we accept.
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Now, in the case of grain, we apply variable discounts over time.
Chairman PROXMIRE. You said grain?
Mr. DIAMOND. Grain, yes. As Mr. Colby indicated, they claimed last
year 222 million tons of gross production.
Chairman PROXMIRE. That is the most important product of all, is
it not?
Mr. DIAMOND. Yes.
Chairman PRO%MIRE. And you do not accept that?
Mr. DIAMOND. We will not accept that.
Chairman PROXMIRE. And you say you apply a variable discount?
How big?
Mr. DIAMOND. In the wet year, 1973, we discounted by 24 percent. In
a dry year, we may discount-
Chairman PROXMIRE. You discounted by knocking out the moisture
content?
Mr. DIAMOND. The trash, moisture, weed seeds-they have a very
gross concept, as the grain comes out of the bunker of the combine,
which we feel is not in keeping with accounting practices in other
countries.
Confidence in Data
Chairman PROXMIRE. On the basis of past experience, are you pretty
confident of your ability to discount that accurately?
Mr. DIAMOND. Not too confident.
Chairman PROXMIRE. Is there an error factor of about 10 percent?
Mr. DIAMOND. Possibly. We are undertaking research right now, and
trying to narrow the probable range of error. We think we are prob-
ably a little high at the present time, but in any case, the point is that
one, you cannot accept the Soviet statistics on grain production.
Mr. COLBY. This chart 1 will help explain this problem. You can see
the rates of growth of man-hours worked, fixed capital, and farmland
in the Soviet economy. The chart also presents our rough estimate of
the extent to which changes in both the quantity and the productivity
of man-hours, land, and capital were responsible for past growth in
GNP.
From 1950 to 1958, the very rapid growth of capital stock and the
farmland added by Khrushchev's virgin land campaign helped push
the rate of growth of GNP to almost 7 percent each year. The rate
of growth of man-hours was held down by the delayed effects of low
wartime birth rates. But, at the same time, the productivity of land,
labor, and capital increased almost as fast as combined factor inputs
did.
Before Khrushchev's fall from power, Soviet growth slowed be-
cause the rate of growth of inputs declined, and the growth of produc-
tivity of land, labor, and capital combined, slowed. The Brezhnev
coalition was able to improve somewhat on this situation in 1965-73,
but only by stepping up the man-hours worked. The rate of growth
in productivity of land, labor, and capital continued to fall.
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.11
16
PRODUCTIVITY
Soviet leaders have repeatedly indicated that their economy will
have to depend primarily on productivity gains, rather than on massive
additions of men and equipment.
Another way of looking at the question of productivity is to com-
pare labor productivity in the U.S.S.R. and the United States. In
spite of a volume of investment per worker nearly equal to U.S. levels
in recent years, labor productivity in Soviet industry is only about
half the U.S. level.
Chairman PROxMIRE. That has to be one of the most shocking sta-
tistics for them and encouraging to us. Ten percent, one-tenth. It takes
10 people, it takes 10 farmers in Russia to produce as much as one
farmer in the United States. Now, you have indicated one difference,
with 20 times as many trucks here. There undoubtedly are others, but
it has been my understanding that they have gone quite a long way in
mechanizing their farms or electrifying their farms. They have col-
lectivized their farms, obviously, and used mass production a lot, but
somehow this has broken down. Their most productive operation is
on the little family plots that they permit, but in a very limited degree.
Has there been any analysis as to why you have this very shocking
difference, other than the obvious difference in inputs that you
mention?
Mr. COLBY. Well, there is another one like that, which is sown
acreage per tractor, in acreage. One tractor sows 64 acres in the United
States, and one tractor per 258 acres in the Soviet Union. In other
words, they do not have the kind of tractor work that we have, any-
where near it.
As an example of that kind of
Chairman PRO%MIRE. But that is only 4-to-1 ratio, and the produc-
tivity is 10 to 1.
Mr. CoL BY. The grain acreage harvested per combine, the number
of acres harvested per combine that they own, 52 acres in the United
States, 473 in the Soviet Union. In other words, that is all the com-
bines they have.
Chairman PRO%MIRE. How about the motivational impact?
A lot of our farms, in my State, for instance, about 99 percent of
our farms are family owned. Everybody works on a farm; husband,
wife, the kids. They have a terrific motive because that is what they
live by. That motive is lacking in a collective farm, where, of course,
they do not have a direct payoff on the basis of their effort in
productivity.
Is there any way that that can be analyzed or that element-
Managerial Probleme
Mr. COLBY. We think the managerial problems are really the heart
of the problems in trying to run one of these collectives with people
with jobs rather than incentives.
Mr. DIAMOND. There is an abysmal lack of incentive arrangements
under which the typical peasant can relate his labor input to some
reward. This, of course, leads to very low productivity.
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Chairman PROXMIRE. Well, you would think it also would have an
element of lack of concern for the equipment. I worked on a dairy
farm in Wisconsin last year only for a day, but long enough to see how
the farmer operated, and boy, they have to take loving care of their
equipment. In the first place, it is a big part of their investment. If
all the farmer has is $100,000, about 90 percent of that is in his equip-
ment. They are very careful about it. On the other hand, if the equip-
ment is owned by the collective, why worry if you wreck it or ruin it.
Mr. COLBY. Or forget to put oil in it.
Mr. DIAMOND. A particular tractor or combine in the Soviet setting
will last between 5 and 10 years, depending on the types of machinery.
In the United States they are double. That is, ni farmer in this country
can maintain a comparable type of machine for twice that length of
time.
China Compared
Chairman PROxMIRE. Do you have the same kind of problem in
China where you have vast collectives, where you have a different de-
gree of motivation, at least there appears to be?
Mr. ASHBROOK. Sir, the combination of resources in China is com-
pletely different. There you have a lot of labor applied to a small
amount of land. You are closer to the revolution. You have more en-
thusiasm. You have a simpler managerial situation, and given all those
things, the outlook not only is different, but I would say from the point
of view of the Chinese leadership, much better than in the problem
Chairman PROXMIRE. When you say simpler you mean simpler in
terms they do not have the complex tools and so forth to work with?
It is a man and his family and the soil.
Mr. AsHBROOK. That is right, that is right.
Chairman PROXMIRE. And a few simple tools.
Mr. AsIIBROOK. And despite the talk of tractor output and so on,
there is very little impression in the countryside of mechanization in
most of the countryside.
Mr. COLBY. There is a higher degree of discipline, and it is part of
being closer to the revolutionary experience.
Lack of Chinese Statistics
Chairman PROxMIRE. Does China publish statistics that are reliable?
Mr. AsHBROOK. China in the 1950's published statistics that were
an embryonic copy of the Soviet system. From 1960 on there has been
a statistical blackout, so we have to piece things together.
Chairman PROXMIRE. Piece them together from what?
Mr. AsRBROOK. We piece them together first going back to the statis-
tical base of the 1950's, then using the general percentage claims in the
Chinese press, using the observations of diplomats, travelers, technical
people, overseas Chinese who visit their friends, and then the range
of special sources available to us, and using those all together, we re-
construct the picture.
Chairman PROXMIRE. Well, this is my fault entirely, because it is so
fascinating, we could take days for this. Unfortunately we only have
this morning. Maybe I had better desist in my questions for a while
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and you move ahead. We are especially interested, of course, in getting
the military report.
Mr. COLBY. All right. I think I can read it pretty fast for you.
I think we made the point that in spite of the volume of investment
per worker nearly equal to United States in recent years, labor pro-
ductivity in the Soviet Union industry is only about half the U.S.
level. Soviet industry was able to grow faster than United States
industby increasing employment.
Similarly, farm labor is only about 10 percent as productive in the
U.S.S.R. as in the United States, and this gap is not shrinking.
Managerial problems inherent in a centralized and bureaucratic
system are the root causes of this consistently poor productivity.
Until recently, Communist planners believed that intensive domes-
tic R. & D., plus "borrowing" the latest Western technology, would
enable the U.S.S.R. to gain economic superiority. But they under-
estimated the pace of Western technology, particularly in Germany
and Japan, and overestimated the efficiency of their own R. & D. effort.
Technological Gap
Thus we come to the so-called technological gap, which is becoming
a vexing political dilemma for the Soviet leaders, as well as a crucial
economic problem. This gap is an across-the-board one, from ICBM
systems to electric razors, and increasing contacts with the developed
West have made it harder to conceal this situation from the Russian
people.
Public lecturers in Moscow are questioned as to why Soviet citizens
do not have the gadgets that Westerners have long been accustomed to.
An acute perception of this gap has spurred the Soviet leaders to
increasingly intensive efforts to acquire Western technology.
Marxian concepts concerning the inevitability of Western economic
collapse and the superiority of communism have quietly given way.
Instead, Moscow now considers trade with the developed West as
essential to close the technological gap.
The major channel that the U.S.S.R. uses to acquire technology
from abroad is the outright purchase of machinery and equipment.
Soviet orders for Western machinery and equipment hit $2.7 billion
last year, a 60-percent increase over 1972. The United States got $500
million worth of these orders.
Other channels have included the acquisition of technical data, con-
tacts with Western firms and scientists, and formal arrangements for
joint research and exchange of scientific and technical information.
In some military applications, the results of this reverse engineering
have been good; in civilian sectors, the outcome has been less happy.
Western equipment, frequently is not as productive in a Communist
setting as it is on native ground. Attempts to exploit foreign technical
data or copy foreign machinery have had mixed success.
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Chairman PROxMIRE. Again, I really hate to interrupt, you say in'
some military fields as a result of this, reverse engineering has been
.good. Does that mean they've been getting military assistance from
the West?
Mr. COLBY. Well, they have been getting military technology which
they can turn to goad use.
Chairman PROXMIRE. Such as what?
Mr. COLBY. Computers, some scientific instruments and advanced
equipment.
Chairman PROXMIRE. Where do they get the computers and elec-
trical equipment, from Germany?
Mr. PAISLEY. A variety of countries, Western Europe and Japan
primarily.
Chairman PROXMIRE. Is there no NATO policy at all?
Mr. CoLBY. Well, we have the old COCOM arrangements, which
have been eroding away.
Mr. PAISLEY. The control list has been steadily reduced as Soviet
technology has become more advanced, and now electronics items are
the dominant items on it. The most highly advanced equipment and
computers are covered.
Chairman PROXMIRE. Do you have statistics showing which Western
countries have given military equipment to the Soviet Union, or
military technology, which types?
Mr. PAISLEY. Not at my fingertips, sir, but most of the modern indus-
trial nations have some technology of interest to the U.S.S.R. which
is incorporated in civilian equipment.
Chairman PROxMIRE. Are statistics available?
Mr. COLBY. I think we could reconstruct some. They would not be
total because some shipments are not discovered.'
Chairman PROXMIRE. Do these come from U.S. multinational cor-
porations to any considerable extent?
Mr. PAISLEY. They might come from U.S. companies. If it is manu-
factured under a U.S. license, it would be examined by a committee
in the United States under U.S. export policy.
Chairman PROXMIRE. If there is a U.S.-owned company in West
Germany, for example, making computers or something, then would
that plant have to get a license from the State Department in order
to export to the Soviet Union?
Mr. PAISLEY. Yes, sir; from the Department of Commerce if it
were utilizing U.S. licenses and U.S. technology.
Chairman PROxMIRE. Well, how much do they have to-what
defines U.S. ownership?
Mr. PAISLEY. It is largely determined by the particular components
that are involved. If the components are licensed under U.S. control
that is, then it is not a question of size or proportion of ownership
but whether the technology is under U.S. unilateral control by virtue
of patents or copyrights.
Chairman PROxMIRE. Suppose it changes hands? Can it be sent from
a U.S. firm to a German firm and then go on?
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Mr. PAISLEY. The Soviets have utilized many different ways to
acquire what they want. Evasion has occurred.
Chairman PRoxMIRE. Has occurred.
Mr. PAISLEY. Yes.
Chairman PRoxMIRE. Very well. You may continue, Mr. Colby.
EFFECTS OF DETENTE .
Mr. COLBY. The onset of detente has dismantled some of the tradi-
tional obstacles to Soviet acquisition of U.S. technology. Medium-term
and long-term credits extended after May 1972 resulted in a large
increase in Soviet imports of U.S. equipment and technology. In addi-
tion, U.S. export controls have been relaxed, but still restrict Soviet
access to very specialized and sophisticated foreign technology.
The leadership team that assumed power in 1964 has attacked
economic problems on a number of fronts. The present regime, unlike
its predecessors, has given agriculture a consistently high priority.
Since 1965, the share of total investment going to agriculture has
averaged almost 20 percent. American agriculture gets less than 5
percent of U.S. investment. Average incomes of farmers have risen
by over one-half during the Brezhnev era, as opposed to one-third
for other workers.
Brezhnev has just announced an enormous program to increase and
upgrade the farm lands of European Russia."
Last month, he declared that 35 billion rubles would be spent during
1976 to 1980 in the first phase of a 15-year project to develop the non-
black soil region of the Russian Republic. This is almost one-fourth
of the total agricultural investment planned for 1971 to 1975.
His aim is to reclaim or improve 124 million acres, 79 million of crop-
land, and 45 million of grazing land. The crop-land would be equiva-
lent to about. 15 percent of current sown acreage.
The nonblack soil areas has large tracts of boggy, uneven land,
but it has high annual precipitation and responds well to the appli-
cation of lime and mineral fertilizer, the dark patch over here. The
Soviets hope that this region will provide steady growth in grain
production.
The Soviets do not have a good track record in land reclamation,
however, and the Brezhnev program is unlikely to work out as
announced. In any case, maior benefits will not appear before 1980.
Organizationally, the 1965 economic reiform attempted to improve
efficiency by making managers cost and profit cons'ious. Success was
very limited, however, because managers were still told to meet output
goals regardless. Continued tinkering with the system has not funda-
mentally altered managerial attitudes.
Another step to improve the economic picture was increased trade
with the west, which has become especially important since the late
1960's.2
i gee chart entitled "von-Black-Phil Zone of the TT.S.g.R.," P. 63.
2 gee chart entitled "U.S.S.R.: Foreign Trade by Major Area Exports Plus Imports,"
p. 64.
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Recently, the emphasis has shifted to trade with the United States
in particular. Only the United States had the grains the Soviet Union
needed in 1971-72, and relaxed U.S. controls stimulated sales of
machinery to the U.S.S.R.
Almost all Soviet trade with the developed West, and with some less
developed countries, is paid for with hard currency, as distinct from
barter trade. An upsurge in imports from these areas has not been
matched by increased Soviet exports, resulting in a hard currency
deficit averaging about $250 million annually from 1960 to 1971.1
TRADE WITH THE WEST
Until the mid-1960's, these deficits were financed primarily by gold
sales. By the end of 1965, however, Soviet gold reserves were down to
about 1,000 tons, and Western government-guaranteed medium- and
long-term credits applied to Soviet purchases of capital goods became
the chief method of financing Soviet deficits. During 1966 to 1971, such
credits amounted to more than $2 billion. In 1971, debt service, pay-
ments of principal and interest, were equal to 17 percent of Soviet
hard currency exports.
The U.S.S.R.'s merchandise trade deficit with the hard currency
area reached a record $1.7 billion in 1973, largely because much of the
grain purchased in 1972 was delivered in 1973. The U.S.S.R. imported
at least $1.5 billion in agricultural products, chiefly grain, and about
$1.5 billion in machinery and equipment. Soviet export earnings were
higher than in 1972, however, in part because of higher prices for oil.
To cover the 1972 deficit, the U.S.S.R. relied on new government-
backed net medium- and long-term credits, as well as substantial gold
sales for the first time since 1965. Gold reserves had been built up again
as a result of growing production and the low volume of sales.
? In 1973, the burden of recent trade deficits was lightened consider-
ably by easy access to Western credits and by the windfall increase in
the price of gold. In addition, dollar devaluations permitted the sub-
stantial Soviet borrowing on the Eurodollar market in 1972 to be re-
paid with cheaper dollars.
This brings us to the question of the prospects for the Soviet econ-
omy. We believe that over the next few years it is likely to continue
to grow at a rate considered good by Western standards, although
somewhat slower than in the past.
We estimate that the U.S.S.R. can increase its GNP from 41/2 to 51/2
percent per year through the rest of this decade by adding new con-
tingents of labor at about current rates, while the pace of capital
investment slows slightly.
Chairman PRO%MIRE. I hesitate to interrupt, but I just have to. I
would like to know what assumptions this rate of growth makes with
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respect to military investment because it is my understanding that to
the extent that they continue to maintain a large miliary force, and
they invest in the military, that it means they have that much less in
the gross national product that they can put in investment in equip-
ment, in plant and agriculture and other areas that make their econ-
omy grow. So this growth to 41/2 and to 51/2 percent is based on the
assumption the U.S.S.R. will continue to sharply expand their mili-
tary, or does it assume they will slow it down somewhat 8
Mr. COLBY. I think over the past 10 years we've had 3 percent
Mr. DIAMOND. As the share of gross national product, Senator, it
has been falling because the economy has been running at 5 or 6 per-
cent.
Chairman PROXMIRE. As the share of what has been falling?
Mr. DIAMOND. The share of gross national product spent on defense
has been falling.
Chairman PROXMIRE. Has been falling in the Soviet Union.
Mr. COLBY. The Soviet Union has had a small increase in their de-
fense budget, and the GNP increase has been larger. [Deleted.]
Chairman PRoxMIRE. You are going to come to that a little later,
I take it.
Mr. COLBY. Right.
Chairman PROXMIRE. Good.
ECONOMIC TIES WITH THE. WEST
Mr. COLBY. This estimate, of course, assumes relatively stable in-
ternal and external political conditions. Expanded economic ties with
the West will have an important place in Soviet plans, and they will
almost certainly want to trade more with the United States, especially
for high technology products.
If trade relations with the United States were broken, however,
they could find most of what they want in Western Europe and Japan.
NEGOTIATIONS WITH JAPAN OVER COAL PROJECT
In this connection, the U.S.S.R. and Japan initialed a document
last month that could pave the way for one of the biggest economic
deals between the two countries since the end of the Second World
War.
If final agreement is reached, the Japanese will provide a credit of
$450 million to help finance a coal mining project in Yakutsk in eastern
Siberia. The Japanese will be repaid by deliveries of coking coal be-
ginning in 1983. This is Yakutsk up here, and this is the Tyumen Oil
Field, very substantial.'
Senator ScHWEINER. How close is the coal development to the East-
ern Siberian mining that I guess it is oil drilling that we are financing
through the Export-Import Bank in eastern Siberia.
Mr. DIAMOND. Now, the gas field above Yakutsk is one set of nego-
tiations, as you can see on the chart, north of the coal fields and fur-
ther back in the hinterlands, more permafrost. One set of negotiations
with Japanese and American companies is under way.
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Senator, is that what you were alluding to, or the other set of ne-
gotiations to the west?
Senator SCHWEIKER. The North Star project.
Mr. DIAMOND. The North Star project is in the Tyumen Field where
Mr. Colby is pointing here, and that proposal is quite independent of
the negotiations in Yakutsk. The gas in the Yakutsk fields would flow
to the west coast. The Tyumen gas would be delivered to the U.S. east
coast.
Senator SCHWEIKER. All right. Thank you.
SOVIET ECONOMIC RELATIONS WITH WEST GERMANY AND FRANCE
Mr. COLBY. The U.S.S.R. has been particularly active in increasing
its economic relations with West Germany. Recent discussions have
centered on the possible West German construction of nuclear power
plants in the U.S.S.R. A contract has been signed for joint develop-
ment of a $1 billion iron ore and steel plant in Kursk, in Central Euro-
pean Russia.
France has also continued to support Soviet development. Within
the last year, French firms have signed two contracts, $150 million
for the development of a Siberian cellulose plant, and $100 million
for the design and equipping a complex of five petro-chemical plants.
There has also been some discussion of French participation in the
construction of a $1 billion aluminum complex.
Senator SCHWEIKER. In these. deals they work out, what kind of
interest rates do the Russians get? I know the Export-Import Bank
has 6 or 7 percent. I am just curious on what kind of interest can they
get from Japan and France, for example, in the long range develop-
ment.
Mr. DIAMOND. They are getting comparable interest rates. These
western governments have been underwriting, through their banks,
underwriting interest rates of 51/2 to 61/2 percent. Now, as Mr. Colby
will bring up in just a second, there has been a sizeable turning point
just in the last two weeks in the negotiations with the Germans in
opening up the large ferrous metals developments in European
Russia, $1 billion iron ore and steel plant. The Russians again came
hat in hand and said we want 6-61/2 percent, 10-11 year pay periods,
and as you may have seen in the press, this caused Mr. Brandt some
internal political problems.
Senator SCHWEIKER. Over the relatively low payments.
Mr. DIAMOND. Over the subsidy. The prime rate in Europe is cur-
rently 10 or 11 percent, so that in effect this would be a subsidy to the
Soviets.
Then the Soviets overnight abandoned the negotiating posture and
said they would pay cash.
Senator SCHWEIKER. What project was that?
Mr. DIAMOND. The Kursk iron ore and steel complex, which is in
European Russia just north of the Ukraine.
Senator SCHWEiKER. Thank you, Mr. Chairman.
Go ahead.
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SOVIET POSSIBILITIES FOR INCREASED TRADE IMPROVED
Mr. COLBY. From the Soviet side, the possibilities for increased
trade have improved, and Soviet hard currency earnings should rise
rapidly over the next few years.
With expenditures for Western grain in 1974 expected to be half
or less of 1973 outlays, these earnings could easily support a large
rise in Soviet imports of Western plants, equipment and other goods.
Imports of machinery and equipment, which rose sharply in 1972 and
1973, should increase even faster in 1974-1975.
The value of Soviet exports should rise sharply during 1974-1975
because of the much higher prices for oil and raw materials. With
market prices expected to range between $7 and $10 per barrel, oil ex-
ports alone may earn $2 billion to $3 billion in 1974 and $2.6 billion
to $3.7 billion in 1975. Higher prices for wood products, chemicals
and coal, along with expanded deliveries of natural gas, could push
total Soviet exports to almost $6 billion in 1974, double the 1972 level,
and to $7 billion in 1975.
Gold sales, however, represent the largest single additional source
of potential foreign exchange earnings. Soviet gold reserves are now
estimated to be more than adequate in view of the long term debt of
$3.6 billion at the end of 1973. The Soviets would therefore be free
to market most, if not all, of current gold production in Western
markets. [Deleted.]
Between 1976 and 1980, the outlook for the Soviet balance of pay-
ments is less favorable than in 1974-75. Exports of crude oil to the
West are expected to peak in 1976 and then decline as a result of con-
straints on domestic supply, higher domestic consumption, and com-
mitments to Eastern Europe, as well as limits on the volume of barter
imports from the Middle East.
Earnings from other sources such as gold sales, tourism, and trans-
portation should help to soften the impact of the declining oil reve-
nues. If the U.S.S.R., for example, continues to sell just its yearly
production of gold- on Western markets, at $150 an ounce, annual
revenues could reach about $1.5 billion by 1980.
The projected fall-off in Soviet hard currency exports has broad
implications for the U.S.S.R.'s foreign trade position. If imports on
long term credits continue to increase at the present rate, and if the
U.S.S.R. concludes the massive cooperative projects now being dis-
cussed with the West, for example, the Tyumen, Yakutsk, and North
Star oil and gas projects, total.long-term debt could reach $9 or $10
billion by 1980.
Service on such a debt would require approximately $2.3 billion, or
35 percent of projected Soviet exports in 1980.
The Soviets, however, probably will not continue to increase draw-
ings on Western credits at present rates. In view of their improved
export potential, they may pay cash for some of their purchases. They
did just that last month when they paid for West German equipment
for the first stage of the Kursk iron and steel complex.
LONG-TERM PROBLEM OF MANAGING A COMPLEX ECONOMY
Over the long term, the Soviet leadership's most difficult problem
in the economic sphere will be how to manage an increasingly com-
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plev economy. The economic mechanisms devised by Stalin were effec-
tive in pulling the country up by the boot straps, and establishing the
basic foundations of an industrialized economy.
The present system, however, pays too little attention to price, cost,
and demand factors, and does not seem well suited to meeting the
needs of a modern society.
The challenge facing the current leadership is to adjust the system
to meet these needs without surrendering the power they hold so dear.
No one, either inside or outside of the U.S.S.R., has yet advanced a
convincing program for economic reform that would achieve this
kind of balance.
Mr. Chairman, you probably noticed that in this review of the
Soviet economy I made no mention of the impact of expenditures for
military programs. The omission was intentional. Since you have
indicated a particular interest in this problem, I thought it best to
respond at some length, in a separate section. I might begin by assur-
ing you that the Soviet leaders, also, are intensely concerned with this
matter, and keep a close eye on defense spending. They apparently
believe, however, that their economy is capable of sustaining or even
accelerating the pace of defense spending.
Spending Growth Rate
Soviet defense and space spending has been growing by about
3 percent per year since 1960. The economy has been growing faster,
however, and the share devoted to defense declined.
Military expenditures impact on the Soviet economy principally
by appropriating some of the best materials and highest quality skilled
and professional manpower, but they are not a chief cause of Soviet
economic difficulties. The civilian economy would, of course, benefit
from having more of these scarce, high quality resources, but their
transfer to civilian purposes probably would not boost overall eco-
nomic growth much.
Chairman PROXMIRE. How much has the decline been in the military
share of the GNP since 1960?
Mr. PAISLEY. I think it has been something around 10 percent to
7 or 8 percent.
Chairman PROXMIRE. It has gone from 10 percent down to 7 or
8 percent?
Mr. PAISLEY. Yes, sir. This is a very gross approximation. It is the
trend that we see as more important than a level.
Definition of Military
Chairman PROxMIRE. Now, when you say 7 or 8 or 10 percent, 7 or
8 percent, what do you mean by the military? What does it include?
Mr. COLBY. It is military and space, and it is comparable-we tried
to make it-
Chairman PROXMIRE. Their space program is part of the military
program much more than ours is.
Mr. COLBY. Not totally, but largely.
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Chairman PROxMIRE. We have the problem in our military of includ-
ing atomic energy or not, and in some of our other efforts.
Do you have the same problem in their approach?
Mr. COLBY. Defining which side it is, yes.
Mr. PAISLEY. We do include the atomic energy allocations that re-
late to national defense programs in both countries.
Chairman PROxMIRE. Well, in view of the fact that their GNP is
about half of ours, if they have about 71/2 percent-
Mr. COLBY. If I could ask you to wait a minute, Mr. Chairman, this
is a terribly complicated subject. I have an explanation of it, and then
I think we could answer your questions better.
Chairman PROxMIRE. Very good.
Organization of Soviet Military Forces
Mr. COLBY. A few words about the organization of the Soviet
military forces may help to make the amounts spent on them more
meaningful.
There are five main branches of service : The ground forces, the navy,
the air defense forces, the air force, and the strategic rocket forces.
The Soviets also maintain an active research and development estab-
lishment, as well as a space program that has both civilian and military
applications.
Ground Force8
The Soviet ground forces, as well as air defense forces, are much
larger than those of the United States. All.together, the Soviets have
about 4 million men under arms, about one and a half million more
than the United States.
Chairman PROXMIRE. Is that full time?
Mr. COLBY. Yes.
Chairman PROXMIRE. It does not include reserves?
Mr. COLBY. No, it does not. They have a militia out beyond that.
Chairman PROXMIRE. How do you know this 4 million?
Mr. CoLBY. By reconstruction of units, by strengths, supplemented
by examination of all available sources.
Chairman PROXMIRE. Do you have a sufficient number so that this
is a pretty hard, reliable figure do you think?
Mr. PAISLEY. Some elements are quite hard, some elements of the
estimates. Others, we know much less perfectly because they are
simply not accessible to our sources.
Chairman PROXMIRE. What would you say is the margin of error
here for the 4 million, 100,000 give or take?
Mr. PAISLEY. 200,000, give or take.
Chairman PROXMIRE. If they went up and down by 200,000 a year,
would we know it?
Mr. PAISLEY. It would depend on which elements went up or down.
[Deleted.]
Sources of Data
Mr. COLBY. The budget released in December of each year is the
only official statement made by the U.S.S.R. on defense spending. The
figure announced is not a useful indicator of either the level or trend
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in defense spending, however, as its coverage is not known and may
change from year to year without explanation. Moreover, military re-
search and development is not in the announced budget.
CIA Cost E8timate8
Because the Soviets regard actual levels of military spending as a
state secret, CIA estimates of this spending are largely arrived at by
a direct costing method. This procedure involves identifying Soviet
military programs, estimating the magnitude or the quantities involved
in each program, and then applying estimated individual prices to
each quantity. All Soviet military activities other than the military re-
search and development figure are estimated by this procedure, and
are thus independent of the published defense spending figure.
We estimate that Soviet expenditures to support this military effort
amounted to at least 25 billion rubles in 1973.
Chairman PROXMIRE. What is the ruble equivalent to a dollar?
Mr. COLBY. Well, that is a total artificial relationship, and I will
show you in equivalents that we have here. Given the possible range
of error in the estimates of both defense spending and GNP, the de-
fense share of GNP probably lies between 6 and 10 percent.'
The level of the Soviets' military activity has been increasing
steadily since 1960. They have added about a million men to their
armed forces and deployed a number of new weapons systems for both
strategic and general purpose forces. The trend in ruble expenditures
during this period, as you can see from this chart, has been generally
upward, increasing at an average annual rate of about 3 percent.
Senator SCHWEIKER. What is the level? The million men takes them
up to what level of military manpower?
Mr. COLBY. To about 4 million.
You will note, however, that for the last few years ruble spending
has remained at essentially the same level. I will explain why this is
so in a moment.
The shares of total expenditures devoted to investment, procure-
ment of hardware and construction of facilities, and military research
and development, as well as space, have changed significantly over the
years.
EXPENDITURES FOR MILITARY INVESTMENT
Expenditures for investment have dropped from about 40 percent
of total expenditures in 1960 to around 20 percent in 1972.
Chairman PROXMIRE. What is military investment? Would that
include equipment?
Mr. COLBY. That is equipment. That is equipment and facilities.
Chairman PROXMIRE. Ships, tanks, planes, missiles and all that?
Mr. COLBY. Right.
This drop reflects the completion of a number of major strategic
programs begun in the 1950's and early 1960's.
On the other hand, military research and development and space
expenditures have increased during the same period, from about 15
percent of total expenditures in 1960 to over 30 percent in 1972. These
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increases clearly were connected with the several new strategic sys-
tems now in development, and which were tested in the last 9 months.
Now, these are Soviet flight tests, as you can see, on the four new
missile systems we have been talking about, the test period began to
intensify in the latter part of last year, and it is continuing now.
[Deleted.]
Chairman PROXMIRE. I see.
EXPENDITURES FOR SPACE
Mr. COLBY. The largest percentage increase was observed in expendi-
tures for space, which rose from about 2 percent in 1960 to over 11
percent in 1972.
The leveling off of ruble spending in the last few years that I just
referred to reflects the fact that the U.S.S.R. has been between major
strategic procurement cycles. Since 1969 military research and de-
velopment expenditures for strategic systems have increased rapidly,
while expenditures for strategic investment have been declining.
Chairman PROIMIRE. Well, that increase in space is very significant,
from 2 percent to over 11 percent ?
Mr. CoLBY. Yes.
Chairman PRoxx . Do you have any breakdown at all to show
the part of that that is military and the part that is not?
Mr. PAISLEY. That is very difficult to determine, sir, in all cases,
because we do not have a good idea of what the purpose of all of
their space activity is. We know some that are clearly military; we
know some that are clearly associated with activity which in this
country would be classified normally as civilian, but there is a grey
area that we cannot determine.
Chairman PROXMIRE. For example, they do have some exploration
of the Moon and that sort of thing.
Mr. PAISLEY. Yes, Sir.
Mr. COLEY. Now, you know, they have had a terrible time on their
civilian space program, and they have had some very bad, bad
experiences I mean, a whole string of them have not worked. They
lost the astronauts and they put things on various planets that have
not worked, and all the rest of it. And we think, as a conclusion,
that they put their primary effort in the military arena, although
their civilian space programs are given high public visibility.
Chairman PRox1IRE. In other words, they are including all of their
effort in here, and the 2 to 11 percent increase, you thinik is very
largely a military increase.
Mr. CoLBY. Yes, but a lot of it was construction of facilities that
have dual purposes, and it is difficult to separate launch pads and
things like that into military and'civilian facilities.
Chairman PROXMIRE. They can be used for either one.
Mr. PAISLEY. We think the most dynamic aspect of their space pro-
gram is the military at the present time.
Mr. CoLBY. We expect that production of the new strategic systems
now under development will begin this year, and will cause Soviet
investment expenditures to reverse this downward trend.
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DEFENSE OUTLAYS ESTIMATED TO INCREASE IN 1974
The U.S.S.R. recently announced that defense spending would
decline by about 1 percent in 1974. We regard this announced cut as
largely a political gesture related to Soviet proposals at the U.N.,
MBFR, and SALT, rather than an indicator of actual spending. The
Soviets apparently want to convey the impression to domestic and
foreign audiences that the U.S.S.R. is confident that continued prog-
ress will be made in detente with the United States.
Actually, we estimate, on the basis of observed and projected changes
in military and space programs and forces, that there will be an
increase in Soviet defense outlays during 1974.
Chairman PROXMIRE. Of roughly what magnitude? Any notion?
Mr. PAISLEY. Roughly 3 to 4 percent.
Chairman PROxMIRE. Three to 4 percent? They say a 1-percent de-
cline, and it is actually a 3- or 4-percent increase.
Mr. COLBY. It has been roughly-the total has been roughly on a
level head the last 3 or 4 years. We do estimate it will resume at 3 or
maybe even a little above that in this case.
Chairman PROxMIRE. Are you going to get into the missiles they will
produce in this case as a part of this?
Mr. CoLBY. It will be those four missiles. I can tell you about that.
Chairman PROXMIRE. Are they going to go ahead with the four
missiles?
Mr. COLBY. [Deleted.]
Chairman PROXMIRE. OK.
Mr. COLBY. Military research and development is the only category
of spending that can be approximated through analysis of published
Soviet financial data. Most research and development expenditures
are funded under the science category of the state budget.
Soviet budgetary literature describes this account as a source of
funding for projects of national importance, and specifically in-
cludes defense related research and development. We believe that
space and military A. & D. take up most of the allocation for science
in the state budget. Some other activities, such as the SST and civil
nuclear energy and other nonmilitary activities, are probably also
funded under this account.
Chairman PROxMIRE. You do include the SST as part of the rubles.
Mr. COLBY. No, that is in the civilian science account.
Mr. PAISLEY. We have tried to net out civil nuclear energy and the
SST as nonmilitary R. & D.
Chairman PROxMIRE. Well, what percentage of the science account
goes in the military?
Mr. PAISLEY. Something on the order of 60-80 percent, I believe.
Mr. DIAMOND. Including space, about two-thirds in the last decade.
Chairman PROXMIRE. About two-thirds or a little more. OK.
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Mr. CoLBY. You will note that we. have thus far limited our dis-
cussion of Soviet defense spending to ruble terms, that is, how the
Soviet leaders would view the effort. We also make estimates of the
dollar cost of Soviet defense programs. For this purpose the Soviet
force is considered to be an alternative U.S. force, so that the calcula-
tion measures what it would cost the United States to purchase and
operate the existing Soviet military establishment. Now, this is not a
direct exchange rate program. We have costed the various Soviet
activities as though they were produced and paid for in America, and
this is the only sensible way we have been able to find that we have been
able to run a comparison.
Weaknesses in Estimates
Chairman PROXMIRE. Just one more point before you go on. You
would concede that none of these measures, including this one, gives
you a real precise answer-it is just another measure that you throw
in but you would not on this basis say that you have got a solid com-
parison. You can compare
Mr. COLBY. We have got the best comparison we can come up with,
and it has its weaknesses, and we are quite willing to admit that.
APPROACH TO HEALTH COSTS COMPARED
Chairman PROXMIRE. With the'health budget, do you strike a mean
between the ruble and the dollar?
Mr. DIAMOND. Yes.
Chairman PROXMIRE. Why can you not do the same thing here ?
Mr. COLBY. Because the costing is so different, the costing problems
are so different here. In the health thing, if you started to compare it,
I think you would come up with quite a different set of comparative
figures, and what you are really after in the health thing is how much
is -it costing them, not how does it compare to ours. That is not the
real problem. Whereas this is always a great question, How is it com-
pared to ours?
ALLOCATIONS TO MEET U.B. THREAT
Chairman PROXMIRE. Both the Soviet Union and the United States
have problems with' China. Now, my instincts, and they could be
wrong, their problem would show up as more of a claim on their
military resources than our problem would on our military resources.
If that is the case, can you allocate the resources that,t ley apply to
meeting the so-called U.S. threat, if they would look at it that way,
not that we-say, compared to the amount that we put into meeting
the Soviet threat. They have got a big eastern froi'}.
Mr. COLBY. [Deleted.]
Chairman PROXMIRE. On that basis, did you come to a conclusion,
or will you.tell us that as we go ahead?
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Mr. COLBY. No, I do not think we have that kind of monetary con-
clusion. We do obviously follow the force confrontations.
Chairman PROXMIRE. It is conceivable that you might accept this,
that they are now devoting a greater absolute amount than we are to
defense, and yet they might be devoting substantially less to counter-
acting us than we are to counteracting them.
Mr. COLBY. Until very recently, a very substantial amount of our
outlays was the South Vietnamese war that took up a great deal of our
budget.
Chairman PROXMIRE. Of course, it does not take up anything like
the proportion any more, does it?
Mr. COLBY. No.
Chairman PROXMIRE. All right, sir.
DOLLAR EVALUATIONS
Mr. COLBY. These dollar valuations, then, provide a rough measure
of the size of the Soviet programs.
The dollar equivalent, for our estimate of about 25 billion.rubles for
the total Soviet defense effort in 1973, works out to be over $80 billion.
From the late 1950's until 1970, U.S. defense outlays exceeded the
estimated dollar cost of the Soviet effort. Since 1970 the Soviet effort,
measured in dollars, has exceeded that of the United States. This catch-
ing up is a result of steady increases in Soviet spending, while U.S.
spending, measured in constant prices, declined.
STRUCTURE OF DEFENSE EFFORTS
In terms of the structure of the defense efforts measured in dollars,
the United States and U.S.S.R. present a similar picture. In 1973 the
amount of resources allocated to the procurement of weapons and
facilities was about the same. The dollar value of Soviet spending
for operating their forces exceeded U.S. expenditures slightly.
MILITARY MANPOWER
Measured in dollar terms, Soviet resources devoted to active military
manpower were over $35 billion, exceeding the U.S. figure by over
$10 billion. This difference, which may seem surprising considering
the low pay of the Soviet conscript, results simply from applying U.S.
pay scales to the larger number of men in the Soviet Force. In other
words, again, note that this is not a ruble expenditure. This is what it
would cost the United States to run a force like that.
Chairman PROxMIRE. I cannot understand why it would not be a
whale of a lot bigger in view of the fact that they have got about 4
million compared with something on the order of 2.5. million for the
United States.
Senator SCHWEIRER. It would be if it were percentagewise.
Mr. COLBY. Well, this is percentage, both percentage and absolutes.
Chairman PROXMIRE. You see, if you take 4 million and you give
them U.S. pay all the way up and down
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Mr. CoLBY. But, you know, our whole structure-now, this includes
operating expenses and not just pay.
Chairman PRoxMIRE. The biggest part of operating expenses is pay.
It is more than half, substantially more.
Senator SCHWEISER. Well, when you say 25 percent of their budget
say is made up of military pay and 50 percent of our budget is military
pay, I am confused in the difference in operating definition. What else
is in there, operating, besides pay? There must be some other big factor.
Mr. CoLi;Y. The cost of operating, the materials, the fuel, all the
rest of it, the various kinds of things that you use when you operate.
Chairman PROxMIRE. But the biggest by far is pay.
Mr. PAISLEY. Pay and allowances.
Mr. CoLBY. Yes, on both sides, yes.
Chairman PROxMIRE. That is why I cannot understand why in view
of the fact they have got 60 or 70 percent more men, why they have
not go-
Senator ScxwElKER. Their pay costs are 25 percent and ours are 50
percent. That is what I do not understand.
Mr. PAISLEY. Their operating ratio would be much higher if they
operated their forces as we do. That is, the operating portion is about
one-third of total operating costs. Two-thirds is direct manpower-re-
lated pay and allowances. The one-third that is operating cost includes
POL consumption and the cost of moving their forces around and con-
ducting exercises. Also, I would point out that the 25-percent figure
you referred to represents the share of military expenditures-in
rubles-devoted to military pay and allowances. The dollar valuation
of Soviet military forces-with U.S. military pay scales-yields a
higher figure, something like 40 percent.
O perationa and Maintenance Coet8
Mr. CoLBY. This perhaps can help you out on this, Mr. Chairman.
The 1972 figure for the operating costs here in the United States, the
total is $45 billion, broken into about $23 billion for military person-
nel, and $21 billion for operations and maintenance. On the Soviet
side the military personnel is about 70 percent of the total. About $35
billion of operating costs is for military personnel and $141/2 billion
is operations and maintenance. So a very substantial amount-about
70 percent-of Soviet operating costs are for military pay, as com-
pared with 50 percent for U.S. military pay when both are measured
in dollar terms.
Chairman PROxMIRE. Is this because we have the higher amount of
indirect and military support 8
Mr. CoLnY. No, it is because they have got that extra million and
a half men.
Chairman PRO%MIRE. I know, but therefore theirs ought to be
higher. I am trying to find out why ours is so high.
Mr. PAISLEY. They operate their forces, even though they have
larger forces, they operate them at less intensity. The navy, for ex-
ample, stays at anchor a lot, even though it is in the Mediterranean.
They stay at anchor a lot more than they sail.
Mr. CoLBY. [Deleted.]
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Chairman PROXMIRE. How about their troops? Do they go on ma-
neuvers and so forth?
Mr. COLBY. They do have maneuvers. They do have annual ones. I
do not think they do as much as we do, frankly.
Mr. PAISLEY. In all of their forces, they operate much less exten-
sively. Their flying hours per man is only about half that of U.S.
training. They exercise less also.
Chairman PROxMIRE. For the record can you give us a breakdown of
the operating costs for us and them?
Mr. COLBY. I think I read it, but I will make sure it is in the record.
[The following information was subsequently supplied for the
record:]
COMPARISONS OF UNITED STATES AND SOVIET MILITARY OPERATING COSTS
[In billions of U.S. dollars]
U.S.S.R. 197United Stat'e72
35 23
143. 21
MILITARY R. & D.
Mr. COLBY. The estimated dollar cost of reproducing the Soviet
R. & D. effort also was higher than that of the United States in 1973.
While the comparison between the dollar values of Soviet and U.S.
spending reflects levels of effort, I should point out that the mere level
of spending is not a good measure of military capabilities and that
equal levels of effort do not necessarily result in equal effectiveness of
troops or equipment.
Net Assessment
Chairman PROXMIRE. Well, before you conclude this section, that
is a fascinating thing you have just said, before you conclude. Do you
have any measures of effectiveness?
Mr. COLBY. Well, you get into the whole morale effect, the staff
strategies.
Chairman PROXMIRE. Well, do you have any objective indication
that our capability is less or more than theirs?
Mr. COLBY. Well, what are you talking about is what we call the net
assessment business, Mr. Chairman, and we in the intelligence business
traditionally have tried to limit ourselves to a report and an evalua-
tion of what the other side looks like. What we do becomes a policy
question. How we run our forces, how we organize them becomes an
internal American decision, and then the netting out is something that
we participate in but we do not run as a separate intelligence function
by itself.
Chairman PROxMIRE. In this comparison we spend substantially
more on education than they do. They are doing very well, but we still
spend a great deal more. We put enormous stress on vocational educa-
tion and on higher education. Maybe I have come to the wrong conclu-
sion but it is my understanding, in view of the volunteer Army and
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the much higher pay that, we have had lately, that we are attracting
people with better morale, maybe somewhat higher skills, less turn-
over, and it may be that our individual soldiers, sailors, marines, of-
ficers, and so forth have somewhat higher skills and therefore are some-
what more efficient than theirs are.
Is there any way that this can be appraised at all, or evaluated?
Mr. CoLBY. Well, we obviously spend quite a bit of effort trying to
do this. We for instance have participated with the Pentagon in some
rather careful discussions on the recent war experience in the Middle
East and then on an evaluation of Soviet tactics, because this is real
Soviet tactics, and what kind of tactics did it amount to, how did they
use their artillery, their infantry, and all that sort of thing. We do a
great deal of that.
The net assessment of that is a function which is in the Defense
Department now, in which you put the intelligence input, you put the
American side of the equation, and you put the cost factors, and you
have to resolve the dilemma created by those three elements of the
equation, and come up with a total defense plan and a total defense
budget, obviously.
Chairman PROBMIBE. By far the biggest difference was on research
and development. They appear to be spending substantially more than
we do, maybe 50 percent more, not quite 50 percent more, but 30 per-
cent more, and there it would seem to me that it is extraordinarily
difficult to judge the performance. By and large, in every other sector,
as you have shown so well and documented so thoroughly, we were
ahead of them in applications of research. We certainly are in agricul-
ture; we seem to be in industry. Our industrial workers are twice as
efficient as theirs. Our farm workers are 10 times as efficient as theirs.
It would seem that although they may be applying more in the re-
search area, it may be that their output is no. greater or maybe less,
or maybe more.
Mr. COLBY. Yes, it very easily could be. Some of their missile sys-
tems, for instance, they obviously are behind us on the multiple in-
dependently targeted reentry vehicles. The Soviets are behind us. We
have had those for years.
Chairman PnoxmntE. Are there any areas where they are obviously
ahead of us?
Mr. COLBY. There are some things they are doing that we are not
doing. [Deleted.]
Chairman PxoxMrxn. Now I can see the figures more clearly. They
have almost 25 percent more, it is $12.5 billion compared to almost $10
billion for us. Is that right?
Mr. COLBY. Yes.
Chairman PROXMTE. Well, that kind of a difference, it is a differ-
ence which is recent.
Would that be affected by the strategic arms limitation talks or not?
Mr. CoLBY. No, it has not been.
There are certain things excluded under the SALT agreement: we
are not supposed to test SAM's in an ABM mode, for example and a
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35
few things like that. So they have not spent that kind of money. They
have spent it on something else.
Chairman PROXMIRE. How do you arrive at that 12.5? How do you
measure it?
Mr. COLBY. You take a look at what we think their research and de-
velopment expenditures mean, what are they? I mean, what are the
space reseach facilities, not the silos for the operational missiles, but
the test fields, the factories producing this kind of thing, the labora-
tories, to the extent that we can find them, and so forth, and we cost
those as though they would be spent and bought and built in the
United States.
Mr. PAISLEY. That is the way we check the basic figure, Mr. Colby.
The initial figure is arrived, as was explained in the Director's state-
ment, through the analysis of the Soviet budget.
Mr. COLBY. That is right in the R. & D. field. Excuse me.
Mr. PAISLEY. That is right, because in the R. & D. field, so much of
the activity, such a large portion cannot be identified until it gets to
the final test and evaluation phase. Once we see it in the test and eval-
uation phase, such as these four major weapons systems you saw de-
picted on the screen, we know that that research and development had
to have begun much earlier, and that is why we say the upsurge in
activities we are now seeing probably has not been materially
created, caused, or influenced by the strategic arms limitation talks.
Chairman PROXMIRE. They do not publish these figures, do they?
Mr. COLBY. They publish the overall science figure in their budget.
Mr. PAISLEY. They publish the science figure, but we have to analyzo
it to try to pull out
Chairman PROXMIRE. Is that the fundamental bedrock on which you
then compute this $12.5 billion?
Mr. PAISLEY. Yes, sir. We have to try to net out that portion of the
total which is civilian.
Chairman PROXMIRE. What makes you think they would not try to
exaggerate or brag up this one and use this to impress their satellites
and so forth?
Mr. PAISLEY. Well, they are proud of their science activity. They are
proud that this is a scientific economy and a scientific nation and a
scientific philosophy. We have not been able to detect a deliberate dis-
tortion of this kind of budgetary data.
Perhaps Mr. Diamond could
Mr. DIAMOND. It seems internally consistent in a global budget set-
ting of revenues and expenditures, and we think we can trace a good
part of the civilian action. [Deleted.]
What we cannot clearly trace is the military component. So to that
extent, they could fudge.
Chairman PROXMIRE. In their research and development it seems
to me we have to judge it pretty much by results, and it does take time.
It takes maybe 2 or 3 years or maybe a little more, sometimes
quite a bit more before it is translated into procurement. But when you
come to the quality of submarines, for example, the speed, the
reliability in missiles, MIRV'ing, the breakthrough in almost all these
areas we seem to have been ahead. I do not want to be overconfident,
maybe we're behind, but it seems we are consistently ahead.
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Now, is this a remarkable difference that we see here? Is there any
way that we can interpret this as meaning they may be forging ahead?
[Deleted.]
Mr. COLBY. Well, there is a lot of experimenting over there. [De-
leted.]
Mr. DIAMOND. But these are R. & D. inputs. They are not output.
We do not have a measure of their productivity.
Mr. COLBY. Yes, this is input, and you will not find that figure, you
will not find the $12.5 billion. That is a dollar figure. You will not
find that figure which, taking the ruble figure, try to scrub it, try to
straighten it out and then cost it in dollars.
SOVIET IMPORTS OF MILITARY TECHNOLOGY
Chairman PROXMIRE. Earlier you made to me what was one of the
most shocking revelations I have heard in a long time when you said
that from Western sources they are able to buy for the military some
useful equipment.
Now, part of that would be procurement. Part of that might be in
research and development. I imagine they use their computers in re-
search and development a great deal.
Mr. COLBY. [Deleted.] Their people come over and go through the
XYZ factory, for instance, and then ask some very penetrating ques-
tions.
Chairman PROXMIRE. Can you estimate how much of each, R. & D.
and procurement, is secured from western sources.?
Mr. PAISLEY. Well, Senator, I think you may have received a mis-
impression from me. It is not a large quantity and it is not direct mili-
tary equipment. It is technology that in the West is in the civilian
economy, but it is of a quality that is higher than the Soviets have
available in either their civilian or the military economy.
Chairman PROXMIRE. Yes, but you used the term military there in
your presentation.
Mr. PAISLEY. The equipment is civilian equipment in the West, but
it is reverse engineered for military applications in the U.S.S.R., and
if I used the term military in relation to the original equipment that
was an error.
Chairman PROXMIRE. You say in your prepared statement, "In some
military fields, the results of this reverse engineering have been good."
Mr. COLBY. On their military. In other words, the results on their
military have been good.
Chairman PROXMIRE. So they might not only buy computers, ma-
chine tools and a number of other things, photographic equipment and
so forth that they apply in the military area and so forth, is that it?
Mr. COLBY. Yes.
Chairman PROXMIRE. It is not big in terms of dollars ?
Mr. PAISLEY. No, sir.
Chairman PROXMIRE. Maybe 5 percent?
Mr. PAISLEY. Oh, much less. It is infinitesimal. They will buy it
single item and will reverse engineer it so they can learn how to build
it, and then they will build it and apply those techniques to their own
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weapons systems. But it is not a question of being dependent, having
their own military procurement dependent on foreign sources of sup-
ply. That is just not done. And that is perhaps where the misimpres-
sion was obtained.
Military R. & D.
Chairman PROXMIRE. By and large the SALT talks are aimed at the
second item you have got there, procurement rather than R. & D. are
they not, although they can reach
Mr. COLBY. That is right essentially, yes.
Chairman PROXMIRE. You said that there was some influence from
R. & D. testing some of the systems.
Is there any action that we can take to prevent an arms race in
R. & D. which it seems to me is eminently more dangerous than pro-
curement?
Mr. COLBY. There are possibilities, I suppose, of agreeing to suspen-
sion of some R. & D. activities which can be monitored and verified.
The atmospheric nuclear test ban treaty, for example, has prevented
that sort of testing and has held down one element in the R. & D. race.
Now, they still go in for underground tests, of course.
[Deleted.] I think the Soviet R. & D. effort reflects, Mr. Chairman,
this drive to just become more modern and more technological. It
pervades the society. They feel they have got to come up and catch up
with the West.
Chairman PROXMIRE. This is the same application in the military
that they have got in the industrial and other areas?
Mr. COLBY. It is an application, and obviously in Soviet terms, the
military is No. 1.
Soviets Trying To Catch Up To United States
Chairman PROXMIRE. Well, that implies that they are behind in the
military in the application of their past research and development, and
they are trying to catch up. Is that it?
Mr. COLBY. That is true. The complexity of their missile systems,
their accuracies, their various other things, have traditionally been
behind ours. There is no question about that, and they are just driv-
ing to try to catch up.
Chairman PROXMIRE. Do the U.S. figures include our civil space
program, the R. & D. ?
Mr. PAISLEY. No, they do not.
Chairman PROXMIRE. They include our military space program but
not our civilian s ace Program in NASA?
Mr. PAISLEY. Yes, sir.
Chairman PROXMIRE. But you include all space on the Soviet side.
Mr. COLBY. No, sir, we scrubbed out what we could.
Chairman PROXMIRE. The Shuttle, for example, they tell us-we
just had hearings. I happen to be Chairman of the subcommittee that
handles the space budget. They told us that they expect about a third
of the use of the Shuttle would be by the military.
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Did we apply that in our part of the military, a third of the
Shuttle cost ?
Mr. PAISLEY. No, I was not aware of that information, sir.
Mr. COLBY. I think we did not cover it at all.
Chairman PRO%MIRE. Well, the Defense Department differs on that.
They are a little lower; 29 percent.
Mr. COLBY. I would doubt that we had the Shuttle in there at all be-
cause it is a NASA program, and we would automatically leave them
out. I mean, we are trying to get comparable things here.
Chairman PROxMIRE. That is going to be-of course, they expect it
to cost, including total operating cost over the terms, to be about $49
billion, and that is the present cost, and the ultimate cost with over-
runs and inflation is going to be, God knows, $100 billion.
Mr. COLBY. Of course, you are going ahead. This is looking back-
ward.
Chairman PROxMIRE. That was just a suggestion for your informa-
tion.
There was military expenditure in NASA in 1972, some, but you did
not include any of that.
Mr. PAISLEY. If we could identify it as a military related activity,
we would and we do work closely with NASA. I do not know in that
particular year whether we did have a NASA amount.
Chairman PRO%MIRE. Would you modify that in any way if you in-
cluded everything that has military implications in the NASA budget?
Would that increase the 9.9 significantly?
Mr. PAISLEY. I do not know what level we are not including. I am
not familiar with the programs that you are referring to, that may
have military applications other than the Space Shuttle which you
just mentioned.
Chairman PEox intE. We are getting a list right now from NASA
on some of the supersonic technology and so forth, for example. We
will provide you with that.
Mr. COLBY. We would be very interested.
Chairman PROXMIRE. They justify that strictly on military because
we have no supersonic commercial prospects at all.
How about the military applications of the spade program? After
all, a great deal of that, the research and so forth, is done to give us
the capability with respect to satellites and so forth. They might have
great military implications.
Mr. COLBY. Well, certainly "we have had a tradeoff. We have bene-
fitted on our side from the space program in various respects, but I
think our estimate on the other side is that the military side of it drives
and has the priority on the Soviet side. The civilian side=
Chairman PxoxMluE. Are we pumping into their budget part of
their efforts in space to make them look like a world leader, a tech-
nological leader, that has some military implications and we do it
for the same reason but not including it in ours?
Mr. COLBY. I think we tried to pull those out`of it.
Chairman PRoxMnu. Pull them out on both sides.
Mr. COLBY. Yes; there are tradeoffs and side benefits.
Chairman PnoxMIRE. Do they have a separate agency in the Soviet
Union that runs the space program like we do?
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Mr. PAISLEY. We doubt that they have a program that splits the
military and civilian. Most of the activities that we know of appear
to be carried out at military facilities.
Procurement
Chairman PROXMIRE. The other difference here is in procurement.
That's something new, too, for them to be ahead of us in procure-
ment, I take it.
Mr. COLBY. We are about even on procurement.
Chairman PROXMIRE. They are a little bit ahead of us. They are
$18.5 billion and we are $18 billion. But they are a little bit ahead of
us.
Mr. COLBY. But remember, they have to procure for this force, too,
in tanks, trucks, things like that.
Operations and Maintenance
Chairman PROxMIRE. Now, from the standpoint of operations and
maintenance, we spend a good deal more than they do, except for the
fact that they have more people.
Mr. CoLBY. Right.
Chairman PROXMIRE. OK. Fine.
Go ahead.
Mr. COLBY. [Deleted.]
Chairman PROXMIRE. [Deleted.]
CHINESE ECONOMIC GROWTH
Mr. COLBY. Mr. Chairman, you asked that I also cover the Chinese
economy, and single out the expenditures for military purposes. I
propose first to discuss the general state of the economy, and conclude
with the issue of military expenditures.
Since the Communists came to power in 1949, China's economic
growth has been strong but erratic.
China's GNP has grown by 4 percent annually, reaching a level of
roughly $170 billion in 1973, less than 15 percent of U.S. GNP. Per
capita GNP of $190 is only 3 percent of the U.S. figure.,'
National output, which rose sharply in the 1950's, plummeted in
the early 1960's following the disastrous "Leap Forward," 1958, to
1960. In 1966, just as momentum had been regained, Mao unleashed
the cultural revolution, and production again declined. Since 1968,
the economy has been growing steadily, and the latest ideological
rumble, the anti-Confucius campaign, so far has had no noticeable
effect on output.
Though still a poor country, the People's Republic of China can
boast of many achievements, including : provision of adequate if
austere amounts of food and clothing for 900 million people.
Source of Data
Chairman PROXMIRE. How accurate is that?
Mr. COLBY. Well, we base it on the 1953 Chinese census of 583 mil-
lion, and an average annual growth rate of 2.2 percent.
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Chairman PRO%MIRE. Have they been trying to hold down their birth
rate?
Mr. COLBY. There have been some steps in that regard, but we do
not think that they are all that effective.
Mr. ASHBROOK. That is right, During this period of time there have
been three separate population control campaigns which have coin-
cided with moderate economic policy. Ideologically, a birth control
campaign is suspect. It is bourgeois thinking, and under the socialist
system, more people are more producers. But they are now trying.
You know, they readjusted their thinking and they are putting in
a campaign, but it has not had appreciable demographic impact.
Mr. COLBY. The other achievements, production of modern military
equipment including nuclear weapons, let aircraft, and strategic mis-
siles; production of a wide and growing variety of industrial goods;
expansion of petroleum output from near total dependence on imports
to a growing surplus for export; extension of railroad lines through
some of the world's most difficult terrain.
Nevertheless, China lags 5 to 20 years or more behind the other
large industrial nations in various branches of technology. Although
China has been outdistancing other less developed countries such as
India, Pakistan, and Indonesia, it is not gaining ground on the fast
moving, high technology nations such as the United States and Japan.
Until 1962, China's leaders stressed heavy industry and defense at
the expense of agriculture and consumer welfare. Industrial produc-
tion has grown by about 8 percent per annum compared to 2 percent
for agriculture.,
After the disaster years of 1959 to 1961 when China was brought
to the verge of starvation, the regime shifted to an agriculture first
policy. The modern sector of the economy began to supply agriculture
with increasing amounts of chemical fertilizer, pesticides, pumps,
seeds, trucks, and farm machinery.
Investment in industry reflected the new policy. Most notably,
China in the past 2 years has contracted to buy more than $1 billion
worth of fertilizer and synthetic fiber plants to strengthen agriculture.
SLOWDOWN IN MILITARY EXPENDITURES
Concurrently, there appears to be some slowdown in military ex-
penditures and increased emphasis on consumer goods. Also, to give
a fillip to industrial modernization, China has relaxed its policy of
avoiding foreign debt by arranging to finance industrial plants
through deferred payments.
When we look at the Chinese economy sector by sector, it is apparent
that agricultural production and its relation to population is still the
basic problem. Some steps have been taken to ease the pressure on agri-
cultural production.2
'See chart entitled "China : Agricultural and Industrial Production" p. 71.
2 See chart entitled "China : Grain Production and Population," p.' 72.
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41
AGRICULTURE
China's population is about 900 million and is continuing to grow
by about 2 percent per annum. Available arable land is already being
cultivated, so major additions to output must be derived thro ugh in-
creases in yields. Large investments in fertilizers, water control facili-
ties, and research are needed.
Though domestic fertilizer production, both from modern and local
plants, has been rising rapidly, the regime has opted for a rapid boost
in output by importing large fertilizer facilities from the United
States, Western Europe and Japan.
So far, the Chinese have ordered 13 urea plants which will increase
urea production eightfold over present levels when they come on line in
the late 1970's.
Large investments in synthetic fiber plants are aimed at relieving the
pressure on agriculture to provide additional natural fibers at the ex-
pense of grain.
Considerable investment also has been made in water conservation,
mostly in small projects in the south. In north China, major new in-
vestments will be required to provide large-scale irrigation systems.
In the meantime, China is spending large amounts of foreign ex-
change on grain and cotton. 7.5 million tons of grain, valued at $750
million, were imported in 1973. Cotton imports also rose sharply to
$350 million in 1973.1
As for industry, China has vast resources of most raw materials,
and industrial output is growing rapidly. Energy resources are no
problem. Coal and hydroelectric resources are huge, and petroleum de-
posits appear to be abundant. Recent development policies have empha-
sized petroleum, while coal and electric power are falling short of
needs.
Petroleum output exceeded 50 million tons, one million barrels per
day, in 1973, enough to meet domestic needs at the present level of
industrialization and allow for exports of about one million tons to
Japan. Production from land fields is being developed rapidly, but
offshore exploitation will require further imports of expensive explor-
ation and production equipment. Large investments in pipelines, rail-
road cars, port facilities, and tankers also will be needed to distribute
the growing volume of petroleum.
Coal mining is being expanded with imported equipment, and elec-
tric power production is being strengthened by imported gas turbines,
steam turbines, and boilers, as well as by expanding domestic produc-
tion of generators and other electrical equipment. Steam power tech-
nology is far behind that of the West, and only a small portion of
China's vast hydroelectric potential has been tapped.
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42
Though considerable progress has been made in metallurgy, partic-
ularly steel, China is still a net importer of metals. Crude steel produc-
tion, estimated at 25 million tons in 1973, was supplemented by imports
of 3 million tons of high quality finished steel. Both the raw material
and finishing sectors are lagging. China is importing increasing quan-
tities of iron ore, steel scrap, and pig iron, and has recently negotiated
for a $400 million steel rolling plant from Japan and West Germany.
Imports of copper and aluminum are rising because China has failed
to add new capacity as needed. China also imports lead, zinc, nickel,
platinum, chromium, cobalt, and other metals while exporting tung-
sten, antimony, and tin.
China is one of the world's largest cotton textile producers. None-
theless, production barely keeps pace with population growth. Cloth
rationing is still an essential economic measure.
Despite striking gains in the production of machine tools and other
types of machinery, many varieties and sizes are still lacking. Large
quantities of advanced production equipment must still be imported
to avoid reduced growth rates and large technological gaps.
In the field of transportation, the Chinese have proven adept at
building railroads and highways in mountainous terrain. They have
also developed a small transportation equipment industry that pro-
duces railroad equipment and trucks. Nevertheless, primitive forms of
transport still handle most local traffic.
Large quantities of transport equipment, including trucks, ships,
commercial aircraft, and diesel and electric locomotives have to be
imported.
The patterns of foreign trade shifted radically following the with-
drawal of Soviet technicians in 1960. As you can see on this chart, in
1959 the trade was at a ratio of 70 to 30 percent in favor of Communist
countries. Since 1965, the figures have been reversed."
Although foreign trade is only a small component of China's econ-
omy, it has been shooting up in recent years. Total trade jumped from
$4.3 billion in 1971 to $8.5 billion in 1973. At least half of this increase
probably is accounted for by revaluation of world currencies and
worldwide inflation.
Major exports are textiles, foodstuffs, and raw materials. Imports,
I have already mentioned, feature grain, fertilizers, machinery, and
metals.2
I Fee chart entitled "China : Foreign Trade. 1957-72," p. 74.
2 See chart entitled "China : Commodity Composition of Trade, 1973," p. 75.
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TRADE WITH SOVIET UNION AND UNITED STATES COMPARED
Trade with the United States jumped from $110 million in 1972 to
$860 million in 1973.
Chairman PROXMIRE. How does it compare again with our trade
with Russia?
Mr. DIAMOND. Machinery orders are $500 million in 1973. Total
exports to and imports. from the U.S.S.R. were about $1.4 billion.
Chairman PROXMIRE. So China is about half of what it is with the
Soviet Union. That is remarkable when you consider the fact that
China is so much smaller than the Soviet Union in GNP and domestic
production.
Thank you.
Mr. COLBY. The United States was second only to Japan in China's
foreign trade. The United States shipped nearly $800 million worth
of goods to China, including wheat, corn, cotton, soybeans, aircraft,
and metal scrap. In return, the United States bought $65 million worth
of Chinese silk, pig bristles, fireworks, cotton fabrics, carpets, tin, and
antiques.
In 1973, China contracted for $1.2 billion in whole plants, mainly
chemical fertilizer and artificial fiber plants. Medium term credits are
being used to finance about two-thirds of these contracts.
When we look at the mid and long range prospects for the Chinese
economy, we believe that GNP should continue to grow by 4 to 5
percent annually. Such a growth would be sufficient to support con-
tinued expansion of industrial capacity, to supply the population at
slowly rising levels of well-being, and to improve the inventory of
modern weapons available to the Armed Forces.
The political campaign against Lin Piao and Confucius, however,
should warn China watchers against facile straight-line projections
of economic policy and growth prospects. Nevertheless, periods of
political turbulence probably will have a smaller impact than in the
past, because Communist economic organizations, controls, and pri-
orities will be more resistant to change.
The pressure of population against the means of subsistence should
gradually be relieved by the growth of national output and, over the
long term, by some successes in population control measures.
Industrial output should increase about 8 percent annually, and
agricultural output 2 to 3 percent.
For the next 10 years or more, China will continue to benefit from
its relative industrial backwardness by obtaining plant and equipment
abroad on which R. & D. costs have been paid off and technical prob-
lems ironed out.
As for economic priorities in the future, agriculture should continue
to receive extensive support from the industrial sector. In any case,
steady increases in yields per hectare will be essential.
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Chairman PRO%MIRE. Let me just interrupt again. You said Japan
is their principal trading partner and the United States is second.
Mr. CoLBY. Second.
Chairman PRO%MIRE. And you pointed out that their trade with
Communist countriesis less than it is with free countries. That is
quite a turnaround from what it was 20 years ago, is it not?
Mr. COLEY. In 1955, oh, yes, certainly. I think this is one of the most
interesting items, though, this turn toward the use of credit, because
there was a period in which it was non-Maoist to take credit.
Chairman PRO%MIRE. What I am trying to get at is the fact that we
consider with some reason that the Communist countries act, if not as
a monolith, they tend to act together, and they view us as the enemy.
They do; a lot of the literature and so forth is that way. But if you
look at the facts of life here, the hard, cold facts of trade, it appears
that they are developing more and more dependence on the free world,
and that this might be a consideration. In view of the size of Russia,
the proximity of Russia, and the close ideological relationship that
they have had in the past, this seems to me to be a very significant de-
vement here.
7. CoLBY. Well, the real key occurred here at the time of the Sino-
Soviet split. At that point their trade with the Soviet Union declined
very sharply, and with Soviet Eastern satellite blocs.
Chairman PxoxMiRE. How big is their trade with the Soviet Union?
Is that most with the Soviet Union or is it with other Communist
countries 1
Mr. ASHBROOK. Sir, I think the total volume is about a quarter of a
billion dollars but that is a very rough estimate.
Chairman PRoxMnuE. In 1973, that is fascinating, they had about a
third as much with the Soviet Union as they had with the United
States.
Mr. ABHBROOK. That is right.
Chairman PROxMIRE. Well, isn't that something.
Thank you.
Mr. COLBY.. Rising pressure from an increasingly literate and tech-
nically sophisticated population will probably focus more attention on
consumer welfare.
In industry, technological improvements will be emphasized, though
small, local plants will account for large portions of output of consum-
sumer goods, construction materials, and farm machinery.
In the field of foreign trade, China's oft-stated goal of self-suffi-
ciency in industry and technology is not likely to be attained in the
foreseeable future.
Peking must continue to rely heavily on Japan, Western Europe,
and the U.S. for various types of high-technology equipment. The
United States will have a particular advantage in the supply of civil
aircraft, computers, communications equipment, oil exploration and
drilling equipment, and specialized machine tools.
The United States will remain a major supplier of agricultural com-
modities, especially grain in poor harvest years, and cotton.
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China, however, remembering its experience following the with-
drawal of the Soviet technicians, will maintain a diversity of suppliers.
Finally, Peking will try to bring its U.S. trade closer to balance by
modifying products to suit American tastes, and by expanding pro-
duction of commodities with a ready market in the United States.
Nevertheless, Sino-U.S. trade will continue to focus on U.S. exports.
I will conclude this prepared statement by discussing the Chinese
commitment of resources to military programs.
Chairman PRoxxmE. Let me just ask you, is China the biggest
Communist country economically, outside the Soviet Union, and if
so, what is the third biggest?
Mr. COLBY. Yes. I think Poland would be next.
Mr. ABHBROOK. Well, sir, it would be computing aggregate versus
per capita GNP, and aggregate GNP, I am almost certain it would
be the biggest, but its per capita GNP is like one-tenth.
Chairman PROXMIRE. I know China's per capita GNP would be
way down. I know their overall GNP was about the same as Italy.
Mr. AsiiBROOK. It is now about $170 billion, so I think the sheer
weight of numbers would put that far ahead of any East European
country.
Chairman PROXMIRE. Italy is West European, but you look at Italy.
I think they were about 10th. They were about 10th. They were pretty
far down. I am not sure that-China's GNP is probably bigger than
Canada, although not. much. One of the reasons I am bringing this up
is that I think there is a great deal of outdated thinking that, because
China is a huge country with the biggest population in the world
by far, and because of our experience in the Korean War and in the
Vietnam War, we envision China as a threat to the United States, and
this is nonsense when we look at the size of their economy. It is ridicu-
lous, like Italy being a threat. In my view they are a threat in the
Far East. They are a threat if we are stupid enough to have a land
war on the Asian continent, but except, for that, they just do not
have the wherewithal. They just absolutely do not. That is in my view.
Mr. DIAMOND. We have a measure in 1972 dollar value of the Chi-
nese output falling between Italy and the United Kingdom, that is
around $140 billion, and the United Kingdom at $152 billion, and
Italy, $112 billion.
Chairman PROxMIRE. Far less than Japan, of course.
Mr. DIAMOND. Japan, $280 billion. That is right. It is about one-
half of Japan.
Mr. AsllBxoox. Mr. Chairman, those figures he is quoting may seem
lower, but we have had a substantial inflation and we are 1 year ahead.
Mr. DIAMOND. These are 1971 U.S. dollars.
Mr. ASHBROOK. And 1972 GNP figures, but we have got one more
year of inflation and one more year of growth.
Chairman PROXMIRE. The fact is they have been growing about 4
percent, which is about the rate that everybody has been growing,
and so there should not be that much difference. There should not be
that much change.
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Mr. ASHBROOK. China is in the 4 to 5 percent growth group. You
have West Germany and Japan in the 10 percent group, West Ger-
many not lately, but Japan.
Chairman PRO%MIRE. And that-Russia and the United States
have also been growing about the same.
Mr. AsHBROOE. At the 4-percent level.
Chairman PROxMIRE. All right.
CHINA'S DEFENSE PROGRAM
Mr. COLBY. Estimating the numbers of Chinese forces is difficult,
but we believe they have nearly as many men under arms as the
U.S.S.R. More than 80 percent of these military personnel, however,
are probably assigned to ground force units. The number involved
with advanced weapons, such as strategic missiles, supersonic aircraft
and modern submarines, is small by either United States or Soviet
standards.
Lak of Published Data
The Chinese are even more secretive about defense spending than
the U.S.S.R.: they publish no information on their military expendi-
tures. We have recently begun an effort, however, to estimate China's
resource commitment to defense, employing methodologies similar
to those used in estimating Soviet defense costs. The results of this
effort are still preliminary, but a few generalizations appear to be
valid.
The problem can best be approached by subdividing the question
into two parts, defense operating costs and defense procurement costs.
Defense operating Costs
Defense operating costs would appear to have little impact on the
economy, largely because of the extensive use of relatively unskilled
manpower, which in China is certainly not a scarce resource.
Procurement Costs
Military equipment procurement costs, however, impinge directly
and heavily on the country's modest industrial base. The term procure-
ment as we use it here includes only 'the cost of actually producing
arms and equipment and does not include any costs associated with
research, development and testing programs. We have insufficient
information to develop valid estimates of resources devoted to Chinese
military research and development.
RELATIVE CAPABILITY WITH THAT OF THE UNITED STATES OR THE SOVIET
UNION
Chairman PROxMIRE. You have insufficient information, but would
it appear on the basis of our knowledge of the Chinese educational
system and the number of scientists they have and research tech-
nicians of various kinds that they have a. capa'ility that is com-
parable in any sense with that of the United States or the Soviet
Union?
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Mr. COLBY. Oh, no, not at all. We do know that they have cordoned
off a sector of their effort and have given it a protected status during
these ups and downs of the cultural revolution. [Deleted.]
Chairman PROXMIRE. Thank you.
Mr. COLBY. According to our measures, over the past 10 years there
has been a generally upward trend in Chinese military procurement,
with two periods of rapid growth, each followed by a decline:
Of particular interest are the two occasions when the Chinese re-
duced procurement. The first occurred in 1967 when the disruptions of
the cultural revolution caused about a 12-percent reduction.
An even more drastic cut was made in 1972 when military procure-
ment dropped by almost 20 percent, primarily as a result of a cut-
back in aircraft production. The reasons for this decline is not yet
clear. Contributing factors may have been : New priorities in favor
of economic growth established by a less military-oriented leadership
in the wake of Lin Piao's death in late 1971; an inability to develop
follow-on advanced weapon systems.
TRADE-OFF BETWEEN MILITARY AND ECONOMIC DEVELOPMENT
Chairman PROXMIRE. That is a very, very interesting analogy, and
fascinating, but it seems to be a trade-off. If they are going to con-
centrate on military development, they will have to reduce their
economic development, or at least reduce the rate of increase of their
economic development, and it would seem the same thing would apply
to the Soviet Union.
Mr. COLBY. Well, here your talent base as such is smaller; that is,
capable of running this kind of advanced technology. So it is a higher
percentage of commitment to the military. It is a higher percent of
total effort. It has nothing to do with the numbers of people, but it is
a higher percentage of talent devoted to this nonproductive effort.
Chairman PROXMIRE. Here you can see that if the Soviet Union is
looking for a long term revolution on the notion of their often pro-
fessed belief that they still hold of world revolution by force and
violence, if they are going to achieve that, it will have to be, it seems
to me, in the distant future. It would seem to be therefore more danger-
ous if they reduce their military and concentrate more on their eco-
nomic development. That is where the future really has to be because
without a very, very powerful economic plant, they will be unable to
develop the e}iormous spectrum of weapons that they would have to
have to take on anything like this country.
Mr. COLBY. Then you have the basic dilemma of how can you run a
very productive economic apparatus and even a research and develop-
ment apparatus under the conditions of political control that they
think is essential to their lifestyle, and that is a terrible dilemma for
them that they have not worked out.
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' II II11[I I1'lllllllIllll 'ill'' III Iii
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Chairman PROXMIRE. That is a constraining factor, but I think we
are always inclined to be more and more tense and disturbed about the
terrific Soviet danger when they increase their military, for obvious
reasons. But it seems to me it can be counterproductive for them, inas-
much as, to the extent that they push resources to this area, the re-
sources available for the others are less.
Mr. COLBY. Well, their value system says that they have to be a
strong military power. They have to be, in their cosmos, they have to
be equal to the United States, so there is a drive to be equal to us.
Chairman PROXMIRE. Here you have got the Chinese cutting back
on their military. Rather than being reassured, I think this indicates
that eventually they are building toward what could be a very
threatenin political society. If they concentrated more on the mill-
tary area, g I think they would be less threatening.
Mr. COLBY. Well, they have got so many enormous problems in run-
ning China, I mean, their population base is'so enormous, it takes up
so much of their time and energy just staying afloat.
Chairman PROXMIRE. Who is running China? What is the lineup ?
Mr. COLBY. [Deleted.] As you can see on, the chart, procurement in
1973 increased slightly over the 1972 level, but still remains consid-
erably below the peak of 1971. As this chart shows, it also is consider-
ably below the U.S. and the U.S.S.R."
Our measures do not yet give a good sense of the absolute level of
outlays in Chinese cost terms. Still, some understanding of the defense
burden on the economy can be gained by comparing the dollar index
of military procurement, priced in dollars, with the index of growth
in industrial production.
From 1964 to 1971, military procurement rose considerably faster
than overall industrial output. Since 1971, the trend has reversed. This
decline in the defense share may be illusory, however, because some
procurement funds may have been, diverted into military research
and development.
It should be borne in mind. that military production preempts
China's most modern production capacity and, more important, has
first call on the Nation's finest scientific, engineering, and managerial
talent. [Deleted.]
China's history of sudden bursts in defense production, and equally
unexpected reductions, provides little basis for protecting future
military procurement levels. Given the Chinese leaders' clear inten-
tion to develop modern, sophisticated weaponry, however, we expect
the trend in procurement to be upward over the" next few years.
Mr. Chairman, that completes my statement.
[The prepared statement of Mr. Colby follows :]
I See chart entitled "China : Growth of Military Procurement and Indiibtrlal Production,"
P. 78.
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I. Mr. Chairman, it is a pleasure to be here this morning. As you requested in
your letter inviting me to appear, I will discuss the economies of the Soviet
Union and the Peoples Republic of China. I will make comparisons with the
U.S. economy where these are meaningful, or help to put the economic perform-
ance of the other two powers into perspective.
A. In separate sections, I will deal with the commitment of resources
to military and space functions, and describe how we arrive at our esti-
mates of Soviet and Chinese expenditures in these areas.
B. I have a prepared statement that will take about an hour, and I will
of course be glad to respond to your questions.
II. Before moving into substantive matters, I would like to say a few words
about economic intelligence, and its relationship to open and unclassified eco-
nomic reporting and analysis.
A. CIA started economic intelligence on the U.S.S.R. and China. It built
a corps of economic analysts for this purpose :
(1) As the importance of foreign economic developments for the U.S.
economy and U.S. Government policy has grown, demands increased
on CIA and this well-equipped analyst corps for intelligence support
on other parts of the world.
(2) The National Security Council, the Council for International
Economic Policy, the Departments of State and Treasury, and other
departments and executive staffs frequently request information, anal-
yses, and estimates on foreign economic developments from CIA.
B. Intelligence support to these policymakers requires an integrated view
of political, military, and economic events. Even when the events in question
are mainly economic, they often impact on U.S. security as well as economic
interests, and must be looked at in the overall context :
(1) In the past 6 months, for example, information concerning eco-
nomic threats to our access to key natural resources, such as petroleum,
have taken on increasing importance.
C. To produce such reports, CIA has the unique capability to incorporate
into its analyses economic information which can only be obtained through
highly sensitive collection programs :
(1) This is especially true of information on the intentions and nego-
tiating strategies of foreign officials. Senior U.S. policymakers and
negotiators have found such information invaluable on critical interna-
tional trade, finance, and energy issues that impact directly on U.S.
national security, political and economic objectives.
(2) Classified collection programs are also essential to economic intel-
ligence on denied areas. In the analysis of economic activities, highly
classified sources help to substantiate the analysis and conclusions.
(3) [Deleted.]
D. CIA's economic intelligence production is normally classified because
it includes such information from classified sources. However, the ultimate
analyses or general conclusions sometimes do not need to be classified :
(1) Such unclassified products are from time to time made available
to scholars and Government components outside the intelligence commu-
nity. As you are aware, CIA economic intelligence analysts have contrib-
uted studies to the almost annual issuance on the Soviet or Chinese
economies put out by this committee, the most recent of which is titled
Soviet Economic Prospects for the Seventies, dated June 27, 1978.
(2) The transcript of this hearing will be carefully reviewed to
declassify any part which would not reveal sensitive intelligence sources
and methods.
Sources of information on the Soviet economy
III. [Deleted.] Each year the U.S.S.R. publishes a wealth of information in an
official economic handbook (Narodnoye khozyaystvo) that is similar to-although
much less inclusive than-the U.S. Statistical Abstract.
A. Additional data appear in specialized statistical handbooks on trade,
'industry, consumer welfare, labor, and agriculture.
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B. Population censuses are also published at irregular intervals.
C. Finally, much useful information is gleaned from books, journals, news-
papers, radio broadcasts, speeches, and the like.
IV. We feel that the data on physical quantities are generally reliable. Un-
fortunately, official indexes of industrial production, consumption, prices, and
economic. growth incorporate considerable bias. Moreover, while much economic
data is released, vast areas of relative silence remain.
A. Defense-related producing sectors are conspicuous in this regard, fol-
lowing longstanding Russian tradition.
B. Money and banking data are also sparsely reported.
C. A third bothersome area concerns the Soviet balance of international
payments. Ample data on commodity trade have come available in the last
decade, but Soviet international financial relations are still unreported.
V. In constructing estimates of the Soviet economy our analysts carefully
examine the Soviet data, testing, verifying, adjusting in some cases to make them
comparable with Western concepts, and making independent estimates where
necessary.
A. [Deleted.]
B. Although our perception of some aspects of the Soviet economy remains
less certain than we would like, in general we think we have a good under-
standing of their economic strengths and weaknesses and their position
vi.s-a-vis the United States.
I. The Soviet Union has become the world's second largest economic power.
It has achieved this status by a longstanding stress on industrial development.
The country now has a gross national product equivalent to $660 billion-
slightly more than half that of the United States.
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A. Soviet economic growth was especially rapid in the 1950's, as the
Nation recovered from wartime devastation. The pace gradually slowed
after 1958, and since 1970 the rate of growth has been lower than in the
United States:
(1) In absolute terms, the gap between the United States and Soviet
economies has increased in recent years.
II. The major support for Soviet economic growth has been the leadership's
willingness to devote increasing shares of national output to investment.
A. For instance, the share of GNP devoted to investment in new buildings
and equipment has grown steadily since the 1950s. The USSR now spends
over ,one-fourth of its national product on new buildings and equipment, as
opposed to less than one-fifth in the United States.
USSR-US: New Fixed Investment
USSR
30
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Ili J. , 11 tl III I III II i
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B. This policy of achieving economic growth by favoring investment has
forced the Soviet population to accept a smaller share of the national product
than its U.S. counterpart.
-US: P+ r Ca lonmump#icm 1972
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C. In 1973 the average Soviet citizen consumed about one-third as much
goods and services as a U.S. consumer, but even this comparison does not tell
the whole story. The Soviet consumer is also plagued by an inferior quality,
assortment, and styling of clothes and durables, chronic shortages, and long
queues at retail stores :
(1) Even compared with Eastern Europe, the level of living in the
U.S.S.R. is markedly low.
USSR-US: Stocks of Consumer Durables, 1972
Mile
TOW 3144 Sets
Aatomolihs
Vacuum
Cleaners
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L. I I'I 1 II! II I
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D. Except for sewing machines, Soviet consumers enjoy only a fraction of
the durables readily available in the United States. Many items-automatic
washers, dryers, and freezers-simply are not manufactured or sold in the
U.S.S.R.
E. The situation is gradually improving-particularly for those on the
bottom rung of the economic ladder :
(1) In the last 2 years, the new Togliatti plant has increased passenger
car output substantially. The waiting period for a new car is now around
2 or 3 years-which is better than the previous 6 year wait.
(2) Soviet households also can buy furniture and better quality refrig-
erators with less delay.
-Vegetables,
Milk and
Milk products
3200--Calories per day per person-3300
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F. The Russian people get enough to eat in terms of daily calories, but
their diet is heavily weighted with starches and low in meat, vegetables, and
fruit.
(1) Under Brezhnev, the U.S.S.R. has made meat consumption the
basic plank in its consumer program, and per capita consumption has
increased by one-fourth since 1965. Nevertheless, the average Soviet
citizen still eats only about 40 percent as much meat as his U.S.
counterpart.
Ill.
sectors With is brief
the Soviet economy. introduction, eginnw with industry, whc h has been various
showpiece.
USR U$: kwustriat Growth
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I. .l11111111
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A. During most of the postwar period, industrial production grew faster
in the U.S.S.R. than in the United States. But the emphasis was on heavy
industry, and producer goods have been favored over consumer goods.
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B. Although the growth of Soviet industrial production has been impres-
sive, the quality and variety have been deficient. The leadership has been
striving to overcome these shortcomings :
(1) Soviet industrial managers, however, are hampered by the rela-
tively low technological levels of their plants and equipment. Also, the
planners criticize their inefficient use of industrial materials.
(2) The managers in turn blame the shoddy equipment turned out
by domestic machinery enterprises and failures in industrial supply.
(3) Efforts to upgrade domestic machinery and economize on the use
of industrial raw materials during. the past 2 years have had only
limited success.
C. Soviet industrial strength has been based above all on abundant raw
materials and energy sources. These resources are still available, but are
more expensive now :
USSR4JS: Output of Metals and MIAs,, 1973
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I I JjWII II
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(1) Production of metals and minerals is sufficient in most cases to
provide for both domestic requirements and Eastern European needs.
The major exception is tin, which has to be imported in large quantities.
(2) Nevertheless, the Soviet Union has already exploited many of
its most accessible mineral deposits. Most of the remaining reserves are
in Siberia or the Far East, where the severe climate and lack of trans-
portation and local labor hinder development.
Energy
IV. Energy, now such an important word in the United States, is also very
much on the minds of the Russian leaders. Just as in our country, Soviet eco-
nomic growth has depended on the exploitation of huge energy resources. There
are, however, substantial differences in the pattern of energy consumption in
the two countries.
R-Uriimary Energy
Reserves, 1972
USSR as e percent of US
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A. Nevertheless, the shift toward oil and gas in the Soviet energy balance
has been rapid. Also, growing quantities of petroleum have been sent to
Eastern Europe and the West.
B. It may be comforting to know that in recent months Soviet petroleum
officials have complained about the headaches the world energy crisis has
given them :
USSR: imports and Exports
"AWXM Mlt f%PaHtS T arm a Ma*ST 1f U
WPM$ 0 EkPeAl5 is THEW T
Oil
Million barrels per day
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I I, I II III III 11
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(1) They claim, for instance, that the U.S.S.R. does not have enough oil
to simultaneously meet its own requirements, fill the needs of other
socialist countries, and continue to expand deliveries to established mar-
kets in capitalist countries.
(2) Although crude oil output was below plan in 1972 and 1973, short-
ages similar to those in the United States did not and will not occur. The
U.S.S.R. is a net exporter of about 2 million barrels per day of oil,
almost one-fourth of total domestic production. About one-half of these
exports go to the West, especially Western Europe.
(3) Moscow has little, if any, uncommitted oil from domestic sources
with which to expand sales to the West and take advantage of the
present prices.
C. The expanding demand for oil and gas comes at a time when production
from existing Western fields is leveling off. The development of Siberian and
offshore deposits must fill the gap :
(1) Exploration of these new sources will require a huge investment.
(2) Moreover, without foreign-especially U.S.-help, development
will be delayed. The U.S.S.R. lacks some of the critical technologies
needed to drill at great depths and offshore, or to pipe gas across the
Siberian permafrost.
Agriculture
V. Annoying as these energy problems may be, the real economic headache in
the Soviet Union is agriculture. Despite massive investments under both Khrush-
chev and Brezhnev, assuring an adequate food supply for a growing population
has been a constant problem.
A. Of all sectors in the United States and Soviet economies, agriculture
offers the greatest contrast in terms of organization and efficiency :
(1) For example, the Russians employ 31 percent of their labor force
in agriculture, as opposed to 4 percent in the United States. The Soviet
output per worker however, is only 11 percent as much as is achieved
in the United States.
(2) A measure of Soviet production methods can be gleaned from the
fact that they have only 5 percent as many trucks per 1,000 farmworkers
as we do.
(3) Finally, the U.S.S.R. has been expanding sown acreage in an effort
to increase production, while the United States-until recently-had been
reducing the area under cultivation and struggling with farm surpluses.
B. Soviet agriculture is handicapped by a short growing season and an
extreme continental climate. As a result, production is highly variable. The
crop failure of 1972 was followed by a record harvest in 1973-only the
most recent example of the large swings in the crop yields.
C. Soviet farm production has climbed far above the level of a decade ago,
but still cannot provide the quality diet that the Soviet population desires.
The demand for neat is rising faster than incomes, placing a severe strain
on the Soviet grain-livestock economy.
D. Changes in the size of the Soviet grain crop have world-wide repercus-
sions, especially since Brezhnev's program to provide the Soviet people with
a better diet has pulled up the demand for feed grain :
(1) Through 1971, grain production did not keep pace with demand,
and deep inroads were made into government stocks.
(2) Then, confronted with the poor 1972 harvest, the regime imported
massive quantities of grain-over 24 million tons in fiscal year 1973-
rather than abandon its livestock goals. Of this total, 18 million tons
were wheat to replace the Russian wheat that had been fed to livestock.
(3) The United States supplied most of these grain imports-10.5
million tons of wheat, 3.7 million tons of corn and a little rye and bar-
ley.
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E. In 1973 the gross Soviet grain harvest was a record-about 222 million
tons. After discounting for unusually high moisture content, we estimate the
net usable grain at about 170 million tons. This harvest should reduce grain
imports in fiscal year 1914 to perhaps 12 million tons, about half wheat and
half other grains :
(1) The record crop and continuing imports will permit a rebuilding
of stocks and continued exports to client states. Also, the Soviet Union
will be able to offer grain for political purposes, such as the loan of 2
million tons of wheat to India last year.
The leadership's attitude
VI. Sensitivity to the economic situation is characteristic of the Soviet leaders.
The leadership, for example, is well aware of the variations in grain output and
the ever present possibility of having to increase grain imports. On the whole,
they view the past economic record with a sense of accomplishment, but are not
entirely pleased.
A. The fact that troubles Soviet leaders, despite great progress, is that the
U.S.S.R. remains far behind the U.S. in a number of key areas. The emer-
gence of Japan as a major economic force has added to this concern.
B. The slide in the GNP growth rate naturally worries the leadership,
because catching up with the West depends on vigorous economic growth.
Declining rates of growth in productivity are causing the most concern :
(1) Past growth was based on large increases of productive farm land,
new plants and equipment, and workers. Except for labor, the rate of
growth of these factors has declined sharply. .
Y~ 9. . ? t1 Eti1Ml!
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i t it l i l l III I
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i
(2) This chart will help explain this problem. You can see the rates
of growth of manhours worked, fixed capital, and farmland in the
Soviet economy. The chart also presents our rough estimate of the extent
to which changes in both the quantity and the productivity of man-hours,
land, and capital were responsible for past growth in GNP.
(3) From 1950 to 1958, the very rapid growth of capital stock and the
farmland added by Khrushchev's virgin land campaign helped push the
rate of growth of GNP to almost 7 percent each year. (The rate of
growth of man-hours was held down by the delayed effects of low war-
time birth rates.) But-at the same time-the productivity of land,
labor, and capital increased almost as fast as combined factor inputs
did.
(4) Before Khrushchev's fall from power, Soviet growth slowed be-
cause the rate of growth of inputs declined, and the growth of produc-
tivity of land, labor, and capital combined slowed. The Brezhnev coali-
tion was able to improve somewhat on this situation in 1965-73, but
only by stepping up the manhours worked. The rate of growth in pro-
ductivity of land, labor, and capital continued to fall.
(5) Soviet leaders have repeatedly indicated that their economy.will
have to depend primarily on productivity gains, rather than on massive
additions of men and equipment.
C. Another way of looking at the question of productivity is to compare
labor productivity in the U.S.S.R. and the United States. In spite of a volume
of investment per worker nearly equal to U.S. levels in recent years, labor
productivity in Soviet industry is only about half the U.S. level. Soviet
industry was able to grow faster than U.S. industry mostly by increasing
employment :
(1) Similarly, farm labor is only about 10 percent as productive in the
U.S.S.R. as in the United States, and this gap is not shrinking.
(2) Managerial problems inherent in a centralized and bureaucratic
system are the root causes of this consistently poor productivity.
D. Until recently, Communist planners believed that intensive domestic
R. & D., plus "borrowing" the latest Western technology, would enable the
U.S.S.R. to gain economic superiority. But they. underestimated the pace
of Western technology, particularly in Germany and Japan, and overesti-
mated the efficiency of their own R. & D. effort.
The need for technology
VII. Thus we come to the so-called "technological gan," which is becoming a
vexing political dilemma for the Soviet leaders, as well as a crucial economic
problem.
A. This gap is an across the board one-from ICBM systems to electric
razors-and increasing contacts with the developed West have made it
harder to conceal this situation from the Russian people :
(1) Public lecturers in Moscow are frequently badgered with ques-
tions as to why Soviet citizens do not have the gadgets that Westerners
have long been accustomed to.
B. An acute perception of this gap has spurred the Soviet leaders to in-
creasingly intensive efforts to acquire Western technology :
(1) Marxian concepts concerning the inevitability of Western economic
collapse and the superiority of communism have quietly given way.
Instead, Moscow now considers trade with the developed West as es-
sential to close the technological gap.
(2) The major channel that the U.S.S.R. uses to acquire technology
from abroad is the outright purchase of machinery and equipment.
Soviet orders for Western machinery and equipment hit $2.7 billion
last year-a 60-percent increase over 1972. The United States got $500
million worth of these orders.
(3) Other channels have included the acquisition of technical data,
contacts with Western firms and scientists, and formal arrangements for
joint research and exchange of scientific and technical information.
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C. In some military applications, the results of this reverse engineering
have been good ; in civilian sectors, the outcome has been less happy. Western
equipment frequently is not as productive in a Communist setting as it is on
native ground. Attempts to. exploit foreign technical data or copy foreign
machinery have had mixed success.
D. The onset of detente has dismantled some of the traditional obstacles
to Soviet acquisition of U.S. technology. Medium term and long term credits
extended after May 1972 resulted in a large increase in Soviet imports of
U.S. equipment and technology. In addition, U.S. export controls have been
relaxed, but still restrict Soviet access to very specialized and sophisticated
foreign technology.
The Soviets face their problems
VIII. The leadership team that assumed power in 1964 has attacked economic
problems on a number of fronts.
A. The present regime-unlike its predecessors-has given agriculture a
consistently high priority :
(1) Since 1965, the share of total investment going to agriculture has
averaged almost 20 percent. American agriculture gets less than 5 per-
cent of U.S. investment.
(2) Average incomes of farmers have risen by over one-half during
the Brezhnev era, as opposed to one-third for other workers.
B. Brezhnev has just announced an enormous program to increase and up-
grade the farm lands of European Russia :
(1) Last month, he declared that 35 billion rubles would be spent
during 1976-80 in the first phase of a 15-year project to develop the
nonblack soil region of the Russian Republic. This is almost one-fourth
of the total agricultural investment planned for 1971-75.
(2) His aim is to reclaim or improve 124 million acres-79 million of
crop land, and 45 million of grazing land. The crop land would be
equivalent to about 15 percent of current sown acreage.
(3) The nonblack soil area has large tracts of boggy, uneven land,
but it has high annual precipitation and responds well to the application
of lime and mineral fertilizer. The Soviets hope that this region will
provide steady growth in grain production.
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(4) The Soviets do not have a good track record in land reclamation,
however, and the Brezhnev program is unlikely to work out as an-
nounced. In any case, major benefits will not appear before 1980.
C. Organizationally, the 1965 economic reform attempted to improve
efficiency by making managers cost and profit conscious. Success was very
limited, however, because managers were still told to meet output goals
regardless. Continued tinkering with the system has not fundamentally
altered managerial attitudes.
D. Another step to improve the economic picture was increased trade with
the West, which has become especially important since the late 1960's:
USSR : EForeign xports pluusdImports Area
less Developed
Countries
," ?, Developed West
(1) Recently, the emphasis has shifted to trade with the United States
in particular. Only the United States had the grains the Soviet Union
needed in 1971-72, and relaxed U.S. controls stimulated sales of ma-
chinery to the U.S.S.R.
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USSR: Hard Currency Merchandise Trade
(2) Almost all Soviet trade with the developed West-and with some
less developed countries-is paid for with hard currency, as distinct
from barter trade. An upsurge in imports from these areas has not been
matched by increased Soviet exports, resulting in a hard currency defi-
cit averaging about $250 million annually during 1960-71.
(3) Until the mid-1960's these deficits were financed primarily by gold
sales. By the end of 1965, however, Soviet gold reserves were down to
about 1,000 tons, and Western government-guaranteed medium- and
long-term credits applied to Sovibt purchases of capital goods became
the chief method of financing Soviet deficits. During 1966-71, such credits
amounted to more than $2 billion. ,~n 1971, debt service-payments of
principal and interest-were equal to%17 percent of Soviet hard currency
exports.
D. The U.S.S.R.'s merchandise trade defi'it with the hard currency area
reached a record $1.7 billion in 1973-largely because much of the grain pur-
chased in 1972 was delivered in 1973. The U.S.S.R. imported at least $1.5
billion in agricultural products (chiefly grain) and about $1.5 billion in ma-
chinery and equipment. Soviet export earnings were higher than in 1972,
however-in part because of higher prices for oil :
(1) To cover the 1972 deficit, the U.S.S.R. relied on new Government-
backed net medium- and long-term credits-as well as substantial gold
sales for the first time since 1965. (Gold reserves had been built up again
as a result of growing production and the low volume of sales.)
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(2) In 1973, the burden of recent trade deficits was lightened con-
siderably by easy access to Western credits and by the windfall increase
in the price of gold. In addition, dollar devaluations permitted the sub-
stantial Soviet borrowing on the Eurodollar market in 1972 to be repaid
with cheaper dollars.
Prospects
IX. This brings us to the question of the prospects for the Soviet economy. We
believe that over the next few years it is likely to continue to grow at a rate con-
sidered good by Western standards, although somewhat slower than in the past.
A. We estimate that the U.S.S.R. can increase its GNP from 41/2 to 5'/z
percent per year through the rest of this decade by adding new contingents
of labor at about current rates, while the pace of capital investment slows
slightly. This estimate, of course, assumes relatively stable internal and ex-
ternal political conditions.
B. Expanded economic ties with the West will have an important place in
Soviet plans, and they will almost certainly want to trade more with the
United States, especially for high technology products :
(1) If trade relations with the United States were broken, however,
they could find most of what they want in Western Europe and Japan.
C. In this connection, the U.S.S.R. and Japan initialed a document last
month that could pave the way for one of the biggest economic deals between
the two countries since the end of the Second World War.
Japanese interested In Siberian Resources
(1) If final agreement is reached, the Japanese will provide a credit
of $450 million to help finance a coal mining project in Yakutsk in
eastern Siberia. The Japanese will be repaid by deliveries of coking coal
beginning in 1983.
D. The U.S.SR. has been particularly active in increasing its economic
relations with West Germany. Recent discussions have centered on the pos-
sible West German construction of nuclear power plants in the U.S.S.R.:
(1) A contract has been signed for joint development of a $1 billion
iron ore and steel plant in Kursk-in central European Russia.
E. France has also continued to support Soviet development. Within the
last year French firms have signed two contracts-$150 million for the de-
velopment of a Siberian cellulose plant, and $100 million for the design
and equipping of five petrochemical plants. There has also been some discus-
sion of French participation in the construction of a $1 billion aluminum
complex.
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F. From the Soviet side, the possibilities for increased trade have im-
proved, and Soviet hard currency earnings should rise rapidly over the next
few years:
(1) With expenditures for Western grain in 1974 expected to be half
or less of 1973 outlays, these earnings could easily support a large
rise in Soviet imports of Western plants, equipment and other goods.
Imports of machinery and equipment, which rose sharply in 1972 and
1913, should increase even faster in 1974-1975.
(2) The value of Soviet exports should rise sharply during 1974-75
because of the much higher prices for oil and raw materials. With
market prices expected to range between $7 and $10 per barrel, oil exports
alone may earn $2-$3 billion in 1974 and $2.6-$3.7 billion in 1975. Higher
prices for wood products, chemicals, and coal-along with expanded
deliveries of natural gas-could push total Soviet exports to almost $6
billion in 1974 (double the 1972 level) and to $7 billion in 1975.
(3) Gold sales, however, represent the largest single additional source
of potential foreign exchange earnings. Soviet gold reserves are now esti-
mated to be more than adequate in view of the long-term debt of $3.6
billion at the end of 1973. The Soviets would therefore be free to market
most, if not all, of current gold production in Western markets.
[Deleted.]
G. Between 1976 and 1980 the outlook for the Soviet balance of payments
is less favorable than in 1974-75.
(1) Exports of crude oil to the West are expected to peak in 1976
and then decline as a result of constraints on domestic supply, higher
domestic consumption, and commitments to Eastern Europe-as well as
limits on the volume of barter, imports from the Middle East.
(2) Earnings from other sources such as gold sales, tourism, and
transportation should help to soften the impact of the declining oil
revenues. If the U.S.S.R., for example, continues to sell just its yearly
production of gold on Western markets, at $150 an ounce, annual reve-
nues could reach $1.5 billion by 1980.
(3) The projected falloff in Soviet hard currency exports has broad
implications for the U.S.S.R.'s foreign trade position.
If imports on long-term credits continue to increase at the present
rate, and if the U.S.S.R. concludes the massive cooperative projects now
being discussed with the West-for example the Tyumen, Yakutsk, and
North Star oil and gas projects-total long-term debt could reach $9 or
$10 billion by 1980.
Service on such a debt would require approximately $2.3 billion, or
35 percent of projected Soviet exports in 1980.
(4) The Soviets, however, probably will not continue to increase draw-
ings on Western credits at present rates. In view of their improved
export potential, they may pay cash for some of their purchases. They
did just that last month when they paid for West German equipment
for the first stage of the Kursk iron and steel complex.
H. Over the long term, the Soviet leadership's most difficult problem in the
economic sphere will be how to manage an increasingly complex economy :
(1) The economic mechanisms devised by Stalin were effective in
pulling the country up by the bootstraps, and establishing the basic
foundations of an industrialized economy.
(2) The present system, however, pays too little attention to price,
cost, and demand factors, and does not seem well suited to meeting the
needs of a modern society.
(3) The challenge facing the current leadership is to adjust the
system to meet these needs without surrendering the power they hold
so dear. No one-either inside or outside of the U.S.S.R.-has yet
advanced a convincing program for economic- reform that would achieve
this kind of balance.
Military expenditures
X. Mr. Chairman, you probably noticed that in this review of the Soviet econ-
omy I made no mention of the impact of expenditures for military programs.
The ommission was intentional. Since you have indicated a particular interest in
this problem, I thought it best to respond at some length, in a separate section.
I might begin by assuring you that the Soviet leaders, also, are intensely con-
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cerned with this matter, and keep a close eye on defense spending. They appar-
ently believe, however, that their economy is capable of sustaining or even accel-
erating the pace of defense spending.
A. Soviet defense and space spending has been growing by about 3 percent
per year since 1960. The economy has been growing faster, however, and the
share devoted to defense declined.
B. Military expenditures impact on the Soviet economy principally by
appropriating some of the best materials and highest-quality skilled and
professional manpower-but they are not a chief cause of Soviet economic
difficulties. The civilian economy would, of course, benefit from having more
of these scarce, high-quality resources, but their transfer to civilian purposes
probably would not boost overall economic growth much.
XI. A few words about the organization of the Soviet military forces may help
make the amounts spent on them more meaningful.
A. There are five main branches of service ; the ground forces, the navy,
the air defense forces, the air force and the strategic rocket forces. The
Soviets also maintain an active research and development establishment, as
well as a space program that has both civilian and military applications.
B. The Soviet ground forces, as well as air defense forces, are much larger
than those of the United States. All together, the Soviets have 4 million men
under arms-about 11/2 million more than the United States.
C. The budget released in December of each year is the only official state-
ment made by the U.S.S.R. on defense spending. The figure announced is
not a useful indicator of either the level or trend in defense spending, how-
ever, as its coverage is not known and may change from year to year without
explanation. Moreover, military research and development is not in the
announced budget.
XII. Because the Soviets regard actual levels of military spending as a state
secret, CIA estimates of this spending are largely arrived at by a direct costing
method.
A. This procedure involves identifying Soviet military programs, esti-
mating the magnitude or the quantities involved in each program, and then
applying estimated individual prices to each quantity. All Soviet military
activities other than the military research and development figure are esti-
mated by this procedure, and are thus independent of the published defense
spending figure.
B. We estimate that Soviet expenditures to support this military effort
amounted to at least 25 billion rubles in 1973. Given the possible range of
error in the estimates of both defense spending and GNP, the defense share
of GNP probably lies between 6 and 10 percent.
Estimated Soviet Expenditures for Defense
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C. The level of the Soviets' military activity has been increasing steadily
since 1960. They have added about a million men to their armed forces and
deployed a number of new weapons systems for both strategic and general
purpose. The trend in ruble expenditures during this period, as you can
see from this chart, has been generally upward-increasing at an average
annual rate of about 3 percent. You will note, however, that for the last
few years ruble spending has remained at essentially the same level. I will
explain why this is so in a moment.
D. The shares of total expenditures devoted to investment (procurement
of hardware and construction of facilities) and military research and de-
velopment, as well as space, have changed significantly over the years :
(1) Expenditures for investment have dropped from about 40 per-
cent of total expenditures in 1960 to around 20 percent in 1972. This
drop reflects the completion of a number of major strategic programs
begun in the 1950's and early 1960's.
(2) On the other hand, military research and development and space
expenditures have increased during the same period, from about 15
percent of total expenditures in 1960 to over 30 percent in 1972. These
increases clearly were connected with the several new strategic systems
now in development and which were tested especially during the past
9 months.
(3) The largest percentage increase was observed in expenditures
for space-which rose from about 2 percent in 1960 to over 11 percent
in 1972.
E. The leveling off of ruble spending in the last few years that .1 just re-
ferred to reflects the fact that the U.S.S.R. has been between major strategic
procurement cycles. Since 1969 military research and development expendi-
tures for strategic systems have increased rapidly, while expenditures for
strategic investment have been declining.
F. We expect that production of the new strategic systems now under
development will begin this year, and will cause Soviet investment expendi-
tures to reverse this downward trend.
XIII. The U.S.S.R. recently announced that defense spending would decline
by about 1 percent in 1974.
A. We regard this announced cut as largely a political gesture related to
Soviet proposals at the UN, MBFR, and SALT, rather than an indicator of
actual spending. The Soviets apparently want to convey the impression to
domestic and foreign audiences that the U.S.S.R. is confident that continued
progress will be made in detente with the United States.
B. Actually, we estimate on the basis of observed and projected changes
in military and space programs and forces-that there will be an increase
in Soviet defense outlays during 1974.
XIV. Military research and development is the only category of spending that
can be approximated through analysis of published Soviet financial data. Most
research and development expenditures are funded under the science category of
the state budget.
A. Soviet budgetary literature describes this account as a source of fund-
ing for "projects of national importance," and specifically includes defense
related research and development.
B. We believe that space and military R. & D. take up most of the alloca-
tion for science in the state budget. Some other activities, such as the SST
and civil nuclear energy and other nonmilitary activities, are probably also
funded under this account.
XV. You will note that we have thus far limited our discussion of Soviet de-
fense spending to ruble terms-that is, how the Soviet leaders would view the
effort. We also make estimates of of the dollar cost of Soviet defense programs.
For this purpose the Soviet force is considered to be an alternative U.S. force,
so that the calculation measures what it would cost the United States to purchase
and operate the existing Soviet military establishment. These dollar valuations,
then, provide a rough measure of the size of the Soviet programs.
A. The dollar equivalent-for our estimate of about 25 billion rubles for
the total Soviet defense effort in 1973-works out to be over $80 billion.
(1) From the late 1950's until 1970, U.S. defense outlays exceeded the
estimated dollar cost of the Soviet effort. Since 1970 the Soviet effort,
measured in dollars, has exceeded that of the United States.
(2) This catching up is a result of steady increases in Soviet spending,
while U.S. spending-measured in constant prices-declined.
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B. In terms of the structure of the defense efforts measured in dollars,
the United States and U.S.S.R. present a similar picture. In 1973 the amount
of resources allocated to the procurement of weapons and facilities was
about the same. The dollar value of Soviet spending for operating their
forces exceeded U.S. expenditures slightly:
(1) Measured in dollar terms, Soviet resources devoted to active
military manpower were over $35 billion-exceeding the U.S. figure by
over $10 billion.
(2) This difference-which may seem surprising considering the low
pay of the Soviet conscript-results simply from applying U.S. pay scales
to the larger number of men in the Soviet force.
C. The estimated dollar cost of reproducing the Soviet R. & D. effort
also was higher than that of the United States in 1973.
D. While the comparison between the dollar values of Soviet and United
States spending reflects levels of effort, I should point out that the mere
level of spending is not a good measure of military capabilities and that
equal levels of effort do not necessarily result in equal effectiveness of
troops or equipment.
XVI. [Deleted.]
I. Mr. Chairman, you asked that I also cover the Chinese economy, and single
out the expenditures for military purposes. I propose first to discuss the general
state of the economy, and conclude with the issue of military expenditures.
Overall performance
II. Since the Communists came to power in 1949, China's economic growth
has been strong but erratic.
im19 50 55 60 65 70 73
A. China's GNP has grown by 4 percent annually reaching a level of
roughly $170 billion in 1973, less than 15 percent of United States GNP.
Per capita GNP of $190 is only 3 percent of the United States figure.
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B. National output, which rose sharply in the 1950's, plummeted in the
early 1960's following the disastrous Leap Forward (1958-60). In 1966,
just as momentum had been regained, Mao unleashed the Cultural Revolu-
tion, and production again declined. Since 1968, the economy has been grow-
ing steadily, and the latest ideological rumble-the anti-Confucius cam-
paign-so far has had no noticeable effect on output.
C. Though still a poor country, the People's Republic of China can boast
of many achievements, including:
Provision of adequate if austere amounts of food and clothing for 900
million people. (We base this on the 1953 Chinese census of 583 million,
and an average annual growth rate of 2.2 percent.)
Production of modern military equipment including nuclear weapons,
jet aircraft, and strategic missiles.
Production of a wide and growing variety of industrial goods.
Expansion of petroleum output from near total dependence on imports
to a growing surplus for export.
Extension of railroad lines through some of the world's most difficult
terrain.
D. Nevertheless, China lags 5 to 20 years or more behind the other large
industrial nations in various branches of technology. Although China has
been outdistancing other less-developed countries such as India, Pakistan,
and Indonesia, it is not gaining ground on the fast-moving high-technology
nations such as the United States and Japan.
E. Until 1962, China's leaders stressed heavy industry and defense at the
expense of agriculture and consumer welfare :
(1) Industrial production has grown by about 8 percent per annum
compared to 2 percent for agriculture.
(2) After the "disaster years" of 1959-61-when China was brought
to the verge of starvation-the regime shifted to an agriculture first
policy-
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(a) The modern sector of the economy began to supply agricul-
ture with increasing amounts of chemical fertilizer, pesticides,
pumps, seeds, trucks, and farm machinery.
(b) Investment in industry reflected the new policy. Most notably,
China in the past 2 years has contracted to buy more than $1 bil-
lion worth of fertilizer and synthetic fiber plants to strengthen
agriculture.
(3) Concurrently, there appears to be some slowdown in military
expenditures and increased emphasis on consumer goods.
(4) Also, to give a fillip to industrial modernization, China has
relaxed its policy of avoiding foreign debt by arranging to finance in-
dustrial plants through deferred payments.
Preformance by sector
III. When we look at the Chinese economy sector by sector, it is apparent that
agricultural production and its relation to population is still the basic problem.
Some steps have been taken to ease the pressure on agricultural production.
A. China's population is about 900 million and is continuing to grow by
about 2 percent per annum.
B. Available arable land already is being cultivated, so major additions
to output must be derived through increases in yields. Large investments in
fertilizers, water control facilities, and research are needed.
C. Though domestic fertilizer production-both from modern and local
plants-has been rising rapidly, the regime has opted for a rapid boost in
output by importing large fertilizer facilities from the United States, West-
ern Europe, and Japan.
1. So far the Chinese have ordered 13 urea plants which will increase
urea production 8-fold over present levels when they come on line in the
late 1970s.
D. Large investments in synthetic fiber plants are aimed at relieving the
pressure on agriculture to provide additional natural fibers at the expense
of grain.
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E. Considerable investment also has been made in water conservation,
mostly in small projects in the south. In north China, major new invest-
ments will be required to provide large-scale irrigation systems.
t" Imports of Gram-
1968-73
Thous nd M*Mc rons
F. In the meantime, China is spending large amounts of foreign exchange
on grain and cotton. Approximately 7.5 million tons of grain, valued at $750
million, were imported in 1973. Cotton imports also rose sharply to $350
million in 1973.
IV. As for industry, China has vast resources of most raw materials, and in-
dustrial output is growing rapidly.
A. Energy resources are no problem. Coal and hydroelectric resources are
huge, and petroleum deposits appear to be abundant :
(1) Recent development policies have emphasized petroleum, while
coal and electric power are falling short of needs.
(2) Petroleum output exceeded 50 million tons (1 million b/d) in 1973,
enough to meet domestic needs at the present level of industrialization
and allow for exports of about 1 million tons to Japan. Production from
land fields is being developed rapidly, but off-shore exploitation will re-
quire further imports of expensive exploration and production equip-
ment. Large investments in pipelines, railroad cars, port facilities, and
tankers also will be needed to distribute the growing volume of petro-
leum.
(3) Coal mining is being expanded with imported equipment, and
electric power production is being strengthened by imported gas turbines,
steam turbines, and boilers, as well as by expanding domestic produc-
tion of generators and other electrical equipment. Steam power tech-
nology is far behind that of the West, and only a small portion of
China's vast hydroelectric potential has been tapped.
B. Though considerable progress has been made in metallurgy, particularly
steel, China is still a net importer of metals :
(1) Crude steel production, estimated at 25 million tons in 1973, was
supplemented by imports of 3 million tons of high-quality finished steel.
Both the raw material and finishing sectors are lagging. China is import-
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ing increasing quantities of iron ore, steel scrap, and pig iron, and has
recently negotiated for a $400 million steel rolling plant from Japan and
West Germany.
(2) Imports of copper and aluminum are rising because China has
failed to add new capacity as needed. China also imports lead, zinc,
nickel, platinum, chromium, cobalt, and other metals while exporting
tungsten, antimony, and tin.
C. China is one of the world's largest cotton textile producers. Nonethe-
less, production barely keeps pace with population growth. Cloth rationing
is still an essential economic measure.
D. Despite striking gains in the production of machine tools and other
types of machinery, many varieties and sizes are still acking. Large quan-
tities of advanced production equipment must still be imported to avoid
reduced growth rates and large technological gaps.
V. In the field of transportation, the Chinese have proven adept at building
railroads and highways in mountainous terrain. They have also developed a
small transportation equipment industry that produces railroad equipment and
trucks. Nevertheless, primitive forms of transport still handle most local traffic.
A. Large quantities of transport equipment-including trucks, ships, com-
mercial aircraft, and diesel and electric locomotives-have to be imported.
VI. The patterns of foreign trade shifted radically following the withdrawal of
Soviet technicians in 1960. As you can see on this chart, in 1959 the trade was at
a ratio of 70 to 30 percent in favor of Communist countries. Since 1965, the
figures have been reversed.
A. Although foreign trade is only a small component of China's economy,
it has been shooting up in recent years. Total trade jumped from $4.3 bil-
lion in 1971 to $8.5 billion in 1973. At least half of this increase probably is
accounted for by revaluation of world currencies and worldwide inflation.
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F$Istrlis
B. Major exports are textiles, foodstuffs, and raw materials. Imports, as I
have already mentioned, feature grain, fertilizers, machinery, and metals.
C. Trade with the United States jumped from $110 million in 1972 to $860
million in 1973. The United States was second only to Japan in China's foreign
trade:
(1) The United States shipped nearly $800 million worth of goods to
China, including wheat, corn, cotton, soybeans, aircraft, and metal scrap.
(2) In return, the United States bought $65 million worth of Chinese
silk, pig bristles, fireworks, cotton fabrics, carpets, tin, and antiques.
D. In 1973, China contracted for $1.2 billion in whole plants-mainly
chemical fertilizer and artificial fiber plants. Medium-term credits are being
used to finance about two-thirds of these contracts.
Proapeots-Mid and long range
VII. When we look at the mid- and long range prospects for the Chinese
economy, we believe that GNP should continue to grow by 4 to 5 percent an-
nually. Such a growth would be sufficient to support continued expansion of
industrial capacity, to supply the population at slowly rising levels of well-being,
and to improve the inventory of modern weapons available to the armed forces.
A. The political campaign against Lin Piao and Confucius, however, should
warn China watchers against facile straight-line projections of economic
policy and growth prospects. Nevertheless, periods of political turbulence
probably will have a smaller impact than in the past, because Communist
economic organizations, controls, and priorities will be more resistant to
change.
B. The pressure of population against the means of subsistence should
gradually be relieved by the growth of national output and, over the long
term, by some successes in population control measures.
C. Industrial output should increase about 8 percent annually, and agri-
cultural output 2 to 3 percent.
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D. For the next 10 years or more, China will continue to benefit from
its relative industrial backwardness by obtaining plant and equipment abroad
on which R. & D. costs have been paid off and technical problems ironed
out.
VIII. As for economic priorities in the future, agriculture should continue to
receive extensive support from the industrial sector. In any case, steady in-
creases in yields per hectare will be essential.
A. Rising pressure from an increasingly literate and technically sophi-
sticated population will probably focus more attention on consumer welfare.
B. In industry, technological improvements will be emphasized, though
small, local plants will account for large portions of output of consumer
goods, construction materials, and farm machinery.
IX. In the field of foreign trade, China's oft-stated goal of self-sufficiency in
industry and technology is not likely to be attained in the foreseeable future.
A. Peking must continue to rely heavily on Japan, Western Europe, and
the United States for various types of high-technology equipment.
B. The United States will have a particular advantage in the supply
of civil aircraft, computers, communications equipment, oil exploration and
drilling equipment, and specialized machine tools.
C. The United States will remain a major supplier of agricultural com-
modities, especially grain in poor harvest years-and cotton.
D. China, however, remembering its experience following the withdrawal
of the Soviet technicians, will maintain a diversity of suppliers.
E. Finally, Peking will try to bring its U.S. trade closer to balance by
modifying products to suit American tastes, and by expanding production
of commodities with a ready market in the United States. Nevertheless,
Sino-U.S. trade will continue to focus on U.S. exports.
Expnnditure8 for nviiitary programs
X. I will conclude this prepared statement by discussing the Chinese commit-
ment of resources to military programs.
A. Estimating the numbers of Chinese forces is difficult, but we believe
they have nearly as many men-under arms, as the U.S.S.R. More than 80
percent of these military personnel, however, are probably assigned to
ground force units. The number involved with advanced weapons-such as
strategic missiles, supersonic aircraft, and modern submarines-is small by
either United States or Soviet standards.
B. The Chinese are even more secretive about defense spending than
the U.S.S.R.: They publish no information on their military expenditures.
We have recently begun an effort, however, to estimate China's resource
commitment to defense, employing methodologies similar to those used in
estimating Soviet defense costs. The results of this effort are still pre-
liminary, but a few generalizations appear to be valid.
C. The problem can best be approached by subdividing the question into
two parts-defense operating costs and defense procurement costs :
(1) Defense operating costs would appear to have little impact on the
economy, largely because of the extensive use of relatively unskilled
manpower, which, in China, is certainly not a scarce resource.
(2) Military equipment procurement costs, however, impinge directly
and heavily on the country's modest industrial base. The term "procure-
ment" as we use it here includes only the cost of actually reproducing
arms and equipment, and does not include any costs associated with
research, development, and testing programs. We have insufficient in-
formation to develop valid estimates of resources devoted to Chinese
military research and development.
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CHINA : Trends in
1964 100
ilita
rocurement
XI. According to our measures, over the past 10 years there has been a gener-
ally upward trend in Chinese military procurement, with two periods of rapid
growth, each followed by a decline.
A. Of particular interest are the two occasions when the Chinese reduced
procurement.
(1) The first occurred in 1967 when the disruptions of the Cultural
Revolution caused about a 12-percent reduction.
(2) An even more drastic cut was made in 1972 when military pro-
curement dropped by almost 20 percent, primarily as a result of a cut-
back in aircraft production. The reasons for this recent decline is not yet
clear. Contributing factors may have been :
New priorities in favor of economic growth established by a less
military-oriented leadership in the wake of Lin Piao's death in late
1971.
An inability to develop follow-on advanced weapon systems.
B. As you can see on the chart, procurement in 1973 increased slightly
over the 1972 level, but still remains considerably below the peak of 1971.
As this chart shows, it also is considerably below the United States and
U.S.S.R.
XII. Our measures do not yet give a good sense of the absolute level of out-
lays in Chinese cost terms. Still, some understanding of the-defense burden on
the economy can be gained by comparing the dollar. index of military procure-
ment with-priced in dollars-the index of growth in industrial production.
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CHINA; Growth of Military Procurement
and Industrial Production
1964 100
240 r-
180
160
65 66 67 68 69 70 71 72 73
A. From 1964 to 1971 military procurement rose considerably faster than
overall industrial output. Since 1971, the trend has reversed. This decline in
the defense share may be illusory, however, because some procurement funds
may have been diverted into military research and development.
B. It should be borne in mind that military production preempts China's
most modern production capacity and, more important, has first call on the
Nation's finest scientific, engineering, and managerial talent. [Deleted.]
XIII. China's history of sudden bursts in defense production, and equally un-
expected reductions, provides little basis for projecting future military procure-
ment levels. Given the Chinese leaders' clear intention to develop modern, sophis-
ticated weaponry, however, we expect the trend in procurement to be upward
over the next few years.
Chairman PROXMIRE. How about the Chinese space program? Do
you have any information on that?
Mr. CoLBY. They have shot two, I think, space shots.
Mr. ASHBROOK. There were two shots with small payloads.
Chairman PROxMIRE. Did they put them into orbit?
Mr. ASHBROOIc. That is right.
Chairman PRoxMIRE. The hour is late. I am just going to take a
few minutes to go over some requests for information, and I will not
take much longer.
As you know, the CIA has been quite cooperative with the Joint
Economics Committee in the preparation of various economic studies
on the Soviet Union and China which we have conducted. We are
grateful for that cooperation and for the valuable contribution you
have made to our understanding of the economic conditions of these
two countries. I think that the studies made, one under the chairman-
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ship of Paul Douglas, and one at the very helpful suggestion of Sen-
ator Javits, have been two of the most useful studies Congress has
had and this country has had, because they were done by a number of
scholars and groups, and the CIA had a very large and significant
input.
We would like to draw further on the information gathering and
analytical capabilities of the CIA.
Would you be agreeable to providing us with information about the
Russian and Chinese economies on a more regular basis, at least an-
nually, so that we can step up our review of these two important econ-
omies ?
Mr. COLBY. Certainly.
Chairman PROXMIRE. And would you instruct your staff to cooperate
with our staff so we can have access to the kinds of information we need
to mprove the quality of our studies?
Mir. COLEY. Certainly.
Chairman PROXMIRE. Would you agree to provide to this committee
each year a reconstruction or analysis of the Soviet budget showing
planned expenditures, actual expenditures by major functions or
sectors, including defense spending?
Can you do that?
Mr. COLBY. I think so.
The analysis of the Soviet budget.
Mr. DIAMOND. Yes, we can do that, Senator.
The defense element will cause us some pain.
Mr. COLBY. Mr. Chairman, I do get back to the fact that I am quite
content to provide these answers to the committee on a classified basis
and to declassify as much as we possibly can declassify. There will be
some things-a lot of the things we had today were very highly classi-
fied, quite frankly, and we will have to take them out, but we will lean
forward to declassify as much as we possibly can.
UNCERTAINTY OF SOVIET DEFENSE SPENDING ESTIMATES
Chairman PROxMIRE. Is it fair to say there is a large area of uncer-
tainty in our knowledge about Soviet defense spending, and that there
may be a substantial margin of error in any individual estimate?
Mr. COLBY. That is a hard adjective to sign up to, Mr. Chairman. It
does not have any very specific reference point. I would not say that
it is a large area of error. I would say that there certainly is some
error.
Chairman PROXMIRE. Would you say it is a 10 percent margin of
error you have?
Mr. PAISLEY. It would vary with that portion we are talking about.
Chairman PRoxMIRE. No. 1, you are positive on the basis of the 25
percent difference you have testified to, that they are now definitely
spending more in resources, absolute resources, in research and devel-
opment than we are.
Is that right?
And however, they may be spending not 25 percent more, maybe only
10 percent more or maybe 40 percent more.
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Mr. COLBY. That was not what they are spending, Mr. Chairman.
That was our valuation of what that would cost here.
Chairman PROXMIRE. OK; I am happy to get that correction.
Mr. COLBY. So it is different.
Chairman PROXMIRE. I should not say they are spending more-
they are putting more resources in, then, on the basis of this evalua-
tion, where we price out their R. & D. in terms of our own, what it
would cost to do the same amount here. They are spending about 25
percent or they are devoting about 25 percent more resources than we
are to R. & D.
Mr. COLBY. Yes.
And that could be what, 15 or 40, depending on the error, or some-
thing like that?
Mr. PAISLEY. Yes. I would say we would subscribe to that.
Chairman PROXMIRE. And procurement was close, I understand, it
was $18 billion for us, $18.5 billion for them. That is only a difference
of about 2 or 3 percent. I take it that we might be spending as much
as they are.
Mr. PAISLEY. We consider that rough equality.
Chairman PROXMIRE. All right.
[The following chart was subsequently supplied for the record by
Mr. Colby in the context of the above interrogation by Chairman
Proxmire:]
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Chairman PROXMIRE. Will you agree to provide the committee on a
regular basis some information showing the size of the Soviet defense
budget, comparing official Government financial and budgetary data
with your own building block estimates broken out for major pro-
grams, such as ground forces, naval forces, and the like, and showing
what goes in that budget for R. & D., space, and atomic energy?
Mr. COLBY. Certainly.
Chairman PROXMIRE. And also indicate to us how much confidence
you have in the various estimates.
Mr. COLBY. Certainly.
Chairman PROXMIRE. And then designate some of your staff to work
with our staff, so that economic and budgetary information can be
requested and obtained on a prompt and regular basis, so that the staff
can be briefed from time to time on issues we are concerned about.
Mr. COLBY. I would request with respect to the staff, as distinct from
the members, Mr. Chairman, that we could go through the normal
clearance procedure because certain of this information does get into
high clearances. The members, of course, there is no clearance of
members at all.
Chairman PROXMIRE. That is absolutely correct.
Well, thank you very much for a superlative job. I just wish the
whole membership could have been here this morning. As you know,
the recess started yesterday, for the Senate and for the House, too.
Senator Schweiker was here, but I am sure that the members will
be very interested in reading this, and I urge you to declassify, and
make as much available as possible, because the more you can make
available for the record on an unclassified basis, the more productive
this hearing can be.
I want to thank you very much. The subcommittee stands adjourned.
[Whereupon, at 12:55 p.m., the subcommittee adjourned, subject to
the call of the Chair.]
Declassified and Approved For Release 2012/06/26: CIA-RDP99-00418R000100140016-0