SOVIET INVESTMENT POLICY IN THE 11TH FIVE-YEAR PLAN

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• Publication Date: September 1, 1982
• Content Type: REPORT

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Directorate of Confidential
Intelligence
Soviet Investment Policy in
the 11th Five-Year Plan
Confidential
SOV 82-10131
September 1982
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Directorate of Confidential
Intelligence
Soviet Investment Policy in
the 11th Five-Year Plan
This assessment was prepared b of
the Office of Soviet Analysis. Comments and queries
are welcome and may be directed to Chief, Soviet
Economy Division, SOYA,
Confidential
SOV 82-10131
September 1982
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Confidential
Soviet Investment Policy in
the 11th Five-Year Plan
0
Key Judgments Rapid growth of new plant and equipment outlays has always played a key
Information available role in the Soviet Union's strategy for promoting economic growth. In the
as oIl August 1982 latter half of the 1970s, however, growth in capital investment slowed
was used in this report.
markedly. The reasons for the slowdown include:
? Bottlenecks in sectors that provide key investment inputs such as steel
and construction materials.
? A decision to maintain the primacy of defense spending against a
background of tightening resource constraints.
? The leadership's apparent conviction, dating from the mid-1970s, that
more and more investment was too costly a way of sustaining economic
growth.
The decline in investment growth is slated to continue in the 1981-85 Plan
period. The investment increase targeted-10.4 percent over 1976-80-is
by far the lowest in the post-World War II era. Achievement of the growth
in GNP and its component sectors implied by the 1981-85 Plan therefore
depends critically on substantial increases in capital productivity. Indeed,
increasing the efficiency of capital investment is one of the central national
economic goals. The upward trend in the amount of capital per unit of out-
put of goods and services (capital-output ratios) in the 1970s stands out as
the dominant feature of the recent slowdown in Soviet economic growth
and the source of much of the leadership's difficulty in arriving at decisions
on resource allocations.
Moscow's chances of substantially boosting capital productivity during the
current plan period are remote. The cornerstone of Soviet investment
policy, as laid out at the 26th Party Congress in February 1981, is
increased emphasis on replacement of machinery and equipment and the
renovation of existing structures rather than investment in new construc-
tion. There is, in fact, little new in this policy, which aims at modernizing
Soviet capital and using it more efficiently. It has been repeatedly
promulgated in past five-year plans but never successfully implemented.
The systemic reforms that might permit such an investment strategy to be
carried out effectively are not likely to be instituted.
The pattern of investment allocations called for in the 1981-85 Plan also is
likely to be a drag on overall capital productivity. The plan lacks balance.
It stresses development of fuels and energy-apparently at the expense of
other sectors, many of them also vital to economic growth. The projected
iii Confidential
SOV 82-10131
September 1982
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distribution of investment suggests that Moscow has still not devised sound
criteria for allocating investment, even though the need for improved
planning and management of investment has become more urgent in the
face of an impending reduction in the share of investment in GNP.
Without major improvement in capital productivity, the industrial output
goals of the 11th Five-Year Plan are unattainable. As measured by a
steady rise in incremental capital-output ratios (ICORs) in industry, capital
productivity has been declining for several years. Most of the industrial
production and investment targets for 1981-85 imply a reversal of this
trend. Given the dim prospects for greater efficiency, however, and the
continuing upward pressure on capital-output ratios, a reversal of ICOR
trends seems virtually impossible.
Nor can the Soviet capital stock be significantly augmented by other
means such as putting more plant and equipment into operation by
reducing the huge volume of unfinished construction, lowering retirement
rates, and buying more machinery abroad. Unfinished construction has,
except in 1980, steadily mounted, and the systemic shortcomings that have
defeated repeated attempts to arrest the upward trend are not likely to be
eliminated. Retirement rates are already extremely low-so low, in fact,
that they impede efforts to increase efficiency. The USSR's tight hard
currency position restricts Soviet purchases of Western machinery, for
which stepped-up imports of less technologically advanced East European
machinery would be a poor substitute.
On balance, then, the slowing rate of investment growth and the declining
rate of return on investment are likely to reinforce other economic factors
impeding economic growth in the 1980s. Investment strategy seems certain
to be a central topic in academic and professional debate, and probably in
political circles as well. Criticism of the current strategy has already begun
in the USSR, in some instances in leading Soviet publications and by
prominent economists. Doubts have been expressed not only about the
distribution of investment in 1981-85 but about the assumption that higher
productivity of investment is compatible with reduced growth in
investment.
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Key Judgments iii
Introduction 1
Soviet Investment Policy 1
Investment Allocations in the 1981-85 Plan 5
Consistency of Investment and Production Plans 7
Coping With the Investment Squeeze 9
Reduced Level of Unfinished Construction 10
Intensified Debate Over Investment Policy 11
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Soviet Investment Policy an
0
Introduction
In the 1981-85 Plan, the USSR is counting on a rise
in capital productivity to offset the decline in invest-
ment growth. The key questions treated in this paper
are whether the policies by which the Soviet Union
intends to improve the efficiency of capital investment
will work and, therefore, whether the plan production
targets, particularly the industrial goals, are realistic.
I I
This assessment first describes Soviet investment
strategy during the 1960s and 1970s and considers
investment policies laid down for 1981-85. After an
analysis of the planned allocations of investment, the
consistency of industrial output targets and invest-
ment plans is discussed. Finally, the paper explores
the options open to Soviet policymakers in dealing
with the investment squeeze and reviews the evidence
that a vigorous debate is under way in the USSR over
investment policy.
Soviet Investment Policy
Strategy in the 1960s and 1970s. In the postwar
period the USSR has relied primarily on massive
injections of labor and new plant and equipment to
support economic growth. Total gross fixed capital
stock in the USSR more than quadrupled between
1960 and 1980 (table 1). Soviet planners relentlessly
pushed the expansion of capital assets by allocating a
large and rising share of resources to capital invest-
ment, holding retirements to a minimum, and pro-
longing the service lives of technologically obsolete
plant and equipment through repeated major repairs.
In addition, past Soviet investment has tended to
emphasize the creation of new facilities rather than
the renovation of existing enterprises. As a result, the
bulk of new fixed investment during the period was
channeled into buildings and structures rather than
into new machinery and equipment, although machin-
ery and equipment are the rinci al carriers of new
technology.
Table I
USSR: Gross Fixed Capital in the Economy and in
Selected Sectors (End of Year)
Billion Rubles, 1980/1960
1973 Prices
100 551 5.5
Agriculture a 54 238 4.4
Nonproductive fixed capital 172 595 3.5
Housing 120 339 2.8
Note: The Soviets break down fixed capital (osnovnyefondy) into
"productive" and "nonproductive" capital. In Marxist parlance,
productive capital is used directly in the production process.
Nonproductive capital includes capital in the housing and municipal
services sector, in organizations and institutions of public health,
education, science, culture, and art, and in adminj~st tt;vg organs.
a Including livestock. L~X'I
Source: CIA Reference Aid SOV 82-10093, (Unclassified), August
1982, Soviet Statistics on Capital Formation.
In the latter half of the 1970s, however, Soviet
planners opted to reduce sharply the rate of growth of
new fixed investment. This decision was the first
major indication that the much talked about transi-
tion from "extensive" to "intensive" development
would be enforced-that is, from reliance on rapid
increase in inputs to much greater emphasis on more
efficient use of inputs and technological progress.
Capital investment, which had grown at an average
annual rate of 7 percent in 1971-75, slowed to an
average annual rate of 3.4 percent in the last half of
the decade. The leadership probably pared investment
growth because it wanted to increase the priority for
25X1
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Figure 1
USSR: Growth in Gross Fixed Capital
Investment
Strategy in the 1981-85 Plan. In devising an invest-
ment strategy for the 1981-85 Plan, Soviet planners
confronted an array of deserving petitioners:
? Because of declining growth in energy production,
particularly coal and oil, huge investments had to be
allocated to the exploration and exploitation of
energy sources, particularly in West Siberia where
large investment expenditures are needed in infra-
structure as well as in producing fields.
? Subpar performance in the ferrous metals indus-
try-stemming from inadequate past investment in
certain key areas-required heavy outlays in that
sector.
1961-65 1966-70 1971-75 1976-80 1981-85
Plan
consumption while maintaining the primacy of de-
fense spending. At the same time, many Soviet offi-
cials were concerned that the steady rise in capital-
output ratios dating from the early 1960s
demonstrated that simply relying on more and more
investment to sustain economic growth was too costly
(figure 1).
Most of the growth in investment during 1976-80 was
concentrated in the first three years of the plan
period. Growth averaged about 5 percent a year in
1976-78, but only about 1.5 percent in 1979-80. The
slowdown in the last two years of the plan could
reflect an attempt to adjust for more-than-desired
investment in the first three years. However, it was
more likely associated with the emergence in the late
1970s of bottlenecks in the production and distribu-
tion of such key investment inputs as steel and
construction materials. The persistence of these bot-
tlenecks helps explain the further reduction in
planned investment growth in 1981-85.
Hobbled by years of neglect, the Soviet transporta-
tion system is unprepared to meet the increasing
demand for services. Major investments in new
roads, inland waterways, rail lines, and rolling stock
seemed necessary.
? Despite the huge sums spent on agriculture under
Brezhnev-agricultural investment now accounts?5X1
for 27 percent of total investment '-the leadership
continues to perceive a strong need for investment in
this sector.
Advocates of consumer-oriented programs argued
for a larger share of investment-notably for the
modernization of light industry and housing con-
struction.
1
Meanwhile, capital-output ratios have been steadily
rising in all major sectors of the Soviet economy and
in most branches of industry, adding to the allocation
problem by increasing the demand for investment.
'This includes capital investment in state and collective farms-
both productive and nonproductive investment-as well as expendi-
tures for the construction of agricultural repair enterprises, scientif-
ic-research institutions, construction-related enterprises of the Min-
istry of Land Reclamation and Water Resources, enterprises for the
processing of agricultural products, and other similar expenditures
for the development of agriculture. This concept of agricultural
investment is presented by the Soviets under the rubric "agricul-
ture-entire complex of works." For an in-depth discussion of
Soviet published statistics on agricultural investment, see CIA
Research Aid SOV 82-10093 (Unclassified), August 1982, Sovit5X1
Statistics on Capital Formation. (u)
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Table 2
USSR: Capital-Output Ratios
1.6
1.9
2.2
2.7
3.3
1.5
1.9
2.1
2.4
2.8
Ferrous metals
2.2
2.5
3.0
3.5
4.5
Fuels and power
3.1
3.4
3.8
4.1
4.8
Machinery
0.9
1.1
1.3
1.5
1.8
1.9
2.5
2.9
3.1
3.9
0.6
0.8
1.0
2.0
2.9
Transportation and
communications
3.1
3.1
3.2
3.4
4.0
Sources: Ratios were constructed by dividing values of gross fixed
capital stock found in CIA Reference Aid Soviet Statistics on
Capital Formation by values of output found in CIA GNP accounts,
unpublished.
The capital-output ratio for the overall economy, for
example, more than doubled between 1960 and 1980
(table 2). A number of factors have been responsible.
There has been a shift to more capital-intensive forms
of production in order to conserve labor and fuel.
Minerals, fuels, and raw materials are found in more
inaccessible regions of the country. Systemic deficien-
cies such as the lack of effective control over invest-
ment projects and inefficiencies in construction work
have also contributed to the rise in the ratio. Con-
struction time, for example, is extremely long in the
USSR, and construction norms are often exceeded by
significant margins. According to a Soviet economic
journal:
Construction time for large industrial projects is
five to 10 or more years and three to four years
for medium-sized projects. This is much longer
than the construction time in the United States
and other developed countries where large enter-
prises in ferrous metallurgy are built in less than
24 months and enterprises in the majority of
other branches are built within a year. The
project planning time (frequently two to three
years or more) and the time required to reach the
technical and economic potential of newly acti-
vated production capacities are excessively long
at the present time. As a result, when a new or
rebuilt enterprise begins operating at full capaci-
ty it is already technically obsolete. This is not
surprising when we consider the modern tem o
of scientific and technical progress
After weighing all the competing demands for invest-
ment allocations and reviewing the resources available
to them, the leadership decreed a further slowdown in
the growth of new fixed investment. The original
1981-85 Plan targeted an increase of 12 to 15 percent
in total new fixed investment for the five-year period
over the last half of the seventies. The goal was
revised downward to 10.4 percent by President Brezh-
nev at the November 1981 meeting of the Supreme
Soviet, at least partly on the grounds that investment
resources were still out of balance with investment
To justify the gamble it is taking, the rielis
counting on an upturn in capital productivity. Increas-
ing the efficiency of capital investment has been
singled out as one of the central national economic
goals of the 1981-85 Plan. As Gosplan Chairman
Baybakov put the issue in his November 1981 speech
to the Supreme Soviet:
For the first time in the practice of national
economic planning, the planned growth of na-
tional income exceeds the planned growth of
capital investment. This requires fundamentally
new approaches to the distribution of capital
investments and organization of construction.
Chief attention must be devoted to increasing the
effectiveness of capital investments and better
coordinating capital construction with the mate-
rial and technical resources and potential of
construction and installation orgarrj' gns.
' T. Khachaturov, "Puti povysheniya effektivnosti kapital'n kh
vlozheniy," Voprosy ekonomiki (July 1979), pp. Y5XI. I
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The investment strategy hammered out at the 26th
Party Congress in February 1981 depends first of all
on getting better control over construction work.
Detailed lists of all construction projects-both new
construction starts and reconstruction-are to be as-
sembled, approved by appropriate authorities, and
rigidly adhered to over the course of the plan. The
plan for construction projects is to be consistent with
available construction materials, labor resources, pow-
er-generating equipment, financial resources, and
with the existing capabilities of construction and
installation organizations. To speed up construction
work, payment for construction work will not be made
until a project is completed, and up to 0.5 percent of
the estimated cost of construction and installation
work is to be credited to the participating organiza-
tions for each month that construction is finished
ahead of schedule. In addition, construction worker
bonuses are to be predicated on the volume of con-
struction and reconstruction work completed.I
The dominant theme of Moscow's investment policy,
however, is the increased emphasis on renovating and
reequipping existing facilities. That is, a larger share
of investment is to go for machinery and equipment
and less for buildings and other structures. About half
the increase in ferrous metals output during 1981-85,
for instance, and approximately 85 percent of the
increment in machinery output are to result from
renovation. Soviet planners claim that renovation is
advantageous because it (1) involves mainly new ma-
chinery and equipment and relatively little expensive
construction work, (2) accelerates the withdrawal of
old technology from production processes and hastens
its replacement with new, resource-saving technology,
and (3) shortens construction time.'
But this approach is not new. The Soviet leadership
has long stressed the importance of renovation and
reequipping at the expense of new construction. Pro-
fessor Stanley H. Cohn estimates that the share of
' According to the Central Statistical Administration, the rate of
return on reconstruction investment is 1.5 times larger and lead-
times 27 percent lower than on new construction. See David A.
Dyker, Planned and Unplanned Investment Patterns in the 1980s,
paper delivered at Colloquium on the CMEA Five-Year (1981-85)
equipment in the Soviet capital stock increased by
only one percentage point between 1958 and 1977.^
According to data published by the Scientific Insti-
tute of Gosplan, in the 1970s the share of equipment
in the industrial stock of fixed capital increased from
39.2 to only 39.8 percents 25X1
Boris Rumer, among others, has examined the reasons
for the failure of this renovation and reequipping
strategy.' He found that:
? The replacement of machines often requires exten-
sive and expensive remodeling, reengineering, and
even the expansion of existing facilities. This is
especially true in the European parts of the country
where the Soviet :industrial plant is much older and
is situated in densely populated areas.
? The Soviet "investment complex" (machine-build-
ing industries, construction enterprises, and desip5X1
organizations) has been ill prepared and poorly
motivated to sustain the policy. Design enterprises,
for instance, tend to concentrate on designing new
enterprises because standard construction projects
are much easier and more profitable. Also, the
machine-building industry prefers to manufacture
serial, standardized equipment rather than ma-
chines to fit the specific conditions and dimensions
of an enterprise under renovation.
? Both the contracting enterprise and the construction
firm prefer expansion to renovating or reequipping.
Renovation interferes with production activity and
can therefore jeopardize output goals and cut work-
er and managerial bonuses. Construction enterprises
would rather expand existing facilities because t'X1
find it easier to work on open building sites and they
can report a larger volume of work, enhancing their
plan fulfillment record. 25X1
' Stanley H. Cohn, "Soviet Replacement Investment: A Rising
Policy Imperative," Soviet Economy in a Time of Change, a
compendium of papers submitted to the Joint Economic Commit-
tee 96th Congress, 1st Session, Volume 1, 10 October 1979, p. 234.
25X1
'
VoDrosv
' V. Kremyanskii, "Izmenenii stoimosti stroit
ekonomiki, No. 10 (October 1981), pp. 52-64.
6 Boris Rumer, Soviet Industrial Investments: Problems of the 5X1
1981-85 Plan, The National Council for Soviet and East European
Research, Washington, D.C., 10 June 1982. 1
25X1
25X1
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In any event, expansion often amounts to new con-
struction, because both additions to existing struc-
tures and new enterprises built adjacent to existing
facilities are frequently reported as expansion. The
ability of construction organizations and their custom-
ers to thwart the will of the central authorities on
investment policy is probably in large measure a
reflection of the difficulty of monitoring myriad con-
struction sites in a vast country. The evasion process
may be aided by the failure of the statistical authori-
ties to distinguish among expansion, renovation, and
technological reequipping. In published statistics, all
three of these items are lum ed to ether under the
heading of reconstruction.'
Investment Allocations in the 1981-85 Plan
Industry receives the largest increase in investment
during 1981-85-a 23-percent increase compared
with 1976-80 (table 3). Historically, industry has
received the lion's share of investment resources, but
if the 1981-85 Plan is fulfilled, industry's share would
rise from about one-third (during the 1970s) to two-
fifths of total capital investment. More than four-
fifths of the increment to industrial investment is
directed to just three branches-fuels and power,
ferrous metals, and machine building. The fuel and
power industries alone have been allocated two-thirds
of the total increase in investment in industry
Capital investment in the entire fuel and power
complex-electric power generation; coal, oil, and gas
production; and pipeline construction-is to be 50
percent larger than in 1976-80 (table 4). The invest-
ment goals for fuels and power include increases of 20
percent for electric power, 63 percent for oil, and 120
' According to official data, the share of "renovation, expansion,
and requipping of existing enterprises" in the total volume of state
capital investment increased from 68 percent in 1975 to 72 percent
in 1980. Rumer estimates, however, that almost 60 percent of the
money invested in existing enterprises between 1976 and 1980 was
swallowed up by expansion. See Rumer op. cit., p. 21. According to
Rumer, emphasizing reconstruction has increased the share of
construction in total investment: "It seems justified to conclude
that one of the consequences of expanding the extent of reconstruc-
tion in industry is to raise the share of construction in capital
investment, and this leads to the relatively more rapid growth of
buildings and structures than of equipment in fixed capital. In other
words, the results attained contradict the stated goal." (Boris
Rumer, The Dynamics of the Capital Coefficient of USSR Indus-
trial Output: Investment Process in Soviet Industry, Final Report
to National Council for Soviet and East European Research,
Washington, D.C., p. 26.)
Table 3
USSR: Investment in the
11th Five-Year Plan
Billion Rubles, Percentage
1973 Prices Increase
1976-80 1981-853 Plan 1981-85
(Actual) (Plan) Over 1976-80
223.6 275 b 23
Ferrous metals 15.2 20 b 30
Fuels and power 65.7 100 C 52
Machinery d 53.9 59
Other 88.8 96 8
Agriculture 128.5 138 b 7
(Agriculture-whole (171.0) (190) (11)
complex of works)
Transportation and 75.9 NA NA
communications
Railroads 17.3 21 b 22
Construction 25.4 NA NA
Housing 86.3 93 8
Note: Data for 1976-80 are from Narodnoye khozyaystvo SSSR v
1980 g, p. 337. Plans for 1981-85 were compiled on the basis of
information found in the open literature.
a In the case of total industry, ferrous metals, machinery, and the
railroads, the 1981-85 figures were (a) calculated fror i nped
percentage increases over 1976-80 published in the open press and (b)
rounded to the nearest billion rubles.
b Estimated.
c See table 4.
d Includes metalworking.
e Based on a statement by a Soviet official that capital investment in
machine building will significantly exceed the level of the previous
five-year period.
percent for gas. Although plans for the coal industry
have not been published, investment in this sector
probably will increase by about 20 percei 25 (~
? Gosplan Chairman Baybakov, in a speech before the USSR
Supreme Soviet in November 1981, stated that 132 billion rubles of
capital investment would be allocated to the fuel and energy
complex during 1981-85. We estimate that the construction of gas
and oil pipelines planned for this period will cost about 32 billion
rubles. Subtracting this and planned allocations for oil, gas, and
electric power published in the open literature (table 4) from 132
billion rubles results in an estimate of 12 billion rubles of capital
investment for the coal industry during the 11th Fivg eg'rrlan=
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Table 4
USSR: Planned Energy Investment During 1981-85
Energy Sector
Billion Rubles,
Percentage
1973 Prices
Increase
1976-80 a
(Actual)
1981-85 b
(Plan)
Plan 1981-85
Over 1976-80
Fuel and power
complex
88
132
50
Nonpipeline
investment
66
100
52
Electric
power
19
Oil
26
43
63
Gas
10
22
120
Pipeline
construction
22
32
45
a Because of rounding, components of nonpipeline investment do not
add to the total shown.
b In the case of electric power and oil, the 1981-85 figures shown
were (a) calculated from planned percentage increases over 1976-80
published in the open press and (b) rounded to the nearest billion
rubles.
Particularly ambitious targets have been set for the
construction of gas pipelines. Five main lines extend-
ing from Tyumen Oblast in West Siberia to central
regions of the country are to be brought on stream
during 1981-85, and construction of a major export
line from Urengoy to Western Europe is under way.
Investment in ferrous metallurgy is scheduled for a
30-percent boost during 1981-85 in an effort to revive
steel production, to modernize producing facilities,
and to improve product quality. In addition, Soviet
sources have hinted that capital investment in the
machine-building industry will "significantly exceed"
the level of the previous five-year period! Ferrous
metals and machinery are pivotal industries in the
USSR, and they must do better than they have in the
past few years if the economy is to regain earlier rates
A. Stepun, "0 ratsional'nom napravlenii kapitalovlozheniy v
odinnadisatoy pyatiletke," Planovoye khozyaystvo, No. 10, (Octo-
of growth. More modern machinery is vitally needed
in almost all sectors of the economy to improve labor
productivity, to substitute for increasingly tight labor
supplies, and to conserve energy resources-all key
components of the official investment and growth
strategy for the eighties. 25X1
Investment in the entire agricultural complex is slated
to rise by 11 percent during 1981-85-compared with
31 percent during 1976-80-and maintain its 27-
percent share of total investment. In particular, to
reduce losses of farm products, large increases are
planned for constructing storage facilities-up 60
percent over 1976-80-and hard-surfaced roads on
farms-up 40 percent over 1976-80. Crop waste and
losses during and after harvest, reportedly amounting
to 20 percent of total output annually, constitute one
of Soviet agriculture's biggest problems.'? The lack of
adequate storage facilities is particularly serious. Last
1 1 A h 1
for examp e, s1 age an ay age
year in the RSFSIt
,
installations were available on only 44 percent of the
republic's collective farms and 38 percent of its state
farms. Only 55 percent of collective farms and 65
percent of state farms had vegetable and potato
storehouses, and 83 percent and 76 percent respec-
tively, had grain and seed storehouses. 25X
The increases in new fixed investment scheduled for
the two major sectors of the economy-industry and
agriculture-coupled with increases planned for the
railroads and for housing construction more than
consume the total targeted increment to overall in-
vestment. Consequently, investment allocations to se-
lected industries and some sectors of the economy
must have been cut. We cannot say with certaint5X1
which particular sectors have been singled out for
reductions. Among the possibilities are the chemicals,
construction materials, timber, and consumer goods
(light and processed foods) branches of industry as
well as the so-called nonproductive sectors of the
economy-science, education, health, personal serv-
ices, and the like. Investment allocations to most of
these sectors, with the notable exception of the con-
sumer goods industries, were reduced in 1980 com-
pared with the previous year. Investment funds for
10 G. Kulik, "Ob effekiivnosti kapital'nykh vlozheniy v sel'skom
khozyaystvye," Planovoye khozyaystvo, No. 10, (October 1981),
pp. 91-97.1
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Figure 2
USSR: Incremental Capital-Output
Ratios in Industry, 1961-79
they did in 1961-80 (Variant I in table 5), (b) the
USSR managed to hold ICORs to 1980 levels (Vari-
ant II), or (c) the ICORs behaved as they did in 1976-
80-that is, increased more steeply than in the 1961-
Three-Year Moving Average 80 period (Variant III). 25 1
8
0 1961 65
most, if not all, of these sectors may have been slashed
again in the plan for 1981-85. Even the consumer-
related industries may have been cut despite leader-
ship rhetoric that a central part of the program to
raise living standards is the accelerated expansion of
the light and food industries.
Consistency of Investment and Production Plans
Trends in ICORs. Can the output goals for 1981-85
be achieved with the low growth planned for invest-
ment? For help in dealing with this question, we
examined recent trends in the incremental capital-
output ratios (ICORs) in industry-that is, the addi-
tional investment associated with a ruble's worth of
additional industrial production. The ratios were then
used to test the consistency between Soviet industrial
output and investment plans for 1981-85.
Because of data limitations we restricted the analysis
to industry. Alternative sets of investment require-
ments were calculated for industry in 1981-85 de-
pending on whether (a) the ICORs continued to rise as
The results for industry as a whole were sobering
(figure 2). Whereas in the early 1970s each additional
ruble's worth of output required three additional
rubles of capital, by the end of the decade over six
additional rubles of capital were required. Should this
trend continue during 1981-85, overall industrial out-
put would increase by little more than 2 percent per
year rather than 5 percent per year as planned. Even
if the rise in the ICOR for industry is somehow
arrested, output would grow by no more than 3
percent annually during 1981-85."
25X1
There appear to be two exceptions to the general
picture of output goals being set far too high with
respect to projected capital outlays. Investment plans
for fuels and ferrous metallurgy appear sufficient to
" These calculations are based on Western estim5Xf1actual
industrial output, which differ from Soviet estimates because of
methodological differences in their calculation. In short, Western
observers consistently find official achieved rates of output growth
to be biased upward. (On the other hand, ex ante planned indicators
are acceptable.) For more on these matters, see CIA Research
Paper ER 80-10461 (Unclassified), August 1980, Comparing
Planned and Actual Growth of Industrial Output in Centrally
Planned Economies. (u)
Moscow's perceptions of its economic problems, depend on
its own economic statistics. To test the differenchh99?calculated
ICORs for total industry using Soviet figures for actual gross value
of industrial output published in the annual issues of Narodnoye
khozyaystvo. A comparison of the estimated investment require-
ments obtained with the results we obtained previously (table 5) are
shown below in billions of rubles (1973 prices):
Variants Planned
Investment
Soviet output 383 355 477
measure 25`x
There is a substantial difference in the two calculations, indicating
that Soviet perceptions of the USSR's investment needs may be
much lower than our own. Still, even using the Soviet measure of
industrial output, requirements exceed planned investment by a
significant margin, particularly if recent ICOR trends continue.r
25X1
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Table 5
USSR: Estimated Investment Requirements, 1981-85 a
Variant I:
1961-80 ICOR
Trend Continues
Variant II:
ICOR Stays the
Same as in 1980
Variant III:
1976-80 ICOR
Trend Continues
Planned
Investment
Chemicals
47
41
61
22 b
Construction materials
42
33
73
9 b
Light industry
17
15
19
9 b
a The ICORs were derived by dividing changes in the capital stock
by changes in output. The figures in the above table give investment
requirements for each industry on the assumption that investment is
equal to the expansion of the capital stock commensurate with
various ICOR trends, with allowance made for replacement of
wornout structures and machines as well as for projected increases in
unfinished construction. An additional adjustment was made in the
case of the fuels sector mainly because of large expenditures for
drilling for oil and gas. Expenditures for drilling in the USSR are
classified as new fixed investment, but such outlays do not result in
additional commissioned capacity. To allow for this, the investment
requirement figures for fuel in Variants I, II, and III were raised
from their unadjusted values of 34, 27, and 47 billion rubles,
respectively, as follows: During 1976-80 about 46 billion rubles were
invested in the coal, oil, and gas industries, but the capital stock in
these industries increased only 23 billion rubles. Allowing for an
increase in unfinished construction of over 4.5 billion rubles and
perhaps another 3 billion. rubles of investment to replace wornout
machinery and equipment means that each billion ruble increment to,
the capital stock required 1.7 billion rubles of capital investment
during the period. Applying a similar ratio to the 1981-85 period
yields the investment requirements shown in the table.
b The figures shown are the investment allocations during 1976-80.
These industries probably face cuts. At best, investment will be held
at 1976-80 levels.
meet output goals even if ICORs rise in these sectors
at the rates of the recent past. Even in some parts of
these sectors, however, output goals may be beyond
reach for other reasons. In the coal industry, for
instance, labor shortages are hampering production.
As for other sectors, inadequate amounts of invest-
ment alone probably will preclude fulfillment of pro-
duction targets. Investment goals for electric power,
machine building, construction materials, light indus-
try, and chemicals will be far short of requirements
even if rising ICOR trends can be stopped-which, as
we argue below, seems unlikely.
Prospects for ICOIIs. It is highly unlikely that the
planners can reverse or even arrest the rising trends in
the ICORs in industry during the current five-year
plan period. The ratios for overall industry and for
individual branches such as chemicals, machine build-
ing, and construction materials would have to be 25X1
reduced to mid-1970 or earlier levels in order to meet
1981-85 output targets. The factors that influenced
ICOR trends in the late 1970s, moreover, are likely to
have even more impact in the 1980s.1
25 1
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The Soviet economy is becoming increasingly depend-
ent on the Siberian areas of the country for fuel and
raw materials. Developing these new resource areas
requires heavy capital investment, particularly con-
struction activity. Construction costs in the eastern
regions range from 30 percent higher to more than
double those in the European part of the USSR.
Furthermore, most of the areas where resources must
be developed require large investments in both basic
facilities for exploration and exploitation and social
overhead capital-roads, housing, and cultural and
service facilities. During the 1980s, for instance, we
estimate that the eastern regions of the USSR will
provide almost the entire increment of oil and gas
production and more than 90 percent of the increment
of coal production.
In addition, in both the traditional producing areas of
the European USSR and Siberia, the declining quali-
ty of readily available raw materials is pushing up
capital requirements because of the cost of enriching
the minerals and ores. As lower quality resources are
being extracted from more distant, less hospitable
locations, capital costs have been rising more rapidly
than output.
The returns from many investment projects, more-
over, will not materialize for long periods of time.
This is particularly true in ferrous and nonferrous
metallurgy, where the time to bring new capacity on
line is often 10 to 15 years or longer. The construction
of the Muruntau gold plant, potentially the world's
largest, began in 1967 and is still not completed.
Large investment expenditures are required also to
explore for new oil reserves. Return on this investment
could be as far off as five to 10 years, the time it takes
to bring new oilfields on stream.
For particular industries, these and other circum-
stances translate into escalating requirements for
capital goods just to produce current levels of output.
In the oil industry, for example, investment require-
ments are rising sharply, as reflected in the invest-
ment plans. By 1985 drilling is to be almost double
the 1980 level, much of it to greater depths and in
more isolated areas. This will require increasing
amounts of high-quality drill pipe, rigs, and other
equipment. In addition, the current inventory of pro-
ducing wells is being converted from free-flowing to
mechanized wells-particularly in West Siberia. This
will require large investments in gas-lift equipment,
pumps, and the like. Meanwhile, the share of water in
total fluid produced at Soviet oilfields has been
increasing rapidly. Far more pumping equipment will
be required in the 1980s to stabilize and maintain the
oil output at aging fields.
I 2 X1
Declining quality of resources has hindered steel and
coal production. The erosion in iron ore grades, for
example, has raised production costs sharply and
forced the USSR to devote a growing share of
investment to building iron ore enrichm26Yetilities.
Accessibility to resource supplies has become a partic-
ularly difficult problem for the forestry and wood-
working industry. Moscow has had to go further and
further into climatically and geographically difficult
areas of Siberia for new timber supplies
Large up-front investment costs and delayed payoffs
are being confronted particularly in transportation
and in the nonferrous and ferrous metallkWt'Indus-
tries. For example, the Soviets are allocating large
amounts of investment capital to the construction of
the Baikal-Amur Mainline. The return from this
investment cannot be expected for many years since
much of the increased investment expenditure is for
structures such as roadbeds, bridges, and tunnels
rather than equipment that might significantly im-
prove present railroad performance through gains in
worker productivity. In ferrous and nonferrous metal-
lurgy, it often takes 10 to 15 years and in some cases
even longer to bring new capacity on line2 X, I
Coping With the llnvestnaent Squeeze 2 -jam
If trends in capital-output ratios continue to be unfa-
vorable, the options available to the leadership in
dealing with the investment squeeze are limited. It
could try to (1) reduce dramatically the amount of
unfinished construction in the different branches of
industry, (2) lower retirement rates for the industrial
capital stock, (3) increase imports of machinery and
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equipment, or (4) generally improve the planning and
management of investment. None of these possibili-
ties, however, hold much promise for significant gains
in the near term.)
Reduced Level of Unfinished Construction. Reducing
the large amount of unfinished construction-con-
struction and installation work beyond initial stages
but not finished to the point of permitting use of the
assets-has always seemed to Soviet planners a cheap
way of generating more fixed capital in a short time.
The amount of unfinished construction has more than
doubled since 1970 and in 1980 was equivalent to
about 6 percent of the value of the total capital stock
in the economy, and to almost 80 percent of total
fixed capital investment. Indeed, the volume of unfin-
ished construction is largest in some of the more
troubled branches of industry-machine building and
ferrous metals.
The existence of such a large volume of idle capital
assets in the face of the increasing scarcity of invest-
ment goods is somewhat paradoxical. Much of the
explanation lies in the persistent overbidding for
investment resources by ministries and enterprises, for
which capital is generally inexpensive. Much capital is
allocated directly by the central authorities, and the
relatively low 6-percent charge on capital that enter-
prises have had to pay since the mid-1960s has not
significantly discouraged them from undertaking
more investment than they can complete in reasonable
lengths of time."
In point of fact, the Soviet leadership has rarely
succeeded in reducing the backlog of unfinished con-
struction. It has been rising almost without pause
during the last two decades despite repeated effor ~{ 1
reduce it. The single exception was 1980, when it'feiI
by 1 percent." 25X1
Lower Retirement.Rates. Moscow could also make
fixed capital grow faster by requiring enterprises to
hold on to existing capital assets for longer periods of
time. Retirement rates in the USSR, however, are
already extremely :low. Even though officially desig-
nated service lives of productive assets have been
shortened twice during the postwar period-in 1963
and in 1975-Soviet asset lives still substantially
exceed those in the United States and other Western
economies. For example, the average retirement rate
of the Soviet capital stock during 1961-80 was 1.5 to
1.7 percent annually." By way of comparison, the25X1
overall stock of equipment and structures in the
United States was :retired at an average annual rate of
3.7 percent during the same period." 2541
Productive assets can be retained for longer periods
only by heavier maintenance expenditures-"capital
repairs" in Soviet terminology-and at the expense of
modernization through investment in new equip-
ment." In 1976, 29 billion rubles were spent on capital
repairs-13.3 billion for repair of buildings and struc-
tures and 15.7 billion to repair machinery and equip-
ment. This was roughly equal to one-fourth of total
" Note, however, that s! atistics on unfinished construction are given 1
in current prices, whereas capital stock data are published in
constant prices. There may be some overstatement, therefore, of the
volume of assets availa",le in the form of unfinished construction.
(u)
" CIA Reference Aid SOV 82-10093 (Unclassified), op. cit., pp. 10-
11. (u)
" See Cohn, op. cit., pp. 238-239, for a comparison of the service
lives of industrial equipment in the USSR with those in the United
States and other Western countries. 25X1
16 In Soviet practice, maintenance expenditures fall into two catego-
ries: current and capital repairs. Current repairs cover prevenl{vX1
maintenance and routine servicing of machinery and equipm t+~a
Capital repairs involve major renovation outlays to replace defec-
tive or worn parts of existing asserts in order to extend the useful
life of machines. The former are treated as a cost of production
whereas the latter are financed from amortization allowances.
Capital repairs account for 40 percent and re lacement investment
for 60 percent of amortization allowances 15X1
Even the rapid commissioning of this pool of idle
assets would provide at best a one-time boost to the
existing capital stock, not a continuous infusion of
fixed capital. Furthermore, the boost would be rela-
tively small. If Moscow succeeded in commissioning
as much as half of the present volume of unfinished
construction during 1981-85, the average annual
growth of the total capital stock during this period
would increase less than half a percentage point.=
11 Overbidding, as David A. Dyker points out, reflects the built-in
incentive ministries have (a) to undertake as many building projects
as possible in period 1 in order to get more investment funds in
period 2 and (b) continue projects once begun even if they become
uneconomical for fear of jeopardizing future investment allocations.
Enterprises also have an interest in spending internally generated
capital investment funds as rapidly as possible. See Dyker, op. cit.,
O
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capital investment that year." When the large sums
spent annually on current repairs, which are estimat-
ed to equal the cost of capital repairs, are added in,
Moscow's maintenance bill becomes staggering. Capi-
tal repair is also a highly labor-intensive and capital-
intensive activity that represents a heavy drain on
scarce manpower and equipment resources. Repair
activity, for example, absorbs an estimated one-tenth
of the entire industrial labor force and one-third or
more of the Soviet machine tool park.
Reducing retirement rates, therefore, might well be
counterproductive. The demands for capital and cur-
rent repair would become even greater. Moreover,
since capital repairs are an alternative to replacement
investment, increasing service lives of existing assets
would further delay the modernization of industry in
the Soviet Union.
Moscow's needs for grain or much of its requirements
for industrial raw and semifinished maul
I
Better Planning and Management. Improved plan-
ning and management of investment could offset some
of the effects of slower investment growth. In particu-
lar, steps that would permit more rational allocation
of investment among sectors and projects, and more
rational use of investment resources on given projects,
could help boost the overall productivity24XIpital.
Without major (and unexpected) systemic changes,
however, such improvements are unlikely. The basic
problem is that resources for investment are still for
the most part allocated more or less arbitrarily by
Moscow.
Efforts to introduce economic criteria to put central-
ized, administratively determined investon a
more rational footing have not fared well. As noted
above, squandering of capital resources was not mate-
rially reduced by terminating capital's status as a
"free good" with the introduction in the mid-1960s of
a 6-percent charge on capital. Nor has application of
various "coefficients of effectiveness" to serve as
measures of the return on capital helped. In any event,
even well-designed and effectively enforced criteria
could still lead to misallocation of capital because of
the failure of Soviet prices to adequately reflect
Imports of Machinery and Equipment. The USSR
could also ease the strain on investment resources by
importing more machinery and equipment, both from
the West and from Eastern Europe. Soviet purchases
of machinery from the West, however, have fallen by
two-thirds since the mid-1970s as the USSR struggles
to right its hard currency balance, and Moscow's
ability to increase machinery imports from the West
is currently constrained by its tight hard currency
position. The USSR's continuing requirements for
hard currency imports of grain and other agricultural
commodities, combined with soft Western markets for
Soviet oil and other primary product exports, suggest
that the leadership will be unable to buy substantial
amounts of machinery and equipment from the West
in the near term.
The East Europeans currently provide a large volume
of machinery and equipment to the USSR. In the
main, however, this machinery does not approach the
quality or the technological level of that available in
the West. Consequently, Moscow will not be able to
turn to Eastern Europe for more sophisticated ma-
chinery. The Soviets also will be hard pressed to free
up hard currency to purchase equipment in the West
by turning to Eastern Europe for nonmachinery im-
ports. Eastern Europe is not in a position to fill
relative scarcities. 25X1
Intensified Debate Over Investment Policy
The official view that the need for increased invest-
ment can be substantially avoided by higher capital
productivity has been publicly challenged within the
Soviet Union. The fact that opposition v-Ivere
published at all suggests significant political support
for such criticism and could mean that a debate over
investment policy is currently under way in the
USSR. The prominent Soviet economist A. G. Agan-
begyan, for instance, questioned the planned distribu-
tion of investment in 1981-85 in Pravda earlier this
year.18 He argued that there should be more invest-
ment in the machinery sector now, even at the expense
11 A. G. Aganbegyan, "Intensfkatsiya: sushchnosti, puti i sredstva
klyuchevoy faktor rosta," Pravda, 24 February 1252.C
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of other industries with a high priority for capital
investment, since, in the long run, the productive
capacity of these other industries depends on the
acquisition of more and better machinery.
not less, investment is required to make the transition
from extensive to intensive growth .21 1 251l
Advocates of the existing policy of reduced investrrMX1
growth have not fallen silent, however. In Ekonomi-
cheskaya Gazeta, 1). Chernikov of the Gosplan Eco-
nomics Institute maintained that studies undertaken
by the institute have shown a trade-off between the
rate of investment spending and investment leadtimes
and capital stock retirement rates.2' According to the
study, too high a rate of capital investment requires
longer periods of time for the investment to be
assimilated and leads to slower rates of retirement of
the capital stock. Modernization of existing plant and
equipment is therefore delayed. He further notes that
the studies have shown that capital and labor are not
readily substitutable. Like Val'tukh, Chernikov im-
plies that the complementarity between labor and
capital is greater than generally believed. Chernikov
concludes, however, that the rate of growth of capital
investment should be slowed-rather than accelerated
to be consistent with the slower growth of the labor
force and to take account of lags in the assimilation of
new capital assets. 25X1
The strongest and most direct criticism, however,
appeared in two articles in the March 1982 issue of
The Economics and Organization of Industrial Pro-
duction (EKO)." The authors went beyond Agan-
begyan's statement. They argued that increased capi-
tal productivity and the success of an "intensive"
development strategy, at this juncture at least, require
rapid growth in investment because:
Rising labor productivity, through means other than
increased productive capacity (such as better organi-
zation and management of labor), will lead to
unemployment of workers released because of great-
er efficiency unless there is capital for them to work
with.
Capacity utilization rates went above optimum lev-
els in the mid-1970s. Therefore, attempting to push
these rates still higher simply leads to higher unit
costs, increased downtime, and reduced production.
Capacity utilization rates in fact have recently
fallen in many industries, but the lower rates do not
indicate the existence of usable capacity that can be
put into operation on demand. Rather, they reflect
bottlenecks in sectors supplying inputs on which use
of this capacity depends.
Much of the USSR's plant and equipment is old and
obsolete, requiring large investment outlays to re-
place these outmoded facilities with the modern,
technologically advanced capital that economic
progress and growth demands.
In other words, future progress in the development of
the industrial sector is possible only on the basis of
accelerating growth in the investment sector. More,
19 K. K. Val'tukh, "Investitsionny kompleks i intensiJkatsiya
proizvodstva," and N. N. Baryshnikov and B. L. Lavrovsky,
"Moshchnosti i reservy," Ekonomika i organizatsiya promyshlen-
nogo proizvodstva, No. 3, 1982, pp. 4-51.1
At some point, the arguments for higher investment
may win out, particularly if economic growth contin-
ues to slow as we believe it will. This would entail,
however, cutting either the defense sector or the share
of resources going to the consumer, or both. Either of
these operations would be painful. Living standards
are stagnating in the USSR. Reducing the rate of
growth in defense spending would also be difficult
]D According to Val'tukh: "Sometimes one has occasion to encounter
the notion that raising the efficiency of capital investments unfail-
ingly involves a transition to low rates of growth of the scale of
investments. Quite the opposite relationship is the normal one:
When capital investments grow rapidly, there is an opportunity to
eliminate disproportions, to accomplish major structural shifts
aimed at raising the technical level of production and product
quality, that is, in the final analysis to increase the efficiency of the
investments themselves and of the economy as a whole. A slacken-
drop in the benefit per unit of the capital investments."
11 D. Chernikov, "Intensi ikatsiya i sbalansirovannost',
2~ TI
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given the momentum of present defense programs and
the likelihood that the decision would have to be-made
during a succession period in the Soviet Union.
In any case, substantially raising the rate of increase
in investment could not be done quickly. Much of the
Soviet plant and equipment is badly in need of
modernization, and resource bottlenecks are con-
straining production in industrial sectors that either
produce investment goods directly-the machine-
building industries-or provide inputs to these sec-
tors-steel and construction materials. Boosting out-
put in these industries will first require substantial
investment in these sectors.
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