STATEMENT OF THE HONORABLE HENRY ROWEN CHAIRMAN NATIONAL INTELLIGENCE COUNCIL CENTRAL INTELLIGENCE AGENCY BEFORE THE JOINT ECONOMIC COMMITTEE SUBCOMMITTEE ON INTERNATIONAL TRADE, FINANCE, AND SECURITY ECONOMICS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00366R000200050008-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 59
• Document Creation Date: December 20, 2016
• Document Release Date: October 23, 2007
• Sequence Number: 8
• Publication Date: December 1, 1982
• Content Type: REPORT

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STATEMENT or
THE HONORABLE HENRY ROWEN
CHAIRMAN
NATIONAL INTELLIGENCE COUNCIL
CENTRAL INTELLIGENCE AGENCY
BEFORE THE JOINT ECONOMIC COMMITTEE
SUBCOMMITTEE ON INTERNATIONAL TRADE,
FINANCE, AND SECURITY ECONOMICS
"CENTRAL INTELLIGENCE AGENCY BRIEFING
CN THE SOVIET ECONO?;Y"
DECEMBER 1, 1982
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PREFACE
BY
SENATOR WILLIAM PROXMIRE
VICE CHAIRMAN
SUBCOMMITTEE ON INTERNATIONAL TRADE,
FINANCE, AND SECURITY ECONOMICS
The following report of the Central Intelligence Agency responds
to my request for a balanced assessment of the Soviet economy
showing both its capabilities and vulnerabilities. The result is
a unique contribution to our understanding of Soviet economics.
Its uniqueness lies in the fact that it analyzes the strengths as
well as the weaknesses in the Soviet economy.
~ It is worth highlighting the principal findings in the study:
* Soviet economic growth has been steadily slowing down.
However, there will be continued positive growth for
the foreseeable future.
* Economic performance has been poor and there have been
many departures from standards of economic efficiency.
But this does not mean the Soviet economy is losing its
viability or its dynamism.
* While there has been a gap between Soviet performance and
plans, an economic collapse in the USSR is not considered
even a remote possibility.
Analysts in the West have typically focused on Soviet economic
problems. The attention to the negative aspects of the Soviet
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economic system and to the failures of performance is appropriate
and necessary. The danger in such an approach is that, by over-
looking the positive side, we see an incomplete picture which leaft
us to form incorrect conclusions.
The Soviet Union is our principal potential adversary. All
the more reason to have accurate, balanced assessments of the state
of its economy. One of the worst things we can do is to under-
estimate the economic strength of our principal adversary.
It needs to be understood that, while the Soviet Union has
been weakened by such harmful developments as the inefficient per-
formance of the farm sector and the heavy burden of defense, it is
the world's second largest economy in terms of GNP, has a large
and well trained labor force, is highly industrialized, and possesses
enormous reserves of natural resources, including oil and gas and
the relatively scarce minerals and precious metals. It is sobering
to reflect on the possibility that Soviet economic trends might
improve rather than grow worse.
This report should go far to clear up the confusion that exists
in Congress and the public as to where the Soviet economy stands.
It should also make it obvious that. there is at least the same degree
of uncertainty in making forecasts about future economic performance
in the Soviet Union as there is with respect to our own economy.
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T . I NTRODUCT I ON :
A. Mr. Chairman. in your request that we hrief your
subcommittee on Soviet economic prospects, you noted the
"unusual amount of confusion in congress and the general
public today as to where the.Soviet economy stands." You
also suggested that our briefing he built around an
assessment of "the capabilities and vulnerabilities of
the Soviet economy."
1. We agree that confusion regarding the Soviet economy
abounds.
2. WNe.believe,.however, that this confusion results not
so much from disagreement over Soviet economic'
performance as from uncertainty as to how to
interpret that performance.
3. Western observers have tended to describe Soviet
economic performance as "Door" or "deteriorating" at
a time when Soviet iefense soendinpp, continues to
rise, overall Soviet gross national product in real
terms continues to increase, and Soviet GNP is second
in size only to that of the US.
B. These characterizations arc not wrong.
1. Given past rates of economic growth, the gap between
Soviet performance and plans and exDectations, and
the marked departure from standards of economic
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efficiency, tic resole coripiiieri by the Soviet economy
in recent years hes indeed been poor.
2. R.esul t s that are rinsat i sfPe.tnrv when measured by this
yardstick, however, do not mean that the Soviet
economy is losing its vie.hility as well As its
dynamism.
C. In fact, we do not consider an economic "collapse"--a
sudden and sustained decline in GNP--even a remote
possibility.
1. Our projections indicate that growth in GNP will
remain slow but positive.
2. Growth is being retarded by a combination of
factors. Some are beyond Soviet control, and some
reflect the weaknesses of the Soviet economic svstern
that even the new Andropov regime is not likely to
change. Other factors holding down economic growth
represent oolicv choices--for example, the allocation
of resources to defen e--that could he modified but
are unlikely to c',ange much in the near term.
3. Nevertheless, we expert annual growth to average one
to two percent for the foreseeable future. Per
capita consumption could level off or even fell
slightly.
D. Returning to your initial questions, we will try to give
as balanced a picture. of the Soviet economy as possihlc.
We will sumTnarize an(' assess its basic capabilities and
vulnerahilities.
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1 lve will, howevor, first iocntifv the noels that
economic activity is r'Psie'ned to serve in the USSR
and then describe Soviet success in meeting these
goals.
2. As a final piece of stage-setting. we will discuss
how the 11th Five-Year Plan is faring, judging by the
results of the first two years, 1981. and 1982.
II. Soviet Economic Objectives and Priorities
A. Turning first to Soviet economic objectives and
priorities, we believe that Soviet economic activity has
always focused on building' military power.
1. But the Soviet leadership has also always placed?
great stress on rapid economic growth.
2. The good life for the Soviet populace, in the form of
a risirg standard of living,
has been of importance
to.Moscow too for almost 30 years. 6u.t improvements
in the welfare of Soviet consumers have generally
been subordinated to the demands of the military and
to the high rate of capital investment necessary to
insure fast GNP growth. It aooears, though, that
consumer interests are now being treated somewhat
less cavalierly. Breaking precedent, the 11th Five-
Year Plan calls for capital investment to grow more
slowly than consumption.
3. In pursuit of these national objectives, successive
regimes have given heavy industry priority status
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because it is t*,c sourre of mi l i tarv hardware and
investment e'oods.
4. Meanwhile, despite somA experimentation with
decentralized forms of economic administration. the
Soviet leadership has remained firmly committed to
strict central planning and management of most
economic activity. The justification has been that
rigorous centralization is required for fulfillment
of national objectives.
B. Soviet economic performance in terms of the objectives
and priorities establishe(' by the leadership has been
mixed.
1. The Soviet Union has hurt an exceedingly powerful
military force. Under Khrushchev the emphasis was en
strgtegic nuclear programs, but Brezhnev presided
over an across-the-board exoansion and modernization
of all Soviet forces.
a. Since the mid-1960s the USSR has increased its
arsenal of intercontinental nuclear delivery
vehicles near!yy sixfold--overturning ITS
quantitative superiority--and giving itself an
assured nuclear retaliation capability.
b. During the same period, Moscow has more than
tripled the size of its battlefield nuclear
forces, reducing the credibility of NATO's
nuclear weapons ns a couunterweii*ht to the Warsaw
Pmt's larger conventional forces.
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c.Meanwhile the Soviet Union has more than doubled
the artillery firepower of its divisions,
increased ninefold the weight of ordnance that
tactical air forces can deliver deep in NATO
territory, and reduced the West's qualitative
lead in such key areas as tank armor.
d. At sea, the USSR has introduced new, heavily
armed surface ships, nuclear-powered submarines,
and naval aircraft and quadrupled the number of
missile launchers on ships and submarines.
e. Meanwhile, under lirezhnev the USSR has expanded
its military activities in the Third World--
ranging from arms sales to Soviet forces in
defensive roles and support of Cuban forces in
combat to intervention in Afghanistan.
2. While developing its military power, the USSR has
until recently been able to maintain a rapid rate of
economic growth.
a. Soviet GNP, as measured by CIA, grew at an
average annual rate of 4.6 percent from 1950
through 1981. During the same period US GNP
increased by 3.4 percent per year.
b. Soviet growth, however, has steadily slowed
during this period--especially after 1978. The
deceleration can be seen in Figure 1. The
average annual rate of increase in GNP was about
6 percent during the 1P50s, 5 percent during the
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1 PROs, and ne it 1 v ?1 percent between 1970 an(?
1978. In 197!--81 . Yearly growth averaged less
than 2. percent. This year we expect GNP growth
to be about 1.5 percent.
c. To a remarkable degree, the slowdown in Soviet
economic growth has a parallel in OECD
countries. During the first three years of the
seventies. OECD GNP increased at the rate of 5
percent per year. The crisis induced by OPEC oil
prices brought OECD) growth to a halt in 1.974-
75. Then in 1976-79, ONP resumed a respectahle
rate of growth of a Dercent per year. In 199n-
81 , however. (;NP growth in the MCI) col lapsed to
1.2 percent per veer.
d. The slowdown in the USSR in part reflects four
consecutive poor or mediocre harvests. But most
sectors of the economy have been sluggish,
especially industry.
(1) In large measure, industrial performance has
been held back by the emergence of serious
bottlenecks unconnected with agriculture.
Growth in industrial output, which averaged
almost 6 percent a year in 1971-75, fell
abruptly in 1976 and in 1976-81 averaged just
slightly over 3 percent annually.
(2~ The decline in growth has been steady.
Industriai Droduction grew by only 2 percent
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in 1981 and is expected. to rise by 1-1/2 to 2
percent this year.
3. The higher prio*ity accorded to military strength is
suggested by the continued rise in defense spending
at the average annual rate of 4 percent that has
prevailed since the mid-1960s.
a. Growth in defense spending has continued in spite
of competition for resources that might ease
strains in the rest of the economy.
h. Defense spending is now about 1? to 14 percent of
f;*;P.
4. At the sftme time, Ieadershio concern about consumer
welfare seems to have somewhat diluted the conmitment
to growth.
a. The share of Soviet GNP allocated to fixed
capital investment--the driving force behind
Soviet economic growth--has more or less
stabilized in the last few years at about 26
percent (factor cost), compared with about 20
percent in 1960.
b. Slowing investment growth is explained partly by
bottlenecks in sectors providing building
materials and machinery. But it probably also
stems from a political decision to protect Soviet
consumers in n t.imn of tightening economic
constraints.
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Nonetheless, as shown in Figure 2, consumption
still account!; for only 55 percent of Soviet (.NP,
far below the share in most non-corrrnunist
industrialized countries.
III. The 11th Five-Year Plan So Far
A. Turning to recent developments, the results of the last
two years must have been most disappointing to Soviet
leaders. It is already clear that most of the imoortant
goals of the 11th Five-Year Plan cannot be met.
1. The plan was excessively ambitious from, the start.
For example, both industrial production and
agricultural output were to grow by about 5 percent
annually, even though production in both sectors had
grown at much slower rates in 1976-80.
2. Performance has been far below plan. The small
increase in agricultural output this year will do
little more than offset the decline in 1981, while
stagnation or falling output in key industrial
branches threatens to intensify already serious
bottlenecks.
3. Production of steel and steel products continues to
sputter, with output this year little changed from
two years ago and below the peaks reached in 1978.
Cement production. meanwhile, fell below the 1980
level, and freight car production will decline this
year. for the sixth consecutive year.
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4. The slump in steel is particularly damaging to
machinery production. Along with shortfalls in the
output of building materials. it also threatens to
curtail growth in construction. Even the moderate
1981-85 investment targets coup be in ieopardv.
5. From the beginning the 11th Five-Year Plan goals
depended on large productivity increases.
Underfulfiliment of the productivity plans has been
striking, however. The rise in industrial lahor
productivity, for instance, Averaged only 1.4 percent
a year in 1981-82, far below the 4.5 percent-per-year
increase called for by the plan.
6. The unrealistic, almost fantasy-like character of the
plan can be illustrated by comparing production goals
with investment plans. As our next chart (Figure 3)
shows, incremental capital output ratios--that is,
the amount of additional capital needed to produce an
additional unit of output--have been rising steadily
and steeply in the USSR for many years, with little
prospect that the rise will soon end. Yet, based on
little more than admonitions that productivity must
rise, capital investment targets in conjunction with
output goals imply a decline in these ratios.
B. Bright spots in economic performance in 1981-82 are hard
to find. But there have been a few.
1. On the production side, natural gas continues to rise
at a rapid rate--7 percent in 1981 and nearly 8
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percent this vear.
2. OvcrnI I energy pr-duct ion might he considered a
plus. In 1982 at least, output of all major forms of-
primary energy rose. Oil production continues to
inch ahead--by about 0.9 percent this year. And coal
output. reversing a three-vear decline, evidently
will rise by about 2 Dercent. At hest, however, it
will barely exceed the 1980 level.
3. The USSR has also substantially improved its hare?
currency balance of trade this year. Our next chart
(Figure 4) illustrates the point.
a. The hard currency trade deficit last year was
about $4 billion,. causing some anxiety in Western
financial circles. Judging by first half 1982
results, the deficit this year will be reduced to
perhaps $2 billion.
(1) The central authorities, with their total
monopoly of control over foreign trade and
the allocation of key resources, sharply
raised the volume of oil exports to the West,
espite softening prices in world markets.
At the same time. they held the value of hard
currency imports steady.
(2) The result was a trade deficit in the first
half of 1982 that was almost $4 billion lower
than in the same six months of 1981. The
already relatively small hard currency debt--
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X11.5 hi Ilion it the end of 1931--will rise
little if at n':l.
tr. The Soviets have paid a price for this'success,
however.
(l.) The inerease in oil exports to the West came
at the expense of deliveries to Eastern
Europe and domestic consumption.
(Z) In holding the value. of .i..mpo.r,ts.,st,e.&dv,,
Moscow also accepted a reduction in the
volume of hard currency imports. In
particular, it scaled back purchases of
Western equipment and consumer goods needed
to help mrdernize Soviet industry and meet
consumer needs.
IV. Basic Strengths of the Economy
A. We turn now to our discussion of the strengths and
weaknesses of the Soviet economy. We will look first at
the USSR.'s economic-stronE points, starting with those
attributes that shore up the economy as a whole, and then
move on to identify specific sectors that are performing
in a ticularl.y effective fashion.
B. The sl.. , size- of the economy, reflecting the subst,,.ntial
growt: .-ice World War II, is one of its strengths. As
the nex- chart (Figure 5) indicates, Soviet GNP in 1982
will equal about $1.6 trillion, roughly 55 percent of US
GNP this year. Per capita GNP is almost $6,000.
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C. The population is also large, currently numbering about
270 million. The labor force totals about 1.47 million
and, by world standards, is well-trained and well-
educated.
1. Literacy is by now almost universal in the USSR. The
educational level of the population has been rising
rapidly. Twenty-three percent of those over 16 in
1979 have completed at least a secondary education
(10th grade in the Soviet Union) compared with only
14 percent in 1970. In 1979 an additional 7-1/2
percent also had completed higher education, compared
with 5 percent in 1970.
2. A particular effort is being made to expand the
education of the indigenous nationality groups in the
Central Asian republics. The USSR wants to upgrade
the skills of the relatively large pool of labor
available there and possibly encourage outmigration
by assigning these better educated young people to
labor-short areas. ^raduates of higher, specialized
secondary, and vocational-technical schools receive
compulsory work assignments at specific enterprises
where, it is hoped, they will continue to work.
3. The emphasis on mathematics, engineering, and science
ii, viet schools is also a plus for the
technologically oriented Soviet society. About one-
third of total instruction time in secondary schools
is'devoted to mathematics and science. There are
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serious flaws, however,, in Soviet education,
including: too much rote 1Prrning and, at the
university level, narrow specialization early bn.,
D. Another of the strengths of the Soviet economy is the
tremendous accumulation of capital assets that has
occurred since World War 11.
1. The value of gross fixed capital assets--buildings,
machinery equipment, and the like--amounted to over
1.74 trillion rubles in 1990 according to Soviet
published data. The value of Soviet capital assets
expressed in constant prices increased almost 11-fold
between :1950 and 1980 and about 4.4-fold from 1960
through 1980--long after the USSR. had recovered from
wartime devastation.
2. This phenomenal expansion reflects the allocation of-
a large and, until recently, rising share of Soviet
resources to capital investment. The rapid growth of
capital assets has resulted in a more than three-fo'.ld
increase in the amount of capital per worker. The
rise was almost 3-1/2 fold in industry and over fives-,
fold on state and collective farms.
3. Two-thirds of the stock of capital assets is
concentrated in industry, agriculture, transportation
and corn iunications, and construction. Only about 15
percent of total gross fixed capital consists of
housing or is used to provide services to the
population such As he:dl h care and education.
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4. Although the rapid Accumulation of capital assets is
one of the Soviet Union's strengths. the capita]
stock includes a disproportionately large share of
worn out and technologically ohsolete equipment.
Soviet policies have kept retirement rates of
existing assets artificially low and have prolonged
their service lives through repeated capital repairs.
E. The USSR is exceptionally well endowed with natural
resources, as the reserve estimates in Table 1 indicate.
1. Beginning with energy, the Soviet Union has about 40
percent of the world's proved reserves of natural
gas--the 30 trillion cubic meters under Soviet
control exceed the reserves of all industrialized
nations comhined.
a. Soviet reserves of coal account for 30 percent of
the world's total recoverable reserves and are
sufficient to insure over 200 years of output at
current rates of production.
b. The Soviets do not puhlish figures for oil
reserves, as they do for gas and coal. Our
estimate is that oil reserves, at least in West
Siberia, are substantial, though increasingly
difficult to expl"oit.
2. The USSR is abundantly stocked with other important
raw materials.
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TABLE 1
USSR: Estimated Reserves of Selected Fuels
and Nonfuel Minerals
Size of Reserves
Share of World.
Reserves
(Percent)
Years to
Exhaustion
(M. 1980
Production)
Gas
30 Trillion m3
40
65
Coal
165.5 billion tons
27
230
Iron ore
63.3 billion tons
40
250
Manganese
2.5 billion tons
40
250
Chromite
271.2 million tons
10'
80
Copper
40.0 million tons
7
28
Nickel
11.3 million tons
is
48
Cobalt
100 million tons
NA
17'
Lead
17 million tons
11
28'
Zinc
22 million tons
10
24"
Gold
200 million troy ounces
35
20
Platinum-group metals
90 million troy ounces
25
25.,
Tungsten
215 thousand tons
11
24'
*'Corresponding to Western concepts of proven and probable. reserves',
exploitable at current prices with existing technology.
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a. According to Soviet st li'i i es, iron ore reservt:~
amount to about 60 billion tons--some 40 percent
of the world's total.
b. With as much as one-fifth of the world's forest
resources, the USSR has a virtually inexhaustible
source for producing wood and wood products.
c. In addition, the Soviets claim--and may well
have--the world's largest reserves of mang-.nese,
nickel, lead, molybdenum, mer.curv, and
antimony. They also say that reserves of
chromite, gold, Dlatinum-group metals, zinc, nd
copper are among the largest in the world and
sufficient to support Soviet mine production for
many decades.
d. The Soviets also have substantia.l reserves of
potash and phosphate rock--raw materials for the
production of chemical fertilizers--although a
large portion of the newer phosphate deposits
consist of poor quality ore.
F. With its wealth in human, capital, and material
resources, the USSR is highly self-sufficient--another of
the economy's major strengths. Our next chart (Figure
illustrates this.
1. Thu nigh degree of Soviet self-sufficiency in vital
raw materials is shown by its position as a net
exporter of a large number of these materials. Net
exports of energy--mostly of oil and natural gas--now
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FIGURE 6
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a dflv e q u i %, !ent o^
about 1.5 percent of total energy production.
2. The Soviets are major exporters of precious metals,
ferrous and non-ferrous ores and metal products,
chemicals, and timber. Because of expected gains in
output the Soviets will he able to expand sales of
key minerals such as platinum group metals, nickel,
cobalt, manganese. chromite, and gold during the
1980s. We also anticipate major increases in the
Soviet exports of ammonia, nitrogen, and potash
fertilizer and methanol.
3. Though highly self-sufficient, the 1JSSP is not
autarkic. Indeed, for at least the last decade,
trade with the We:,.t has been an important?e]ement in
the USSR's efforts to modernize the Soviet economy
and render it more efficient.
a.. I will develop this point in detail later, but
on here that the Soviets now must
let me ment.,jr_~
.y
rely on Western imports of capital and technology
to increase,or maintain production of some of the
raw materials in which they are abundantly
endowed and self-sufficient.
h. I would also like to note that imports from the
Vest have become critical to Soviet efforts to
improve, or simply maintain, the ouality of the
Soviet diet. In. 1.081, imports of grain and other
agricuiturA1 proluets reached almost X17 billion,
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or about 40 per-ent of the USSR's total hard
eurrency purchases.
c. Rut despite the large-scale expansion in
agricultural imports, the Soviet Union remains
basically self-sufficient with respect to food.
(1) These imports are intended mainly to prevent
a decline in meat consumption and are not
essential to maintaining an adequate quantity
of food consumption.
(2l At 3,300 r?alories--see onr next chart
(Figure 7) , which compares the composition of
the US and Soviet diets--average daily food
intake is equivalent to that in developed,'
Western col!ntries. Grain production is more
than sufficient to meet consumer demand for
bread and other cereal products.
4. To summarize, when we say the USSR is self-
sufficient, we do not mean that the Soviets neither
need nor benefit from trade.
a. Imports, particul~.rly from the West, can play an
important role in relieving critical shortages,
spurring' technological progress, and generally
improving Soviet economic performance.
b. What we do memn i. that the ability of the Soviet
economy to rennin viable in the absence of
imports is much greater than that of most,
possibly all. other industrialized economies.
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C'onsequen! !v, the susceDtibi l itv of the Soviet
Union to economic 'leverage tends to be 1 imi ted.__
G. In considering fundamental strengths, the highly
centralized, rigid system of administering the econorny--
while perhaps the Soviet Union's major economic
millstone--has had its advantages in enabling the
leadership to mobilize resources in crash programs to
achieve priority objectives.
1. The o-ime example of this ennnhility has been
Moscow's success in building up its military might.
This has been achieved through centrally-directed
mobilization and allocation of the USSR's highest
quality human and material resources and a rigorous
system of quality control in military production that
prevents the shod(iine s so ehareeteristie of Soviet
civilian output.
2. Centrally directe' concentration of resources does
not of course work everywhere. Agr_:culture, which we
will discuss in more detail later, is an example.
a. Even though over P. quarter of total investment
has been allocated to the farm sector for many
years, agricultural output continues to he a
diseppointmen' to Soviet leaders. There are many
reasons for this, but one overriding reason is
that effective central supervision over an
activity conducted over so vast a geographical
area is virtus!Hty impossible.
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Another is that economic administration by fiat
is singularly ill-suited to a sector where
incentives to individual producers are so crucial
a determinant of output.
H. We turn now to specific areas where Soviet economic
performance has been es^ecially strong.
1.. As we mentioned. natural as has been a maior Soviet
success story. It will play a pivotal role in
meeting the enervv needs of the economy in the 1980s,
particularly as a substitute for crude oil in
industry and in home use but also as a potential hard
currency earner.
2. The nuclear power industry, although it has not met
the full expectations of the leadership, has also
done quite well. We estimate that the annual
increase in nuclear-generated electricity will
increase by about 17 percent. a year during 1981-85
and supply about 11. percent of the country's
electricity by the end of the period.
3. Development and production of some Soviet natural
orocePdine at respectable rates despite
the obstacles of remote location and conditions that
make extraction exceedingly difficult.
R. The USSR is second only to South Africa in the
production of Bold. Production in 1981 was about
325 tons. Its stock of gold is about 1900 tons,
worth over $25 billion at current prices.
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b. Soviet or oauc:ion of platinum-group metals.
nickel, and cobalt will jump sharply during the
t9R0s. Output of these resources will be
adequate to meet domestic needs and also to
provide increasing qrrantities for exoort.
c. Prospects for production of those resources
located in morF eas.:ily ac^essihle reti.on s Look
even better. 1";ich new depoci is 'oming on stream
TAzakhstPn and Georeia should generate sizahle
increases in production of both chro?nite and
manganese.
V. Basic Weaknesses of the Economy
A. We will now look at the weaknesses or vulnerabilities
represented on the Soviet economic ledger. We will focus
first on oroblerns stenTning from circumstances beyond
Soviet control and then turn to the shortcomings and
vulnerabilities of the economy that are inherent in the
USSR's system of economic planning and administration.
Then we wi l l consider specific weaknesses.
B. Soviet economic performance has been hurt in recent years
declining increments to the labor force
increasing ('fficulty of extracting and transporting
vital energy and other raw material inputs.
1. Because of lower hirth rates in the 1960s, an
increase in the number of workers reaching retirement
age and a rising ir.ortality rate among males in the-1125
to 44 age range, in^rements to the working-age
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population have been declining since the mid-1970s.
The falloff became particularly sharp starting in
1980, and--as our next chart (Figure 8) shows--
increments will remain very low throughout this
decade.
a. From 1971 to 1981, the working-age population
grew by about 23 million. In 1.981-91, it will
increase by only about 4 million peoDle. The
decline in growth of the labor force--that is,
people actually employed--will be less, largely
because of a rise in the share of the population
in the 20 to 39 age group, where labor force
participation rates are highest. But the decline
in growth will still he substantial. The
increment to the labor force in 1981-91 is
expected to be only 9 million, compared with 19
million in 1971.-81. With participation rates in
the labor force already very high, there are few
unemployed people to draw on to offset adverse
demographic conditions.
b. Other factors will aggravate the labor
shortage. Large-scale migration from the
countryside to urban areas, formerly a rich
source of labor SuDDIV to the rest of the
economy, has slowed considerably in the past
decade. The agricultural sector itself faces
shortages of qualified manpower in most areas.
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FIGURE 8
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This problem is compounded by the fact that rural
residents in the Central Asian republics, where
increments to the working age population will be
highest and where there still is substantial
redundant labor, are reluctant to migrate.
2. As we noted earlier, the Soviet Union is blessed with
enormous quantities of a 1arve array of raw
materials. But in many instances these materials are
increasingly inaccessible, and thus the cost of
exploiting them has been rising sharply. This has
been strikingly true of Soviet energy resources.
9. With the decline in production in the Volga-Urals
oil fields in the mid-1970s, growth in Soviet oil
production has come from West Siberia, much of it
from the giant Samotlor field. However,
production in this field probable h?s peaked,
compelling the Soviets to seek oil in even more
remote and fforbidding regions. In 1981-85, just
to achieve the slowest growth rate planned in oil
output since World War II will require greatly
expanded drilling and pumpinz operations.
b. Decades of mining have depleted the underground
coal mines of the European USSR. The Soviets
must tunnel deeper shafts and mine thinner seams
just to maintain coal output at current levels.
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During i97'-81, for exAmole, more than 80 percent
of new mine onntr)ut was needed to offset deoletion
at older rnnder7round operations.
c. Even the extraction and distribution of natural
gas has grown considerably more expensive.
(ll Natural gas deposits in the old producing;
areas--Nort.h Caucasus, Transeaucasus,
Ukraine, Volga-Urals, and western
Turkmenistan--are severely depleted. More
and more gas must be piped from central Asia
and especially Tyumen oblast to replace
exhausted !ocal supplies.
(^) Such long-distance transmission of natural
gas requires construction of lengthy
pipelines and a great many compressor
stiitions. R very expensive operation.
d. Fasi'v accessible supplies of many non-energy raw
materials have also been exhausted.
(1) The Soviets have largely depleted reserves of
copper, nickel, and bauxite in the Ural
Mountains and are beginning to tap deposits
in northern Siberia or, in the case of
bauxite, are exploiting non-bauxite ores and
boosting imports. Similarly, the richest
deposits of phosphate rock in the Kola
peninsula have been depleted, forcing the
Soviets tr+ move to lower-quality deposits in
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Siberia.
(?) In the case of iron ore, the Soviets have
depleted their richest deposits in the
Western USSR. To compensate for declining
ore grades, increasing amounts of investment
must be devoted to ore-enriching facilities,
raising both production costs and manpower
requirements.
(3) The Soviets are also faced with the depletion
of forests in the traditional logging areas
of the north-western USSP. Government
planners have chosen to overcut these forest
tracts beyond the point of na.turAl
regeneration so that, at least temporarily,
the scale of cnerations in Siberia could be
held down. But when loggers are forced to
expand operations in Siberia--and the Far
East--recovery costs will be high because of
the distances involved, the harsh climate,
and the lack of infrastructure.
3. As our next chart (Figure 9) shows, the increase in
fixed capital investment has also slowed markedly in
recent years. This deceleration can he seen as both
forced upon the leadership by shortages of key inputs
and--as I noted earlier--as a conscious policy
choice.
a. Growth was 7 nereer:t a year in 1971-75, slowed to
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about 5 percen,.n "ea,r in 1976-78, and fell
sharply to an nver:ge annual rate of only about
- 1.5 percent in 1979-80.
b. Growth picked up in 1981--fixed investment rising
3 percent--but the 11th Five-Year Plan calls
for investment in 1.981-85 to rise by less than 2
percent a year. This. is by far the lowest
planned rate of increase in the post World War II
period. The rise from 1971-75 to 1976-80 was
nearly 30 percent.
C. Because of tightening demographic, investment, and
resource constraints, the traditional Soviet economic
growth formula of relying on lavish use of labor,
capital,.and material inputs is no longer applicable.
1. The Soviets themselves have long recognized the need
for a new approach. For at least a decade they have
been stressing the necessity of switching from an
extensive to an.,intensive pattern of growth. This
means essentially that growth must largely spring
from productivity gains--from more efficient use of
resources for any given level of technology and from
faster technological progress.
2. But the Droductiv4ty of capital has actually been
falling for several. years, and labor productivity--
see our next chart (Figure 10)--has been rising at
steadily declining rates. For this, shortcomings in
the Soviet system seem largely to blame, a matter to
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which I will now turn.
D. The Soviet economic system is peculiarly ill suited to
promote efficiency and technological progress. Four
features of the system help to explain why.
1. First, economic planning and management are highly
centralized, with resources allocated mainly by
administrative fiat. Reforms aime' at increasing the
degree of enterprise autonomy have generally come to
naught.
a. Indeed, central control over economic activity
has been on the increase for the last several
y-ears, as indicated by an increase in the number
of corrmodities that are allocated in physical
terms according to central planning decisions.
b. The arbitrary nature of central decisions on
allocating inputs and assigning outputs, which is
aggravated by the absence of prices that
accurately reflect relative scarcities, precludes
efficient planning.
2. Along with overe'ntrali?ation, the goals the central
i
authorities impose on the ecororny have generally been
unrealistic. Faced with a gAp hetween what they want
to 1o and what is poscihle. Soviet leaders have
tended to call for productivity gains and material
savings that are beyond the system's capacity.
a. iThe economy thus chronically operates under
conditions of strain and shortage. And, as I
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indicated carper. the number and severity of
supply bottlenecks have been increasing in recent
years.
b. Wit-h inDUts r ^ularly hard to come by,
enterprises have a strong incentive to hoard.
This intensi f ies bottlenecks and leads to more
hoarding, in a depressing circle of waste.
3. Overcentralization coupled with unrealistic planning
has meant that the behavior of factory directors is
largely dictated by the urgency of meeting the plan
imposed by higher authorities.
a. Fulfillment, however, is generally measured by
multiple and often inconsistent "success
indicators" of varying degrees of priority, such
as physical volume of output, gross value of
output, value added, material savings, and
productivity.
b. The principal drawback of this system is that
managers often strive to meet the targets even at
the expense of what is economically rational from
the standpoint of the central authorities and
society as a whole.
c. For example, if gross value of output is a prime
goal, waste is encouraged, as managers seek to
make their production as material-intensive as
possible.
d. The Soviet Union is currently elevating value
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added in production to the nosition of the prime
success indicator. Though probably less perverse
a target than gross value of output, it, too, is
subject to abuse. For example, it could induce
managers to increase employment at a time of
labor stringency.
4. Finally, Soviet eeonoTnic.performanee has long been
impaired by the separation of research, development,
and production into different organizations. Each
organization operates according to different planning
targets.
a. Scientific Research Institutes do basic research
and are paid for successful completion of
research projects whatever their practical
benefit to the economy.
b. Design Bureaus develop the blueprints for new
eouipment and are largely rewarded for the
successful testing of the protototvpe. Rewards
are only loosely linked to successful
incorporation of the new product into serial
production.
c. Production plants, meanwhile, are rewarded for
increasing both physical output and the value of
output.
(1) The introduction of new products at a plant
initially disrupts serial output,
jeopardizing plan fulfillment and resulting
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rewards.
(2) The Soviets have no competitive marketplace.
to force hoth developer and producer to
introduce better products and technologies.
Indeed, hostility to technological change at
the producer level is characteristic of the
Soviet economy--as Yuri Andropov told the
Central Conrii*ttee of the Party a week ago.
d. Because of this division of labor and the systems
rewards, Soviet products remain in production for
an inordinately long time, new products
frequently embody only minimal change, and the
fruits of truly advanced research impact on
serial production only with great delay. Over
the last decade And a half, the Soviets have
reorvanized c'eveioament ane. production
estahlishmentc to deal with this problem. But
the problem..prr, sists.
E. Moving from generalizrtions to particulars, we will look
now at the areas in wi:i,-h the USSR seems oarticularly
weak or vulnerable.
F. Historically, agriculture has been the economy's leading
problem sector. Its nerformance over the past four years
has strengthened its claim to that dubious distinction.
1. After peaking in 1.978. farm output fell steadily
through 1 9R1 . who'. i t ctood over
1() percent below the
197R Iev(I. Tb1s v eeurr hr oottuct+on is expected to rise
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but by only Ftbout two oerCeent.
2. The grain crop which reached a record high of 237
million tons in 1975, has not reached 190 million
tons in any subsequent year. Last year the grain
harvest was so low that Moscow never announced a
figure, although unofficial statements put the crop
at 158 million tons.
3. Production of meat--a key commodity in the regime's
drive to better the Soviet standard of living--has
also fared poorly. It reached 15.5 million tons in
1978 but has been below that level since, ranging
from 15 to 15.3 million tons over the last four
years .
4. Bad weather has been a, major factor in the decline in
agricultural production since 1978, but harsh weather
and unfavorable geozraohical conditions constitute a
permanent threat and obstacle to agriculture and only
partly explain why Soviet efforts over the years to
boost farm output have not yielded more dividends.
a. Mishandling of the sector by the Soviet
authorities has also had much to do with its
disappointing performance.
b. Management and planning processes are much too
centralized. Farm efficiency is seriously
handicapped by constant intervention of
unqualified officials regarding what to plant,
when to plant, when to harvest, and the like.
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c. Prices of far ?T i-Ia,?ts grid outputs set by the
central authorities are eneo'.raging en assortment
of ot'tDUt that is inconsistent with the national
plan. At a time when Moscow is striving to
expand output of meat. milk, and eggs, relative
prices are such that farmers find it more
profitable to concentrate on growing crops.
d. Though investment it, agriculture has been heavy---
over a quarter of total investment outlays has
gone to the farm sector for many rears--much of
it has been misdirected.
(1) There has `>een too much emphasis on
construction, net enough on equipment.
Furthermore, the quality of farm machinery is
low, with t`h? incidence of breakdowns hiiZh.
e. Deliveries to,theagricultural sector of needed
materiel inputs. such as fertilizers, have been
insufficient while the proportion of aged and
unskilled worriers in the farm labor force--which
accounts for ahout 20 percent of the total labor
force--is high.
f. The regime has also failed to take maximum
advantage of the potential of the private sector
in agriculture, even in periods, such as the
present, when it is encouraging expanded output
there.
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5. In recoe'nition of the rising popular demand for
quality food, Brezhnev told the Central Committee in
18te 1981 that food was the most important "political
and economic problem" of the 11th Five-Year Plan.
a. The increase in demand reflects rising consumer
expectations and incomes. The inability to
satisfy that demand is a function of both
stagnant output of most livestock products and
the regime's unwillingness--reinforced by
Poland's experience--to raise prices in state
stores.
b. The leadership has attempted to ease the
imbalance between supply and demand by allowing
various local rationing schemes under which
customers may purchase only limited amounts of
certain foods in state stores. But long lines
for meat, mill., and milk products remain
widespread. To soften the impact of shortages on
the work force, the regime has. redirected
substantial amounts of quality foods from public
state retail outlets to special distribution
outlets in factories and other economic
enterprises.
6. Against this ha.ckground, Rrezhnev last May unveiled
his Food Program--in preparation for a year and a
half. The ohiective of the Drogram was to boost
Soviet food Droduction and reduce dependence on
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ports--quickly. The Poo%i program attacks
agriculture's problems from three directions:
a. First, it reorganizes the agricultural
administration by creating conznissions at all
levels of government to coordinate agricultural
operations and all related activities, ranging
from sectors providing supplies to agriculture to
the processing, distribution, and marketing of
farm output.
b. Second, without significantly raising previous
targets for total expenditures, the program seeks
to redirect irvestment to weak links in the food
production chain. Investment in sectors
producing machinery for agriculture is to rise
sharply. To reduce waste, investment in on-farm-
food processing and storage facilities has been
given top priority. 'store investment in rural
housing and roads is scheduler) to improve farm-
to-market transportation Hod stem the flow of
younger worke.?~ to the cities. Upgrading the
plant and equipment in food Drocessing is another
major target.
c. Third, financtai incentives are to he raised.
Prices paid by the state to farms for a large
variety of HLyricultnral products will increase on
January 1. A, the same time, prices paid by the
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farms for equipment, fuel and fertilizer will be
lowered.
7. For the most part, however, the Food Program
represents relatively minor variations of old
policies.
a. One exception is the reorganization of
agricultural administration, which--by increasing
friction and confusion within the bureauraev--is
likely to cause more prohlems than it solves.
The Win defect of the Program lies in its
omissions. It does nothing to reduce day-to-day
bureauratic interference in agriculture,'and it
does not do enough to restructure prices or to
change the incentive system so that rewards are
directly keyed to performance.
G. As the recent meetings of the Communist Party Central
Committee and the Supreme Soviet made clear, there are
very serious problems in other sectors as well.
1. The Soviet steel industry, for example, has become a
major bottleneck.
A. Shortages of steel. esoecielly high-ruality
products, are holding back the growth of civilian
machine building end other priority sectors of
the civilian economy.
b. The appetite of the Soviet economy for steel is
probably unparalleled--and a reflection of its
relative technological backwardness. Last year
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t''ie T3SSR w n nal f the ( P of
the united States used i r) '3 iiiion metric tons
ro':led steel products comoAred with VS
consumption of E4 million tons.
c. The shortages of steel won't be remedied
quickly. Investment require-eats to cope with
the declining c u ' l i tv r f ore ^rc escalating
rapidly. and new
of
C'ac>pci tv reollires lcTig gestation
periods before it can be brought on stream. In
addition, supplies of coring coal and iron ore
are likely to continue to be tight in the next
several years.
2. Transportation is another sector responsible for
recent poor economic performance. Snarls on the
railroads-the backbone of the system--have disrupted
economic activity across the heard. but most
p>rtieularly in t1ne (lei ive^v of raw materials sueeh as
coal, iron orn. timmber, scrag-*netal. and chemical
fertilizer.
'he Soviet economy' recuires e large volume of
transport seryiees not only because of its size
and compleyity but a1sn `?ecause the country's
resources and people are spreed widely over a
very large land mass.
h. l"ompared with North Amer iep and Europe, the USSR
is poorly serv^r' by
y r -;'o ,lnd w,'ter transport,
rind governm, n i !,)l ;C Y
?,ei,+ hack the
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development of an adequate highway system. The
brunt of the transport burden. therefore, has
fallen to the railroads.
c. The railroads, however, appear to have reached
their capacity ceiling with present technoloaY
and facilities. Consequently, the transport
sector will find it difficult to support economic
growth through the next several years at least.
3. In the energy field the leadership faces rather
different problems in the coal and oil industries.
a. Coal production, which drooped during 1979-81,
has been hampered by deteriorating underground
mining conditions at larger, established mines,
by shortages of labor and declining labor
productivity, and by insufficient capital
investment.
b. Oil production continues to increase, though
slowly. Even the very small. growth of the last
few years has required an enormous effort.
4. Finally, shortages of raw materials and depletion of
slowdown in
a. Current output, 'for example, increased by less
than 2 percent annually during 1976-80 compared with
nearly 5-1/2 percent annually in the preceding five
year period.
b. Shortfalls in the production of cement, roofing
fuel and power supplies have caused a marked
the production of construction materials.
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materials, construction resources, and wR11 material',
have restricted construction activity throughout the
economy.
H. As we emphasized eerlier, the Soviet economy does not
depend on trade for survival. Total imports equal about
12 or 13 percent of GNP, those from the West--only about
5 percent. But, because of the difficulties just
enumerated, the elimination or easing of critical
bottlenecks and the achievement of key elements in Soviet
development plans are closely tied to imports from the
West.
1. The USSR will have to import a broad range of Western
oil and gas equipment if it is to minimize the fall
in production in fields where depletion is at an
advanced stage, increase output elsewhere, and help
locate and develop reserves.
a. Pipelaying equipment capable of handling large-
diameter pipe is produced only in the West, and
we estimate that the Soviets will need to import
at 15-20 million tons of steel pipe during the
remainder of the 1980s to build the pipelines
they have scheduled.
b. They will also continue to need sophisticated
exploration eaipment, high capacity submersible
pumps for the oil fields, and probably high-
powered turbines for gas compressor stations.
2. Soviet requirements for quality steel should result
in annual imports of steel other than pipe of about
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$2 billion (current prices) at least until the mid-
1980s.
3. Imports of chemical ^ouipment and technology probably
will continue to be large, reflecting the still
antiquated character of some parts of the chemical
industry and the importance of the industry for
agricultural production.
4. Imports of grain and other agricultural commodities
have soared in recent years an' almost certainly will
remain high. Grain purchases in 1979-82 averaged
more than 30 million tons a year.
I. The USSR's ability to earn the hard currency it needs to
pay for its Western imports is, however, already under
pressure and may well diminish in the future.
1. The main reason is the leveling off and possible
decline in Soviet oil production.
a. Because domestic consumption will continue to
rise and because of ongoing demands from Eastern
Europe, we expect oil exports to the West--which
account for about half of Soviet hard currency
merchandise export earnings--to fall.
b. According to our projections the rise in hard
currency earnings from stepped up exports of
natural gas will only partially offset the
anticipated decrease in receipts from oil.
2. Other factors also have restricted Soviet hard
currency earning capacity.
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a. Primarily because of the softening of enervv
prices. Soviet terms of trade vis-a-vis the West
will be less favorable in the 1980s than they
were in the l0"Os, when upward spiraling oil and
gold 'prices hrcught the L'SSP windfall gains.
b. In addition, demand for Soviet raw materials will
be weak if western economic activity, fails to
pick up.
c. Soviet manufactured goods, which are generally
not competitive in Western markets, are unlikely
to take up the slack.
d. Finally, less e.eveloped countries, including OPEC
countries, probably will be less able to pay cash
for Soviet arms.
3. The Soviet capacity to buv from the West is of course
backstopped by the USSR's huge stock of gold. But
the USSR. is reluctant to undertake massive sales of
gold in an uncertain market because of the downward
pressure that Soviet sales exert on prices.
4. On balance, the unpromising export outlook suggests
that the USSR may have to make do with little if any
increase in real imports in the 1980s.
J. The USSR's relations with Eastern Europe add another
dimension of strain. Because it wishes to maintain
political and social stahility in Eastern Europe, the
Soviet Union has given favorable economic treatment to
five of the six Warsaw Part countries--Czechoslovakiia,
East Germany. Bulgar ire. Poland, and Hungary. The
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exception has been Romania.
1. This specinl treatmen or "assistance", has taken
two basic forms: Subsidization and credits.
a. Subsidies have not been given dire?tly. They
have instead been extended through preferential
terms of trade. That is, Eastern Europe's terms
of trade vis-a-vis the Soviet Union are more
advantageous than those that would prevail if
Eastern Europe conducted that same trade with the
non-communist world.
b. In essence, the USSR sells energy, mainly oil,
and other raw materials to Eastern Europe for
less than world market prices and pays more than
world prices for the manufactured goods it buys
from Eastern Europe.
c. Estimates of the cost to the Soviet Union of
giving preferential terms of trade to Eastern
Europe are rough---and controversial. According
to the highest Western estimate we know of, these
subsidies totaled almost $70 billion in 1.960-80,
with about 90 percent of this amount accumulating
after 1974. The huge jump implicit in subsidies
reflects the explosion in world oil prices in
1973-1980 and the large rise in opportunity costs
to the USSR of its oil exports to Eastern Europe.
d. The credits come mainly from the trade surpluses
the USSR has consistently run vis-a-vis Eastern
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Europe since the mid-1970x, although the Soviet
Union has also given some direct hard currency
assistance to Poland.
2. Eastern Europe, battling severe economic problems of
its own, continues to depend on Soviet assistance.
But economic stringencies in the USSR have increased
greatly the
Europe.
cost to the Soviets of aiding Eastern
3. The USSR apparently has decided to give reduced
priority to Eastern Europe's economic needs in the
future. Soviet oil exports to Eastern Europe were
cut this
year. and the USSR's trade surplus
with the
area apparently declined. Soviet subsidies will.
probably fall too. But a drastic cut in exports of
raw materials and in trade credits and subsidies is
unlikely.
VI. Uncertainties Attached to the Growth Forecast
A. Before summing uo our main points, M4r. chairman, I would
like to note that Andropov's advent to power has not
altered our assessment of Soviet economic prospects.
1. The exogenous factors impeding economic growth are
not affected by the change in leadership.
2. Moreover, Andropov's comments to the Central
Corrrni ttee last week Doint to no significant change:;
in economic policy.
a. He indicated that he will take a cautious
approach to (ronornic reform.
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b. He furt for made ehcar that defense and heavy
industry will retain their priority.
3. The smattering of economic targets for 1953 announced
at the Supreme Soviet meeting a week ago are
overambitious, suggesting that relief of economic
strains and bottlenecks from more realistic planning
is not to he expected.
B. Andropov is. however, in nn extremely early point in his
reign. Thus major oolic
changes could lie ahead. For
this reason--and for reasons unrelated to leadership
changes--our forecast of average annual growth in real.
GNP of 1 to 2 percent could be off the mark.
1. Growth could he more rapid, for example:
a. If the USSR enjoyed a run of good luck with the
weather, leading to a succession of good
harvests.
b. If the new leadership were willing to undertake a
substantial reallocation of resources from
defense to investment.
c. If the new regime were We somehow, perhaps by
diverting resources from cefense to consumption,
to improve morale and lahor productivity.
d. Above all, if efficiency could be boosted by
mitigating some of the most damaging features of
the existing system. Productivity might be
raised, for example, without a drastic overhaul
of the system through
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(1) more halanced Pilocntion of investment to end
the neglect of such vital sectors as
transport. and by
(?) stopping the proliferation of success
indicators and of overlapping lines of
authority that has characterized the so-
called " reforms" of oast dears.
P . I f Andropov--his rule sec-irely estahl i she''--
undertook basiee changes that significant Iv
recdiced central izRtion and gave substantially
greater play to market forces, the prospects
would be even Netter. Such a reform, however,
would be constrained by the imperatives of
maintaining political oontrol in a large
multinational society. Furthermore, attempts to
implement reform would encounter stubborn non-
compliance by party and economic bureaucrats.
2. (rowth could he less rapid, for example:
a. If the bad wec;.ther of the last few years
continued, reusing R permanent depression in
agricultural output. In any case, there is a
theory, substnntiated by evidence, that the
genera>>v favorable weather that prevailed
between the early 19R0s and ?nid-1970s wRS an
abberation. 4lthough the weather for crops in
the past several veers was surely worse than any
long-run Hverriuue. a return to the pre-1975
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conditions is ',nl ik.ely.
b. If the new leadership decided to accelerate the
growth in defense spending at the expense of
investment.
C. If the riDpl.e effent of current hottlenecks
intensified.
d. If oubl ie CVni(bism Qn,' apathy deepened markedly
or active unrest developed.
3. Of these possibilities, serious widesoread unrest--as
the Polish experience suggests--is the one most
likely to hit aggreg.+te output the hardest. However,
we consider such an eventuality unlikely. It would
probably require a steep and prolonged drop in living
standards in the first instance. Large-scale labor
disturbances might also occur if Andropov pursued
with excessive zeal his promised campaign to impose
greater discipline in the work place.
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VII. Concluding Comments
To sum up our presentation. then
A. Soviet economic growth has slowed markedly in recent
years. The slowdown partly reflects declining increment.;
to the supply of labor and the stock of capital and
sharply mereised cosh, in nroAucinc and transporting
vital energy and raw m:-terials. Put it also stems from
the inability of the s'ister to offset these constraints
by bringing about substantial increases in efficiency and
productivity. Indeed, economic growth has sharply
decelerated even before the labor and energy shortages
have reached their maxi nurn severity.
B. The consequences of the slowdown are:
1. First, much harder choices for the leadership in
allocating resources to consumption, investment, and.
defense.
2. Second, the further invalidation of the I1SSR's claim
that its economy is an appropriate model for the rest
of the world, particularly the third world.
C. In spite of its disaprpointing oerformRnce, the Soviet
economy, hov..rever, is not going to co,Iapse. Indeed, we
expect GNP to continue to grow, although slowly.
Furthermore? so fnr, defense spending continues to rise.
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