INTELLIGENCE MEMORANDUM ECONOMIC AND MILITARY IMPLICATIONS OF THE NEW SOVIET PLAN

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• Document Number (FOIA) /ESDN (CREST): 0005347549
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• Document Creation Date: June 23, 2015
• Document Release Date: May 28, 2009
• Case Number: F-2009-00190
• Publication Date: October 30, 1967

(b)(1)
(b)(3)
DIRECTORATE OF
INTELLIGENCE
Intelli6crence memorandum
Economic and Military Implications
of the New Soviet Plan
N w 3oti(nl
APPROVED FOR RELEASE^DATE:
21 -May-2009
copy No. 37
RR IM 67-68
30 October 1967
TS No. 192877/67
 x V'j
SUBJECT Economic and Military Implications
of the New Soviet Plan
w i
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r sa " C.3
C
CENTRAL INTELLIGENCE AGENCY
WASHINGTON, D.C. 20505
MEMORANDUM FOR; Mr. Arthur A. Hartman
Staff Director
Senior Interdepartmental Group
Office of the Under Secretary
Department of State
1, Attached is an Intelligence Memorandum which
analyzes the recent Soviet plan and budget announce-
ments. These statements, which call for a rise of
2.2 billion rubles in defense expenditures in 1968,
almost certainly reflect an important change in
economic priorities in favor of the military estab-
lishment. Study of the available evidence suggests
that military and space outlays will. grow by a
substantial amount in real terms, an increase which
probably results more from the augmentation of a
number of programs than from a crash expansion of
any single one of them.
2. Other factors, however, such as accounting
changes, higher prices for military goods, and perhaps
military pay increases, could explain some of the
announced increase. In any event, the diversion of
additional funds to military purposes will force a
slowdown in agricultural and industrial investment.
In pursuing this course, the USSR is prejudicing the
long-term rate of technological improvement of its
industrial plant and making future agricultural gains
more precarious.
WILLIAM N, MOREILL, JR,.
Director\
Economic Research
Attachment:' IM 67-68 (Subject Report) (TS)
This Memorandum May Be
Downgraded To SECRET When
Detached From The Report
I i
 TOP SEGRAR142
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
Military and Economic Implications
of the New Soviet Plan
Summary
Recent Soviet plan and budget announcements,
which call for a rise of 2.2 billion rubles in
defense expenditures in 1968, almost certainly
reflect an important change in economic priorities
in favor of the military establishment. An
analysis of the available evidence suggests that
military and space outlays will grow by a sub-
stantial amount in real. terms as a result of
increases in many programs. However, accounting
changes, higher prices for military goods, and
perhaps military pay increases could also play a
role; in combination these might exceed a billion
rubles but are judged likely to fall short of
one-half billion rubles in 1968. The diversion
of additional funds to military purposes will
force a slowdown in agricultural and industrial
investment. Thereby, the USSR is risking the
long-term technological quality of its industrial
plant and making future agricultural gains more
precarious (see Figure 1).
No single Soviet military program is suscep-
tible -- except under extraordinary crash
conditions -- to changes in magnitude that would
account for a major portion of the announced 2.2
billion rubles. The largest military programs
.Note: This memorandum was produced by CIA. It
was prepared by the Office of Economic Research
with contributions from the Office of Strategic
Research and the Office of Current Intelligence.
This memorandum was coordinated with the produc-
tion offices of the Directorate of Intelligence
and represents the best judgment of the Direc-
torate as of October 1967.
f r4~._~ ~
 !~ L`T
TOP ern l7 GisCRET
USSR: Estimated Defense and Space Expenditures
1960-1968
21-23
20.4 }- - -
1967 1968
Preliminary Projected
under way in the USSR in 1967 are those for de-
ployment of the SS-9 and SS-11 ICBM's, which are
at an estimated combined annual spending level of
1.7 billion rubles. All other individual Soviet
military programs require much smaller expendi-
tures.* However, improvements in the readiness
and mobility of general-purpose forces could re-
quire the expenditure of one-half billion rubles
or more in the next year. If actual military
spending in 1968 were to rise by the announced 2.2
billion rubles, it would almost certainly be a
compound of increases in several major programs.
The present political, military, and economic
climate in the USSR is favorable to a further
shift in resource allocation priorities. The
* Estimates for 1967 outlays on the ABM system
being deployed at Moscow are at a ZeveZ of about
100 million rubles; the deployment program for
the Tallinn defensive system, about 200 million
rubles; nuclear ballistic-missile submarines,
about 140 million rubles; and air defense fighter
aircraft procurement, about 200 million rubles.
 re-equipping of Arab nations in the Middle East,
the desire to increase aid to North Vietnam and
the uncertainties created by that conflict, and,
the plan to strengthen defenses because of the
Chinese problem are all developments that bolster
the arguments of the Soviet military leadership
for a larger share of the budget. The recent
announcement of US intentions to deploy a thin ABM
screen, we believe, has not yet been fully digested
in the thinking of top Soviet policymakers, nor re-
flected in the budget announcement, but this develop-
ment also strengthens the hand of the military
spending advocates.
As for the economic climate, recent develop-
ments in both agriculture and industry appear to
have strengthened the Soviet economy. Two favorable
harvest years have reduced the urgency for doubling
agricultural investment along the lines of the
Brezhnev program and have eliminated for the time
being the necessity of large imports of wheat.
Industrial production, bolstered by gains in
military output and productivity, continues to grow
at a rapid 8 percent a year in spite of continued
difficulties in commissioning new plants and getting
operations up to rated capacity (see Figures 2
and 3). Finally, in terms of both real and mone-
tary income, the consumer has enjoyed very good
years in 1966-67, with the notable exception of
housing.
An examination of available data indicates that
the rise in Soviet military spending will have its
largest immediate impact on (a) investment in
modern industrial facilities, (b) production of
nonmilitary industrial goods, and (c) investment
in agriculture. No data were announced on plans
for the production of industrial equipment and
military equipment for 1968-70, but the data for
1966-67 -- when military spending was also rising
rapidly -- are illuminating. Production of equip-
ment for investment increased at an average rate
of only 5 percent in 1966-67, compared with 10
percent in 1961-65. Deliveries of military equip-
ment rose an average of 11 percent in 1966-67,
compared with 3, percent in 1961-65. In the case
of nonmilitary goods, the original 1970 goals are
being either trimmed (natural gas, electric power,
 plastics and resins, and chemical fibers) or set
at the low end of the range announced by Kosygin
in 1966 (steel, motor vehicles, and fertilizer).
The plan for a doubling of agricultural investment
is being cut back, especially the plans for agri-
cultural machinery.
The slowdown in the flow of new industrial
investment will force the USSR to operate an
industrial plant that is growing older and more
obsolescent. Therefore (a) technology will lag,
(b) repair bills will mount, and (c) a growing
fraction of output will be below western standards.
In agriculture, the lack of a sustained investment
program probably will mean the failure to meet the
ambitious goals for 1970, which, if realized,
would have permitted the USSR to once more export
grain in quantity. The consumer also will feel
the effect of the change in economic priorities.
The promised increases in wages, pensions, and
other benefits will mean sizable increases in
money income, but these increases are not likely
to be paralleled by similar increases in real
goods. Housing and construction of new capacity
in consumer goods industries are especially vul-
nerable when the pressure on resources mounts.
.~ -,oar
 USSR: Indexes of Production of Civilian and Military Machinery
1958-1967
60
1958
1966 1967
Preliminary
USSR: Growth of Industrial Output, Capital and Labor, and Productivity 1951-1970
(Average annual rates in percent)
9.7 _
INCREASE IN INDUSTRIAL GROWTH IN INPUTS OF CAPITAL GAINS IN PRODUCTIVITY
OUTPUT AND LABOR COMBINED (CAPITAL AND LABOR COMBINED)
8.2
4.9 5.0
3.0
i i
(1962 = 100)
Ci
vilian Mac
hinery
I
s
i
i
olwooo '
Military M
achinery
??
40
 For SECKE
ITT UIUCTII i
1. On 10 October 1967, Nikolay K. Baybakov,
the Deputy Chairman of the Soviet Council of
Ministers and Chairman of Gosplan, addressed the
Supreme Soviet on the state economic plan for 1968
and on preliminary plans for 1968-70. On the same
date the Minister of Finance, Vasiliy F. Garbuzov,
reported on the USSR State Budget for 1968 and the
implementation of the budget for 1967. It is
believed that these plan and budget announcements,
although lacking detail, signaled an important
change in Soviet economic priorities in favor of
the military establishment. The most important
single figure to appear was a planned increase in
defense expenditures for 1968 of 2.2 billion rubles.
2. The annual plan and budget speeches tradi-
tionally offer the most authoritative description
of Soviet economic policy. Indeed, in many key
areas, very little is published later to supplement
the information contained in these two basic
statements. The uncertainty surrounding military
programs in the plan and budget speeches is always
great. It is known that the overt defense budget
does not cover all Soviet military outlays; it is
also known that the degree of coverage has varied
over time because of shifts in accounting practices.
3. In mid-1961, for example, Premier Khrushchev
suddenly announced that expenditures for defense
would be increased to 12.4 billion rubles in 1961,
instead of the planned 9.3 billion rubles announced
the December before. His statement followed hard
on the announcement by President Kennedy of a sub-
stantial boost in the US military budget. Much of
the announced Soviet increase in 1961 appears to
have been spurious -- actual outlays were later
reported as only 11.6 billion rubles, and there was
strong evidence of a transfer to the defense
category of defense-related expenditures from other
categories of the budget. Nevertheless, whenever
the USSR announces a substantial jump in military
spending in an atmosphere of military and political
tension, as it did this October, the announcement
is a clear political signal and almost certainly
means that some shift in resources in favor of
military programs is actually planned.
 +%\ll C"1T
POLITICAL CO:'ISIDLRATI.O;JS.
4. Three important political factors bear
on the plan and budget announcements. Two of
the factors involve the image that the USSR wishes
to present to the world at this point in time, and
they exist quite apart from the actual relationship
between the announcements and the ultimate alloca-
tion of resources. The third factor concerns the
hard political realities at the pinnacle of the
leadership which determine the way in which economic
(and all other) decisions are made.
5. Recent international developments have
very likely increased the Soviet leaders' concern
for the USSR's national security and hence the need
to demonstrate a posture of strength and readiness.
Some leaders may see the US ABM announcement as a
sign that the arms race is about to enter a new and
enormously more expensive phase which will tax
Soviet resources but which the Soviet Union cannot
avoid; however, there has not been sufficient time
to digest the full impact of the US announcement.
6. Other leaders may be more concerned that
the trend in "local wars," such as the war in
Vietnam and the war between Israel and the Arab
states, means that the United States has gone
beyond "containment" and is trying to roll back
revolutionary and socialist regimes. Finally,
some may view the rapid development of Communist
China's military might as carrying with it the
prospect that the near future will see the USSR
confronted by a hostile well-armed neighbor.
7. Individual Soviet leaders may differ on
the nature and degree of the threat posed by these
developments and on the best way of countering it.
Some leaders have a far bleaker view of the world
scene than others and would prefer to adopt a
militant international stance and match the United
States step-for-step on all of the arms fronts.
Even those who would give higher priority to building
up the USSR's internal strength and searching out
areas of agreement with a potential enemy, however,
would not wish to negotiate from apparent weakness.
The result this summer and fall has been not only
:F-OP HEeRET
 TOP sitettiff
the announced increases in military spending but
also such well-publicized activities as support
for North Vietnam and the Arab states and the
large-scale "Dnepr" military exercise. Moscow
apparently has believed it to be necessary to add
to the "strength" side of its desired image of
"strength and reasonableness."
8. Another political factor influencing the
shape of the recently announced economic plans and
budgetary measures is the desire of the regime to
draw attention, especially during its 50th Anni-
versary, to its ability to provide for the popu-
lation's welfare while maintaining a high rate of
economic growth. In part, this factor stems from
the need to stimulate the enthusiasm of the populace
for "building Communism" and thus obtaining its
willing participation in economic development. it
also stems from the need to prove to those who are
determining the path of development in the emerging
nations that "socialism" is a more progressive
means by which to develop a nation's economy and
improve its standard of living.
9. As in dealing with the international
situation, individual leaders may differ over the
emphasis they put on satisfying the immediate wants
of the population as distinguished from investing
for further economic growth. They may differ over
priorities -- urban development or bringing 20th-
century amenities to the rural areas, expanding
facilities for education or for recreation. They
may also differ over what methods will prove most
successful -- increasing the purchasing power of
the population or expanding the state-run welfare
programs and facilities, spurring the growth of
productivity by increasing investment in production
facilities or by increasing the workers' pay, pro-
ducing more and/or better goods or improving the
means by which they are processed en route to the
final consumer. Regardless of their individual
motives and priority preferences, however, the
USSR's political leaders do seem to agree that it
is expedient from time to time to undertake measures
and programs designed to better the life of the
Soviet citizenry.
 10. The Soviet leaders thus appear to be in
general agreement about these two broad problems --
the need to polish the image of the regime as a
resolute defender of international "progress" and
as a capable provider for the wants of its people.
As noted, however, beneath this agreement on over-
all goals lie sharp differences about specific
points which in turn necessitate the making of
hard choices among the competing demands for Soviet
resources. These demands are still resolved by
compromise, not only between those leaders favoring
more guns and those favoring more butter but also
between those favoring different types of guns and
between those preferring different brands of butter.
This year the butter advocates did well, particularly
those advocating an increase in disposable income
and the stepped-up production of consumer goods to
prevent inflation. However, the guns advocates also
got a sizable increase, as the regime continues to
show that it is more responsive than was Khrushchev
to the views of the military hierarchy.
11. The provision of more guns and butter in
the short run means that needed long-run investment
in future capacity to produce guns and butter may be
jeopardized. Thus present decisions on resource
allocation may come back to haunt the leadership
if long-term growth rates decline or if agricultural
production stagnates. As the product of compromise
acceptable to the collective leadership, the decisions
probably fully satisfy none of the individual
leaders; for this reason also it may be expected
that if these decisions backfire they will become
a subject of acrimonious disagreement.
 MILITARY CO JSIDERATIO;-JS
Potential Inflation of the Military Budget
12 Several factors may lead to an exaggeration
of the increase in the real flow of goods and serv-
ices to military uses in 1968. The one with the
greatest potential effect is the general change in
prices for military equipment and other commodities
used directly or indirectly by the military,
although in any event it is believed that this
would be less than 500 million rubles. This change
was part of an overall revision in Soviet wholesale
prices that was completed on 1 July 1967.
13. Shifts in accounting practices probably
explained a significant portion of increased
defense budgets in 1961 and 1962. The opportunities
for major bookkeeping adjustments are believed to
be smaller today. One possible exception is the
treatment of military assistance. It is not known
whether military. assistance isincorporated in the
explicit defense budget. if military assistance
previously has been.carried outside the explicit
defense budget, a reclassification of military
assistance to North Vietnam and the Arab World
might add as much as 500 million rubles to the
budget.
14. Finally, a broad military pay increase in
1968 to parallel the wage increases for civilian
workers could add 200 million to 300 million rubles
to the budget. Although there is no evidence of
such an increase, military pay has not been raised
for'many years and a pay hike would appear to be
:
long overdue. Moreover, the reduction in conscrip-
tion terms would intensify the problem of retaining
skills in the military services and thus would
increase the pressures for a pay raise and other
incentives to reenlistment.
15. In summary, the total effects of higher
prices, accounting shifts, and military pay
increases potentially could exceed a billion rubles
but are likely to fall short of a half-billion
rubles.
 Recent Trends in Military Expenditures
16. Total Soviet spending for military and
space programs will have increased in 1967 by almost
3 billion rubles above 1965 levels -- a marked
change from the more stable level of spending under
Khrushchev during 1962-65 (see Figure 4). Estimated
expenditures in 1967 -- about 20 billion rubles --
are approximately 16 percent higher than the 1965
level and some 5 to 6 percent above the 1966 level.
Expenditures for ICBM's will have doubled in the
two years, and expenditures for SAM's and the ABM
program will have increased 70 percent. On the
basis of present estimates, expenditures for ICBM
programs should peak in 1967 and thereafter (1968-70)
decline somewhat.
17. The factors most likely to affect these
projections would appear more likely to increase
rather than to reduce them. The factors include
the possibility that ICBM deployment, including
qualitative improvements in present systems, would
move to higher levels than now estimated. Similarly,
in the case of the Moscow ABM system, a more rapid
national deployment might occur than is now antici-
pated.
18. The trend of expenditures for the general-
purpose forces and for command and general support
has held at about 9 billion rubles from 1962 through
1967. Current projections show little or no change
in the level of these expenditures in 1968, although
developments in 1967 could have led the Soviet
leaders to decisions for broad improvements in these
forces.
Possible Areas of Increased Spending
19. The increases announced for 1968 are 2.2
billion rubles for the defense budget and about a
half-billion rubles estimated as the share of the
increased science funds that is allocated to military
R&D and space. After allowing for some possible
price and accounting effects that would not call for
additional programs or activities (discussed above),
there would still seem to be some 1.5 billion rubles
that could create real changes in military forces
 T_ G) 12 S E C_ U ET
USSR: T Comparison of Announced Defense Budget
and Es imafed Total $Military and pa+ a pond u~r
1950'-196
Total*
r~
?
Announced
(in Current Rubles)
1950 1954 1$
*In fi955 rubleprkes Includeg;military research and development,
space,~expenditures, and expenditures an security forces .
and up to a 500-million-ruble real increase for
military research and development and space efforts.
The total amount -- approximately equivalent to
$4 billion to $5 billion in military goods and
services purchased in the United States -- is
especially large when viewed as a further increment
to the cost of the already expanded strategic
system.
20. Direct evidence of new military programs
or extensions of existing programs to higher levels
than now estimated can neither strongly support nor
convincingly argue against the prospect of signifi-
cant real increases in defense spending to these
levels. Discussions of possible programs are
extremely speculative under such circumstances. The
various alternatives discussed below should be
+E)FI
 r n77 t'1T!'~7l TAT
OP SECRE r
considered only as illustrative examples of programs
that the USSR could pursue which would place demands
on the economy for the general magnitude of resources
implied by this increase.
Strategic Programs
21, There are relatively few military programs
under way in the USSR which are big enough in them-
selves to have major implications for overall Soviet
military expenditures. The programs having the
largest expenditures during 1967 were the SS-9 and
SS-11 ICBM deployment programs, which combined were
at a level of about 1.7 billion rubles. Expenditures
for these programs had been expected to peak in 1967
and to decline by almost a billion rubles in 1968.
Considerable uncertainty still exists about the
status of these programs, however, and the sharp
decline in expenditures referred to above either
may not occur or may be much more moderate.
22. Each of the other programs required sub-
stantially smaller levels of expenditures. For
example, estimated expenditures for the ABM system
being deployed at Moscow were at a level of about
100 million rubles; the deployment program for the
Tallinn system was at a level of 200 million rubles;
nuclear ballistic-missile submarines were some 140
million rubles; and fighter aircraft.procurement
for air defense was at a level of about 200 million
rubles. No one of these smaller programs is sus-
ceptible to changes that would make up a major part
of the increase in announced defense expenditures,
although several, such as the ABM, are expected to
grow substantially in 1968. It is probable, there-
fore, that an overall increase of the magnitude
which was announced would consist of increases in
many programs,
23. Because all of these systems are now well
along in their production cycle, they are reason-
able candidates for either expansion or continuation
of deployment rates beyond currently estimated
levels. The ICBM programs alone, for example, could
drive estimated total military outlays for 1968
upward by nearly a billion rubles if, instead of
reduced expenditures implied by a falling off of
deployment rates, the estimated rate of deployment
 of the past two years is maintained for another
year or so. In contrast, the pace of deployment
of the Tallinn system is believed to be already
rapid and would have to be sharply accelerated
in 1968, or the Moscow ABM system expanded into
a broader deployment program, for these systems to
affect 1968 expenditures significantly. Either
of the above two programs could require as much as
an additional one-quarter billion rubles in such
circumstances.
General-Purpose Forces and Command and General-
Support Programs
24. Pressures have existed for a number of
years for upgrading the capabilities of the general-
purpose forces and the command and general-support
establishment to enable the USSR to exploit its
strategic position more fully through the exercise
or show of force at substrategic combat levels.
These pressures appear to have been held carefully
in check up to now as a result of the costs of
developing and expanding the deployment of strategic
systems.
25. Any general loosening of the restraints on
military spending would release pent-up demands of
several years standing. The requirements would
extend throughout many program areas and in the
aggregate could generate substantial expenditures in
the relatively short run. The increasing conflicts
of interest in the Middle East and the growing
Soviet apprehension about Asia related to the
Vietnam War and the Sino-Soviet dispute are probably
strengthening the arguments of the proponents of
improved general-purpose forces.
26. Total annual expenditures for the general-
purpose forces were relatively stable at about 6
billion rubles during the 1960's. There has, how-
ever, been considerable fluctuation in the levels
of the force elements and weapons systems programs
that has tended to be offsetting. A determination
to upgrade general-purpose force capabilities sig-
nificantly and rapidly -- for example, to improve
force mobility or limited war potential -- could
alter the pattern of general stability and in-
crease total expenditures by some one-half billion
TOP nFn*FT
 TOP SE CFtT
to a billion rubles, depending on the intensity
of the effort.
27. There are several different types of pro-
grams that could contribute to such an increase.
If, for example, 200,000 men were added to the
ground forces, expenditures would be raised by
roughly 200 million rubles. An increase of about
300 million rubles could be generated by a decision
that the mobility, fire-power, and tactical air sup-
port of the ground troops should be quickly aug-
mented -- bringing expenditures for these programs
to about 3.8 billion rubles. Similarly, a speedup
in the introduction of new transport aircraft
could raise outlays in 1968 by about 100 million
rubles above the 1967 level of about 500 million
rubles. Combined improvements in the surface fleet,
the naval air arm, and the submarine attack forces
would require some 200 million rubles more in 1968
than in 1967.
Increased Operational Activity
28. The top Soviet leadership this summer has
showed increasing concern for the level of readi-
ness of the armed forces. This concern already has
generated increased operating and maintenance costs.
In a speech to military graduates in July 1967,
Brezhnev stressed the need for increased readiness,
and this was followed by a conference of military
district commanders which stressed preparedness.
In the same month, there was a major strategic
exercise that involved combined forces. In September
1967, there was another massive military exercise
(Dnepr) in the western USSR. Some troop units have
been moved toward the Chinese border, and naval units
have been moved into the Mediterranean. Other
indications of increased alert status and opera-
tional readiness suggest that POL and logistics
consumption have been increasing. It is calculated
that some 200 million rubles might be required per
year for these operational support activities.
Military Research and Development and Space
29. Soviet expenditures for science in the
fields of military weapons and space have climbed
 TOP SE 77 TT
steadily over the years, roughly paralleling trends
in the United States. Since the early 1960's, there
has been evidence of increased concern for the large
annual increments for science, and efforts have been
pushed for greater cost-effectiveness -- more research
per ruble. Some decline in the rate of growth has
occurred recently -- a trend which was reversed by
the announced increases for 1968. Because of the
diffused nature of science in the Soviet economy
and because of the lag between program initiation
and intelligence detection of programs, identifica-
tion of specific new scientific projects will take
a long time.
420P n crr, SEGnr~-r~
itET
 EC0
1J0MIC CO JSIJERATIOLS
General Developments in 1966-67
30. Before considering the effects of the re-
vised economic plan and the effect of the shift
in priorities in favor of the military establish-
ment, some discussion of the performance of the
Soviet economy over the past few years is essen-
tial. Soviet gross national product (GNP) grew at
an annual rate of nearly 6 percent during 1966-67,
somewhat faster than the average of nearly 5 per-
cent achieved during 1961-65 although still below
the average for the 1950's (see Table 1). Most of
the moderate acceleration in the rate of economic
growth in 1966-67 is attributable to the above
average performance of agriculture. The Soviet
USSR: Average Annual Rate of Growth
in Gross National Product and Its Components
1951-70
Percent a/
196670
1951m6o 1961-65
1966
1967 b
Plan
Gross national product
6.7 4.8 .
7.8
3.8
6.0
Agricultural output
4.1 3.0
10.9
-3.4
4.7
Industrial output
9.7 6.5
7.5
8.5
8.3
Other d/
7.2 5.4
5.9
6.3
6.3
a. Unless otherwise noted, all data are CIA estimates.
b. Preliminary.
c. Mid-point of Soviet official plan range.
d. Construction, transportation, communications, and services.
Union harvested a bumper crop in 1966 and also
benefited from better than average weather in 1967.
The rate of growth of industrial production
increased moderately in both years, spurred by
sharp increases in raw materials from agriculture.
The improved performance of the Soviet economy in
1966-67 reflects a sharp increase in productivity
 because inputs of labor and capital continued to
increase at about past rates.
31. A rising share of the increase in GNP was
allocated to defense. Consumption also may have
increased somewhat faster than GNP. Investment,
the touchstone for future economic growth, seems
to have been the residual claimant in these two
years.
Agriculture Yields Priority to Defense
32. Planned agricultural investment is likely
to be one of the first victims of increased mili-
tary spending. Net agricultural output increased
an average of 3.5 percent per year in 1966-67,
largely because of favorable weather. Although
this rate was better than the annual average of 3
percent in 1961-65, it was well below the rate of
growth achieved during the 1950's as well as the
rate set in the plan for 1966-70. Total grain
production is estimated at about 140 million metric
tons in 1966 and about 115 million to 120 million
metric tons in 1967. Average yields of grain per
acre increased sharply in 1966 and fell back in
1967. The above-average grain crops permitted
rapid growth in the output of meat, milk, and other
livestock products, which increased 7.4 percent per
year in 1966-67, three times as fast as in 1961-65,
and also allowed grain stocks to be rebuilt. Conse-
quently, the USSR did not have to use its scarce
reserves of gold and hard currency to purchase
large emergency wheat imports, as in 1963-65.
33. The success in agriculture apparently has
led to a significant cutback in prior plans for
1966-70 to allocate large additional investment
resources to that sector. Shaken by the grim
necessity to import large quantities of wheat in
the early 1960's, the regime had incorporated in
the Plan Directives for 1966-70 large increases in
machinery deliveries above those of 1961-65, a
doubling of the output of mineral fertilizer, and
the irrigating and draining of more than 20
million acres of land. These plans are far
behind schedule (see Table 2). Deliveries of
tractors and trucks to the farms increased by 15.7
 percent and 51 percent, respectively, in 1966; the
number of new tractors scarcely increased at all in
1967; and the number of trucks actually declined
by 13 percent. Even more significant, however,
deliveries of agricultural machinery increased
slightly in 1966 but not at all in 1967.
34. Deliveries of mineral fertilizer increased
in 1966 and 1967, and this contributed significantly
to the growth in agricultural output. The fertili-
zer program is more nearly on schedule than other
major agricultural programs, but the 1968 plan calls
for an increase in mineral fertilizer of only one-
half the average rate achieved in 1966-67. The
reclamation of land is proceeding at less than two-
thirds of the rate required to meet the 1966-70
plan. Five million acres of land were reclaimed
in 1966-67, but half that amount of land was with-
drawn from use in 1966 and additional amounts
probably were withdrawn in 1967.
35. Two other elements of the agricultural
program -- a greater role for private activity and
greatly increased monetary incentives -- have been
carried out in varying degrees and probably con-
tributed to the agricultural success in 1966-67.
Following the lifting of Khrushchev's restrictions,
private holdings of land and livestock increased
markedly in 1965 and also slightly in 1966-67.
Private plots and livestock holdings account for a
large percentage of the output of meat, milk, eggs,
and vegetables, which grew particularly rapidly in
1966-67. In view of the small expansion in the
private sector in 1966-67, however, the regime
apparently does not intend to rely on the private
sector for additional food supplies.
36. With respect to incentives, special bonuses
of 50 percent were provided for above-plan deliveries
of grain in 1966-67, wages were raised on state farms
in 1967, and other benefits were provided. As a
result, cash and in-kind earnings of collective
farmers from the socialized sector rose 16 percent
in 1966 and about 4 percent in 1967. Wages of
workers on state farms rose about 7 percent in 1966
and again in 1967. The percentage increase in
incomes of farmers in these two years was more
than double that of non-agricultural employees.
TOP ni+
 TOP SRGPC+;~4
1966 1967
1968 1966-70
Plan Actual Plan Actual a/ Plan Plan
USSR: Planned and Actual Flow
of Resources to Agriculture
196670
Machinery deliveries
Tractors
Trucks
Other agricul-
tural machinery
Land reclamation
program
Average Annual Rate of Growth
(Percent)
9.8 15.7 3.6 0.4 10.4
85 51 241.5 -1302 79.3 40.9
N.A. 3.6 11.6 0 19 13
Gross additions to
irrigated and
drained area
Mineral fertilizer
deliveries
2.5 2.8 2.4 2.4 2.8 21 to 23
Average Annual Rate of Growth
_( Percen- _ - _
12.8 5
9.4 5.4 15.2
37. The agricultural successes of 1966-67
apparently have resulted in major foot-dragging
and large cutbacks in Brezhnev's many-faceted pro-
gram "to get agriculture moving again." Histori-
cally, investment commitments to agriculture have
provided a ready source of cutbacks when crops
happen to be large, for other claims on resources
always seem urgent. Another cycle of complacency
may be in the offing. In any event, the regime
- 19 -
TOP 8ttttttt
 cannot count exclusively on above-average weather
plus rubles in the hands of the peasants to cure
the chronic ills of Soviet agriculture.
Rapid Pace in Industry
38. Industrial production in 1966-67 grew at
an annual rate of 8 percent, considerably above
the 6.5 percent average annual rate for 1961-65
but well below the average of the 1950's. Except
for electric power, iron ore, pig iron, and
some chemicals, output of major industrial com-
modities was approximately on schedule.
39. Contrary to hallowed Soviet doctrine
about the primacy of heavy industry, production
of consumer goods -- both durables and non-
durables -- increased at approximately the same
rate as the output of producer goods, and in
1968 the former is actually planned to exceed the
latter. The only previous similar occurrence was
in 1953-54, following the death of Stalin early in
1953, and was abruptly reversed with Malenkov's fall
from power in 1955. The especially rapid rise in
the output of the light and food industries was
made possible by the sharply increased availabilities
of agricultural raw materials resulting from the
bumper harvest in 1966. Indeed, the growth of
these industries accounts for almost one-half of
the acceleration in overall industrial growth.
40. Two notable developments characterized
machinery output in 1966-67. First, unlike the
recent past, the rate of growth of military-
oriented machinery in these years was much more
rapid than that of civilian machinery (see
Table 3). Second, also in sharp contrast to
past practice, the consumer durables component
of civilian machinery increased far more rapidly
than the producer durables component. Output of
consumer durables rose about 12 percent per year
in 1966-67, whereas producer durables grew only 5
percent per year. These two developments mean that
a greatly increased share of machinery output in
1966-67 was diverted from investment purposes to
military and consumption purposes.
 41. The moderate acceleration in industrial
growth in the past two years reflects increased
productivity. Inputs of labor and capital (plant
and equipment) grew a bit slower than in 1961-65,
but their productivity doubled. The annual gain
of 3 percent during 1966-67, however, is still
far below the rate planned for 1966-70 and that
actually achieved during. the 1950's.
42. Several factors account for the sharp rise
in the growth of productivity. Possibly the most
important factor was the much greater availability
of agricultural raw materials, permitting the fuller
use of available plant capacity in consumer indus-
tries. Another factor was the bringing of actual
operating capacities nearer to those planned in a
number of major industrial plants. Many plants
producing civilian goods were hastily built and
prematurely commissioned during the latter years of
Khrushchev's regime. Finally, the economic reform
currently_,being carried out in industry probably
also made some contribution to productivity, par-
ticularly in 1967. The reform, which gears monetary
incentives more closely than before to enterprise
efficiency, affected only about 700 plants in 1966,
but by August 1967 it affected 5,500 plants, which
accounted for a third of total industrial output.
Plants under the reform are reported to have done
better than industry as a whole in increasing sales,
profits, and productivity. Soviet sources, however,
repeatedly attribute the initial successes to one-
time factors, such as the using up of excess stocks
of products and materials.
Shortfalls in Agricultural and Industrial Investment
43. Although data are meager and ambiguous,
the growth rate of aggregate investment in 1966-67
apparently was higher than that of 1961-65 but
well below the rate of the 1950's. Nevertheless,
investment in the two key sectors of agriculture
and industry is well behind plan. In 1966-67,
investment in agriculture increased at only about
one-half of the planned rate, and all of the
increase was devoted to land improvement and build-
ings; investment in machinery and equipment did not
rise at all. Investment in industry increased only
about 4.7 percent in 1966 and probably somewhat
faster in 1967.
 USSR: Average Annual Rate of Growth
in the Allocation of Machinery a/
1961-70
Percent
Total machinery
Of which:
Military
Civilian
Of which:
Original
1961-65 1966 1967 1966-67 1966-70 Plan
7.4 9.7 7.2 8.4 10 to 11
3.5 13.6 8.9 11.2 8.5 to 12
10.3 7.2 6.2 6.7 11
Equipment for
investment lO.4 5.4 4.7 5.0
Consumer
durables 10.1 13.2 10.8 12.0
a. Data on performance in 1961-6-7 are CIA estimates. Figures for
the 1966-70 plan are CIA calculations based on Soviet plan announce-
ments.
44. The slowdown in the rate of growth of
industrial investment resulted in a drop in the
rate of growth of capital stock (plant and equip-
ment) in 1966-67 from an average of 11 percent in
1961-65 to 8.5 percent in 1966 and to probably an
even lower rate. in 1967. Agricultural plant and
equipment increased 10 percent per year during
1961-65 and 7 percent in 1966. In both sectors
the rate of growth of capital stock probably
achieved in 1966-67 falls far short of the rates
projected in the 1966-70 plan. In the face of a
declining rate of investment in 1961-65, the
previous rate of growth of capital stock was main-
tained by deferring the retirement of obsolete
plant and equipment. These opportunities clearly
are nearing exhaustion.
 Improvements in Consumer Welfare
45. Soviet consumers fared exceptionally we:Y1
in 1966-67. Real income per capita, which inc~1 r
wages, farm incomes in kind, and payments from Lhe
state budget, rose nearly 6 percent per year, c.oim
pared with about 3.5 percent in 1961-65. Thanks
primarily to the good crop years, per capita cur...-
sumption of goods and services in 1966-67 rose
almost as fast as real incomes -- about 5.5 per?cenn.t.
annually, double the rate in 1961-65. Much larger
supplies of meat, dairy products, and vegetables
were available, significantly improving the quality
of the diet, which has long consisted mainly of
bread and potatoes.
46. Clothing supplies also increased markedly,
and their quality was better, thanks in part to
unprecedentedly large imports: from the West, whi:&.
are estimated to amount to $100 million in 1967.
Such imports were insignificant in the past.
Consumer durables, particularly television sets,
refrigerators, and washing machines, were also avail
able in much greater quantities; production of con-
sumer durables rose about 12 percent per year in
1966-67, double the rate of increase in 1961-65,. On
the other hand, services improved only slightly,
Plans for housing construction were greatly under
fulfilled as usual, and per capita housing space
increased by a mere 0.2 meter.
47. Despite the increased flow of consumer
goods, inflationary pressures grew stronger in
1966-67. Considerable inflationary potential
already, existed in the economy as a result of pa
policies which provided large quantities of rubles
unmatched by goods and services. Per capita dis-
posable money income rose more than 7.5 percent pa
year, much faster than the 5.2 percent called fo,:
in the 1966-70 plan and considerably faster than
consumption of goods and services. As in the r
past, a substantial part of the excess purchass_s?j
power was absorbed in voluntary savings; savings
bank deposits increased about 20 percent per yeas
in 1966-67. This means, however, that the people
expect housing and durable goods to be made avai_l.-
able in the future.
 i v i vi^viea
Adjustments in Overall Targets for 1968-70
48. Although the increase of 2.2 billion
rubles in the announced defensebudget_for 1968 has
drawn the most attention, theplan and budget
announcements contain other indications of increased
emphasis on military programs in 1968-70. First,
Baybakov reaffirmed the original goals for a major
increase in national income and industrial pro-
duction in 1966-70. At the same time, a number
of the original 1970 goals in key nonmilitary areas
were pared back (see Table 4). Either the original
Table 4
USSR: Revision of 1970 Plan Goals
Original
1970 Goal
New
1970 Goal
National income a/
1955 ? 100 (index)
138 to 141
Industrial
production
1965 = 100 (index)
147 to 150
149 b/
Individual
Oil
products
Million metric tons
345 to 355
350
Natural
gas
Billion cubic meters
225 to 240
215
Electric
power
Billion kilowatt-
hours
830 to 850
807
Steel
Million metric tons
124 to 129
124
Fertilizer
Million metric tons
62 to 65
62
Plastics and resins
Million metric tons
2.1 to 2.3
1.8
Chemical fibers
Thousand metric
tons
78o to 830
707
Million units
1.36 to 1.51 1.36
a. Soviet concept, which excludes services.
b. CIA calculation from Soviet announcements.
 goals are reduced (natural gas, electric power,
plastics and resins, and chemical fibers) or the
new 1970 goals are set at the lower limits of the
ranges originally set out by Kosygin in 1966 (steel,
motor vehicles, and fertilizer).
49. Not only have production goals been cut
back in certain major sectors of industry, but also
investment goals for those sectors are lower than
those originally set for 1970. The concentration
of the cutbacks outside of the military-oriented
machinery industry, coupled with the reaffirmation
of the target for industrial production as a whole,
suggests a plan revision that would accommodate a
boost in military expenditures above levels pre-
viously planned.
50. The Soviet planners seem to have sketched
out a pattern of industrial development during
1968-70 in which production of some key industrial
commodities and investment goods -- such as steel,
electric power, and synthetics -- grow at slower
rates than originally planned, permitting the
military-oriented sectors of industry to grow at
more rapid rates. Information available on 1968-70
does not permit the separating out of planned rates
of growth for producer durables and military equip-
ment. Only a qualitative judgment can be made that
the pattern of 1966-67 will continue into 1968-70.
Brezhnev Agricultural Program a Casualty
51. As in 1966 and 1967, ambitious plans have
again been announced for the production or delivery
of major categories of equipment to agriculture.
Because of the lackluster record in this area in
1966-67, it is believed that the 1968 target probably
will not be met. The rate of increase of deliveries
of fertilizer to the farms is set in 1968 at only
one-half the rate achieved in 1966-67. The increase
in investment in agricultural machinery and equip-
ment in the revised 1966-70 plan may be as much as
one-third less than in the original plan. In any
event, unless there are unexpected and spectacular
boosts in the allocation of resources to agriculture
in 1969 and 1970, the initial targets for investment
in agricultural equipment and land reclamation as
well as for deliveries of fertilizer will be
seriously underfulfilled.
TOP `-=-'
 T ERaT -0 12 Is-
52. The sag in the Brezhnev program for invest-
ment in agriculture may have been agreed on because
of the good-to-excellent harvests of 1966 and 1967.
Enhanced monetary incentives to farm workers had a
role in these successes, and the Soviet leaders
could have believed that these incentives. were a
happy substitute for the commitment of investment
resources. It is easy to imagine that the suddenly
improved agricultural situation -- allowing the
accumulation of some grain stocks -- provided the
military leaders with an excellent talking point in
any plan for a larger defense budget; at the same
time, it is doubtful that agricultural plans were
cut without a sharp battle at the highest political
level. In any case, the 1966-70 goals for agricul-
tural production cannot be met cheaply; investment
in real resources will have to be revived if the
goals are to be realized.
53. The single clear feature of the 1968 and
1969-70 plans in the area of consumption is the
announced rise in money incomes of the population.
Measures to be carried out in 1968 are to add 6
billion rubles to cash incomes. Per capita real
income is scheduled to increase by 7 percent per
year.
54. In part, the increases in incomes stem
from a wage creep associated with rising labor
productivity and normal higher growth in welfare
payments in the form of pensions and other transfer
payments. Nevertheless, the planners are carrying
out a series of wage and welfare reforms which could
have been postponed. For example, in 1968 (a)
minimum wages of the state labor force will increase
to 60 rubles a month, from 40 rubles in rural areas
and 45 rubles in urban areas; (b) geographic dif-
ferentials in earnings for workers in remote areas
will rise; (c) collective farmers will be allowed
to retire five years earlier; (d) one-third of the
state labor force will receive longer vacations;
(e) workers making 60 to 80 rubles a month will pay
less income tax; and (f) veterans' disability pensions
and sick pay allowances will increase. Over and
above these measures, which benefit primarily the
most distressed parts of the population, 11,- million
Tllp c~ro~r
 'I'0P 9rnn.--*-
machine tool operators will receive a 15-percent
hike in pay.
55. What the new plans for 1968-70 do not say
is how goods and services are to grow to meet the
swelling consumer demand. As incomes increase,
the demand for more and better quality goods is
bound to become more insistent. The 1968 plan
suggests, however, that the regime does not intend
to make any appreciable adjustments in the original
five-year-plan directives in the area of consump-
tion. Where 1970 goals for consumer durables were
given in the new 1969-70 plan, they stayed at the
levels set out in the original plan for 1970.
Despite the publicity given to plans for produc-
tion of passenger cars, the USSR is barely at the
threshold of the automobile age. Nor will the
consumer demand be accommodated by a long-desired
increase in the supply of housing. The new goal
for housing construction in 1966-70 is 3 percent
less than the target carried in the original plan.
56. The output of consumer goods in industry
in 1968 is to grow at a higher rate than other
industrial production -- 8.6 percent, compared with
7.9 percent. It must be remembered that previous
attempts to close the gap between rates of growth
of consumer goods and producer goods foundered.
The same elements that contributed to previous
failures are present now -- (a) plans depend on an
unreasonably high assumption about the receipts by
consumer industry of agricultural raw materials,
and (b) with investment being pressed down, plans
for expanding and renovating consumer industry will
be the first to be jettisoned.
Economic Perspective: Two Risks
57. The increased allocation of resources to
the military will accentuate the current slowdown
in the flow of new industrial investment and will
force the USSR to operate an industrial plant that
is growing older and more obsolescent. Therefore,
(a) technology will lag, (b) repair bills will
mount, and (c) a growing fraction of output will
be below world standards. The leadership is taking
a major risk in diverting investment resources to
military use when these resources may be vital to
- 27 -
T CR
 maintaining the long-term quality of the industrial
plant.
58. In similar fashion, Soviet agriculture
in most years carries out its basic task of
providing sufficient calories for the population
but needs to move to a higher level of organization,
technology, and diversity of output. Greatly
increased production of meats and other quality
foods requires a large sustained investment in
agriculture. This investment, which is a necessary
but not a sufficient condition for growth, was
provided for in the Brezhnev program. The sub-
stantial cuts in this program represent the second
major risk taken by the leadership -- namely, that
future gains in agricultural production are made
more precarious.
4TO'P SECREX
 I*n art Of
Tan Sanrnf