THE SOVIET ECONOMY IN 1978-79 AND PROSPECTS FOR 1980

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000200350002-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 32
• Document Creation Date: December 22, 2016
• Document Release Date: February 29, 2012
• Sequence Number: 2
• Publication Date: June 1, 1980
• Content Type: REPORT

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iiarionai
Foreign
Assessment
Center
The Soviet Economy in 1978-79
and Prospects for 1980
ER 80-10328
June 1980
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National
Foreign
Assessment
Center
The Soviet Economy in 1978-79
and Prospects for 1980
A Research Paper
Research for this report was completed
on 1 June 1980.
Comments and queries on this paper are welcome
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ER 80-10328
June 1980
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USSR: Growth of Gross National Product ', by
Sector of Origin, Selected Periods
1966-70
1971-75
1976-77
1978-79
GNP
5.3
3.8
4.1
2.1
Agriculture'
3.9
-0.5
6.6
-1.2
Nonagricultural sectors
5.7
5.1
3.5
2.9
Industry
6.4
6.0
4.1
3.0
Construction
5.9
5.6
3.0
1.7
Transportation
7.5
6.6
3.3
3.6
Communications
8.9
7.3
6.0
5.6
Trade
6.8
4.6
3.5
2.3
Services
4.2
3.5
3.1
3.2
Other
3.8
1.8
0.9
1.3
Calculated at factor cost.
' Excludes intra-agricultural use of farm products but does not make
an adjustment for purchases by agriculture from other sectors. Value
added in agriculture grew by an average of 3.5 percent in 1966-70,
- 2.0 percent in 1971-75, 7.3 percent in 1976-77, and - 2.3 percent
in 1978-79.
USSR: Growth of Gross National Product,
Factor Inputs, and Factor Productivity
1961-70
1971-75
1976-77
1978-79
1976-80 Plan
GNP
5.2
3.8
4.1
2.1
5.0
Factor inputs
4.3
4.2
3.6
3.6
3.5
Man-hours
1.8
1.7
1.3
1.4
1.5
Capital
8.1
7.9
7.2
6.9
6.5
Land
0.1
0.8
-0.1
0
0.5
Factor productivity
0.9
-0.4
0.5
-1.4
1.4
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The Soviet Economy in 1978-79
and Prospects for 1980
The Soviet economy slowed to a crawl in 1978-79. The average annual GNP
growth rate of 2.1 percent was the lowest for any two-year period since
World War II.* Farm output declined during the period, primarily as a
result of last year's major grain crop failure, while growth in almost every
other major sector of the economy fell considerably below that of recent
years (see table 1).
The economy's poor performance was attributable, in part, to unusually
harsh weather during the period. Record-breaking cold during the 1978-79
winter crippled transport, hampered factory operations, and raised the
demand for energy-causing substantial losses in industrial production. A
prolonged drought over most of the European USSR last spring and summer
was the main reason for agriculture's downturn.
The severity and the wide-ranging nature of the slowdown, however, reflect
more fundamental problems. After 25 years of sustained high rates of
growth-fueled by ever larger amounts of capital and labor-the Soviet
economy has entered a period of increasing strain. During the past two
years, the USSR has experienced (a) a virtual leveling-off of oil output and a
decline in coal production, (b) a major rise in raw material costs, and (c) a
falloff in investment growth. These problems cannot be overcome easily and
will restrict growth through much of the 1980s. On top of these problems,
and partly because of them, overall resource productivity (output per unit of
combined inputs of labor, capital and land) is declining and prospects for a
turnaround are bleak (see table 2). How to raise productivity is now the key
economic question facing Soviet leaders as they enter the 1980s.
Because of the economy's lackluster showing during the past two years, the
lot of the average Soviet citizen improved little. Growth in per capita
consumption was less than 2 percent annually in 1978-79. Per capita meat
production-a key indicator of improved living standards-dipped slightly
in 1979 compared with 1978, while housing, automobiles, refrigerators, and
other high priority consumer items remained in short supply.
* Underlying the 2.1 percent rate for 1978-79 was a 3.5 percent increase in GNP in 1978 and
a 0.7 percent increase in 1979. See the appendix for an annual breakdown of GNP growth by
sector of origin since 1970 and an index of GNP growth by sector of origin since 1965.
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On a brighter note, record grain imports of 31 million tons in calendar year
1979 and additional large purchases this year have enabled Moscow to avoid
the massive distress slaughtering that otherwise would have resulted from
last year's disasterous grain harvest. In addition, Moscow was able to take
advantage of the runups in the world price of oil and gold to increase hard
currency imports and still earn a hefty current account surplus.
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Agriculture: A Major Disappointment
1
Industry: No Longer a Growth Leader
2
Energy: Struggle To Boost Output
3
Machinery
8
Slowdown in Capital Formation: Future Impediment to Growth
10
Skyrocketing Raw Material Costs
12
Efficiency of Resource Use
13
Agricultural Rebound Likely 22
Statistical Appendix 25
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1. Growth of Gross National Product, by Sector of Origin
2. Growth of Gross National Product, Factor Inputs,
and Factor Productivity
3. Production of Major Crops and Livestock Products
7. Growth in Chemicals and Petrochemicals Output
8. Total Freight Traffic Statistics
10. Hard Currency Balance of Payments
11. Machinery Orders Placed With Hard Currency Countries 17
Al. Growth of Gross National Product, by Sector of Origin
A2. Index of Gross National Product Growth, by Sector of Origin 25
1. Value of Livestock in Privately Owned Herds
2. Energy Production
3. Oil Production Trends and Projections
4. Growth in Average Distance of Transport for Selected Fuels 13
7. Gap Between the Average Levels of State Retail Prices and 20
Collective Farm Market Prices for Food
8. Productivity of Key Industrial Commodities
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The Soviet Economy in 1978-79
and Prospects for 1980
Agriculture: A Major Disappointment
Last year's poor grain harvest of 179 million tons-
58 million tons below the record level of 1978-
together with declines in production of most other
crops caused farm output to drop by almost 6 percent,
more than offsetting the previous year's growth of 3.4
percent. Only cotton and eggs, which showed record
production levels, did much better than planned in
1979 (see table 3).
As usual, weather was the main factor affecting
agriculture's performance. A prolonged drought in
most of the European USSR during the spring and
summer of 1979 cut grain yields sharply and reduced
USSR: Production of Major Crops
and Livestock Products
Grain'
Potatoes
Sugarbeets
Sunflower seed
Cotton
Vegetables
Meat (slaughter weight)
Milk
Wool
Eggs
pasture and forage crop availabilities dramatically.
Record grain imports of 31 million tons ' in calendar
year 1979 precluded massive slaughter of livestock (see
table 4), but were not sufficient to sustain increases in
output of meat and milk. Indeed, per capita production
of meat declined by 1 percent in 1979.
Increased supplies of livestock products-hoped for as
a result of encouraging production in the private
sector-did not materialize.' The initial 6-percent
Including purchases of roughly 3 million tons for client states.
2 The private sector supplies more than 25 percent of the USSR's
total farm output, including more than 30 percent of its livestock
products.
Average Annual Percent Change
-1.4
20.1
-5.3
9.6
-8.8
3.6
-5.6
6.9
3.4
-0.2
Million Metric Tons
181.6
223.8
195.7
237.4
179.0
89.8
85.1
83.7
86.1
90.3
76.0
99.9
93.1
93.5
76.0
6.0
5.3
5.9
5.3
5.4
7.7
8.3
8.8
8.5
9.2
23.0
25.0
24.1
27.9
25.8
14.0
13.6
14.7
15.5
15.5
87.4
89.7
94.9
94.7
93.3
0.44
0.44
0.46
0.47
0.47
Billion Units
51.4
56.2
61.2
64.5
65.6
'Net of seed and estimated waste. grain output with that of other countries, a downward adjustment of
' Excluding changes in inventories of herds. an average 11 percent is in order. The actual discount for any year
' Measured in "bunker weight," that is, gross output from the depends on average moisture at the time of harvest and the size of the
combine, which includes excess moisture, unripe and damaged total crop.
kernels, weed seeds, and other trash. In order to compare Soviet
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Index: ' 1971=100
Livestock
100.0 109.0
106.1
106.9
111.0
112.8
113.6
Socialized
100.0 113.6
111.5
113.4
117.2
119.8
120.9
Private
100.0 95.2
89.9
87.2
92.3
91.7
91.4
Cattle
99.2 109.1
111.0
110.3
112.7
114.1
115.0
Socialized
74.3 84.6
87.6
87.5
89.4
91.0
92.0
Private
24.9 24.5
23.4
22.8
23.3
23.1
23.0
Hogs
67.5 72.3
57.9
63.1
70.5
73.5
73.7
Socialized
50.9 58.6
45.7
51.3
55.7
58.7
59.0
16.6 13.7
12.2
11.8
14.8
14.8
14.7
Sheep and goats
143.4 151.2
147.1
145.3
146.6
148.1
149.2
Socialized
110.2 119.2
117.7
116.5
117.2
118.9
119.7
Private
33.2 32.0
29.4
28.8
29.4
29.2
29.5
Weighted by average prices paid all producers in 1970.
2 As of 1 January of the stated year.
spurt in the value of private livestock holdings that
occurred in 1977 has not continued (see figure 1).
Private holdings declined by nearly 1 percent in 1978
and were off fractionally again in 1979. Although the
leadership continues to stress the need to provide
official support to the private sector, the press is replete
with comments describing the difficulties private
livestock owners have experienced obtaining feed and
the problems in marketing surplus products.
Other problems which bode ill for future farm output
also affected agriculture's performance last year.
Farm receipts of tractors and fertilizers, including feed
additives were down from the 1978 level (see the
tabulation below):
Tractors Fertilizer
(Thousands) (Million Metric Tons)'
1976
386.4
77.7
1977
364.6
79.8
1978
370.6
81.2
1979
354.0
78.6
Overall, investment in agriculture grew by just 2
percent in 1979-one-half the 1978 rate and only one-
fifth the 10-percent yearly average in 1971-75.
Industry: No Longer a Growth Leader
Faltering under the strains of transportation snarls and
inadequate supplies of raw materials, Soviet industrial
growth continued its downward slide in 1978-79,
posting an increase of 3.8 percent in 1978 and a record
low 2.2 percent last year (see table 5). Shortfalls in the
production of key industrial commodities-especially
steel, oil, coal, construction materials, and chemicals-
contributed to an abrupt slowdown in the production of
investment goods and brought growth in construction
activity to a standstill.' Although production shortfalls
are common in the Soviet economy, the stringencies
encountered during the past two years were unusually
'As a result, new fixed investment growth slowed from 6.1 percent in
1978 to 0.9 percent in 1979.
' Expressed in Soviet standard units. In 1978 the 81.2 million tons of
fertilizer were equivalent to 18.8 million tons of nutrients.
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USSR: Value of Livestock in Privately Figure 1
Owned Herds
1960 65 70 75 79
582208 6-80
severe and reflect problems that have become mutually
reinforcing. In particular:
? Reduced energy growth and stringent allocations,
especially during the severe 1978-79 winter, dis-
rupted operations in a broad range of industries and
transportation facilities.
? Failure to bring new capacity on stream has delayed
the introduction of materials and labor-saving tech-
nology which, in turn, hampered efforts to conserve
resources.
? Shortages in domestic steel output have slowed
growth in machinery production and contributed to
shortages in drilling equipment and pipe, preventing
planned increases in exploration.
? Bottlenecks in rail transportation, caused in part by
declining output of railroad equipment, and the
failure to repair existing stock disrupted deliveries of
raw materials and industrial products.
Energy: Struggle to Boost Output
The past two years marked a turning point in Soviet
energy production. After increasing at a 5.0-percent
annual rate for more than a decade, growth in primary
energy fell to 4.2 percent in 1978 and 3.4 percent last
year (see figure 2). Growth in oil production dropped
precipitously, while coal output declined. Natural gas,
which continued to expand at a near record-breaking
pace, was the one bright spot in the Soviet energy
picture.
Soviet leaders have responded to their energy problems
by boosting investment in oil and gas on a crash basis
(at the expense of other sectors) an&by stepping up the
drive for energy conservation. In December 1977,
President Brezhnev established the fuel-energy sector
as a "leading link," meaning that the sector had
priority for investment that would achieve "maximum
and rapid results." In effect, the investment program
originally planned for the 10th Five-Year Plan (1976-
80) in primary energy was scrapped in favor of a more
ambitious undertaking. In 1978, for example, the
increment in investment in oil, gas, and coal increased
by more than 50 percent and accounted for almost one-
half the increase in total industrial investment.'
Despite these actions, we believe the downward spiral
in the growth of Soviet energy production will
continue.
' In comparison, the increment in investment in oil, gas, and coal in
1975 accounted for only 15 percent of the increase in total industrial
investment that year.
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1971-75
1976
1977
1978
1979
Industrial production
6.0
4.1
4.1
3.8
2.2
Industrial materials
5.5
3.6
2.9
2.4
0.4
Ferrous metals
4.0
2.7
0.9
2.9
-0.9
Crude steel
4.1
2.5
1.3
3.3
-1.6
Rolled steel
4.1
2.8
0.7
3.2
- 1.9
Steel pipe
5.1
5.3
1.3
3.1
3.7
Primary energy
5.0
5.1
4.9
4.2
3.4
Coal
2.4
1.5
1.5
0.2
-0.7
Oil
6.8
5.9
5.0
4.7
2.4
Natural gas
7.9
11.0
7.8
7.6
9.4
Electricity
7.0
6.9
3.6
4.5
3.1
Construction materials
5.4
3.5
1.8
0.6
-2.5
Cement
5.1
1.8
2.3
-0.8
-3.2
Slate
4.8
3.5
-10.0
NA
Soft roofing
5.7
7.1
-2.5
1.6
NA
Machinery
8.2
6.0
6.1
6.4
5.0
Consumer nondurables
3.3
1.4
3.2
1.9
0.5
Food
3.9
-1.0
3.8
2.1
0.5
Soft goods
2.7
4.2
2.5
1.8
0.4
Oil. Soviet oil production has been on a virtual plateau
since October 1978. During 1979, output averaged
11.7 million barrels per day (b/d)-the same as during
the fourth quarter of 1978. Because production in the
early months of 1979 was above the corresponding
period in 1978, however, last year's total output was
2.4 percent higher.
Nearly all the increase in oil production in 1978-79
came from West Siberia. The supergiant Samotlor
field, which by itself accounted for roughly 25 percent
of total production, may have reached peak output in
1979. Large increases in output had been expected
from newer, smaller, more remote fields in West
Siberia, but because of severe winter weather, short-
ages of oilfield equipment, and rail transport bottle-
necks, they failed to reach production goals.
Production in basins outside West Siberia also proved
a disappointment to Moscow. Despite efforts to boost
output in the Urals-Volga region through enhanced
methods of recovery, production dropped from about
4.2 million b/din 1978 to about 4 million b/d last year.
Output in other regions declined for the most part
during the period and is now running at some 2 million
b/d.
Most indicators of Soviet oil production point to
continued trouble. With production dropping both in
the older areas and, in the not too distant future, at
Samotlor, the Soviets will have to develop new fields at
a far greater rate than they have been able to do so far
to keep national production from falling as well.
Although Moscow has been pouring large investments
into West Siberia, it is unlikely that declining output
can be forestalled after 1980.
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USSR: Energy Production
Average Annual Percent Change
Primary Energy oil,
7?$ 7.6
1971- 76 77 78 79 1971- 76 77 78 79
75 75
1971- 76 77 78 79 1971- 76 77 78
75 75 -0.7
The USSR's perceptions of its energy situation have
become more pessimistic in recent months and Soviet
leaders and bureaucrats alike have become more
candid in discussing their energy problems:
? Vladimir Dolgikh, the Communist Party's secretary
for heavy industry, acknowledged in a recent article
that oil production plans for the key West Siberian
region are unrealistic without major improvements
in technology and productivity. He admitted that
with existing technology and at current tempos
production plans could only be achieved by increas-
ing the number of drillers by hundreds of thousands.'
' While Dolgikh specifically cites labor shortages as the main
bottleneck in West Siberia, we believe the lack of drilling rigs for
both production and exploration is the major constraint on raising
output. See Partinnaya zhizn, January 1980.
? Alexander Krylov, a member of the Soviet Academy
of Sciences and a leading petroleum expert, noted in
another recent article that if present Soviet exploita-
tion methods continue, production of oil will soon
peak and then start to fall. Krylov places the blame
squarely on the Soviet planning system which
rewards oil producers on the basis of the number of
meters drilled.'
6 Crews in the USSR are paid bonuses on the basis of meters drilled,
rather than on the amount of oil recovered. This often prompts
Soviet drilling crews to continue drilling in areas which should be
abandoned. See the article "0 tempakh razrabotki neftyanykh
mestorozhdenny" in the January 1980 issue of Ekonomika i
organizatsiva promyshlennogo proizvodstva.
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Large unexplored areas of the USSR may contain
substantial oil and gas, but they are remote and their
potential is unknown. Soviet exploratory drilling has
not increased for years because of continuous pressure
to raise oil output through further development of
known fields. In any event, it would take a decade or
more to attain commercial production in any large
offshore or remote onshore fields that may be found.
Coal. Substantial increases in coal production-on
which Soviet planners were counting heavily-did not
materialize during the past two years. In fact, Soviet
coal production in 1979 totaled 719 million tons,
3 million tons less than in 1977 and 33 million tons
below plan. Coal output declined even more in terms of
average heat output, when measured in standard coal
equivalents (7,000 kilocalories per kilogram), because
of the larger share of low-grade Siberian coal in total
production.'
Although the decline in coal production has affected
most coal regions, problems appear to be most severe in
the Donets Basin-the country's largest producer of
high-quality steam and metallurgical coal-where
output has stagnated in recent years. The Soviets
advance a number of reasons for the industrywide
shortfalls, including:
? Increasingly difficult mining conditions, especially in
traditional coal areas in the European USSR.
? A reduction in the average workweek at some mines
in the Donets Basin from 36 to 30 hours!
? Labor shortages in several basins.
? Shortages of rail cars.
Aside from these problems, production has been held
back by a slowdown in the commissioning of new
capacity and an increase in mine depletion, especially
in coal basins in European USSR. Gross annual
commissionings of new capacity fell to an average of 20
million tons during 1976-79, the lowest level in almost
' For a full discussion of the problems in the Soviet coal industry, see
USSR: Coal Industry Problems and Prospects, March 1980, ER 80-
10154.
Since 1976 the Soviets have reduced the underground miners'
workweek from 36 to 30 hours in those mines with particularly
arduous working conditions. The transfer of miners to a shortened
workweek is reportedly well advanced in the Donets Basin where the
program was launched. Plans call for a 30-hour workweek to be
phased in at all mines with steeply sloping or narrow seams, heavy
dust, or risk of methane gas.
a decade. At the same time annual depletion increased
to more than 15 million tons, up from about 7.2 million
tons 10 years ago. More than three-fourths of gross
annual commissionings now simply offset mine
depletion.'
Natural Gas. Soviet gas output continued to expand at
a near record-breaking pace in 1978-79. Production in
1979 totaled 14.4 trillion cubic feet (tcf), 1.2 tcf above
the 1978 level. More significantly, the jump in gas
output last year accounted for more than two-thirds of
the growth in total energy supplies.
West Siberia was responsible for practically all the
growth in Soviet gas output, with production reaching
3.3 tcf in 1978 and more than 4.3 tcf in 1979. This
outstanding production record was achieved despite
the fact that only three (Medvezhye, Urengoy, and
Vyngapur) of more than a dozen important fields have
been exploited.
The cost of developing these remote gas resources has
been enormous. During 1979 about one-third of the
total investment allocated for the three major fuels
(gas, oil, and coal) was slated for the gas industry,
whereas its share in 1970 was only 20 percent. In West
Siberia alone the value of fixed assets in the gas
industry has skyrocketed at least tenfold since 1972.
Investment costs for new pipeline systems are a major
component as greater volumes of gas are sent over
longer distances. During the past 10 years, the average
distance of gas transport roughly doubled, reaching
nearly 1,800 kilometers in 1979.
Electricity and Nuclear Power. Annual growth in
electricity production averaged an alltime low of less
than 4 percent in 1978-79, well below the near 7-
percent annual increases achieved in the early 1970s.
Despite the slowing of demand, due to slower growth in
overall economic activity, there is evidence of signifi-
cant problems in electricity supply. In particular, an
imbalance between additions to power plant capacity
' Commissionings are defined as the amount of capacity brought on
stream at new or existing mines, based on official Soviet announce-
ments. In most cases it takes several years before these areas reach
peak production levels. Depletions are defined as the amount of
operating capacity lost because of mine exhaustion and the lower
productivity of older mines that are still operating.
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and increases in output has left the Soviet power
system with little reserve capacity. During 1971-78,
electricity output rose by 62 percent while power plant
capacity increased by only 48 percent. As a result,
brownouts and power fluctuations in the networks have
been increasingly reported.
Besides lagging growth in new capacity, adequate
supplies of fuel for thermal power plants are becoming
more difficult to obtain in the energy-short European
USSR. Since most potential fuel supply sources are
limited because of vast distances between potential
resources and the centers of industrial concentrations,
Soviet planners regard nuclear power as the most
promising source of growth in electricity production in
this region. However, the nuclear program is lagging
badly. Output of nuclear-generated electricity in 1979
was about 50 billion kilowatt-hours and accounted for
less than 1 percent of primary energy output last year.
Projections, which have been scaled down by the
Soviets in recent years, now call for 35,000 to 40,000
megawatts (MW) in nuclear capacity by 1985 (less
than 4 percent of all energy) and 100,000 MW by
1990. Almost all this capacity is to be developed in the
European USSR.
Conservation. Despite well-orchestrated public cam-
paigns and the imposition of stiff new tariffs on
excessive energy use in industry, Soviet conservation
efforts paid few dividends in 1978-79. President
Brezhnev admitted to the Central Committee Plenum
in November 1978 that even with the expenditure of 50
billion rubles on conservation measures "in practical
terms there is no lessening of waste and losses of fuels."
(See cartoon page 9.)
Some oil savings, however, have been achieved by the
substitution of other fuels, principally natural gas. A
significant proportion of Soviet heat and power plants
now switch from oil to gas on a seasonal basis, and
increased gas supplies to this sector would reduce oil
consumption even further. However, 54 percent of
Soviet oil is now consumed in internal combustion
engines, and large-scale conversion can come only very
slowly.
Moscow's limited ability to conserve oil stems in large
part from the current pattern of oil consumption. Oil
consumption in the Soviet Union is weighted in favor of
residual and heavy fuel oil, which together account for
about 40 percent of total oil usage, while gasoline
accounts for less than 25 percent. By contrast, gasoline
accounts for 40 percent of the total in the United
States. The USSR has only one passenger car for every
40 inhabitants, compared with more than one for every
two inhabitants in the United States.1?
Practically all the potential energy saving in oil is
concentrated in six sectors, representing almost 80
percent of Soviet oil consumption." The savings that
conservation efforts have been able to wring out of
these areas have been limited because (a) the effi-
ciency of three of these sectors-heat production,
electricity generation, and rail transport-using exist-
ing capital stock is already high by world standards
and (b) because the Soviets have been slow to convert
to more energy-efficient equipment.
Conservation in the heat and power sector already has
been given considerable emphasis with fuel require-
ments per unit of electricity output declining by 11
percent between 1970 and 1979. Improved efficiency
was achieved largely by upgrading generating equip-
ment. As for the transport sector, energy consumption
per ton-kilometer and passenger-kilometer is much
lower in the USSR than in Western Europe or the
United States. The USSR uses only one-fourth as
much energy per passenger-kilometer as the United
States and only about two-thirds as much per ton-
kilometer of freight.
Ferrous Metals
The Soviet steel industry, plagued with problems since
the mid-1970s, continued to experience difficulties in
1978-79 (see table 6). Although crude steel production
rebounded somewhat in 1978 over the depressed level
of the previous two years, output dropped in 1979 by
1.6 percent-the first such decline in production since
World War II.
10 Consequently, only 15 percent of Soviet gasoline was used in
passenger cars, while the comparable US figure was 73 percent.
" Electricity and heat generation, iron and steel production, the
residential-communal sector, construction, transport, and agri-
culture.
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Although raw material shortages and harsh weather
have hampered operations, inadequate investment in
all sectors of the industry-from iron ore mining to
rolling and finishing steel products-has been the main
reason for the industry's deteriorating performance in
recent years. Because the cost of constructing new
capacity has climbed greatly, the gradual increases in
capital spending that have occurred have resulted in
smaller increments to capacity. In addition, as in the
developed West, outlays for environmental purposes
have increased substantially. For example, expendi-
tures for pollution controls, although not as large as in
the United States, reportedly have been running at
10-15 percent of total investment, and even higher
according to one official."
Construction of new steelmaking capacity has lagged
badly, and most of the potential for squeezing addi-
tional output from existing facilities already has been
tapped. Roughly 90 million tons of steel (nearly 60
percent of total output) are still produced in open-
hearth furnaces. Much of the current capacity for
rolled sheet is very old and technically obsolete. Major
deficiencies exist in equipment for the production of
cold-rolled steel, high-quality transformer sheet,
tinplate, and other coated steels. The continuing
failure to produce the desired assortment of products,
especially large-diameter pipe, and casing and drill
pipe has contributed to lags in pipeline construction
and exploratory drilling for oil and gas. As a result, the
USSR has had to rely increasingly on imports from the
West to meet its domestic needs at a substantial cost in
hard currency (see the section "Hard Currency Trade:
Some Windfall Gains" beginning on page 16.)
Machinery
Machinery production-the major source of invest-
ment goods, defense hardware, and consumer dur-
ables-kept its ranking as the fastest growing branch
of industry, although growth in 1979 dipped below
6 percent for the first time this decade. Trends within
the branch were decidedly mixed. Military production
accelerated during the period, reflecting the high cost
'Z In an interview published in Iron and Steel Engineer, September
1979, Dr. Yevgeny Kalinnikov, Head of the Steelmaking Technol-
ogy Department, Institute of Management Sciences in Moscow,
stated that the current cost of air pollution control installations is
"25-30 percent of the capital cost of the steelmaking equipment."
of several major weapons programs. In contrast,
growth in the output of investment goods and con-
sumer durables fell off. Here the lower output of
railroad equipment augurs poorly for any immediate
relief to the overencumbered transportation sector,
while the near stagnation in production of labor-saving
machinery will curtail plans for reducing manual
labor. More importantly, unless machine builders can
reduce metal consumption rates, the decline in steel
output will slow down machinery growth still further.
Chemicals
The usually fast-growing chemicals branch also contri-
buted to the industrial slump in 1978-79. Production
increases, which averaged nearly 9 percent per year in
1971-75 and almost 6 percent in 1976-77, plummeted
to an average of less than 1 percent during the past two
years. In 1979, output of several major chemical
products (fertilizers, plastics, manmade fibers) fell
below the level of 1978 (see table 7).
The Soviet fertilizer industry turned in the most
dispirited showing. The 94.5 million tons produced in
1979 represented a decline of 3.5 million from the
previous year-the first time since World War II that
the output of fertilizers has fallen on a yearly basis. As
a result, fertilizer supply to agriculture in 1979 was
almost 10 million tons below plan. Shortfalls in
phosphate fertilizers have been particularly damaging
because phosphates accelerate the ripening of grain, a
critical factor in areas with short growing seasons.
The weak performance of chemicals can be ascribed
mainly to shortages of raw materials and labor,
together with construction and transportation bottle-
necks. In addition, the shutdown of the gas pipeline
from Iran in 1978, and sharply reduced deliveries after
it was reactivated in May 1979, adversely affected
operations at some ammonia plants.
Transport
The Soviet transport sector-a victim of inadequate
investment and woeful management in recent years-
also performed poorly, especially during 1979. Total
freight hauled last year totaled 6 trillion ton-
kilometers, an increase of less than 1 percent over 1978
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"Now no one will re-
proach us that we are
devoting little atten-
tion to saving electric
power. "
i
0
SAVE
~ IL
~ oc~R4o?~ 8S ~~
ELECTRICITY lo~i~i1l, i iif n
D. Agayev
Pravda
2 March 1978
1971-75
1976
1977
1978
1979
4.0
2.7
0.9
2.9
-0.9
3.6
2.7
0.3
1.9
-1.3
3.7
2.3
1.9
3.1
-1.5
4.1
2.5
1.3
3.3
-1.6
USSR: Growth in Chemicals and
Petrochemical Output
1971-75
1976
1977
1978
1979'
Chemicals and petrochemicals
8.6
5.3
6.0
3.1
-1.4
Mineral fertilizer
10.2
2.3
4.9
1.3
-3.6
Plastics and resins
11.2
7.6
8.2
6.3
-1.0
Manmade fibers and yarns
8.9
6.8
6.7
4.0
-2.7
Automotive tires
8.3
5.8
5.3
2.8
1.7
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(see table 8), reflecting both the poor performance of
the railroad and the falloff in industrial growth. The
rail system, in particular, which accounted for almost
60 percent of the freight turnover, fell far short of
expectations, with only two of 17 categories (grain and
ferrous metals) meeting their 1979 plan. Reflecting
the rail sector's poor performance, freight car
turnaround time continued to increase while the
average train speed continued to fall."
Record cold temperatures during the 1978-79 winter
hampered Soviet rail operations, crippling operations
over widespread areas and causing raw materials and
fuel shortages throughout much of the economy.
Further disruptions occurred last summer and fall
when thousands of railcars had to be diverted from
their normal operations to move record grain imports.
Resource Availability and Use
Labor Force
The low rate of population growth reported from the
January 1979 census confirms the existing projections
that the Soviet labor market is becoming exceedingly
tight. Data from the census showed 262.4 million
people in the USSR, an increase of only 20.7 million,
or less than 1 percent annually since the last census in
1970.
While the full impact of the labor crunch will not come
until the mid- I980s, employment growth has already
begun to slow (see figure 3). During 1976-79, employ-
ment grew only 1.3 percent annually, compared with
an annual average of 1.6 percent during 1971-75.
Agriculture has been particularly hard hit. Despite
official efforts to slow out-migration from farms, the
continuation of such migration has apparently helped
temper the impact of the labor force slowdown on
industry. Even though the current Five-Year Plan calls
for industrial employment to grow at only 0.7 percent
per year, it grew at 1.8 percent annually during 1976-
78. More significantly, increments to industrial em-
ployment rose from about one-fifth of the country's
" In 1978, the average freight car turnaround time increased by 1.8
percent, while the average train speed fell by 0.6 percent. No
yearend figures have been reported for 1979, but scattered data for
the first nine months suggest the situation was even worse.
USSR: Total Freight Traffic Statistics
Trillion Metric
Ton-Kilometers
Average Annual
Percent Change
1960
1.89
1965
2.76
7.9
1970
3.83
6.8 2
1975
5.20
6.3
1976
5.43
4.4
1977
5.63
3.7
1978
5.95
5.7
1979
6.00
1.0
'Average annual growth during 1961-65.
2 Average annual growth during 1966-70.
' Average annual growth during 1971-75.
total employment growth during 1971-75 to more than
two-fifths in 1976-78. With smaller annual increases
in the labor force over the next decade, a continuation
of this trend would create labor shortages in other
sectors of the economy.
Government efforts to maintain output despite low
rates of productivity growth during this period prob-
ably explain above-plan employment growth in indus-
try." Nonetheless, Moscow may have difficulty con-
tinuing the policy, given the impending labor
shortages. Industrial employment grew by only 1.2
percent last year, the lowest rate in 25 years. Within
industry, however, employment in coal, gas, and oil,
grew at a much faster rate, 2-3 percent annually,
indicating that these priority sectors have first call on
available labor resources.
Slowdown in Capital Formation:
Future Impediment to Growth
The sharply falling growth in the capital goods
producing sectors noted previously has retarded the
growth of investment and greatly complicates the tasks
of Soviet planners who must allocate already taut
investment resources to a growing number of "critical"
" This is not unusual. Soviet managers have historically tried to
compensate for inadequate productivity by overfulfilling industrial
employment plans. During the Eighth Five-Year Plan (1966-70),
industrial employment was scheduled to grow at an average annual
rate of 2.4 percent, but actually increased at a rate of 2.9 percent.
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Figure 3
USSR: Increments to
the Working Age
Population
(Males 16-59,
Females 16-54)
01 I I I I 1
1960 65
I 1
70 75
requirements, particularly in the energy field. In an era
of general resource constraints, such allocations lead to
lean investment diets for less favored claimants.
This point was emphasized recently by a leading Soviet
academician 1? who warned that restrictions on the
growth of investment will become even more severe
because of the need to redistribute capital investments
to the fuels and power branches; to metallurgy, to
overcome its problems; and to transportation, which
has become an impediment to growth throughout the
economy. Furthermore, the Soviet scholar noted that
for many types of raw materials, the potential for
increasing extraction is limited, mainly because ex-
traction is becoming more capital intensive and can be
expanded only in remote, geologically difficult regions
where capital costs are extremely high.
" Academician A. G. Aganbegyan, editor in chief of Economika i
organizatsiya promyshlennogo proizyodstva, in an article entitled
"Novyy etap v evolyutsii sistemy khyozaystvovaniya," issue no. 10,
October 1979, pp. 3-19.
I I
80
Further adding to Moscow's problems has been the
rapid growth in uncompleted construction projects,
despite numerous verbal campaigns to concentrate
work on projects nearing completion. Project comple-
tions continue to be frustrated by bottlenecks in the
supply of components-particularly machinery-and
a lack of appropriate incentives in construction organi-
zations, where bonuses are still based largely on the
value of the work completed." As a result, the increase
in gross additions to new fixed capital-a measure of
new capacity brought on stream-fell from a robust
8.9 percent in 1978 to an alltime low of 0.2 percent in
1979. Meanwhile, the growth of unfinished construc-
tion accelerated in many branches of industry during
the period, climbing by nearly 8 percent last year (see
table 9).
16 Basic construction work has a high ruble value, but finishing work
does not.
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1971-75
1976
1977
1978
1979'
Total new fixed investment 2
7.0
4.5
3.6
6.1
0.9
Gross additions of new fixed capital
6.7
1.4
3.2
8.9
0.2
Backlog of unfinished construction
7.9
9.6
10.0
7.0
7.6'
Capital stock
7.9
7.1
6.9
7.2
6.4
Retirement rate
1.5
1.4
1.4
1.2
1.3 '
'Preliminary.
2 Excluding net additions to livestock, capital repair, and changes in
inventory.
' This term differs from gross fixed investment in that it counts only
those investment projects that have been completed.
Estimated.
Because basic construction work has a high ruble value, but
finishing work does not, projects are often passed along before they
are ready for production "startup. "
"Hold it up a little longer-the commission is signing the
certificate."
A. Garmazy
Minsk Sek'skaya Gazeta
27 December 1979
The slowdown in capital formation could not be
occurring at a worse time. Greater investment is
needed to counter the declining increments to labor, to
modernize obsolete plant and equipment, and to stave
off the impending energy crunch. The required invest-
ment programs are becoming much more costly,
however, and their payoff further away as more
investment resources must be devoted to Siberia.
Skyrocketing Raw Material Costs
Capital costs have been rising rapidly, particularly in
the extractive industries, as a result of the declining
quality and quantity of easily accessible raw materials
and, in turn, from the increased reliance on more
sophisticated and expensive recovery techniques." The
need to transport these commodities over much greater
distances-often from areas such as Tyumen Oblast
where little or no transport facilities yet exist-also has
pushed up capital expenditures (see figure 4). Accord-
ing to the Chief of the Administration for Financing
Heavy Industry, the expenditures needed to produce
1 ton of petroleum have increased since 1965 by 150
percent; 1 ton of coal, 120 percent; and 1 cubic meter of
lumber, 170 percent.'8
" Based on official Soviet statistics, for example, the heat value per
ton of mined coal has declined 10 percent in the 1970s.
" Moreover, these percentages reflect only an amortization charge
for fixed capital. If interest charges on capital were included, the
increases in these costs would be even higher.
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USSR: Growth in Average Distance Figure 4
of Transport for Selected Fuels
Efficiency of Resource Use
To some extent the recent decline in economic growth
reflects increasing tightness between the demands of a
burgeoning economy and readily available supplies of
labor, capital, and natural resources. But more impor-
tant, it reflects the Soviet failure to use resources more
efficiently. While productivity has never been the
primary engine of growth in the USSR, declining
productivity in recent years has constrained growth
(see figure 5).
This is especially true in industry, where-following a
decade-long trend-the growth of investment and
capital stock in Soviet industry again outstripped
growth in both labor and output in 1978 and 1979. The
result has been rapidly diminishing returns to new
capital stock and hence to investment. The continued
existence of diminishing returns means that whatever
new technology has been embodied in capital equip-
ment coming on stream, its impact has been insuffi-
cient to offset the rising costs of processing raw
materials.
The inability to bring new capacity on stream more
rapidly also has delayed the introduction of labor- and
materials-saving technology, further hampering the
USSR's efforts to conserve resources and raise produc-
tion. This is becoming particularly important in the
case of energy. Because the energy consumption
structure in the USSR is dominated by heavy industry,
major gains in energy efficiency have to be obtained
largely by upgrading industrial technology-a very
time-consuming, capital-intensive process-or by
major shifts away from more energy-intensive heavy
industry and toward relatively less energy-intensive
light industry and services, a shift contrary to the view
of dominant Soviet interest groups. Even sharp reduc-
tions in the present backlog of incompleted construc-
tion and uninstalled equipment will do little to provide
a more energy-efficient capital stock in the near future
since only now are Soviet planners beginning to call for
the design and production of more energy-saving
equipment.
10
1965 70
u
79
1 By pipelines.
2By rail.
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USSR: Combined Factor Productivity Figure 5
for Industry
, I 1 1 1 1 1 I
1970 75 79
The Soviet consumer made little progress in improving
his living standard during 1978-79. Growth in per
capita consumption averaged less than 2 percent
annually during the period, as the food situation was
especially bad last year. Per capita meat production-
a key indicator of consumer welfare-declined by 1
percent last year, while milk production decreased for
the second consecutive year. Shortages of high-quality
fruits and vegetables also were reported throughout the
USSR. Average food prices in collective farm markets
were roughly double prices in state stores, with meat
prices sometimes three times as high (see figure 6). In
addition, less housing was built in 1979 than 1978,
despite the country's severe housing shortage and the
priority treatment accorded this sector in recent years.
Soviet leaders have been unusually forthright in recent
months in acknowledging consumer complaints. In his
speech to a party plenum last November, Brezhnev
asked why such basic items as soap, diapers, bread, and
milk were in short supply. He stated that unless the
flow of desired consumer goods was increased substan-
tially, it would be necessary "to find specific people to
blame for every scarcity ... and punish them." Speak-
ing of the next Five-Year Plan, he said its principal
goal was clear-"to raise the welfare of the people."
Regional party bosses echoed Brezhnev's remarks in
local election speeches in early 1980 throughout the
country. The leaders, in a frank disclosure of their
problems, detailed shortages of meat, milk, bread
products, and other consumer goods. Belorussian First
Secretary Masherov, for example, indicated that the
Belorussian Central Committee had been receiving
letters "expressing anxiety over shortcomings in sup-
plies of livestock products for the city population,"
sometimes in a very "emotional form" and with "rash
evaluations and conclusions.""
Similarly, Uzbek First Secretary Rashidov stated in an
election speech in January that Uzbekistan "continues
to have difficulties in supplying its population with
meat and milk products" and that there are complaints
about the poor quality and supply of butter,
vegetables,and fruit.'
The US embargo on grain shipments to the USSR has
made the leadership even more worried about the food
situation. In an interview in Pravda this January,
Brezhnev was unusually defensive in reassuring the
population that "plans for providing bread will not be
affected by US actions." Soviet consumers, however,
apparently greeted Brezhnev's remarks with skepti-
cism. Long lines for flour were observed at food stores
in the center of Moscow and outlying areas, and
consumers reportedly have been hoarding supplies.
" See Sovetskaya Belorussiya, 8 February 1980.
m See Pravda Vostoka, 31 January 1980.
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USSR: Gap Between the Average Level of State Retail Prices
and Collective Farm Market Prices for Food'
t Sample of commodities in both state and collective farm markets
limited to major products sold in the farm market-for example,
meat, milk, potatoes, vegetables, and fruit.
Food store in Moscow: Long lines to purchase consumer goods are
endemic in the USSR, especially for meat and other highly sought
after goods.
1979
Preliminary
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Unlike the average consumer, the defense sector was
not affected by the slowdown in the rate of economic
growth. During the past few years, estimated Soviet
defense spending grew more rapidly than GNP.21 As a
result, in 1979 the defense effort consumed 12-14
percent of Soviet GNP.22 This is in contrast to the
1965-78 period, when defense absorbed a relatively
constant 11-13 percent of GNP.
The relatively high growth reflects the fact that
defense programs have great momentum as well as
powerful political and bureaucratic support. Even
against the backdrop of a disappointing economic
performance, major military programs were well
funded, and new production and development pro-
grams were initiated. In addition, the defense sector
continued to siphon off a large share of the economy's
best scientific, technical, and managerial talent and
large amounts of high-quality materials components
and equipment.
During the 1978-79 period, about one-half of total
Soviet defense spending went for procurement of new
equipment and major spare parts and for construction
of new facilities.
Operating expenditures-which include spending for
military personnel and for the operation and mainten-
ance of military equipment and facilities-received a
little more than one-fourth of total defense spending.
About one-fourth of total defense spending went for
military research, development, testing, and evalu-
ation.
No major shifts were evident in the shares of defense
spending allocated among the military services. The
Air Forces and Ground Forces continued to claim the
largest shares, while the Strategic Rocket Forces
claimed the smallest. During the 1978-79 period,
Soviet uniformed military manpower, including milita-
rized security forces and construction and transporta-
" For a more detailed treatment of Soviet defense spending, see
Soviet and US Defense Activities, 1970-79: A Dollar Cost Compari-
son, SR 80-10005, January 1980.
" The share of GNP allocated to defense is 12-14 percent under the
broad definition the Soviets may use. As defined in the United
States, the defense share of GNP would be about one percentage
point less.
tion troops, totaled approximately 5 million men-
more than 3 percent of the total labor force. The
largest share of military personnel-about 35 per-
cent-represented Ground Forces.
Despite the poor performance of the economy, evi-
dence on Soviet military production and development
indicates that Soviet defense spending will continue to
increase at least through 1985 at or near the long-term
rate of 4-5 percent. If so, the defense share of Soviet
GNP could rise to about as much as 15 percent by
1985.
Hard Currency Trade:
Some Windfall Gains
Imports
Soviet hard currency imports climbed steadily in 1978-
79, but heavy gold sales in 1978 and higher oil prices
last year allowed Moscow to keep its current account in
surplus and limit the growth of its hard currency debt
(see table 10). Imports jumped 16 percent in 1978, to
$17 billion, and increased another 27 percent, to $21.6
billion, last year. Disappointing grain harvests in 1977
and in 1979, together with the leadership's determina-
tion to steadily increase meat supplies, led to a rapid
rise in grain and soybean imports. Hard currency
outlays for these products amounted to $2.6 billion in
1978 and an estimated $4 billion last year; the United
States supplied about two-thirds of Soviet needs.
Problems in the steel industry-particularly its inabil-
ity to produce enough large-diameter pipe to support
Moscow's ambitious pipeline construction program-
led to a sharp boost in steel imports from the West.
Deliveries totaled $2.5 billion in 1978 and an estimated
$4 billion in 1979 and were fairly evenly divided
between finished steels and large-diameter pipe.
In contrast, machinery and equipment imports fell
slightly last year after totaling $6.0 billion in 1978.
The decline was presaged by a falloff in equipment
orders from the West beginning in 1977-in all
likelihood the result of the growing backlog of unfin-
ished construction and uninstalled equipment (see
table 11).
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USSR: Hard Currency Balance of Payments
1977
1978
1979
751
1,266
4,111
Trade balance
-3,300
-3,794
-2,069
Exports, f.o.b.
11,345
13,157
19,524
Imports, f.o.b.
-14,645
16,951
21,593
Gold sales
1,597
2,673
2,200
Invisible and other hard currency
trade, net '
2,454
2,387
3,980
Capital account balance
1,917
173
-1,127
Foreign borrowing
1,777
1,785
- 27
East European loans for
Orenburg project
900
286
Foreign lending
140
-1,612
-1,100
Net change in assets in
Western banks
240
-1,512
-1,000
Supplier credits extended
-100
-100
-100
Net errors and omissions
- 2,668
- 1,439
-2,668
' Including net earnings from tourism, transportation, investment
income, official transfers, military sales, and known hard currency
trade under bilateral clearing agreements.
Exports
Soviet exports, $13.2 billion in 1978 and an estimated
$19.5 billion in 1979, were dominated by oil sales.
Moscow earned $5.7 billion on a volume of 1.2 million
b/d in 1978. In 1979 exports fell to less than 1 million
b/d, but Moscow reaped the benefits of OPEC-led
price increases to earn at least $9 billion. Earnings
from natural gas sales reached $2 billion in 1979,
compared with $1.1 billion in 1978. The volume of gas
sold to Western Europe increased by about 10 percent,
and gas prices were hiked substantially in line with
other fuel costs.
Export performance of other commodities has been
mixed. Timber sales in 1978 fell slightly but appar-
ently rebounded last year on the strength of price
increases. Nonferrous metal exports have increased,
while ferrous ores and metals have continued a decline
that began in the early 1970s. One positive note has
been exports of machinery and equipment, which
totaled $1.2 billion in 1978 and probably increased
somewhat last year as well. About three-fourths of the
USSR: Machinery Orders Placed
With Hard Currency Countries
Of which:
Chemical and
petrochemical
1,818
1,628
902
607
Metalworking and
metallurgy
1,028
641
348
752
Ships and port
equipment
283
67
127
61
Mining and
construction
120
147
118
149
Manufacturing of
consumer goods
121
78
44
12
1978 total were exported to less developed countries;
sales of 85,000 passenger cars accounted for one-half
of the USSR's hard currency earnings from equipment
sales to the West.
Balancing the Books
The USSR had little trouble covering its hard currency
trade deficits the past two years. In 1978 Moscow
earned a current account surplus of $1.3 billion,
largely through heavy gold and arms sales. As a result,
gross Soviet hard currency debt grew by only $1.5
billion, to $17.2 billion. The regime took advantage of
the increased liquidity from heavy gold sales to either
prepay or refinance on better terms roughly $1 billion
in loans syndicated in 1975-76. The reduction in the
trade deficit last year led to an even larger current
account surplus-more than $4 billion. Although gold
sales were reduced from 400 tons in 1978 to 220 tons in
1979, the runup in prices allowed the USSR to earn
$2.2 billion; earnings from arms sales were also
substantial.
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Soviet leaders are deeply troubled over the economy's
poor performance. Although Moscow anticipated some
slowdown in overall growth-as reflected in their plans
for 1978-79-the leadership clearly was not prepared
for the sharp declines that occurred in almost all
sectors. In fact, the Kremlin was apparently so
embarrassed by the economy's poor performance last
year that yearend data recently released publicly by
the Central Statistical Administration did not contain
the usual comparisons with the previous year's output.
Nevertheless, Moscow still probably believes that the
economy's problems are correctable without a major
shakeup of the existing economic structure or basic
operating principles. Regarding energy, many Soviet
officials probably realize that oil output is at or close to
its peak and could begin to-decline shortly. Neverthe-
less, Soviet leaders appear to remain confident about
long-term energy prospects. They point to the enor-
mous reserves of coal and gas, in addition to the greater
use of nuclear power, as more than sufficient for future
needs.
Soviet leaders have displayed a similar attitude regard-
ing their labor problems. Although clearly aware that
increased productivity is the key to future growth
prospects (since a sharp slowdown in employment
growth is inevitable), they apparently remain con-
vinced that this can be accomplished without any
radical change in the current system of central
planning and management. In fact, recent actions by
the leadership point in just the opposite direction-
namely, that during the remainder of Brezhnev's era,
Moscow will attempt to boost productivity through
even greater centralization of planning and stronger
labor discipline. A July 1979 Central Committee-
Council of Ministers decree on planning and manage-
ment, in particular, signals a victory for the more
conservative elements of the party and state bureauc-
racy who oppose fundamental reform.
The resolution, which represents the first comprehen-
sive "reform" package to be adopted in over a decade,
calls for:
? Strengthening long-term planning by upgrading the
operational role of the five-year plan.
? Tightening plan discipline by tying enterprise
bonuses to fulfillment of contracts.
? Replacing gross output with net output (value
added) as the chief indicator for enterprise per-
formance.
? Developing stricter accounting and planning controls
on capital investment aimed at eliminating cost
overruns, reducing the backlog of unfinished construc-
tion, and bringing the investment program into line
with available resources.
? Linking enterprise incentive more directly to in-
creases in the quality of output.
? Establishing additional success criteria designed to
induce enterprises to economize on raw materials and
labor.
Although ballyhooed in the press as a major departure
from the past, most of these ideas are not really new.
Rather, they represent an amalgamation of practices
that have existed in the past or have been experimented
with recently." For example, as part of the overall
tightening of centralized control, the resolution calls
for ceilings on the number of workers at industrial
enterprises-a throwback to the pre-Brezhnev era.
Similarly, emphasis on tying wages more directly to
prdductivity reiterates a perennial theme. The failure
to produce enough goods and services, however, has
reduced the effectiveness of monetary incentives as an
inducement to work harder.
In short, because the resolution avoids fundamental
reform while strengthening many of the features of the
Soviet system-directive planning, central allocation
of resources, administrative price setting, and manage-
rial incentives based on production volumes-that for
years have discouraged innovation and encouraged
resource waste, we believe it will do little to perk up the
Soviet economy.
" For a discussion of Soviet reforms over the past dozen years and
their impact on productivity, see Gertrude Schroder's "The Soviet
Economy on a Treadmill of Reform" in the 10 October 1979
compendium of papers submitted to the Joint Economic Committee,
entitled Soviet Economy in a Time of Change.
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Plan
Actual
Required Plan
1976-80
1976-79 '
1980 I
1980
5.0
3.1
12.9
4.6
Industry
6.3
3.6
17.9
4.5
Coal
3.0
0.6
13.1
2.7
Oil
5.5
4.5
9.6
3.6
Gas
8.5
8.9
6.9
7.0
Electricity
5.8
4.5
11.1
4.0
Crude steel
3.6
1.2
13.8
6.1
Rolled steel
3.6
1.1
14.2
5.9
Steel pipe
4.4
3.3
8.8
2.6
Construction
materials
5.4
0.6
26.8
NA
Cement
3.4
0.2
17.3
3.4
Chemicals
10.3
3.0
45.1
9.0
Machinery
8.9
6.0
21.3
6.5
Consumer
nondurables
4.6
1.8
16.7
3.8
Light industry
4.9
2.2
16.7
4.3
Food industry
4.4
1.4
17.2
3.3
Agriculture'
4.9
2.3
15.8
8.5
mollify-the growing material demands of the popu-
lace. The emphasis on conservation reflects the leader-
ship's dashed hopes for large gains in energy and raw
material production in the short term.
Despite the restrained nature of the plan, prospects for
achieving the implied GNP growth rate of 4.6 percent
are poor. The goals set for oil, steel, and other
industrial commodities all appear too high (see figure
7). To restore rapid growth rates in the face of reduced
increments of capital and labor, Moscow has been
banking on sharp increases in productivity-which the
system was unable to deliver in the 1970s.
First-quarter 1980 results for industrial production
indicate that the Soviets will continue to face rough
sledding in this sector. Total industrial ouput was up by
5.3 percent, compared with last year's extremely
depressed first quarter. The failure of processed foods
to recover-up only 1.7 percent-suggests that con-
sumers will experience little, if any, growth in living
standards.
We believe that the first-quarter rebound is temporary
at best. Below-plan output of several products essential
to overall economic performance-such as rolled
NA-not available. ferrous metals, forge presses, sulfuric acid, resins and
Including preliminary 1979 figures. plastics, and cement-will preclude a sustained accel-
' Annual rate required to reach the 1980 goal in the original 10th
Five-Year Plan. eration of growth. As the year progresses and 1980
' Gross value of output. comparisons are made with more typical quarters, the
growth rate will decline. Overall, we expect industrial
output in 1980 will improve slightly over the record low
of 2.2 percent posted last year, but an annual growth in
excess of 3 percent will be hard to achieve.
The 1980 Plan reflects Moscow's awareness that the
Soviet economy will have difficulty rebounding from
last year's dispirited performance. The economic
failures of 1979 are reflected in the goals for 1980,
which scale down the targets originally envisioned for
1980 in the 10th Five-Year Plan, 1976-80 (see table
12).
Two themes dominated the speeches outlining the new
plan at the party plenum last November: (a) Soviet
living standards must be raised and (b) greater
conservation of resources is essential-particularly of
energy and steel. Moscow recognizes that more and
better consumer goods are essential to spur productiv-
ity growth and seems determined to satisfy-or at least
Energy Outlook Grim
Growth of primary energy will continue to slow this
year. The oil production goal of 12.1 million b/d for
1980 represents a comedown from the original plan of
12.4-12.8 million b/d. Even this level is optimistic in
view of production problems in the oil industry. The
revised target calls for all of the production increase to
occur in West Siberia where access is difficult and
where shortfalls in output occurred last year. New
fields in West Siberia were to account for a growing
share of the rise in oil production in 1979, but they
failed to reach production goals. As a result, some of
the giant older fields-Samotlor, Federov, and
Agaw-were pushed harder than originally planned,
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USSR: Production of Key Industrial Commodities
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USSR: Oil Production Trends and Projections
and declines in output are likely to be more rapid than
expected beginning in 1981. We estimate that oil
production will peak this year at less than 12 million
b/d and then begin to decline (see figure 8).
Wide-ranging problems also will continue to plague
the coal industry in 1980. After last year's poor
performance, the 1980 target has been set at 745
million tons, some 60 million tons below the original
1980 goal. As with the oil production plan, the reduced
target for coal appears considerably beyond reach;
production will once again be impeded by (a) a
slowdown in commissioning new capacity, (b) a rise in
the number of depleted mines in western coal basins,
(c) continued deficiencies in transport, and (d)
difficulties in attracting and retaining an adequate
labor force. As a result, coal output in 1980 is not likely
to exceed 725 million tons.
Natural gas remains the one significant high-growth
area in the Soviet energy sector. Production in 1980
should reach or exceed the plan target of 15.4 tcf-
7 percent more than production in 1979 and above the
upper end of the range set in the 1976-80 plan. Almost
all of the growth will come from the large fields in the
permafrost zones of northern Tyumen Oblast (West
Siberia). Beyond 1980, however, some constraints on
growth are possible as investment requirements mount.
The need for pipeline is rising at a time of shortages of
large-diameter pipe, valves, compressors, and skilled
labor.
Prospects for Other Industrial Sectors
The announced iron and steel production targets for
1980-though less than the lower range goals in the
original five-year plan-are also unlikely to be met.
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The target of 157 million tons for crude steel is only a
million tons higher than the original 1979 target, but
would require an increase of 7-8 million tons-about
40-60 percent higher than the best annual increments
previously achieved. Although production of industrial
materials including steel began to pick up after mid-
1979 as the negative effects of the harsh winter wore
off, we believe that labor and raw material shortages
will be even more severe in 1980. A repeat of last year's
dismal performance would have a damaging impact on
Soviet machinery production and investment plans.
Slowing investment growth and declining productivity
of capital will also limit industrial growth. Following
the pattern of slower investment growth established at
the start of the 10th Five-Year Plan, investment is
scheduled to increase by only 3.3 percent in 1980.
Moreover, the drop in growth rates in capital goods
output and the inability of the construction sector to
bring new facilities on stream more expeditiously
foreshadow a downward trend in the growth of capital
stock for the next several years.
The planners are calling once more for investment
resources to be concentrated on finishing projects
already started; the continuing rise in unfinished
construction-now totaling more than 100 billion
rubles-remains a major sore spot with the regime. In
this regard, Finance Minister Vasily Garbuzov told the
November 1979 party plenum that Ministries have
been instructed to limit as much as possible the number
of newly launched construction projects except for
those intended for the production of consumer goods.
The transportation system, especially the rail system,
also will be hard pressed to meet the demands levied on
it. The average distance of hauling freight should again
rise as Soviet dependence on new energy sources that
lie far from established industrial bases increases.
Military demands on the system are also heavy and the
military activities in conjunction with Afghanistan and
the Middle East will add to the load. Nonetheless, the
system should operate somewhat more effectively in
1980, assuming a return to more normal weather and a
reduced volume of grain imports.
Over the longer term, transport problems in the USSR
are likely to worsen unless investment in this sector is
increased considerably during the next five-year plan.
Transportation presents a dilemma to Soviet planners.
On the one hand, domestic transportation is critical to
the development of new supplies of energy and raw
materials. At the same time, investment in transporta-
tion is a claimant on scarce resources at a time when
the competition for resources is becoming more in-
tense. The greater amounts of equipment, construction
materials, and labor that will have to be allocated to
the transportation sector if future bottlenecks are to be
avoided mean less investment resources available for
other sectors.
Agricultural Rebound Likely
Following last year's poor performance, Moscow is
planning to increase farm output by nearly 9 percent in
1980. No goals for specific crops or livestock products
have been announced. In his speech to the November
1979 party plenum, Gosplan Chairman Nikolay
Baybakov stated, however, that plans for procuring
livestock, poultry, milk, wool, and grapes will be lower
than originally targeted in the Five-Year Plan.
Because annual Soviet harvests depend heavily on
weather conditions throughout the year, we cannot
now predict whether the agricultural production goal
will be achieved. Although the late arrival of spring in
the USSR is likely to reduce the yield for winter wheat
somewhat, the outlook for the grain crop is still
generally good.
Consumption Gains Doubtful
The outlook for the consumer in 1980 is particularly
gloomy, especially the food situation. The decision to
limit US grain exports to the Soviet Union will result in
withholding about 19 million tons of US grain in
calendar year 1980. Even with a good harvest, the
Soviets can only partially offset the loss of US grain by
additional grain purchases elsewhere, or by a
combination of other actions-increased drawdowns of
grain stocks that are probably at low levels already,
increased imports of other feedstuffs such as soybean
meal, or increased imports of meat.
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The public mood in the Soviet Union is already one of
pessimism and cynicism as food shortages become
more widespread, especially in cities where supplies
have been relatively good until recently. Media and
party officials have offered inadequate explanations
for the shortages. Soviet consumers, for example, have
been told that lesser developed socialist countries have
received increased foreign aid. The population appears
to discount such propaganda and holds government
mismanagement responsible.
While consumer frustrations do not pose a threat to the
stability of the regime, there are substantial economic
and social costs at stake. Reduced productivity,
excessive labor turnover, alcoholism, and absenteeism,
as well as increased corruption and private (often
illegal) economic activity are all manifestations of
unfulfilled consumer demand, which will continue to
rise unchecked through at least 1980.
Trade Outlook Uncertain
Despite higher prices for gold and oil, along with
greater earnings from arms sales, Moscow's hard
currency imports in 1980 will expand little, if at all.
Because of the US grain embargo, grain imports will
be substantially less than previously expected, but still
should be close to last year's total of 31 million tons.
Judging from the value of orders placed for Western
equipment during the past three years, deliveries of
equipment should also fall substantially in 1980. On
the debit side of the ledger, steel imports should set a
new record as the USSR continues to look to Western
Europe and Japan for large-diameter pipe and other
finished steel products.
Production problems at home will limit export growth.
Oil exports, the mainstay of Soviet hard currency
earnings, will fall in volume for the second straight
year; the precise amount will depend on Soviet success
in meeting oil production targets. Higher oil prices,
however, will keep revenues up. The USSR also will be
able to count on higher revenues from natural gas
exports because of both higher prices and larger export
volumes.
The bearish prospects for imports, combined with
higher prices for exports, suggest a further reduction in
the hard currency trade deficit in 1980. Moscow's
financial position will be further strengthened by high
gold prices; the USSR could earn $5 billion just by
selling out of current production at $500 per ounce.
This financial strength should allow Moscow consider-
able flexibility in handling its trade and payments
account.
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Statistical Appendix
USSR: Growth of Gross National Product,'
by Sector of Origin
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
GNP
7.3
4.1
2.1
7.0
4.0
1.9
4.6
3.6
3.5
0.7
Agriculture
12.4
-0.5
-5.5
14.6
-0.8
-8.8
8.4
4.9
3.4
-5.6
Industry
6.4
6.7
4.9
6.3
6.3
5.9
4.1
4.1
3.8
2.2
Construction
7.7
6.8
5.2
6.0
5.3
5.0
3.4
2.5
2.9
0.5
Transportation
7.1
7.1
5.6
7.2
7.0
6.2
4.4
2.1
4.7
2.4
Communications
7.6
7.3
7.4
7.2
7.2
7.2
6.4
5.7
5.5
5.6
Trade
6.7
4.9
3.2
5.5
4.7
4.6
3.4
3.5
2.9
1.6
Services
3.9
2.7
3.6
2.6
4.1
3.2
3.1
3.0
3.3
3.0
Other
3.4
3.3
1.8
1.3
1.5
1.2
1.4
0.3
0.9
1.7
Calculated at factor costs.
6 ,
i'3,,2 t r, c
' Excluding intra-agricultural use of farm products but e
adjustment for purchases by agriculture from other sectors.
g an
USSR: Index of Gross National Product Growth,'
by Sector of Origin
1965
1966
1967
1968
1969
1970
1971
1972
GNP
77.4
81.5
85.4
90.6
93.2
100.0
104.1
106.4
Agriculture
82.8
86.5
86.5
91.7
88.9
100.0
99.5
94.0
Industry
73.5
77.7
83.5
89.2
94.0
100.0
106.7
112.0
Construction
75.1
78.7
84.8
89.4
92.9
100.0
106.8
112.4
Transportation
69.8
74.9
81.8
88.4
93.4
100.0
107.1
113.2
Communications
65.4
72.3
79.8
85.8
93.0
100.0
107.3
115.2
Trade
72.1
78.0
83.5
89.2
93.7
100.0
104.9
108.3
Services
81.6
85.2
88.8
92.7
96.3
100.0
103.7
107.3
Other
83.3
85.9
89.1
93.8
98.2
100.0
103.3
105.2
1973
1974
1975
1976
1977
1978
1979
GNP
113.8
118.3
120.5
126.1
130.6
135.2
136.2
Agriculture
107.8
107.8
97.5
105.8
110.9
114.7
108.3
Industry
119.0
126.6
134.0
139.6
145.4
151.0
154.2
Construction
119.0
125.3
131.5
136.1
139.5
143.5
144.2
Transportation
121.4
129.9
137.9
144.0
147.1
154.0
157.7
Communications
123.5
132.4
142.0
151.1
159.6
168.4
177.8
Trade
114.3
119.6
125.1
129.4
133.9
137.8
140.1
Services
110.1
114.6
118.3
122.1
125.7
129.8
133.8
Other
106.5
108.1
109.4
111.0
111.3
112.3
114.2
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