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Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Gorbachev's Modernization Program: A Status Report DDB-1900-140-87 August 1987 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Gorbachev's Modernization Program: A Status Report Information Cutoff Date: 19 March 1987 A paper presented by the Central Intelligence Agency and the Defense Intelligence Agency for submission to the Subcommittee on National Security Economics of the joint Economic Committee, Congress of the United States This document has been produced for official use within the US Govern- ment and distribution is limited to US Government agencies. Requests for this document from outside the US Government must be referred to the Defense Intelligence Agency, Washington, D.C. 20340-0001. DDB-1900-140-87 August 1987 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Gorbachev's Modernization Program: A Status Report SUMMARY GorbacheVs efforts to shake the Soviet economy out of its doldrums began to pay off in 1986. Partly as a result of his leadership, partly as a result of some policies instituted by his predecessors, and partly as a result of some good luck, the economy rebounded sharply in 1986. On the strength of record farm output and reduced loss of work time, Soviet GNP grew by an estimated 4.2 percent and industry by an estimated 3.6 percent - the highest rates in a decade. Gorbachev pressed forward with efforts to make modernization of industry a major source of growth by the end of the 1980s. Investment growth soared to 7.5 percent last year, with greatest emphasis on renovating and reequipping facilities that produce machinery critical to modernization. The Soviet consumer, in contrast, did not fare, nearly as well. Per capita consumption grew by less than 1 percent, in part because legal sales of alcohol - historically a major component of Soviet consumption - fell sharply as a result of the antialcohol campaign. Information on defense spending in 1986 is less solid than that for consumption and investment, but our preliminary estimate is that overall defense expenditures in constant prices increased by about 3 percent. Although somewhat above the rate of recent years, this growth does not appear to represent a change in defense spending policy since GorbacheVs arrival. Although the economy's vital signs looked good, several major problems cropped up during the year. The most serious involved: . Poor progress in the regime's efforts to improve the quality, reliability, and technological level of Soviet machinery. ? A sharp decline in Soviet hard currency export earnings. ? The first significant bureaucratic resistance to specific policies. None of these problems had a major impact on growth last year, but they must be corrected or offset if modernization is to proceed on track. Despite these problems, the 1987 plan shows no letup in Gorbachevs drive to revitalize the economy. The goal for overall economic growth is high - over 4 percent. Heavy demands are again placed on industry, as the Soviets are apparently banking on the sharp rise in investment in civil machinebuilding in 1986 to spur an acceleration in output this year. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 However 1987 turns out, we expect some improvement in Soviet economic performance over the next few years relative to 1981-85. Nonetheless, Moscow probably will fall well short of its goal of 4 percent average annual growth in GNP during 1986-90 because of the huge gains in productivity this would require. Based on Gorbachevs program so far and realistic assumptions about productivity, we project GNP to grow at an annual average rate of about 2-3 percent during 1987-90. Growth at this rate - while better than in the recent past - would be inadequate to relieve resource allocation pressures and could eventually lead to some major policy adjustments. The toughest decisions are likely to be in the investment arena. Several branches of industry probably will require increases in investment above current plans if output targets are to be met, but additional investment in the consumer area will also probably be necessary to enhance worker productivity. At the same time, defense industries will require substantial investment to support weapon production plans for the 1990s. New weapon programs are under way to update or replace major systems with improved models in every mission area, with many systems likely to begin series production in the mid-1990s. We do not know how Gorbachev will respond to these pressures, but we do not expect major shifts in military production, at least through 1990. Past heavy investment in defense industries and the momentum of ongoing production programs argue strongly for their continuation. Although there could be some competition for basic materials, intermediate goods, and skilled labor which might cause the pace of production of some new weapon systems to be somewhat slower and their introduction to be somewhat delayed, most major weapon programs should go forward as planned. Failure to sustain the 1986 economic upturn might also induce Moscow to increase demands on its East European allies for more and better quality goods, especially advanced machinery. This could heighten tensions within the Bloc because Soviet allies need advanced machinery for their own modernization programs. Moscow might also look more to the West for technologically advanced equipment, although its current hard currency bind would probably preclude a sharp increase in purchases. Finally, if economic modernization begins to stall, Gorbachev eventually could decide to adopt bolder economic measures, such as a major decentralization of price-setting or an introduction of real competition among enterprises. Movement toward more "radical reform," however, would generate strong political opposition. As long as the economy shows improvement - which seems probable - Gorbachev will be in a position to declare his program a "success" over the next few years. But the course Gorbachev is pursuing is inherently risky. How he fares over the longer term will depend on such factors as continued economic progress, the military environment - including possible arms control agreements - and external conditions such as weather and oil prices. The decisions Gorbachev will have to make over the next few years will be controversial and could well solidify opposing interests in the party and government. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Page Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Gorbachev's Challenge: Accelerate Growth, Upgrade Technology . . . . . . . . 1 Gorbachev's Economic Agenda . . . . . . . . . . . . . . . . . . . . . . . . . 3 1986 Economic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Growth Good, But Some Problems . . . . . . . . . . . . . . . . . . . . . . 5 Trends in Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . . 7 1987 Plan: Full Speed Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Priority for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Maintaining Momentum . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Prospects for Modernization Over the Longer Term . . . . . . . . . . . . . . . 12 Emphasis on Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Growth Through 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Coping with Shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Battles Over Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . 16 Seeking Foreign Economic Support . . . . . . . . . . . . . . . . . . . . . . 19 Prospects For Economic Reform . . . . . . . . . . . . . . . . . . . . . . . 21 Gorbachev's Political Standing . . . . . . . . . . . . . . . . . . . . . . . . . 22 APPENDIXES A. 1986 Economic Performance: A Good Showing . . . . . . . . . . . . . . . . 25 B. Tables on Soviet Economic Performance . . . . . . . . . . . . . . . . . . . 31 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Gorbachev's Modernization Program: A Status Report Since coming to power in March 1985, Mikhail Gorbachev has put forward the most ambitious program for economic, political, and social change since Nikita Khrushchev, often linking the USSR's ability to maintain its status as a military "super- power" to the success of his efforts. This joint CIA-DIA report provides an initial evaluation of Gorbachev s program. It begins by describing Gorbachev's policies and assessing their impact on the economy s performance in 1986. The paper then analyzes the future direction of his economic modernization program in light of the 1987 Plan and the demands for continued military force development. Finally, the paper addresses Soviet economic prospects over the longer term, highlighting problems the USSR will face if Gor- bachev s program fails to bring about the intended acceleration in economic growth. Gorbachev's Challenge: Accelerate Growth, Upgrade Technology At the time Gorbachev took over, the Soviet economy was in the midst of a prolonged growth slowdown, averaging just over 2 percent GNP growth per year in 1976-85. Of the other major industrialized countries, only the United Kingdom had a lower average growth rate during this 10-year period. Although Soviet economic growth after 1980 was as good or better than that of most other major industrialized nations except for the United States and Japan, this was more a reflection of a slide in economic growth in the developed West than a recovery of the Soviet economy (see table 1). Indeed, it was clear at the time Gorbachev became General Secretary that overall GNP growth during the 1981-85 Five-Year Plan (FYP) was going to be the smallest percentage increase of any FYP period. In fact, GNP had increased by less than 1.5 percent in 1984, and during the first quarter of 1985 - just before Gorbachev took over - production was essentially flat. Table 1 USSR and the Developed West: Comparative Growth of GNP USSR 5.0 5.3 3.4 2.3 1.9 US 4.7 3.0 2.5 3.4 2.4 Japan 10.0 11.0 4.3 4.0 3.9 France 5.8 5.4 4.0 3.3 1.2' West 4.8 4.2 2.1 3.3 1.2 Germany Italy 5.2 6.2 2.4 3.8 0.8' UK 3.2 2.5 2.1 1.6 1.7' ' Data are for gross domestic product (GDP). The difference between GNP and GDP, net factor income from abroad, is small. Note: Growth rates are measured in national currencies. Sources: USSR: CIA estimates Western countries: 1961-80, OECD, National Accounts 1981 -85, IMF, International Financial Statistics Growth rates by themselves do not reflect the scope of the USSR's problem. Low growth in the Soviet Union was occurring in an economy that did not compare favorably in size or technological level with that of the United States. Soviet GNP in 1960 was roughly half that of the United States. After narrowing the gap during the 1960s and 1970s and peaking in the early 1980s, Soviet GNP as a percent of US GNP fell to about 55 percent in 1985 (see figure 1). Even more striking, both the USSR and its East European allies continued to lag far behind major Western countries in terms of per capita GNP (see figure 2). Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 One reason for the economy's comparatively poor showing is the USSR's relatively antiquated industrial base. According to one estimate, for example, the average length of service of Soviet industrial equipment is about 20 years, compared with average use times of 10 years in France, West Germany, and Italy, and 12 years in the United States. In contrast to the West, where the rapid introduction of advanced manufacturing technologies has sustained productivity growth, the combined productivity of labor and fixed capital in the USSR has declined in absolute terms over the past decade. We believe Soviet leaders worried about the implications of these trends for the USSR's future military strength. By dint of two decades of a sustained, costly military buildup, the USSR has secured its position as a military superpower whose global interests were increasingly recog- Index: USA = 100 100r I , ee aCJ c oe ~oF nized. In the past 10 years alone (1977-86), more than 22,000 tanks, 21,000 infantry fighting vehicles, and 27,000 armored personnel carriers and like vehicles have been delivered to the Soviet ground forces. Soviet strategic forces received over 3,200 strategic missiles and about 20 new and converted ballistic missile submarines, and Soviet air power was augmented with over 7,100 new fighter aircraft and almost 4,600 helicopters. Even before the US Strategic Defense Initiative (SDI) became an issue, however, Soviet mili- tary authorities had expressed concern that the level of technology embedded in such US pro- grams as the D-5 sea-launched ballistic missile, the Stealth bomber, "smart" conventional weapons, and cruise missiles would offset the numerical superiority that the USSR had achieved in most classes of weapons and thus threaten some of their hard-fought military gains. The USSR has Note: Estimates for the USSR were derived as a geometric mean percentage of a CIA US-Soviet purchasing power parity comparison carried out in rubles and dollars. Estimates for Western Europe were derivea using purchasing power parities calculated with international price weights. (See United Nations, World Comparisons of Purchasing Power and Real Product for 1980. United Nations, New York, N.Y., 1986.) Estimates for Hungary, Poland, and Romania are based on benchmark figures from Irving Kravis, Alan Heston, and Robert Summers, World Product and Income: International Comparisons of Real Gross Product. Johns Hopkins University Press, Baltimore, Md., 1982. Benchmark estimates for 1970 for Bulgaria, Czechoslovakia, East Germany, and Yugoslavia were taken from the UN Economic Bulletin For Europe, vol. 31 no. 2, 1980. These figures were brought forward using estimates of real growth rates and adjusted to reflect differences with the 1975 ICP results for Hungary, Poland, and Romania. n 1-1 I-1 I-I r-i r-i r-, ay *, a `aa~a `ac a ac a at ao 0a ai Gr?y\oJ QoF ~~c b'> Qa Gtie Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 made significant advances in many weapon sys- tems technologies, cutting into the US technology lead in deployed systems in some areas. But the leadership recognized that in most advanced manufacturing technologies the USSR remains years behind the United States (see figure 3). Moreover, SDI, by concentrating competition in those high tech areas where Moscow is weakest, has clearly been viewed by the Soviets as a new and even greater threat. Gorbachev's Economic Agenda Gorbachev's commitment to revitalizing the country's economic base - and hence to un- derwriting future military modernization - has been evident since before he became General Secretary. Even when he assumed power, how- ever, Gorbachev may not have fully grasped the scope of the country's economic problems and the magnitude of the effort needed to attack them. In fact, despite his frenetic efforts over the past 2 years, we still do not see a viable, integrated plan for modernization; rather, we see many individual programs being put forth, each dealing with one facet of the economy. Essentially, Gorbachev has set out a two-step approach. Initially, he is relying on a combination of measures to strengthen party control, improve worker attitudes, and weed out incompetents - what he refers to as "human factor" gains. The most visible part of these efforts has been his campaigns for discipline and against corruption and alcoholism. These measures - which do not call for structural change - have had a positive impact for the most part. Over the longer term, Gorbachev is counting on achieving major productivity gains as a result of organizational changes, reform initiatives, and, most importantly, an ambitious modernization Index: USA = 100 100r I P aca coe Qac oay a0F J Ga~co ~~a )a re~~a ~`co, ti V ey~ +e~ea \A $k `a Coa ro5 tea`' Gti0 SQ a~CC a Xla c~a Jc~ ~JCO, o~a ~J\o Qo~a Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Approximate Length of US Lead in Years 01234567891011121314 Microprocessors Computer-Operated Machine Tools Minicomputers Mainframes Supercomputers Software Flexible Manufacturing Systems I I I I I I I I I I I 1 I I I I I I a I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I US lead is based on projections of length of time required for Soviets to achieve series production of levels of each technology similar to those in US series production today. program to upgrade the country's stock of plant and equipment (see box insert). To this end, the current five-year plan (1986-90) calls for doubling retirement rates for fixed capital, replacing up to one-third of the country's plant and equipment by 1990, and increasing the level of investment in the civilian machine-building and metalwork- ing ministries (MBMW) by 80 percent during 1986-90 over the level achieved during 1981-85. Gorbachev has also instituted an ambitious new program to improve quality control in industry. Known as State Acceptance (Gospriy+emka), the program establishes permanent quality control by state employees at the plant level, a program Defining Modernization The phrase "modernization program" often has been used by Western observers as an umbrella term to describe any policy instituted by Gorbachev for dealing with the country's economic problems. As Gorbachev has used it, however, the term has a more limited meaning and refers to his efforts to upgrade the country's stock of plant and equipment. Basically, it involves substantially increasing the productive capacity of the machine building sector, the primary source of manufacturing technology and equipment. As part of the efforts to modernize the USSR's industrial base, Gorbacheds plan calls for: . Improving the quality of machinery that embodies existing levels of technology by manufacturing it under a stricter system of quality control. a Replacing existing machinery with machinery embodying a higher level of technology, what Soviet planners sometimes refer to as "world standards." Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 not unlike that used by the military to ensure the quality of defense goods. At present, it encompasses 1,500 enterprises which produce an estimated 15 percent of all industrial products and nearly one-third of the output of the critical machine-building sector. Through these actions, Gorbachev has indi- cated that he wants to upgrade the country's technological base so as to put the country on a higher, self-sustaining growth plane. Soviet plan targets imply an average annual GNP growth rate of about 4 percent during 1986-90, which is to accelerate to a 5-percent average annual rate during the 1991-2000 period. Although many of the specific policies Gor- bachev has adopted are not new, the intensity Gorbachev has brought to his efforts and his apparent commitment to finding long-term solu- tions are attributes that his immediate predeces- sors lacked. Nonetheless, Gorbacheds program appears too ambitious on a number of counts: e Meeting output targets for many key commodities would require unrealistic gains in productivity, given planned investment targets. . Even if output targets can be achieved, high growth rates and improved quality are not readily compatible objectives. The industrial output goals for 1986-90, for example, appear too high to allow for a slowdown in production to install new, more technologically advanced equipment. e Finally, despite considerable rhetoric, none of the proposals so far would greatly change the system of economic incentives that has discouraged management innovation and technological change. 1986 marked the initial year of the 1986-90 FYP and the first full year of Gorbachev's steward- ship. As the result of his leadership, changes in- stituted by his predecessors, and good luck, 1986 turned out to be a very good year for the economy (see table 2). On the strength of record farm output and reduced loss of work time, Soviet GNP grew by more than 4 percent, the highest rate in a decade. Industry, the focus of Gorbachevs modernization efforts, also did well, recording its best growth in a decade. Nonetheless, a number of problems surfaced during the year that could spell trouble for Gorbachev's economic program over the longer term. For example, the first significant resistance to specific policies, although not overall goals, surfaced in both the massive government and party bureaucracy, par- ticularly among many enterprise managers who complained that they were being asked to carry out conflicting goals - such as to raise quality standards and output simultaneously. Table 2 USSR: GNP by Sector of Origin' 1981-85 1981 1982 1983 1984 1985 19862 GNP 1.9 1.4 2.6 3.2 1.4 1.1 4.2 Agriculture' 1.9 -0.7 7.2 6.0 -0.7 -1.7 7.3 Other 2.1 2.2 1.2 2.6 2.3 2.3 3.2 Sectors of which: Industry 2.0 1.3 0.7 2.7 2.6 2.7 3.6 CIA estimate calculated in 1982 rubles at factor cost. Preliminary. This measure for agricultural output 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 8.6 percent in 1986 and at an annual average rate of 1 percent in 1981 -85 as a whole. Record farm output led the surge in GNP. Production of potatoes and vegetables increased substantially over depressed 1985 levels, and new highs were established for production of all major livestock products. Meanwhile, a 210-million-ton grain harvest - the highest since 1978 - helped Moscow reduce grain imports and contributed to a 5-percent increase in net livestock production. Overall, net farm output increased by 7.3 percent. (See appendix A for a more detailed description of Soviet economic performance in 1986.) While not growing as rapidly as agriculture, industry also turned in a respectable showing. Production targets for the majority of the most Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 important items produced in the machinery sec- tor - including metal-cutting machine tools and computer equipment - were exceeded. The energy branches, despite problems caused by the Chernobyl nuclear power accident, exhibited healthy growth, with the output goals for coal and natural gas being exceeded. Similarly, those branches producing industrial materials, short- ages of which have caused bottlenecks in the past, did well. Several ambitious plan targets for the year were met or exceeded. Underlying industry's improved performance was an improvement in productivity. After dec- ades of steady decline, overall factor productivity' in industry nearly stabilized in 1986. Faster growth in labor productivity substantially offset a continuing though slowing decline in capital productivity. Much of the improvement in labor productivity appears to have come from reduced loss of worktime through increased discipline, less drunkenness on the job, and more effective management. The room for such reduction is substantial. According to a Soviet economist, on an average workday 18 percent of the work force does not show up because they are on vacation or sick leave, and those who do show up "waste," on the average, 20 percent of their time. Although the leadership could take comfort in the overall figures on growth and productivity, several serious problems cropped up during the year. While not unexpected given all that Gor- bachev was trying to accomplish, they will have to be corrected or offset if his modernization program is to proceed on track. The most serious of these problems are associated with the regime's efforts to improve the quality, reliability, and technological level of Soviet manufactured machinery and equipment over a short period. Soviet planners have established lofty targets for raising product quality during the 12th FYP - 85 to 90 percent of all machinery is to meet what they call "world standards" by 1990. To date, however, progress in meeting this goal has been poor. Leadership statements describe the problems encountered: At the 27th Party Congress (March 1986), several speakers pointedly referred to continued problems in the quality of ma- chinery, noting that some of the machinery installed during reconstruction was still grossly outmoded, while "new machinery" scarcely exceeded older models in terms of productivity. e At a special conference in September 1986, Politburo member Lev Zaykov criticized the recent performance of civilian machine-builders, indicating that targets for improving the quality of machinery were not being met and that poor quality machinery was being turned out even in showcase factories. A recent TASS report of a Council of Ministers' evaluation of the 1986 plan results noted that there was enterprise resistance to the new state system of quality control and stated that the machine-building and other ministries "did not achieve a decisive breakthrough in ... raising the technical level and quality of output." A sharp decline in the Soviets' real import capacity in 1986 - the result of falling oil prices and the depreciation of the dollar - also does not bode well for GorbacheVs modernization program over the longer term. While the ultimate success of that program hinges largely on internal factors, its goals imply that some highly spe- cialized imports from the West for such sectors as energy, machine tools, microelectronics, and telecommunications must be continued, if not increased. Moscow was able to cope fairly well with a difficult situation in 1986 by remaining an active borrower, increasing gold sales, and reduc- ing imports, especially of agricultural products. Such adjustments may not be as easy in the future, however, unless Moscow is willing to increase sharply its debt to the West. Factor productivity measures the difference between the growth of gross national product and the growth of weighted sum of inputs of land, labor, and capital. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Finally, bureaucratic foot-dragging and outright opposition appear to have threatened some of Gorbachev s policies. Gorbachev apparently has become convinced that success in revitalizing the Soviet economy will depend on introducing major political and social as well as economic reforms. These reforms, particularly his cam- paign for greater "openness" and "democratiza- tion" of political life, have met with resistance within the party and government bureaucracy. A party plenum scheduled for December 1986 was, by Gorbacheds own admission, postponed three times. We believe the delay was the result of difficulties in gaining support within the Central Committee for the personnel reforms that he wished to introduce. While economic growth was picking up, Gor- bachev tried to lay the ground work for future gains through his resource allocation policies. In line with the goals laid out in the FYP, invest- ment growth surged, with the greatest attention being given to renovating and reequipping those facilities that produce machinery critical to the modernization effort (see table 3). According to Soviet statistics: Total new fixed capital investment increased by 7.5 percent in 1986, the highest increase in over a decade and slightly above the 1986 plan. e State productive capital investment chan- neled into the reconstruction and retooling of existing enterprises increased by a hefty 17 percent, a good beginning to a plan that calls for about an 11 percent annual increase in renovation expenditures during 1986-90. e On a negative note, the overall amount of new (gross) capacity brought on stream was far less than planned - 6.4 percent growth compared with a 1986 plan target of 14.1 percent. This suggests that Moscow's plans to reduce new construction and concentrate on finishing uncompleted projects were not realized. Table 3 USSR: Selected Indicators of Capital Formation Plan 1976-80 1981-85 1986 1986-90 New fixed capital investment 3.3 3.5 7.5 4.9 State productive capital' investment in the reconstruction and retooling of existing enterprises NA 7.0 17.0 11.0 Commissionings of new capacity 4.4 3.0 6.4 NA ' State capital investment is equal to total investment less investment by cooperatives, kolkhozes, and individuals (in housing). State productive capital investment further excludes investment by the government for services and housing. Although there were a few surprises, the in- vestment priorities laid out in the 12th FYP appear to have been adhered to in 1986. Within industry, the 11 civilian machine-building min- istries apparently received the biggest boost. No yearend data were released, but based on 9-month results, investment in this sector increased by 17 percent. Similarly, plan goals and press commen- tary on the 1986 results suggest that investment in the energy industries rose sharply, although again no figures were released. Somewhat unex- pectedly, investment in the agro-industrial com- plex increased by almost 10 percent in 1986 - far more than the 3-percent average annual rate recorded during the first three years of the program which was established in May 1982. The largest gains were in the nonfarm sector - industries that supply inputs to agriculture and process farm products. While the increase seems somewhat high, the structure of agro-industrial investment appears consistent with Gorbachev s emphasis on providing more resources to agricul- tural support sectors. In contrast to the rapid growth in investment, the consumer did not fare nearly as well from the economy's strong showing in 1986. Per capita consumption grew by less than 1 percent in 1986, in part because legal sales of alcohol - a major component of consumer expenditures - fell by 37 percent as a result of the antialcohol Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 campaign. Nonetheless, gains in key components of consumption - food (excluding alcohol) and housing - may have earned Gorbachev some points with the populace and helped underscore his commitment to improving worker incentives. Food supplies - one of the main indicators by which citizens judge their well-being - im- proved in 1986. Fruit and vegetable production in particular rebounded from depressed 1985 levels. Construction of housing reached 118 million square meters, up 4.4 percent from 1985 and the largest gross increment to the housing stock in 20 years. Despite improved supplies in some areas, un- satisfied consumer demand is reflected in contin- ued queuing in state stores (with fixed prices) and rising prices in collective farm markets. Con- tinued growth in wages, coupled with the drop in alcohol sales, resulted in a large increase in the amount of cash held by the consumer. One indication of the regime's concern over the imbalance between expanded disposable income and goods to buy was its failure to publish a figure on the addition to household savings in 1986. While our information on defense spending in 1986 is less solid than that for consumption and investment, our preliminary estimate is that overall defense expenditures in constant prices increased by about 3 percent (see box insert for a discussion of Soviet defense spending in current prices). Although somewhat above the rate of recent years, it does not appear that this growth represents any change in defense spending policy since GorbacheVs arrival. Rather, it was largely driven by the startup or acceleration of production of several new weapon systems that were under development before Gorbachev took office. In 1985 and 1986 at least, these programs helped raise procurement growth to about 3 percent per year. Measuring Soviet Defense Spending in Current Prices In Western estimates of defense spending, constant prices are used to measure the real growth in defense - that is changes in military manpower, the volume of procurement and construction, and the scale of RDT&E and operations and maintenance - excluding the effects of inflation. The Soviets, however, do not use Western-style constant prices. Rather, most references in Soviet literature to defense spending are in terms of current prices, and presumably the leadership uses this measure, along with various physical indicators, to assess trends. Because current prices show higher rates of growth, the leadership might have a different sense of defense spending trends than constant price estimates would suggest. Indeed, CIA and DIA agree that defense's share of Soviet GNP rose from about 12-14 percent in 1970 to about 15-17 percent in 1982. Although the real growth in defense activities and overall economic output was roughly the same in this period, defense's share of Soviet GNP increased when measured in current prices because costs and prices of defense-related goods and services increased more rapidly than those of nondefense goods and services. Our estimate of defense's claim on the output from individual sectors of the economy supports this view of a rising defense burden when measured in current prices. These shares generally grew between 1972 and 1982. This notion of a rising defense burden is also consistent with leadership statements over the past decade. Although Soviet leaders have always made passing references to the high costs of defense from the late Brezhnev period onward, they have increasingly linked the USSR's inability to provide more rapid gains in consumer welfare and generate high economic growth to the high costs of its defense efforts. Gorbachev has been particularly vocal on this topic. In February, for example, Gorbachev said that defense spending was "a load on the economy... because it diverts enormous resources that could be redirected" to other sectors. Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 The largest jump in expenditures in 1985 was in aircraft procurement. The initial stages of production of the new BLACKJACK bomber - whose development dates back to the early 1970s - and Moscow s continued emphasis on fighter production helped drive up aircraft expenditures, while increases in both tactical and strategic missile procurement - led by outlays for the SA 10 and SA-12 air defense systems - also raised missile procurement in 1985 and 1986 following a cyclical decline in the early 1980s. At the same time, we believe Gorbachev has told military leaders that - like their civilian counterparts - they will have to use resources more effectively. One apparent manifestation of this has been a great emphasis on conservation and less costly training practices. For example, at a major naval conference in December 1985 attended by newly appointed Commander of the Soviet Navy Admiral Chernavin, it was reported that some comman- ders had failed to understand the need for "an in- tensification of combat training" during 1985 and instead had "decided on an unnecessary increase in the number of sea exercises, which leads to overuse of engine capacity, overconsumption of fuel, and premature aging of equipment." The 1987 Plan: Full Speed Ahead Building on a fast 1986 start, the 1987 Plan shows no letup in Gorbacheds drive to revitalize the economy by modernizing the industrial base, improving management, and motivating worker effort. The goals for overall economic and indus- trial growth are high - both over 4 percent - but appear consistent with the targets originally laid out in 12th FYP (see figure 4). The industrial plan focuses on producing more and better machinery for modernization and more goods for the consumer. The Soviets are appar- ently banking on the sharp rise in investment in civil machine building in 1986 to spur an accelera- tion in output this year. Machinery output - after increasing by 4.4 percent last year - is slated to jump by 7.3 percent in 1987, a pace not achieved since the early 1970s. Machine builders are to concentrate their efforts on high-technology products for investment and durables for the consumer. The output of advanced machine tools, instrumentation equipment, and computers is to grow almost 50 percent faster than production of machinery as a whole. Machinery quality also is to improve substantially, with the share of equipment corresponding to "world standards" to rise to 60 percent in 1987. Moscow's plans for some critical sectors re- main unclear. A number of important agricultural targets have not been released, although grain production is to rise to 232 million tons. Simi- larly, targets for other consumer-related sectors have not been released, nor has information on production goals for such commodities as cement and other construction materials. The plan does make clear, however, that growth in steel output is to be achieved primarily from efficiency gains, not increases in production of inputs such as coke and pig iron. Priority for Investment In line with GorbacheVs modernization pro- gram, investment once again seems to have been given priority. Total new fixed capital investment in 1987 is slated to grow at 4.6 percent - faster than overall economic growth - and apparently somewhat above the rate originally called for in the 1986-90 Plan. The central role of the machinery sector in the modernization program and the need to invest more in the energy sectors, partly as a result of the Chernobyl' accident, may have resulted in these sectors getting higher allocations. In a speech outlining the Plan for 1987, State Planning Chairman Talyzin suggested that more investment than was originally planned would also go to sectors serving the consumer. Based on the ambitious target for construction, housing is apparently scheduled for a particularly sharp rise. As usual, no meaningful information was re- leased on Soviet plans for defense spending in 1987. Given the defense industrial capacity al- ready in place, the overall priority afforded the military, and Soviet concern about ongoing West- ern defense programs, we would expect alloca- tions to remain at levels high enough to allow for continued modernization of the USSR's strategic and conventional forces. Major weapon systems such as the SS-25 ICBM, SA 10 surface-to-air mis- sile, the T-80 tank, and the BEAR bomber should Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 1981-85 1986 1987 1986-90 Plan Plan Investment 8 - Industry 5 r- 1981-85 1986 1987 1986-90 Plan Plan 1987 Plan 1986-90 Plan Figure 4. USSR: Selected Economic Indicators (Average Annual Percent Rate of Growth). continue to enter the inventory at a steady pace, adding to Moscow's strategic and conventional capabilities. Maintaining Momentum Gorbachev is apparently counting on payoffs from past investments and continued returns from his "human factors" campaign - particularly his efforts to increase labor productivity through increased material incentives - to meet the ambitious 1987 targets. To this end, average wages are scheduled to increase by 3 percent in 1987, with the increases distributed in favor of good performers and technical personnel. The goals for wages, consumer durables, housing, and paid services exceed the targets called for in the 1986-90 Plan. As a further incentive to improved worker effort, Gorbachev also has enacted legislation - scheduled to take effect in mid 1987 - that will allow some expansion of private production of consumer goods and services. One dilemma Gorbachev faces in this regard is the circular loop of material incentives and productivity. Pay raises will not provide mean- ingful worker incentives without corresponding improvements in the quality and availability of food, housing, and consumer goods and services. Yet, higher productivity is needed to increase the supply of such incentives. Workers will have to be persuaded to change their fundamental attitudes toward work based on the expectation of improved consumer welfare in the future. Besides trying to improve worker incentives, Gorbachev probably is hoping that some of the numerous economic reforms and organizational changes that have been promulgated since he took over will begin to bear fruit. Most of the changes in these areas are just beginning to take effect, however, and Gorbachev probably realizes Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 that, whatever the benefits to be reaped, they insert for a discussion of economic reform under will materialize over the longer term. (See box Gorbachev.) Gorbachev has repeatedly stressed that major structural changes are needed in the Soviet economy if a real breakthrough in performance is to be achieved. His efforts have focused primarily on four areas: streamlining the bureaucracy, increasing enterprise autonomy, improving workers' incentives and encouraging personal initiative. None of the measures adopted so far, however, could be classified as the "radical reform" that Gorbachev said was needed at the 27th Party Congress. Moreover, many of these measures have been only partially implemented and all are encountering the kinds of problems endemic to changing old institutions and creating new ones. Reorganizing the Bureaucracy - The cornerstone of Gorbachev's reform program has been his efforts to reorganize and streamline the bureaucracy. According to his own statements, these policies are designed to achieve more effective centralized control over the main direction of the economy, while at the same time leaving more of the day to day management to lower levels. His insistence that the bureaucracy shift its focus to strategic planning has been reflected in a number of organizational changes. New superagencies answering directly to the Council of Ministers have been created to oversee key economic sectors. Such coordinating bodies have been set up for machine building, the agro-industrial complex, energy, construction, foreign trade, and social development (see chart). Most of these bodies are not yet fully operational, however, and progress in achieving intended sharp cutbacks in personnel has been spotty. Increasing Enterprise Autonomy- An impressive number of new initiatives attempt to increase the authority and responsibility of the enterprise and to motivate them through "economic" rather than "administrative" levers. ? A new enterprise law codifies enterprise rights (including election of enterprise managers) and attempts to give them legal protection from bureaucractic meddling. ? The so-called five-ministry experiment, which makes contract fulfillment the major measure of enterprise success and expands enterprise control over investment and incentive funds, is being extended industrywide during 1987. ? The self-financing experiments in Sumy and Tolyatti will be expanded to additional ministries this year. ? Selected enterprises are given the right to trade directly with foreign firms. Improving Workers' Incentives - Gorbacheds chief accomplishment in this area has been the passage of a wage reform designed to reverse the leveling trend of the Brezhnev years and to create a closer relationship between workers' pay and their performance. Although this reform calls for a pay increase for many categories of workers, no state funds have been set aside for it. Encouraging Personal Initiative -Gorbachevs promise to provide greater scope for individual initiative has brought new legislation sanctioning expanded business opportunities outside the state sector for individuals and small businesses, especially in consumer goods and services. Permissible action is greatly circumscribed, however, and the impact these actions will have remains to be seen. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Prospects for Modernization Over the Longer Term While counting on the human factors cam- paign in the short run, Gorbachev is depending mainly on the proliferation of more technologi- cally advanced equipment to improve productiv- ity across the economy over the longer term. He has repeatedly said that the USSR must replicate the ongoing Western technological revolution in which advanced machine tools, robots, microelec- tronics devices, computers, and telecommunica- tion systems are making operations more flexible, thereby raising quality and cutting costs. At the same time, Gorbachev is hoping that as a result of a series of organizational and administrative measures enterprises will have more incentives to demand and use the best equipment available. Major Reorganizations Since Gorbachev Took Over Date Sector Established Action Taken Machine Oct 85 Machine Building Bureau Building established to oversee 11 civilian machine building ministries. Bureau to carry out "unified technical policy." Given authority to redistribute resources of ministries but no line operational authority over enterprises. Management structure to be reduced. Agriculture Nov 85 USSR State Agro-Industrial Committee (Gosagroprom) established by merging five ministries, one state committee, and elements of three other ministries. Similar reorganiza- tions carried out at regional levels. Central staff reportedly reduced by 47 percent. Rights and responsibilities of regional and farm officials enhanced. Fuel and, Mar 86 Fuel and Energy Bureau created Energy to coordinate energy policy and Complex carry out unified conservation and technological policies. Given authority over budgetary allocations within broad parameters set by Gosplan, but no operational authority over enterprises. Nuclear Jul 86 Separate All-Union Ministry of Energy Nuclear Power Industry of the USSR was created following the Chernobyl' incident. In February 1987 Soviet press charged ministries were circumventing the order to streamline management and sharply reduce central staffs. Thus far, the only "super- ministry" to be created. Some Soviet officials claim it has paid off in greater efficiency, but numerous press complaints suggest Gosagroprom still in state of confusion. Still apparently in initial phase of organization with its responsibilities yet to be decided. Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Date Sector Established Action Taken Construction Aug 86 Four existing construction ministries reorganized into regionally-focused ministries. Four specialized construction ministries unchanged. Reor- ganized to State Construction Committee and given enhanced authority over all construction ministries. Foreign Trade Sep 86 Foreign Economic Commission established to formulate and coordinate foreign trade policy, but does not have management authority of Gosagroprom and Gosstroy. Commission members include heads or deputy heads of all ministries or agencies concerned with foreign trade. 21 ministries and 70 enterprises given right to engage directly in export and import trade. Social Welfare Nov 86 Bureau for Social Development. Responsibilities have not yet been defined and may be still undecided. Gosplan Chief implied in November 1986 speech that the bureau would have broad oversignt over various ministries and institutions concerned with consumer goods and services, health education and social policy. Emphasis on Supply Unlike the West where modernization has been driven by both supply and demand factors - with interaction between the two stimulating self-sustaining growth - GorbacheVs modern- ization program has concentrated primarily on increasing the supply of more technologically advanced equipment. To this end: ? Production of computer equipment is slated First serious attempt in over 20 years to bring some order into chaotic construction sector. Reorganization aimed at strengthening centralized direction while allowing regional authorities more control over local projects. Too soon to assess. Reor- ganization ends Ministry of Trade's long-standing monopoly over foreign trade. Should give end-users more say in contract negotiations. Enterprise right to buy foreign goods limited to foreign exchange they are able to generate through sale abroad of above-plan production. Should help facilitate establishment of joint ventures. Still being formed. to grow by 18 percent annually through 1990. By that time, the Soviets plan to produce 1.1 million personal computers annually, compared with almost none until the mid-1980s. ? Output of the main producer of instrumen- tation equipment is slated to grow by 11 percent per year in the 1986-90 period, up from 6 percent in the previous 5 year period. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Production of robots in the 1986-90 period is to increase by 120 percent, numerically controlled machine tools by 90 percent, and machining centers by 330 percent compared with 1981-85 production. While the Soviets probably will not meet all of these targets, they have already taken a number of major steps to provide more and better machinery in each of these areas. Most significantly, as indicated above, investment in the 11 civilian machine-building ministries is to increase by a massive 80 percent during 1986-90 compared with the 1981-85 period. Meanwhile, funding for "science" - a rough indicator of the resources committed to R&D - is also to increase sharply. The USSR has created interbranch scientific and technical complexes to expedite development and incorporation of new technologies into the machine-building production base. Finally, foreign support is to fill in the gaps that cannot be met domestically. Moscow probably plans to increase the imports of capital equipment from both Eastern Europe and the developed West. Large, cooperative R&D programs have also been established with Eastern Europe in key manufac- turing technologies. In contrast, the Soviets have put far fewer mechanisms into place on the demand side to promote the innovation and diffusion of the ap- propriate technologies into machine building and the rest of the economy. They have yet to change the system of plan targets and incentives sufficiently to make it generally advantageous for managers to favor innovation over maintaining the status quo. Instead, they have tinkered with estab- lished programs - like the enterprise production development 'funds - to give factory managers greater authority and ability to procure new machinery and equipment. This will not work if managers are penalized for stopping production to accommodate modernization or cannot induce machinery suppliers to produce the right equip- ment and provide reliable installation and main- tenance support. These are still likely obstacles confronting the innovation-minded manager. The Soviets also continue to rely on admin- istrative measures to regulate effective demand for new technology. They have attempted to im- prove quality by establishing independent quality- control inspectors in selected enterprises. They also have directed the State Committee for Sci- ence and Technology and the Academy of Sci- ences to act as proxies for machinery customers to determine just what technologies are suited for industrial users. But this is imposition from the top down and assumes that these agencies will make the right choice. In short, given what we know of Gorbachev's modernization plans - and the results we have seen so far - we believe that the Soviet focus on supply-side factors will certainly result in the machine-building sector producing higher vol- umes of more modern equipment. It is not at all clear, however, whether the sector will be able to transform itself or the rest of the economy unless managers throughout the economy demand, and are given the opportunity to select, the correct products. Growth Through 1990 Judging the success of Gorbachev's moderniza- tion program will not be easy. Even approaching some of the technology goals or output targets for key items such as computers or numeri- cally controlled machine tools would be quite an achievement. Since the beginning of the Brezhnev era in the mid-1960s, the Soviets have generally missed the major FYP targets, and this plan is likely to be no different. Gorbachev probably realizes this. While talking tough and saying that no excuses will be brooked, he has also acknowleged that the targets for 1986-90 were set at the upper limit and that their attainment will be difficult. Gorbachev, however, is probably counting on a reasonable degree of success. At a minimum, he would like to reverse the decline in the rate of growth that has occurred in nearly all sectors of the economy over the last decade. While the measure of acceptable performance is some- what arbitrary, Soviet leaders would probably give Gorbachev good grades if national income (the Marxist measure of overall production) and industrial growth increased by one percentage point per year over the depressed levels of the 11th FYP (1981-85). Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 We believe that Gorbachev probably will have some success for the following reasons: . The full potential of the "human factors" campaign - particularly the discipline and the antialcohol program, as well as his efforts to increase managerial and worker incentives - has yet to be tapped. Similarly, there should be some improvement in higher-level planning and management. Gorbachev has promoted a number of younger officials, many of whom appear more willing to consider new approaches to solving economic problems. His efforts to improve incentives for enterprise managers and workers and to reorganize the machinery, trade, and agricultural bureaucracies could also pay some dividends, although how much is impossible to say. Finally, for the reasons just given, the massive jump in investment in the civilian machine-building sector should yield some dividends in higher output growth and improved quality, even if the needs of major industrial users are not fully taken into account. It would be misleading, however, for US and Soviet leaders to look at only aggregate measures of output and industrial growth. Gorbachev is interested not only in raising rates of economic growth over the next few years, but also in changing the structure of the economy so that even higher rates can be achieved during the 1990s. In this context, observations of a number of other variables will give us a better handle on how modernization is proceeding. These include: The Rate of Capital Renewal - Gorbachev has decreed that by 1990 more than one-third of the country's capital stock will be replaced. Of all the major goals Gorbachev has established, achieving this particular one will probably be the least difficult. Our calculations show that even with no increase in retirement rates, this goal will be achieved as long as the current target for overall investment is met. The Level of Technology Embodied in New Equipment - Measuring this will be extremely difficult. Machine builders will be under intense pressure to declare major quality improvements whether they are warranted or not, and we are likely to be bombarded by a host of statistics - some positive, some negative. A good surrogate measure of the USSR's ability to produce world-class machinery will be its success in increasing hard currency sales of manufactured goods - the test of the market place. Factor Productivity Trends - Success in meeting the first two goals should be reflected here. Of all the variables to watch, this is the most critical because - unless the positive results achieved in 1986 can be sustained - there is little hope of accelerating growth during the 1990s. Our overall assessment is that, while we expect some improvement in Soviet economic perfor- mance over the next few years, we doubt that sufficient progress can be achieved in improving the level of technology and reversing productivity trends to permit substantially faster growth in the 1990s. More concretely, we believe that the Soviets will fall well short of their implied goal of 4-percent average annual GNP growth during 1986-90. Similarly, the 5-percent target for 1991-2000 appears to be out of reach. The regime's implicit goal of 4-percent average annual GNP growth during 1986-90 is question- able because of the huge gains in productivity it would require. According to Gorbachev, "human factor" gains are to account for one-third of the increase in productivity, and modernization the remaining two-thirds. Using an econometric model to project what this implies, the elasticity of output with respect to capital - the model's measure of the percentage change in output re- sulting from a 1-percent increase in fixed capital - would have to increase by nearly 26 percent compared with the 1981-85 period, and workers Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 would have to be, on average, 7 percent more productive than they were in 1981-85.2 This much improvement in either factor seems implausible. In the late 1960s and early 1970s, output-capital elasticities of this magnitude were approached, but the relative cost of material inputs - fuels, ores, minerals - was much less. Material input costs since then have risen dramatically and are likely to continue to do so in the years ahead, making the required gains from capital expansion difficult to achieve. As for "human factors," while we still look for some improvements, there are limits to the gains that can be expected. Absenteeism, for instance, can only be reduced so much, and the slow growth in the supply of consumer goods and services is likely to rule out any significant increases in worker incentives in the years ahead. Based on what we believe are more realis- tic assumptions about productivity, we project growth of GNP at an annual average rate of 2 to 3 percent during 1987-90. This assumes a substantial improvement in capital productivity over the 1981-85 period, but less than half of what would be required to meet plan. Coping With Shortfalls We believe growth in the neighborhood of 2 to 3 percent, while better than that in the recent past, would still be insufficient to solve the coun- try's economic problems and could eventually lead to: . Greater reliance on foreign economic ties, and, depending on Gorbachev's political standing; . A push for more ambitious economic reforms. The severity of Moscow's resource allocation bind during the current FYP will depend primarily on its ability to sustain the recent economic up- turn. If, in fact, the economy's strong showing in 1986 proves transitory, then increasingly difficult resource allocation decisions will have to be made between competing civilian and defense interests, as well as among competing interests within the civilian and defense sectors themselves. Over the next few years, the toughest deci- sions are likely to be in the investment arena Despite the high investment growth targets for those branches of industry key to the moderniza- tion program, we believe achieving output targets in critical areas like the machine-building and the energy sectors will require further increases in investment above those currently planned for 1987-90. Investment is already being given pri- ority, however, and finding additional resources will not be easy. A major part of Gorbachev 's human factors campaign depends on increasing workers' incentives and, as noted earlier, the leadership has already deemed it necessary to boost investment in consumer-related areas in 1987. Further increases will probably be needed if momentum is to be maintained. Soviet defense industries also will require sub- stantial investment over the next few years. Anal- ysis of Soviet requirements and programs under way indicates that the Soviets will maintain their historic level of weapons development - about 150-200 major new and modernized systems - into the 1990s. Our evidence shows that new programs are in progress to update or replace older systems with improved models in every mission area, with many likely to begin series production in the mid-1990s. The Soviets commit investment resources to prepare for weapons CIA's macroeconomic model of the Soviet economy, SOVSIM, was modified for use in evaluating Gorbachev's plans. Features were built into the model to assess the regime's efforts to modernize the capital stock. (An example would be the assimilation of more modern, domestically produced automation facilities or imported technology.) This was done by assigning higher returns to new capital than to old capital. In addition, the model was modified to allow for productivity gains originating from "human factors" - policies intended to increase the work effort - the other major element of Gorbachev's economic strategy. Model results suggest that without these initiatives the best the Soviets would be able to do in the 1986-90 Plan would be about 2-percent growth in GNP. Some gains from capital modernization and human factors will be realized, however, and growth rates approaching 3 percent may even be possible. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 production roughly during the 10 years prior to initiation of series production, with the largest expenditures, including those to put in place most of the machinery and equipment, occurring in the last half of this period. This suggests that they will be allocating substantial investment resources in the late 1980s and early 1990s to prepare for systems entering production during the last half of the 1990s. At least some of these funds, however, would have already been included in the budget allocations for this FYP and the Soviet military would undoubtedly resist any efforts to renege on these commitments. Indeed, depending on the pace of major US defense programs - particularly SDI - the military might argue that their requirements have increased and press for additional funding. We do not know how Gorbachev will respond to these pressures, but the state of the economy, Moscow's perception of the military threat, and Gorbachevs domestic political standing would all come into play. Even if economic growth has not picked up, however, Gorbachev would be unlikely to push modernization to the point whereby key military requirements would not be met. Lagging economic growth would, however, certainly make arms control agreements more attractive (see box on impact of Soviet economic problems on arms control positions). Impact of Soviet Economic Problems on Soviet Arms Control Positions Military requirements based on political and doctrinal objectives remain the dominant factor in formulation of Soviet arms control policy. Gorbachev 's economic modernization program, however, is apparently viewed by the Soviet leadership as the key to long-term military-industrial self-sufficiency As such, it has created an important additional incentive to meet these requirements in ways that would minimize the immediate need for significant growth in military costs. One potential means of accomplishing this might be for the Soviets to defer or stretch out the weapons programs that have been designed in response to these requirements, thereby easing the military demand for scarce resources. This approach, in turn, would be facilitated by arms control agreements that would reduce the growth or the absolute size of US military forces, especially in the defensive arena. The greatest potential economic benefit to the Soviets from an arms control agreement would almost certainly be the avoidance of substantial new military cost growth. The near-term benefit to the civilian economy from reducing or even eliminating particular strategic systems, however, would probably be minimal. Production facilities take time to correct and spending on strategic offensive systems currently represents only about 10 percent of total military spending. Arms control related savings achieved through the avoidance of SDI costs during the 1990s, in contrast, could be substantial. To counter a successful SDI program we expect Moscow would continue as well as initiate a number of technical and operational countermeasures to insure that its weapons arrive on target. Depending on how the Soviets respond, defense spending could increase substantially. Also, any major attempt to offset SDI probably would draw from key technical and industrial resources - like those engaged in software and sensor development - vital to other Soviet military and civilian programs. Although we do not know precisely how important these economic considerations are, given that the Soviets are committed to SDI related programs, the potential for long-term savings is significant. Apart from an agreement on strategic forces, the Soviets have also proposed an accord involving conventional forces. Although the precise details of such an agreement remain unclear, Soviet and Warsaw Pact leaders have been publicly talking about a pact that could eventually lead to a Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 reduction of several hundred thousand men. In early June 1986, Warsaw Pact leaders issued an appeal to NATO to join the Pact in reducing conventional and nuclear forces - both troops and weapons - in Europe from the Urals to the Atlantic. The appeal follows statements by Gorbachev in April that called for initial reductions of 100,000 to 150,000 troops by each side. Further cuts, to be completed by the early 1990s, would result in overall reductions of about 25 percent (more than 500,000 men) from each side's present force level. One benefit to the economy of reducing conventional forces would be the availability of more workers to an already tight labor force. The Soviets have been having trouble filling jobs in industry, especially in the RSFSR, and adjustments have had to be made in conscription policy in recent years to maintain the active duty strength of the armed forces. In a speech to a party plenum in June, Gorbachev indicated that industry was already short 700,000 workers. Troop reductions on the scale suggested could have an impact at the margin, particularly in certain areas such as the USSR's western industrial regions. The release of a few hundred thousand soldiers would not, however, have an appreciable impact on the overall civilian labor force now numbering some 130 million workers. On balance, we do not believe the military and economic imperatives of Gorbachev's program would lead the Soviets to accept any arms control agreement that would prevent them from achieving key military objectives. Fundamentally, what they appear to want are agreements that constrain Western defense efforts, facilitate Soviet force modernization, and allow them time to complete the USSR's economic development program while staying within the bounds of current defense spending trends. While we believe that Gorbachev will face difficult decisions in the investment sphere over the next few years, we do not expect his focus on the civilian economy to have a major impact on military production at least through 1990. As last year's joint CIA-DIA assessment argued, the defense establishment is well positioned to accommodate the shifts in machinery demands implied by the industrial modernization program.3 Most of the weapons we expect to be delivered to Soviet forces through 1990 will be manufactured in plants already built, equipped, and operating. Although competition could be stiff for some basic materials and intermediate goods needed for both industrial modernization and weapons production - and might result in the delay or scaling back of some weapons systems - most major programs should go forward as planned. As a result, we anticipate little change from the picture we presented in last year's assess- ment. Even with little growth in procurement over the next few years, the absolute magnitude will remain high enough to permit substantial upgrades of Soviet strategic and conventional forces. New generations of land and sea-based ballistic and cruise missiles recently have entered or will soon enter production, which should result in a comprehensive modernization of the USSR's strategic offensive forces by the early 1990s. Strategic defense force improvements, al- though less substantial, also will permit sustained improvements in capabilities. Conventional forces will undergo a similar upgrade. Two late-generation fighters, the MiG-29 and Su-27, are entering the inventory, while new submarines and warships, including the USSR's first full-size aircraft carrier, are improving naval capabilities. Meanwhile, a variety of improved 3 See the Soviet Economy Under a New Leader, a joint CIA/DIA report published by DIA as DDB-1900-122-86, July 1986. 18 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 land arms (most notably new artillery weapons and the T-80 tank) are being deployed to the ground forces. While this analysis suggests that the overall level of spending on weapons procurement need not be a major source of contention in this FYP, the picture would change if the military and some influential leaders wanted to undertake large new initiatives in either the USSR's conventional or strategic forces. In this case, the leadership would have to decide whether to reduce spending on other types of forces or increase the resources allocated to defense at the expense of civilian programs. Marginal increases at the expense of conventional forces might be possible, for example, if the Soviets decided to boost spending on strategic forces in reaction to SDI. Any large cuts, however, would almost certainly generate strong protests from those service elements being cut. The same would be true, of course, -if the Soviets decided to raise spending sharply on conventional forces, as some elements in the military are currently arguing. The alternative, however, would be to shift resources from the civilian economy at the expense of industrial modernization. Seeking Foreign Economic Support Besides complicating resource allocation, fail- ure of the modernization program to supply industry with the necessary machinery and equip- ment to sustain higher growth levels probably would also lead Moscow to make adjustments in its trade relations. Eastern Europe. In the first instance, we would expect Moscow to increase demands on Eastern Europe. Gorbachev has pushed for greater CEMA integration since becoming General Secre- tary and demanded more and better quality goods from Eastern Europe. Existing trade protocols for 1986-90 probably call for the East Europeans to increase exports to run trade surpluses and pay back outstanding debts owed Moscow. A serious shortfall in the modernization pro- gram would likely lead Moscow to demand even more capital goods from the region. Such de- mands, however, would be resisted. The USSR already absorbs a large share of East European pro- duction in most high-tech industries, and even in those countries best able to meet Soviet requests - most notably East Germany and Czechoslovakia - there is a tremendous need for advanced machinery for domestic investment. Eastern Europe, moreover, finds itself in a better position to oppose Moscow's demands because of its improving terms of trade. The value of Soviet energy deliveries to Eastern Europe - which comprise the bulk of exports to the region - will decline over the next few years as the CEMA pricing mechanism incorporates the drop in world oil prices. Without adjustments to current trade plans, the USSR could begin to run large trade deficits with its East European allies. Moscow would then have to rely on these countries to finance large trade credits if it wishes them to maintain or increase the net flow of resources to the Soviet Union. Developed Countries. Faced with a precipi- tous drop in its hard currency earnings as a result of falling oil prices, the Soviet leadership has said that it hopes to increase machinery exports to the West. In fact, one of the rationales Gorbachev has used to sell his modernization program has been the need to produce machinery that will be competitive on world markets. Failure of the modernization program to raise the technological level of new equipment sub- stantially would seriously hinder any sharp in- crease in machinery sales, which now account for roughly 5 percent of Soviet hard currency exports. Even with the recent Soviet moves to re- organize the foreign trade sector and to promote joint ventures with Western firms, we believe that unless Moscow abandons its conservative borrowing strategy, the USSR's hard currency imports could fall even further over the next few years (see box insert for a discussion of Moscow's recent initiatives in the international trade area). Regardless of the trends in Soviet hard cur- rency earnings, we expect Moscow to continue its massive efforts to steal Western technology. In numerous instances, illegal acquisition of tech- nology has reduced development time and/or Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Recent Soviet Initiatives in the World Economy Over the past year the Soviet Union has embarked on a far-reaching campaign to increase its role in world economic affairs. Soviet moves include restructuring the foreign trade apparatus, permitting the establishment of joint ventures with Western firms, and seeking greater participation in international economic organizations. Moscow's major objective is to raise both the quality and technical level of its domestic output, partly as a means to expand exports of manufactured goods. The leadership believes it must reduce its reliance on sales of energy and other raw materials and, instead, create a trade structure more suited to a large industrial nation. Foreign Trade Reorganization In September 1986 the Soviets announced a major overhaul of the foreign trade apparatus aimed at breaking the Ministry of Foreign Trade's monopoly over foreign trade. As of 1 January 1987, more than 20 ministries and 70 large associations and enterprises had been granted the authority to conduct trade directly with foreign partners. At present, the Ministry of Foreign Trade has retained control of trade in raw materials, food, and about 60 percent of machinery imports, although additional ministries and enterprises could eventually also be given the power to conduct trade transactions. Moscow also created the State Foreign Economic Commission composed of the heads of the major ministries and departments involved with foreign trade. This new body appears to have limited power over resources, however, with its function limited largely to giving guidance on trade matters. Joint Ventures With the West A second major initiative was the establishment of guidelines in early 1987 that permit formation of joint ventures with Western trading partners. The new resolution allows up to 49-percent foreign equity, repatriation of profits, and Western participation in management, although Soviets must occupy the positions of chairman of the board and director-general. In addition, Soviet law will apply to the wages, work hours, and vacations of Soviet citizens. The current joint venture resolution is somewhat vague on many key points of interest to Western firms, and further details are likely to be spelled out as the Soviets begin setting up these projects. Soviet interest in joint ventures is widespread, with proposals sought on everything from the light and food industries to machinebuilding, petrochemicals, electronics, and communications. Indeed, Moscow is probably looking to joint ventures as a means of acquiring Western technology with little to no up-front hard currency expenditures. Moreover, the Soviets may also believe that joint ventures will allow for an easier transfer of technology and management skills than has been the case with traditional purchase of machinery and equipment. The Soviet leadership has also explored expanding relations with international economic institutions such as the European Community and the General Agreement on Trade and Tariffs. Some interest in the International Monetary Fund has also surfaced, but Moscow does not appear to be as serious about this organization, at least at this time. Political motives may partly explain Moscow's actions, as the USSR may feel that its world power status requires that it be a player with major world bodies. But the Soviets have said that they are counting on the association Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 with important economic institutions to open up new trade opportunities, especially through tariff reductions. In conjunction with recent trade activity, Moscow has also broadened the scope of its financial dealings. For example, Soviet or Soviet-owned banks in the West have stepped up the use of acceptance facilities and some of the newer financial instruments. Last year the USSR invested in an international bond issue for the first time and reached a settlement with the British on outstanding Tsarist bonds, prompting speculation that the Soviets may soon issue their own bonds. These actions not only help diversify Moscow's sources of funds but also cut borrowing costs. Although Moscow will continue with its recent trade-related endeavors, it will proceed cautiously. Moreover, continued hard currency shortages act as a further constraint on the USSR's ability to become a major player in international trade circles anytime soon. The reorganization of the trade apparatus is noteworthy, but most trade still remains dominated by central planners. In fact, many systemic weaknesses - such as distorted prices and the lack of incentives - remain and will continue to thwart the qualitative improvement of Soviet-manufactured exports. Some joint ventures will be established, but most Western firms appear unenthusiastic so far, especially considering the problems they have encountered with joint ventures in other socialist countries. Finally, the foreign trade sector does not operate in a vacuum, and rapid expansion in the international arena is unlikely until numerous shortcomings in the domestic economy are corrected. allowed Moscow to field a weapon system more capable than otherwise would have been the case. On occasions this technology has also benefited the civilian economy. Diversion of advanced manufacturing technology - for example, micro- electronic processing know-how and equipment - has raised the quality and performance of de- vices used in both military and civilian products. Indeed, this probably will be even more the case in the future. Many of the products needed for Gorbachev s modernization program in the areas of information processing, computers, and micro-electronics also have military applications. talked about) - would be aimed at stimulating production and innovation, and would certainly be consistent with the direction in which Gor- bachev is already heading. Still, he would have to overcome stubborn political and bureaucratic opposition, which could be expected to intensify if his programs were faltering. . Abroad spectrum of the apparat would probably oppose moving too far in this direction on the grounds that economic decentralization would threaten a loss of political control. Prospects for Economic Reform Ultimately, under the pressure of hard de- cisions on resource allocation and insufficient foreign support for his modernization program, Gorbachev may decide to put more teeth into his calls for "radical reform." Adopting some of the bolder proposals that have been put forward - such as a major decentralization of price setting or real competition among state enter- prises (see box for a discussion of reforms being A major decentralization would threaten the jobs, status, power, and privileges of thousands of officials now running the economy. The specter of unemployment, inflation, and widening class divisions within society would undermine what Soviet citizens and leaders consider to be some of the principal advantages of socialism. Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Some reform-minded economists in the USSR have taken advantage of the more open environment under Gorbachev to advocate bold measures that could transform the economy. Some of the more far-reaching ideas now being discussed include: . Increased competition among state enterprises. Abel Aganbegyan, an economic adviser to Gorbachev, has indicated that inefficient enterprises should be allowed to fail. . A major decentralization of the price formation and supply systems. Articles in the Soviet press have called for allowing suppliers to deal directly with their customers and set prices by negotiation, bypassing the central supply system. . The use of "family contracts" for agriculture production and long-term leases of land and machinery by small groups of farmers. Such measures have been used successfully on an experimental basis, and their broad introduction is being promoted by some Soviet economists. Indeed, there has been significant opposition to some of Gorbachev s political reform efforts in 1986, and Gorbachev certainly recognizes the threat posed to his programs. Many of the actions he has taken since coming to power can be explained as an effort to trim the bloated party and government bureaucracies so that they will be more receptive to his policies. Since taking over, he has made sweeping personnel changes, replacing about half of the government ministers and over one-third of the provincial party lead- ers. Substantial changes have taken place at the mid-and-lower levels of the bureaucracy as well. Gorbachev's Political Standing Despite the opposition shown to some of his policies, Gorbachev is likely to benefit politically from his modernization program over the next few years. As long as the economy shows some improvement over the record posted in the re- cent past - which seems probable - Gorbachev will be in a position to declare his program a "success." Over the longer term, how Gorbachev fares politically is much more open to question. Under a favorable scenario, if: Just how far Gorbachev will go on reform is impossible, to say, although we should have a clearer idea over the next year or so. During the major party plenum dedicated to the economy scheduled for June 1987, issues of economic reform almost certainly will be debated. At the recently completed Party Plenum in January 1987, Gorbachev also called for an All-Union Party Conference to be held in 1988. Second only to a Party Congress in expressing the official "will of the Party," the All-Union Party Conference, said Gorbachev, should address changes in the political system - changes that might lay the groundwork for more substantial reform. The fact that Party Plenum did not endorse his call for an All Union Party Conference, however, shows just how hard changes in these areas are likely to be. the economy continues to show some progress (even if the FYP goals are not met), the military environment appears less threatening either because of an arms control agreement, a slower Western defense buildup, or other factors, and external factors (e.g., weather, oil prices) are favorable, then Gorbachev could emerge at the end of the decade in a much stronger position politically. But the course Gorbachev is pursuing is in- herently risky, and things could just as easily go Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 wrong. Although he may be able to claim some future. The decisions he will have to reach over success in the immediate future, his repeated the next few years in areas ranging from resource attacks on those slowing the process of recon- allocation to political and economic reform will struction and the strenuous nature of his goals be controversial and could well solidify opposing suggest that he is by no means confident of the interests in the party and government. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A 1986 Economic Performance: A Good Showing The 12th FYP got off to a fast start in 1986. Record farm output and a relatively solid performance in industry helped propel GNP growth to more than 4 percent, the highest in nearly a decade. On the strength of a strong showing in the livestock sector and a good grain crop, agriculture rebounded from a poor performance last year and increased by a hefty 7.3 percent. Industry, meanwhile, also did well, growing by over 3.6 percent with all major branches doing as well or better than last year. Despite the strong start, a number of problems cropped up during the year that were not captured in the aggregate growth figures. In particular, the machine-building sector - the key to longer term growth - attracted repeated criticism from the leadership for its failure to meet goals for output quality, product mix, and deliveries. Meanwhile, shifting terms of trade resulted in a decline in hard currency imports and led Moscow to cancel a number of important projects scheduled for the 12th FYP. Industry Industrial output increased by 3.6 percent in 1986 (see table A-1), the best in nearly a decade and only slightly below plan. Growth slowed during the year, however. Industrial growth during the first quarter of 1986 was up by nearly 6 percent compared with the first quarter of 1985, reflecting the very poor industrial performance during the winter of 1984-85 when severe cold and heavy snows hampered production and transportation. During the last three quarters of 1986, industry grew at an annual rate of about 3 percent. Machinery. While substantially better than the 1.7-percent average annual growth rate achieved during 1981-85, the performance of the machinery sector was probably somewhat of a disappointment to the leadership. Output grew by 4.4 percent, well below plan. One of the reasons for the below-plan output may have been that the very heavy investment in the civil machinery sector last year - the 1986 plan called for a 30-percent increase - increased the amount of downtime in enterprises as they installed new equipment or renovated their facilities. Whatever the reason, targets were not met for a number of important types of equipment, including industrial robots, electric motors, chemical equipment, forging and pressing machines, and petroleum equipment. Production targets were exceeded, however, for the majority of items - including metal-cutting machines and computer equipment. In addition to failing to meet plan targets for some key items, machinery producers also had trouble getting their products to their customers. As indicated in figure A-1, 10 of the 11 civilian machine-building ministries were criticized during the course of the year for not meeting contractual deliveries. In most machine-building ministries, fulfillment of contractual commitments deteriorated compared with 1985. According to the Central Statistical Administration's report on 1986 plan fulfillment, "violations of contract discipline were committed by one in four enterprises." Industrial Materials. Output of industrial materials (ferrous and nonferrous metals, chemicals, construction materials, and forest products) grew by 3.9 percent in 1986, reflecting in part poor Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A (Continued) performance in 1985. Most individual sectors performed well, exceeding the growth rates achieved in 1985. Shortages of industrial materials caused bottlenecks throughout the economy during the late 1970s and early 1980s. Continued strong showing by these branches is needed if Gorbacheds modernization program is to stay on track: ? Production of ferrous metals increased by 2.8 percent from the previous year, led by healthy increases in crude steel and rolled products. Output plans were not met, however, for specialty steels, a key product in the modernization program. ? Helped by Gorbacheds "chemicalization" drive, the chemical industry registered healthy production increases. ? Timber output, while exhibiting the sharpest growth for basic materials, still did not reach the 1975 level. Rapid growth was fueled by the opening of new timber tracts along the Baikal-Amur Mainline railroad (BAM) corridor. ? Construction materials were able to shake off the lingering effects of the 1985 harsh winter and posted a rebound in growth to 3.2 percent. ? Light industry continued its slow, but steady progress, with the largest gains in textiles and knit goods. Developments over the past 3 years - the modernization and expansion of capital stock, administrative reforms, personnel reshuffling, and better transport - built a strong foundation for USSR: Growth of Industrial Production by Branch' Annual Percentage Growth Rate 1981-85 1981 1982 1983 1984 1985 1986 Industry 2.0 1.3 0.7 2.7 2.6 2.7 3.6 Machinery 1.7 0.2 -0.2 1.8 2.7 4.2 4.4 Industrial materials 2.2 1.6 0.5 3.8 2.4 2.8 3.9 Ferrous metals 1.2 -0.3 -0.4 3.0 0.9 2.8 2.8 Nonferrous metals 2.0 0.3 0.8 3.0 3.0 3.0 3.0 Chemicals 3.8 3.8 2.0 5.8 3.4 4.3 4.4 Wood products 2.1 2.0 0.6 3.0 2.8 2.1 5.4 Construction materials 1.5 1.5 -0.9 3.5 1.7 1.5 3.2 Energy 2.3 1.8 2.3 2.4 2.8 2.0 3.7 Fuels 1.2 1.3 1.7 1.3 0.9 0.7 3.9 Electric power 3.6 2.5 3.1 3.7 5.2 3.5 3.6 Consumer nondurables 1.7 2.2 1.3 2.4 2.4 0.2 1.1 Soft goods 1.6 1.8 -0.5 1.2 2.8 2.4 1.5 Processed foods 1.8 2.5 2.9 3.4 2.1 -1.6 0.7 Value added at 1982 factor cost. Based on CIA's index of Soviet industrial production. 26 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A (Continued) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Power Machine Building ? ? Heavy and Transport Machine Building ? ? ? ? ? ? ? Electrical Equipment Industry ? ? ? ? ? Chemical and Petroleum Machine Building ? ? ? ? ? ? Machine Tool and Tool Building Industry ? ? ? ? ? Instrument Making, Automation Equipment, and Control Systems Automotive Industry ? Tractor and Agricultural Machine Building ? Machine Building for Animal Husbandry and Feed Production ? ? ? ? Construction, Road, and Municipal Machine Building ? Machine Building for Light and Food Industry and Household Appliances ? ? ? ? Source: Central Statistical Administration plan fulfillment reports. Ten of the 11 civilian machinery ministries have been criticized. These problems take several forms: ""contractual obligations not met," "contractual deliveries not met," "contract discipline breaches," and "output delivery shortfalls." Figure A-1. Civilian Machine- Building Ministries Criticized for not Meeting Delivery Goals, January-December 1986. the 1986 acceleration in output. Expanded use of contract fulfillment indicators, while not without problems, improved the flow of raw materials. Meanwhile, managers - feeling the heat from new ministers in the ferrous metal and construction materials branches - apparently succeeded in finding hidden caches of labor, materials, and equipment. Finally, several key industrial facilities initiated a second work shift under an intensification program. Energy. The energy industries recorded a strong performance in 1986. Targets for coal and natural gas were exceeded, oil production recovered most of the ground lost over the past 2 years, and the electric power industry coped well with the disruptions caused by the Chernobyl nuclear power accident and by reduced hydroelectric output. The price of that success was a large fuel bill, however, another setback in Moscow's drive to conserve energy. Reversing a 2-year decline in output, oil production in 1986 rose to 12.3 million barrels per day (b/d), 400,000 b/d above the 1985 level. All of the increase resulted from growth in West Siberian output, based largely on the return of idle wells to production and a sharp increase in the pace of drilling and well completions. The cost of raising output was apparently high. Although figures on investment have not been released so far, it was slated to rise by 31 percent in 1986. Natural gas output grew by 6.7 percent to 686 billion cubic meters last year, once again outstripping growth in other energy industries. The increase was, however, smaller than the record 56 billion cubic meters posted in 1985. Production at Urengoy supplied most of last year's increment. Yamburg, the USSR's second largest field, did not begin producing until the final quarter. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A (Continued) Coal production in 1986 soared to 751 million tons, an increase of 25 million tons above the 1985 level and one of the largest gains since World War II. Improvements in labor productivity (possibly through lengthening work hours in selected mining activities), as well as higher output from surface mines located east of the Urals, accounted for most of the production gains. Because most of the coal from the Eastern basins is much lower in heat value than that produced elsewhere in the USSR, the net addition to energy output was probably less than the amount implied by the reported production. Electricity output was only slightly below plan, despite a troubled year for the power industry - the loss of capacity in the Chernobyl nuclear accident and drought-reduced hydroelectric production. Electricity output grew by 3.6 percent to 1,599 billion kilowatt hours. A strong performance from fossil-fuel power plants - electricity from this source grew by 5 percent during the year - boosted total output enough to assure an adequate power supply to most of the USSR (For a discussion of the economic impact of Chernobyl, see the box insert.) Agriculture Farm production reached a new high in 1986. Continued growth in the livestock sector combined with substantially increased production of important crops such as grain, potatoes, and vegetables resulted in a 7.3-percent increase in farm output (net of feed, seed, and waste) - nearly 5 percentage points above the previous record in 1983. A 210-million-ton grain crop - the largest grain harvest since the record crop of 237 million tons in. 1978 - helped Moscow reduce grain imports and contributed to a 5-percent increase in Economic Impact of the Chernobyl Accident Analysis of the Chernobyl accident indicates that the ultimate cost to the economy and in human lives will be high, even though the direct damage to agriculture, industrial facilities, and the environment last year was limited to a fairly small area. The biggest economic cost so far has been the loss of electricity generated by the Chernobyl reactors and the resultant increase in fossil fuel used by replacement power plants. We estimate that an additional 15 million barrels of fuel oil (40,000 b/d), 3 billion cubic meters of natural gas, and 5 million tons of coals were used in 1986. In addition, Eastern Europe, particularly Hungary, may have been asked to bear the burden of some electricity cuts during the 1986-87 winter period of peak demand. Longer term consequences for the Soviet civilian nuclear industry include the investment writeoffs of one or more Chernobyl' reactors and the costs of modifications to improve safety at other reactors. A rough total of these capital costs shows them to be equivalent to 1 to 3 years' investment in the industry. Nevertheless, we expect that the Soviets will strive to minimize the impact of the Chernobyl accident on their long-term plans for nuclear power and will continue to expand the role of this energy source. In contrast, Chernobyl's impact on agriculture was small. According to the Soviet press, the area contaminated by radioactive fallout is largely restricted to about 1,000 square Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A (Continued) kilometers, implying a radius of 18 kilometers, and a few outlying pockets. Over half of the contaminated area consists of forest and swampland. Soviet data show that the region accounts for a minuscule share of total Ukrainian farm output. Damage to farming regions beyond the Chernobyl area was probably minimal. In addition to the economic costs, human costs will be substantial. The initial casualties - reportedly 29 people died of acute radiation sickness - will probably account for only a part of the ultimate human toll of the Chernobyl disaster. Many thousands of persons were exposed to radiation, increasing their long-term cancer risk. Theoretical calculations indicate that over the next 70 years radiation exposure from Chernobyl could result in an additional 500 deaths from cancer among the 135,000 people evacuated. This would increase cancer risk from the natural population incidence of 12.5 percent to 12.7 percent. The potential death rate due to radiation-induced cancer among those involved in the cleanup is double that of the evacuees. This cancer threat poses unique medical and psychological problems, even though the overall statistical increase in cancer rates will be minimal. net livestock production. Probably most welcome from the consumers' view, meat production rose by 3.5 percent to 17.7 million tons, exceeding planned output by a surprising margin of 400,000 tons. Meanwhile, potato production reached the highest level since 1979, increasing by nearly 15 million tons from the depressed 1985 level, and vegetable production was up by nearly 2 million tons. Most of the growth in agricultural output was the result of productivity gains according to the Soviet press. Milk yields increased markedly, as did average slaughter weights, and the period of time required to raise animals to marketable size - nearly twice as long as in the United States - was reduced. After a 1 year hiatus, feed efficiency also appeared to improve somewhat. Transportation Helping to support industry's and agriculture's strong showing was the improved performance of the transport sector. Better weather in 1986 spurred the general recovery of major industrial customers and increased the demand for transport services, particularly rail freight. This traffic rose by 4.8 percent and rail passenger turnover by 3.8 percent - both well ahead of planned rates. A good year for agriculture also increased shipments on rail and highway carriers, and the increase in oil production during 1986 raised the overall growth rate for freight traffic by reversing last year's fall in oil pipeline traffic. The railroads squeezed an extra 2.8 percent more tonnage on the mainlines and met the increased demands of industry and agriculture by increasing train weights and reducing turnaround times for freight cars. In addition, as part of their overall campaign to increase efficiency and control rising costs, the railroads began trimming excess labor last year. As a result, labor productivity soared by 7.5 percent last year. Meanwhile, the volume of traffic moved by highway carriers increased by 5.2 percent last year, reversing a 3-year decline. We suspect that the turnaround in performance reflects the adjustments Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix A (Continued) of carriers to policies in the early 1980s - notably higher fuel prices, an increased emphasis on conservation, and a crackdown on padding trucking statistics. The USSR's trade sector was battered for the second consecutive year, although the Soviets coped fairly well with a difficult situation. The collapse of world oil prices coupled with a sharp drop in the dollar relative to other major Western currencies resulted in an estimated 15-20 percent deterioration in the USSR's hard currency terms of trade. The dollar value of hard currency exports in 1986 dropped by 8 percent, based on Soviet trade data for January - September 1986. Despite Soviet attempts to mitigate the effects of the falling oil price by boosting sales, the value of oil exports to the West fell by an estimated 35 percent. While Moscow increased the dollar value of arms exports to the Third World by roughly 15 percent, the beleaguered position of many of Moscow's principal arms customers probably has limited the Soviets' ability to increase hard currency receipts from these sales. Reduced hard currency earnings contributed to an estimated 9-percent decline in the dollar value of hard currency imports in 1986, with real purchases dropping more. The largest decline in imports was registered in grain, as improved domestic agricultural performance and lower world grain prices allowed reduced foreign expenditures without jeopardizing consumption goals. Deliveries of machinery and equipment last year increased slightly in dollar terms, but dropped in real terms. The Soviets were able to limit the extent of import cuts, however, by selling markedly more gold at higher prices last year, as well as by borrowing actively in world financial markets. Moreover, Moscow sought to expand its financial horizons by tapping new sources of credit outside of traditional syndicated loans and export financing. In contrast to trade with the West, Soviet trade with the Communist World grew slightly, increasing to about two-thirds of total trade compared with about 61 percent a year earlier. Moscow's terms of trade with its Communist trading partners improved slightly last year because the large drop in world oil prices has not yet been factored into the CEMA oil pricing formula. One outcome was an increase in the USSR's trade surplus with its East European partners, despite Moscow's repeated calls for more balanced trade. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B Table 1 USSR GNP by Sector of Origin at Factor Cost (billion 1982 rubles) Table 2 USSR Value Added in Industry at Factor Cost (billion 1982 rubles) Table 3 USSR Average Annual Growth of Per-Capita Consumption (1982 established prices) Table 4 USSR Growth of GNP and Factor Productivity (average annual percentage change) Table 5 USSR Growth of Industrial Output and Factor Productivity (average annual percentage change) Table 6 USSR Gross Fixed Capital Investment (billion rubles, 1984 prices) Table 7 USSR Estimated Hard Currency Balance of Payments (million current US dollars) Table 8 USSR Total trade, 1981-85 (billion current US dollars) Table 9 USSR Selected Indicators of Agricultural Output USSR: GNP by Sector of Origin at Factor Cost (billion 1982 rubles) Preliminary 1955 1960 1965 1970 1975 1980 1981 1982 1983 1984 1985 1986 GNP' 248.9 327.3 415.3 531.5 616.8 691.6 701.4 719.7 742.8 753.2 761.1 793.4 Industry 59.3 86.1 118.1 159.8 208.3 237.8 240.8 242.5 249.0 255.4 262.2 271.6 Agriculture 91.1 110.5 127.2 149.8 133.1 135.4 132.6 144.1 152.3 149.2 143.2 155.4 Construction 14.0 22.6 28.4 36.9 46.0 53.1 55.5 56.9 58.7 59.9 61.4 63.7 Transportation 10.6 18.8 30.5 43.0 59.1 70.6 73.5 74.4 76.5 77.7 79.3 82.4 Communications 1.4 1.9 2.8 4.2 5.7 7.2 7.5 7.7 7.9 8.3 8.7 9.1 Trade 11.6 17.1 21.8 31.0 38.6 44.2 45.1 45.1 46.3 47.4 47.8 48.8 Services 49.1 60.0 74.8 92.4 109.8 125.8 128.9 131.0 134.0 137.2 140.5 143.9 Other (includ- 11.9 10.3 11.7 14.3 16.0 17.5 17.6 17.9 18.1 18.2 18.2 18.4 ing military personnel) ' Components may not add exactly to total because of rounding. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Value Added in Industry at Factor Cost (billion 1982 rubles) Preliminary 1955 1960 1965 1970 1975 1980 1981 1982 1983 1984 1985 1986 Industry' 59.3 86.1 118.1 159.8 208.3 237.8 240.8 242.5 249.0 255.4 262.2 271.6 Ferrous metals 4.8 7.0 10.0 12.9 15.9 16.5 16.5 16.4 16.9 17.0 17.5 18.0 Nonferrous metals 2.1 2.8 4.1 6.0 7.9 8.5 8.6 8.6 8.9 9.1 9.4 9.7 Fuel 5.4 8.6 12.1 15.8 20.6 24.3 24.6 25.0 25.4 25.6 25.8 26.8 Electric power 2.5 4.2 7.3 10.6 15.0 18.6 19.1 19.7 20.4 21.5 22.2 23.0 Machine building and metal working 17.6 23.7 33.0 46.1 64.0 77.3 77.5 77.3 78.7 80.9 84.3 88.0 Chemicals 2.2 3.9 6.9 10.5 15.6 18.1 18.7 19.1 20.2 20.9 21.8 22.8 Wood, pulp, and paper 7.5 9.9 11.3 12.9 14.6 14.1 14.4 14.5 14.9 15.4 15.7 16.5 Construction materials 2.9 5.8 7.6 10.3 13.2 14.1 14.3 14.2 14.7 14.9 15.2 15.6 Light industry 6.6 8.8 10.0 13.7 15.5 17.5 17.8 17.7 18.0 18.5 18.9 19.2 Food industry 5.5 8.2 11.4 15.1 18.5 19.8 20.3 20.9 21.6 22.0 21.7 21.8 Other industry 2.2 3.2 4.4 6.0 7.8 8.9 9.0 9.1 9.3 9.5 9.8 10.2 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Average Annual Growth of Per-Capita Consumption (1982 established prices) Preliminary 1956 1961 1966 1971 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 -60 -65 -70 -75 Total consumption 3.9 2.6 5.2 2.8 1.7 2.0 0.9 2.5 2.6 1.3 -1.1 1.1 1.8 -0.5 0.8 Food 3.1 2.0 4.5 1.8 0.1 1.1 -0.5 2.1 1.7 -0.2 -1.5 1.2 0.8 -4.5 -1.3 Soft goods 5.6 2.2 7.2 2.7 3.4 2.5 1.9 3.0 3.3 2.1 -1.5 0.6 2.4 3.2 1.4 Durables 10.4 3.9 9.5 9.7 5.4 7.9 3.3 3.6 6.7 6.3 -2.6 1.7 4.6 5.2 5.0 Services 3.3 4.6 4.2 2.9 2.4 0.9 2.3 2.3 2.2 1.4 1.4 1.3 1.8 1.8 2.1 Housing 3.1 2.5 2.1 1.7 1.4 1.4 1.4 1.2 1.2 1.3 2.0 1.9 1.6 1.6 1.5 Utilities 4.7 7.8 5.4 5.3 5.0 3.0 3.8 3.3 3.7 2.7 3.1 3.2 4.1 3.3 2.9 Transportation 9.3 9.0 8.2 6.4 5.2 -3.9 2.4 4.1 3.5 3.2 1.1 1.4 1.6 1.4 2.7 Communications 5.4 5.7 7.6 5.4 4.2 3.6 3.4 3.9 3.9 3.5 1.3 2.5 3.7 3.7 4.0 Repair and Personal Care 3.7 5.0 6.4 4.4 4.0 3.2 4.8 4.2 4.4 3.4 2.1 3.5 3.1 3.5 4.8 Recreation 5.3 3.6 2.6 4.1 -3.2 -2.1 1.3 2.4 3.8 -1.8 -0.6 -0.5 -1.0 1.1 1.0 Health 3.5 2.3 3.3 1.5 1.0 0.8 1.8 1.0 -0.2 -0.0 0.9 0.6 1.0 0.3 0.8 Education 1.5 5.3 3.0 1.5 1.7 1.2 1.3 1.4 1.5 -0.1 0.9 -0.2 1.0 1.4 1.0 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Growth of GNP and Factor Productivity (average annual percentage change) Preliminary 1966-70' 1971-75' 1976-80' 1981 1982 1983 1984 1985 1986 Gross national product2 5.1 3.0 2.3 1.4 2.6 3.2 1.4 1.1 4.2 Combined inputs3 4.1 4.2 3.4 3.0 3.1 2.9 2.8 2.5 2.5 Workhours 2.0 1.7 1.2 0.9 1.0 0.7 0.5 0.4 0.6 Capital 7.4 8.0 6.9 6.4 6.3 , 6.3 6.3 5.8 5.5 Land 0.0 0.1 -0.1 -0.1 -0.1 0.1 -0.1 -0.7 0.0 Total factor productivity 0.9 -1.1 -1.1 -1.6 -0.4 0.3 -1.3 -1.4 1.7 Workhour productivity 3.0 1.3 1.1 0.5 1.6 2.5 0.9 0.7 3.6 Capital productivity -2.2 -4.6 -4.3 -4.7 -3.4 -2.9 -4.6 -4.5 -1.2 Land productivity 5.0 2.9 2.5 1.5 2.7 3.1 1.5 1.8 4.2 For computing average annual rates of growth, the base year is the year prior to the stated period. Based on indexes of GNP (1982 rubles) by sector of origin at factor cost. Inputs of workhours capital, and land are combined using weights of 56.5 percent, 40.5 percent, 3.0 percent, respectively in a Cobb-Douglas (linear homogeneous) production function. These weights represent the distribution of labor costs (wages, social insurance deductions, and other income), capital costs (depreciation and a calculated capital charge), and land rent in 1982, the base year for all indexes underlying the growth rate calculations. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Growth of Industrial Output and Factor Productivity (average annual percentage change) Preliminary 1966-70' 1971-75' 1976-80' 1981 1982 1983 1984 1985 1986 Industrial production 6.2 5.5 2.7 1.3 0.8 2.7 2.6 2.7 3.6 Combined inputs2 6.0 5.2 4.7 4.4 4.0 3.8 3.8 3.7 3.4 Workhours 3.1 1.5 1.4 0.7 0.8 0.4 0.5 0.4 0.4 Capital 8.8 8.7 7.7 7.8 7.0 6.9 6.8 6.6 6.1 Total factor -0.2 -0.2 -1.9 -3.0 -3.2 -1.1 -1.1 -0.9 -0.2 productivity Workhour 3.1 3.9 1.3 0.6 0.0 2.2 2.1 2.2 3.1 productivity Capital productivity -2.3 -3.0 -4.7 -6.1 -5.9 -4.0 -3.9 -3.7 -2.4 ' For computing the average annual rates of growth, the base year is the year prior to the stated period. 2 Inputs of workhours and capital are combined using weights of 47.4 percent and 52.6 percent, respectively; in a Cobb- Douglas (linear homogeneous) production function. These weights represent the distribution of labor costs (wages, social insurance deductions, and other income) and capital costs (depreciation and a capital charge) in 1982, the base year for all indexes underlying the growth rate calculations. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Gross Fixed Capital Investment (billion rubles, 1984 prices) Total Investment 1965 64.2 1970 92.2 1975 128.5 1980 150.9 1981 156.5 1982 161.9 1983 171.0 1984 174.3 1985 179.5 By source: State 55.3 79.4 111.8 133.1 138.5 143.2 150.7 153.7 157.9 Collective farms 5.5 8.6 12.2 13.3 13.4 13.9 14.8 14.7 15.4 Cooperative enterprises 1.7 2.6 2.7 2.9 2.9 3.1 3.5 3.6 3.7 and organizations Private housing and 1.7 1.6 1.8 1.6 1.7 1.7 2.0 2.3 2.5 apartments By sector: Industry 23.6 32.5 44.9 53.3 55.4 57.0 60.1 62.7 65.5 Agriculture 10.6 16.0 26.1 29.8 30.5 31.0 32.1 31.1 31.5 Transportation and 6.4 9.0 14.4 18.1 18.9 19.9 21.4 22.3 21.9 communications Construction 1.6 3.3 4.8 6.0 5.8 6.3 6.3 5.8 6.1 Housing 11.2 15.8 19.2 21.1 22.4 24.0 25.9 27.3 28.1 Trade and services 10.8 15.6 19.1 22.6 23.5 23.7 25.2 25.1 26.4 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Estimated Hard Currency Balance of Payments (Million Current US Dollars) 1970 1975 1980 1981 1982 1983 1984 1985 1986' Current account balance 114 -4,624 -1,904 -175 4,333 4,663 4,484 317 220 Merchandise trade balance -306 4,814 1,714 200 4,433 4,713 4,434 517 700 Exports, f.o.b. 2,405 9,443 27,784 27,978 31,977 32,428 31,726 26,370 24,200 Imports, f.o.b. 2,711 4,257 26,070 27,778 27,544 27,715 27,292 25,853 23,500 Net interest -80 -570 -700 -1,375 -1,200 -1,150 -1,050 -1,300 -1,580 Other invisibles and transfers 500 760 890 1,000 1,100 1,100 1,100 1,100 1,100 Capital account balance 265 6,520 1,630 5,840 -1,340 1,650 500 5,800 9,200 Net foreign borrowings2 290 5,400 -185 3,000 -865 500 -100 6,000 6,400 Net change in assets held in Western banks3 25 -395 -235 -140 1,575 -400 400 2,000 1,000 Gold sales negl. 725 1,580 2,700 1,100 750 1,000 1,800 3,800 Net errors and -379 -1,896 -3,534 -5,665 -2,993 -6,313 -4,984 -6,117 -9,420 omissions4 Preliminary. z Including additions to short-term debt. A minus sign signifies a decline in the value of assets. Includes hard currency assistance to and trade with Communist countries, credits to the LDCs under military and economic aid programs, credits to developed Western countries to finance sales of oil and other commodities, as well as errors and omissions in other line items of the accounts. Among the omissions is an adjustment for fluctuations in the US dollars vis-a-vis other Western currencies. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Total Trade, 1981-85' (Billions of Current US Dollars) Annual Average 1981-85 1981 1982 1983 1984 1985 19862 USSR Exports by region Total 87.3 79.4 87.2 91.7 91.5 86.9 94.7 Communist 49.3 43.4 47.1 51.0 51.9 53.2 63.1 Developed countries 25.2 24.4 26.2 26.7 26.4 22.5 19.2 Less developed countries 12.7 11.6 13.8 13.9 13.2 11.2 12.4 USSR Imports by region Total 78.3 73.2 77.8 80.5 80.3 82.9 90.2 Communist 44.3 37.2 42.5 45.5 47.0 50.6 59.0 Developed countries 24.6 25.4 26.2 25.4 24.2 23.3 23.2 Less developed countries 9.4 10.6 9.1 9.6 9.1 9.0 8.0 Includes both hard currency trade and trade conducted with soft currency partners on a clearing account basis. 2 Preliminary. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Appendix B (Continued) USSR: Selected Indicators of Agricultural Output 1955 1960 1965 1970 1975 1980 1981 1982 1983 1984 1985 1986 Value of output' 63.8 78.8 94.0 112.5 109.4 114.6 113.7 121.9 129.3 128.3 126.2 135.3 (billion rubles) Commodity production (million metric tons) Grain2 103.7 125.5 121.1 186.8 140.1 189.1 158.2 186.8 192.2 172.6 191.7 210.1 Potatoes 71.8 84.4 88.7 96.8 88.7 67.0 72.1 78.2 82.9 85.5 73.0 87.2 Sugar beets 31.0 57.7 72.3 78.9 66.3 81.0 60.8 71.4 81.8 85.4 82.1 79.3 Sunflower seed 3.80 3.97 5.45 6.14 4.99 4.62 4.68 5.34 5.06 4.53 5.23 5.3 Cotton 3.88 4.29 5.66 6.89 7.86 9.96 9.64 9.28 9.21 8.62 8.75 8.23 Vegetables 14.1 16.6 17.6 21.2 23.4 27.3 27.1 30.0 29.5 31.5 28.1 29.7 Meat 6.3 8.7 10.0 12.3 15.0 15.1 15.2 15.4 16.4 17.0 17.1 17.7 Milk 43.0 61.7 72.6 83.0 90.8 90.9 88.9 91.0 96.5 97.9 98.6 101.1 Wool .256 .357 .357 .419 .467 .461 .460 .452 .462 .465 .447 .465 Eggs (billion) 18.5 27.5 29.1 40.7 57.4 67.9 70.9 72.4 75.1 76.5 77.3 80.3 Net of feed, seed, and waste, in constant 1982 prices. 2 Bunker weight. To be comparable to Western measures, an average reduction of 11 percent is required. Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 DISTRIBUTION LIST C121000, 0124000, 0123000, 0529320, AI17000, (111000, (119950, CI19910, CI22000, C121200/UR,WV,WW,WX AU27 1 DEF SEC ASST AGCY A085 1 NAT DEF UNIVERSITY A100 1 OSD A102 1 OUSD(P) A109 1 OSD/ODUSD(P)/IP&S A117 1 OASD PA&E A124 1 OSD NET ASSESSMENT A126 1 JCS/JCS REP SALT A128 1 SDIO A151 1 OUSDRE (IP&T) A152 1 OUSDRE (SAA) A153 1 ASD (C31) A246 1 JCS/J-3 (JOD) A253 1 JCS/J-3 (SOSDD) A302 1 JCS/CHAIRMAN A304 1 JCS/SECRETARY A305 1 JSOC A308 1 JCS/DIR JT STAFF A310 1 JOINTSPECOPSAGCY A315 1 JCS/JAD A330 1 JCS/J-3 NWSB A332 1 JCS/J-3 STRAT OPS A335 1 JCS/J-4 A340 1 JCS/J-5 MIL SEC A342 1 JCS/SPRAA A350 1 USDOCO USNMR SHAPE A353 2 JSTPS A365 1 US DEL (UN MSC) A368 1 USRMC/NATO A708 1 OSD/OES A724 1 DUSDP B003 1 DIA/DR (PROD REV) 8004 25 DIA/DI-1 B030 1 DIA/ED B032 5 DIA/JSJ B033 15 DIA/DI-3 8038 1 DIA/ESO 8040 5 DIA/DIO B043 1 DIA/OA-10 8045 1 DIA/OA-2 B047 1 DIR/OA-4 B051 1 DIA/OA-6 (M. EAST) B053 1 DIA/DT-5A B060 1 DIA/RTS-2A5 PENT 8079 2 DIA/DIC-2C 8080 1 DIA/NWS 8091 1 DIA/DIA REP NMCC 8096 1 DIA/DI B097 1 DIA/DI (NFIB) BIUU 20 DIA/DB 8102 1 DIA/DB (SPEC ASST) B131 1 DIA/DE B132 1 DIA/VP-TAO B134 1 DIA/DE-1 B136 1 DIA/DE-2 8137 1 DIA/DE-3 B138 1 DIA/DE-4 8142 2 DIA/DE-1 (POL/MIL) 8150 1 DIA/DT 6163 1 DIA/DT-5B B177 1 DIA/DT-5 B332 1 DIA/JSO B345 1 DIA/RTS-2C(VJ) 8351 1 DIA/RTS-3A4 8352 200 DIA/RTS-2F 8363 1 DIA/DB-1B1B 8367 1 DIA/DB-4G B369 1 UTA/DB-8C 8537 1 DIA/VP-TPO B539 1 DIA/OA 8542 1 DIA/DB-1J3 8545 1 DIA/VP 8549 1 DIA/DB-PDO B55U 1 DIA/DI-2 8551 1 DIA/VP-SO/P B552 36 D1A/DI-6B B555 1 DIA/JS 8564 1 DIA/JSI 8571 1 DIA/DB-4G1 B573 1 DIA/DB-1J 8574 1 DIA/DB-4B 8575 1 DIA/DB-1 B58U 1 DIA/DB-1B3 8581 1 DIA/DB-1B B582 1 DIA/DB-1C 8583 1 DIA/DB-1D B586 1 DIA/DB-5D1 8587 1 DIA/DB-4F B588 1 DIA/JSI-2C 8589 1 DIA/JSW B591 1 DIA/DI-5 8593 1 DIA/DB-lE 8594 1 DIA/DB-1F B596 1 DIA/DI-5A B598 1 DIA/DB-2 B600 1 DIA/DB-1G 8602 1 DIA/VP-I B603 1 DIA/DB-6 B605 1 DIA/DB-6B 8606 1 DIA/DB-2B B609 1 0IA/DB-1J2 8611 1 DIA/DB-2C 8615 1 DIA/JSI-3 B617 1 DIA/DB-3 B618 1 DIA/DB-4D4 B620 1 DIA/DB-8 B621 1 DIA/DB-3B 8623 1 DIA/D8-8B B629 1 DIA/DB-3C 8632 1 DIA/DB-4G2 8635 1 0TA/DB-8D B636 1 DIA/JSI-4 B642 1 DIA/JSI-5 8644 1 DIA/DB-5D 8645 1 DIA/DB-5D3 8670 1 DIA/DB-5 B671 1 DIA/DB-5A 8674 1 DIA/DB-5B 8678 1 UTA/DB-5E B680 1 DIA/DB-4 6681 1 DIA/DB-6C PENT, 8720 1 DIA/DX 8722 1 UTA/DX-4 B724 1 DIA/DX-P B731 1 DIA/DX-6 8734 1 DIA/DX-7 8735 1 DIA/DX-7B2 B737 2 DIA/RTS-2B (LIB) 8760 1 DIA/DB-6E B762 1 DIA/DB-6E2 B777 1 DIA/JSI-2A 6782 1 DIA/DB-1C2 8785 2 DIA/JSI-2 8786 1 DIA/DB-1H B789 1 DIA/OB-1H1 B792 1 DIA/DB-1S B795 1 DIA/DB-2D B820 1 DIA/DIA REP JEWC 8822 1 DIA/DIA REP PACOM 8823 1 DIA/DIA REP SHAPE B824 1 DIA/DIA REP SAC 8825 1 DIA/DIA REP EUCOM 8826 2 DIAREP USSOCOM 6854 1 USDAO CANBERRA 8855 1 USDAO VIENNA B858 1 USDAO BRASILIA B862 1 USDAO OTTAWA 8876 1 USDAO LONDON B878 1 USDAO HELSINKI 6879 I USDAO PARIS B880 1 USDAO BONN 8888 1 USDAO JAKARTA B892 1 USDAO TEL AVIV B896 1 USDAO TOKYO 8898 1 USDAO SEOUL 8902 1 USDAO KUALA LUMPUR B916 1 USDAO MANILA 8917 1 USDAO WARSAW B921 1 USDAO RIYADH 8928 1 USDAO BERN 8931 1 USDAO BANGKOK B934 3 USDAO MOSCOW 8937 1 USDAO CARACAS 6948 1 USDAO CAIRO C046 1 WRAIR C065 1 USAITIC-PAC C081 1 USARI C201 1 HQ I CORPS C202 3 III CORPS C207 1 LIMRES C231 1 2ND ARMD DIV C232 1 3RD ARM CAV REGT C234 1 1ST CAV DIV C235 1 1ST INF DIV C242 1 FORSCOM C246 1 6TH CAV BDE(AC) C247 1 THIRD US ARMY C251 1 50TH ARM DIV C284 1 415TH MID (STRAT) C297 1 245TH PSYOP CO C298 1 244TH PSYOP CO C299 1 194TH ARMD BDE C302 1 2ND PSYOP GROUP C304 1 5TH PSYOP GROUP C305 2 18TH ABN CORPS C306 1 82ND ABN DIV C309 1 500TH MIG C314 3 513TH MIG C316 4 20TH SFG (ABN) C318 1 28TH INF DIV C320 1 197TH INF BGE(S) 'C351 1 10TH SFG(A) C364 1 HQ FT DEVENS C400 1 10TH MTN DIV C415 1 5TH INF DIV (M) C419 1 9TH INF DIV C446 1 USAFS SAN ANTONIO C454 1 FLD ARTY SCH C459 3 COMD-GEN STF CUL C460 1 ENGINEER SCH C470 3 ARMY WAR COL C509 1 BALLISTIC RES LAB C512 1 ARMY MATERIEL CMD C523 1 ERADCOM/FI-A C535 1 AVIATION SYS CMD C545 1 ARRCOM C605 1 1ST SOCOM C617 1 CONCEPT ANLYS AGCY C620 1 SRO C623 4 USAOG C635 1 AIR DEF AGCY C639 1 CMBT&TNG DEV DIR C646 1 CACDA C667 4 USAJFKSWC C748 1 HQDA DAMI-FRT C757 1 SED C763 1 HQDA DAMI-FIT C766 1 HQDA DAMI-FIC C768 3 ITAC (LIBRARY) C788 2 HQDA DAMI-FII/S C798 1 1ST(BM) 1 SFGA C799 1 1ST MI CO 1ST SFGA C813 1 USAFS AUGSBURG C819 1 5TH SFG(A) D002 1 OP-91 (DNM) D005 1 OP-60 D007 1 NSIC HQ (NSIC-22D) D150 1 CMC (INTP) D153 1 PACMISTESTCEN D184 1 NAVSTRKWARCEN 0202 1 NAVWARCOL/LIB 0249 3 NAVPGSCOL D263 1 NOSC D301 1 OP-009 (DNI) D559 1 NAVMEDRSCHDEVCOM D660 25 NMITC D900 1 NAVOPINTCEN D902 1 NAVOPINTCEN DET NP 0971 1 OP-009P E001 1 HQ USAF/IN E003 1 HQ USAF/INYX EUIU 1 HQ USAF/INAR E016 1 AFIS/INC E017 1 HQ USAF/INA (W) E018 1 HQ USAF/INA (C) E053 1 HQ USAF/INET E054 1 HQ USAF/INER E100 90 TAC 480 RTG/INPPD E102 1 TAC AIR CMD/INYC E104 1 4513 ATTG/INOI E200 1 ALASKANAIRCOM/INOI E231 1 HQ USAF/LERX (CM) E303 1 HQ USAF/INEGD E310 1 HQ USAF/XOXA E317 1 HQ USAF/SAMI E4U1 1 AF LOG CMD/IN E408 1 AF WEAPONS LAB/IND E413 1 ESD/IND E450 2 AIR UNIV E451 1 AUL/LSE E452 1 CADRE/WGOI E465 1 USAF ACADEMY E503 2 3305 STUGP/TTGM E568 1 6990 ESG E706 - 1 HQ ESC/INYQ E726 2 USAF TAWC/IN E730 1 HQ USAF/XOC F005 3 HQ MAC/INO FO10 2 HQ 23RD AIR FORCE F018 2 21 AF/IN F019 2 22 AF/IN F058 1 1 SOW/IN F081 1 438 MAW/DOI G005 6 HQ SPACECOM/INXU G009 1 CDR USAFA/OP H005 10 USCINCEUR H100 1 HQ USAFE/INS H101 10 USAFE 497RTG (IRC) H300 1 ODCS IN(USAREUR) H309 1 11TH ARM CAV REG H310 1 USASETAF H350 1 1STSFBN 10TH SFG H500 10 CINCUSNAVEUR H511 1 COMSIXTHFLT H525 1 HQ VII CORPS H527 1 HQ 8TH INF DIV H530 1 HQ 1ST ARMORED DIV H704 1 USAFE/INO 1005 1 USCINCCENT 1040 1 SOCCENT J005 1 USCINCLANT J500 1 CINCLANTFLT J515 1 FICEURLANT J582 1 II MAR AMPHIB FOR J654 1 TACTRAGRULANT J818 1 CG SECOND MARDIV K005 5 USCINCPAC K007 1 COMUSJAPAN K100 1 PACAF 548 RTG K101 1 PACAF/INOI K117 1 18TH TFW K201 1 13TH AF K202 1 3 TFW/IN K203 1 6TH TACINTEL GP K300 1 IPAC (LIBRARY) K302 1 USAWESTCOM K305 1 25TH INF DIV K309 1 3D FSSG K313 2 IPAC (CODE IA) K314 1 IPAC (CODE PT) K318 1 IPAC/IT4 K320 1 USARJAPAN K500 1 CINCPACFLT K505 1 FICPAC K510 1 COMNAVFORJAPAN K515 1 COMSEVENTHFLT K525 1 COMNAVAIRPAC K605 1 FMFPAC K612 1 THIRDMARDIV K614 1 FOURTHMAR K615 1 THIRDMAR K621 1 NINTHMAR K658 1 COMUSNAVPHIL K710 1 FISC WESTPAC L005 1 HQ SAC (INO) L006 1 SAC/IN L040 1 SAC 544 SIW/DAA L044 1 HQ SAC/INA L051 10 544 IAS/IAI L101 1 1 STRAD/DOX L102 1 2 BMW/IN L104 1 6 SW/IN L107 1 8 AF/IN L108 1 9 RTS/INOE L109 1 9TH SRW/INCC Lill 1 19 AREFW/DOXI L112 1 22 AREFW/DOXI L113 1 28 BMW/IN L114 1 42 BMW/IN L115 1 43 BMW/IN L117 1 55 SRW/IN L118 1 68 AREFG/DOXI L121 1 92 BMW/IN L122 1 93 BMW/IN L123 1 96 BMW/IN L124 1 97 BMW/IN L125 1 9TH SRW/INCCI L130 1 141 AREFW/DOXI L131 1 151 AREFG/DOXI L134 1 161 AREFW/DOXI L139 1 11 SG/DOXI L140 1 305 AREFW/DOXI L142 1 306 SW/IN L143 1 34 STRAT SQ L144 1 922 SS L147 1 319 BMW/IN L150 1 340 AREFG/DOXI L152 1 351 SMW/D0221 L154 1 379 BMW/IN L155 1 380 BMW/IN L157 1 384 AREFW/DOXI L159 1 410 BMW/IN L161 1 452 AREFW/DOI L162 1 509 BMW/IN L164 1 940 AREFG/DOXI L165 1 4315 CCTSQ/CMCM L166 1 2 ACCS/DOCI L700 1 3 AD/IN L703 1 9 SRW/IN, BET 1 M005 1 USCINCSO N005 1 USREDCOM OTHERS P002 2 NPIC/IB P055 400 CIA/OCR/DSD/DB P057 1 CIA/SOVA/TWA/RP P075 1 FBI P079 1 STATE INR/PMA P080 1 STATE INR/RWE P081 1 STATE INR/EC P090 5 NSA/T515/CDB P091 1 NSA REP DEFENSE P100 1 NAT SEC COUNCIL P109 1 PFIAB P111 1 WH SIT ROOM P112 1 WH MILITARY OFF P125 1 DEPT OF TREASURY P175 1 US CUSTOMS SERVICE P700 1 VICE PRESIDENT P702 1 CIA/NI0/GPF P705 1 SEN SEL COM INTEL P714 1 IC REGISTRY 0008 1 NISC Q043 2 OFMIC Q420 2 FTD/SIIS Q591 1 FSTC-AIFIC Q619 1 MSIC REDSTONE R025 1 COMMERCE R048 1 FEMA R066 1 USCG OIS R069 1 USCG ICC R081 1 DRUG ENFORC ADMIN R082 1 NNBIS Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 R083 1 USCG DISTRICT 8 ARMY U.S. AIRFORCE K115 1 5TH AF R084 1 COORD SE REGION K300 1 IPAC (LIBRARY) R086 1 SOUTHWEST NNBIS C302 1 2ND PSYOP GROUP E100 1 TAC 480 RTG/INPPD K426 1 MACG-18 R087 1 NORTH BORD NNBIS C311 1 305TH PSYOP BN E706 1 HQ ESC/INYQ K427 1 MACG-38 R135 2 USIA C314 1 513TH MIG K516 1 CG I MAF R145 3 ACDA C351 1 10TH SFG(A) UNIFIED AND SPECIFIED COMMANDS K700 1 SEVENTH MAR S030 1 FRD LIB OF CONG C667 1 USAJFKSWC L051 2 544 IAS/IAI ----------------------------- C768 1 ITAC (LIBRARY) L141 1 7 AD/IN 408 COST'S 1314 COPIES C772 1 HQDA DAMI-FIO 8010 1 SOTFE (J-2) L161 1 452 AREFW/DOI H101 1 USAFE 497RTG (IRC) OTHERS (MICROFICHE) 1005 1 USCINCCENT DIA U.S. NAVY 1040 1 SOCCENT P002 1 NPIC/I8 J502 1 COMSECONDFLT Q420 2 FTD/SIIS B331 1 DIA/RTS-2A2 J579 1 4TH MAB Q591 1 FSTC-AIFIC B352 5 DIA/RTS-2F D261 1 NUSC NPT J818 1 CG SECOND MARDIV ------------------------------- B934 1 USDAO MOSCOW D466 1 NAVENPVNTMEDU 6 J977 1 FLTCOMBATDIRSSACT 34 COST'S 40 COPIES Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7