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December 21, 2016
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July 27, 2006
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February 5, 1965
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Approved For Release 2006/07/2 : C1 P67B00446R000600260037-8 OCI No. 0758/65 5 February 1965 DCI BRIEFING FOR HOUSE APPROPRIATIONS COMMITTEE THE SOVIET ECONOMY I. The Soviet economy is large, and it continues to grow. A. Since 1958 its Gross National Product has been about one-half that the United States. B. The Soviets, however, allocate their out- put by standards which differ greatly from ours. C. Their allocations stress the elements of national power. They give high priority to the continuing modernization of their military forces, to space programs, and to modernization of industrial capacity. (CHART, US and Soviet GNP by end use) 1. Thus, as this chart shows, in dollar values Soviet spending for defense and for investment approaches our own. The portion of their investment allocated to industry, in fact, exceeds our own. MORI/CDF Approved For Release 2006/07/2 ~c-W7B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 SECRET 2. When it comes to consumption, however, a Soviet population which is almost one-fifth larger than ours gets less than one-third of what is spent for consumption here. 3. The consumer's welfare is further re- duced by the poor quality and assort- ment of goods, and by his lack of choice. II. While the Soviet economy continues to grow, a general slowdown has become evident in recent years. (CHART, US and Soviet Annual GNP growth rates) A. The Soviet GNP growth rate, which was averaging about seven percent a year in the late 1950's, works out to about four percent a year for the early 1960's. 1. The 1964 increase was a healthy five to six percent, but a substantial part of this apparent growth is merely the recovery from the poor performance in 1963, when a near-disaster in agricul- ture kept GNP growth down to less than two percent. Approved For Release 2006/07/?.KMF 7B00446R000600260037-8 ? Approved For Release 2006/07/2~j fel Pf,7B00446R000600260037-8 (CHART, US and Soviet Absolute GNP) 2. The Communist :Party schedule for catch- ing up with the US in the 1970's has been set back considerably by the re- cent slowdown. From 1956 to 1961, the Soviet growth rate averaged twice that of the US. In this period the absolute gap between the two economies, when both are measured in dollars, actually declined a little. Since 1961,'however, the absolute growth of the US has been about twice that of the USSR, and the absolute gap has increased as fast or faster than Soviet GNP. (CHART, Industrial Production, US vs. USSR) 3. In industry, 1964 saw the continuation of the slow decline in rates of growth from eight-and-one-half percent an- nually in the period 1956-59 to seven percent in 1960-62 and now to five per- 4. The pattern of growth in Soviet GNP in the present period, in summary, is a composite of: Approved For Release 2006/07/?.E G` A P67B00446R000600260037-8 Approved For Release 2006/07/g,Q iL' P. 67B00446R000600260037-8 (a) Erractically fluctuating agricul- tural production with small long- term growth, and (b) slowly declining growth rates in industry. B. Two major causes of the decline in the rate of growth of Soviet industrial production are, first, the inability of the Soviets to maintain the rate of growth of investment in new productive capacity, and second, the competition of defense spending for high- quality resources needed to support the modernization of industry. III. Defense spending.--in which we include the Soviet space program--is growing less rapidly in total right now, but it remains a problem for the whole economy. (CHART, total defense expenditures and proportion devoted to exotics--R & D, adv, wpn. procure- ment, etc.) A. This is primarily because advanced weapons and space programs require the best and scarcest inputs of skilled scientists and engineers, new alloys and other high-cost materials, and the most advanced industrial processes. Approved For Release 2006/07/2'1~'g-#d'P67B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 SECRET B. These are the very inputs which are also needed to carry through the modernization of the civilian economy, and in this key area the competition for critical resources remains intense. C. In this competition, the civilian economy fares rather badly. Our best measure of this is our estimate of the increases in Soviet spending on military research and development, the space program, and the pro- curement of advanced hardware for missiles, radars, and nuclear weapons. (CHART, Spending for R&D, etc.) 1. As can be seen quite clearly in this chart, these expenditures are growing much faster than total military spend- ing. They have just about doubled since 1958. 2. Within this trend, the procurement has tended to level off, but Research and Development spending continues to rise. This supports the point I made earlier that the Soviets are putting great stress on achievement of qualitative improvements. Approved For Release 2006/071 MT67B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDPR7BOO446ROO0600260037-8 D. Mr. Kosygin in his economic report last month announced a cut in the defense budget of 500 million rubles (about 550 million dollars); however, other items in the budget-- such as scientific research--conceal addi- tional spending on defense programs. These concealed items are more likely to rise than those in the announced budget. In general, we believe that there will be a slow increase in Soviet defense spending over the next few years. IV. Another basic difficulty of the Soviet economy, of course, is agriculture, which exerts a drag on the whole economy. A. The problems here are chronic--a long history of neglect, the inherent deficiencies of the collective farm system, some real limi- tations in soil and rainfall, and the dif- ficulty of training enough,$ skilled farm managers and mechanics. (CHART, Total and per capita agricultural production) B. Crop production made a considerable recovery in 1964, but livestock did not, so that total agricultural production last year was about at the level of 1961. On a per capita Approved For Release 2006/071!` P67B00446R000600260037-8 Approved For Release 2006/07,2E - l 67BOO446ROO0600260037-8 basis, with the constant increase in popu- lation, it was lower than either 1961 of 1958, the two relatively good years on the chart. The USSR is continuing some. grain purchases from the West. C. In mid-1963, Khrushchev sponsored a large crash program for the "chemicalization" of the economy. This chemical program was aimed at aiding agriculture by raising the annual production of chemical fertilizers from 20 million metric tons in 1962 to 35 million in 1965 and to 70 million metric tons by 1970. The new leadership is re- ducing sharply the increase of investment scheduled for 1965, and acting very cau- tiously in taking up the long-term credits available for importing equipment from the West. V. There is also a more general reason for this slowdown with which the Soviet economic planners have to contend. A. The Soviet economy is becoming more developed and mature. It has already drawn from the land to the cities most of the excess rural workers agriculture could spare. By and large, the easiest technological gains have SECRET Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 Approved For Release 2006/07j E:Cl 67B00446R000600260037-8 been made, including those gains taken over lock-stock-and-barrel from the US and West- ern Europe. Further technological gains will require more domestic R&D--and more resources. B. As as result, every percent )f future growth is a little harder .to, achieve. (CHART, Direction of Soviet Foreign Trade) VI. One of the consequences of all this can be seen in what has happened in the area of Soviet for- eign trade. A. The Soviets have been trying to increase their industrial imports from the West--as you can see from the bottom segment of each of these bars. (CHART, Soviet financing of hard currency deficits) B. For these industrial imports, the Soviets have had to depend on medium-term credits. Their exports have not been generating enough hard currency to cover imports. C. The medium-term debt piled up in this way has grown rapidly since 1959. Last year it reached some 620 million dollars. (CHART, Soviet gold production, sales, and reserves) D. Another way the Soviets have paid for their imports is with gold. This has led to an SECRET Approved For Release 2006/07/27: CIA-R?P67B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 SECRET almost precipitous drop in their gold re- serves. By the end of 1964, these were down to only about one and a half billion dollars. E. The Soviet "trade drive" in the underdevel- oped countries has also slacked off. Trade between the USSR and a selected group of developing nations rose substantially dur- ing the past decade, but there are no major new initiatives at present. F. Exchanges of important raw materials and manufactured goods with other Communist countries still account for more than 70 percent of Soviet trade. (CHART, Soviet aid to Free World dountries) VII. Soviet aid--is a vigorous and active program. This chart shows the scope of Soviet military and economic aid to Free World countries over the past ten years. A. The green bars represent extensions of eco- nomic aid, and the green line linking them shows the extent to which these commitments have been fulfilled by deliveries. The black bars represent military aid agreements, under which delivery has generally been completed with little delay. Approved For Release 2006/07/2Fg{PT7B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 SECRET B. As the USSR enters its eleventh year of aid activity in the Free World, the program is becoming increasingly complex, the immediate returns less discernible, and Moscow has learned by experience that a foreign aid investment does not guarantee a return in the currency of political influence. 1. Moscow is, however, committed to main- tain its existing programs, and remains ready to consider aid for newly emerging states. Assistance to non-Communist countries was favorably reviewed by Soviet leaders in 1962 and 1963, and Khrushchev's fall is not expected to cause any modification of the foreign aid program. 2. After two years of relatively low ex- tensions of new economic aid, the Soviet Union in 1964 again topped $1 billion-- largely due to sums offered to under- write new five-year plans which start this year, such as Egypt's. Aid extended in 1964 amounted to $875 million for Communist countries and $820 million for Free World countries. Approved For Release 2006/07/? 4{I FRY3P67B00446R000600260037-8 Approved For Release 2006/070 :~ q,~'67B00446RO00600260037-8 (CHART, Soviet aid by countries receiving it) VIII. Soviet military aid frequently is given with less restraint that economic credits. It places less burden on the economy and it serves immediate political objectives more rapidly. A. Three fifths of all military aid to non- Communist nations has gone to two pivotal countries--Egypt and Indonesia--whose poli- tical policies, while not necessarily con- sonant with those of Moscow, have discomfited the West. 1. The Middle East is generally committed to bloc arms. The development of the United Arab Command--dominated by Egypt-- probably assures Moscow of preeminence in Middle East military programs. For example, Nasir is pressing Jordan and Lebanon to obtain MIG jet fighters. 2. Current military assistance to Indonesia continues to maintain a toe hold for the Soviets in Asia. 3. The USSR, learning by experience, is proceeding cautiously with military aid for new, unsophisticated, and politically volatile African states. B. The Soviet military aid program continues, however, to grow in scope and content. -11- SECRET Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 Approved For Release 2006/07/2 jfe1 P67B00446R000600260037-8 mss=siw ] 7 t' Advanced weapons systems now are a standard export item. The USSR continues to supply advisory missions, and to expand the train- ing of free world military officers at its institutes, and is now supplying arms pro- duction.f aoiiities, for instance, a.MIG jet fighter factory for India. IX. Economic problems certainly had something to do with Khrushchev's fall. A. We have no evidence, however, that his suc- cessors are planning any major changes for this year in the pattern of economic alloca- tions. B. We are highly skeptical of the announced cut in defense expenditures for 1965. C. There are two areas, however, where some changes have been in motion--economic organiza- tion, and economic thought. 1. Organizationally, the new leaders are already busy trying to undo some of what they have referred to as Khrushchev's "hare-brained schemes"--for example, the division of the Communist party into separate industrial and agricultural organizations. .cc -12- Approved For Release 2006i07/2'~'7B00446R000600260037-8 Approved For Release 2006/07/2.2 A& 1 ' 71300446RO00600260037-8 2. They are also experimenting with the ideas of Professor Liberman and others who would like to see profits and the market play a much greater role in guid- ing production. D. Obviously, Marxism-Leninism is not going to tell the Soviets how to solve their problems. On the contrary, they are now in fact rifling the storehouse of Western ideas for ways and means of coping with their economic difficul- ties. X. While the Soviet economy has slowed down pretty much across the board in recent years, the growth has by no means come to an end. A. Western, and Yugoslav, ideas will help to the extent that the Soviet Union actually adopt them. Czechoslovakia and other East European countries, incidentally, show signs of putting more Westernized concepts into practice in their economies. B. Some of the things the Soviets are trying in agriculture are intelligent. Barring bad weather, agricultural production should rise--perhaps an average of three to four percent a year over the next five years or so. Approved For Release 2006/07/2`7 1;1 'F IP67B00446R000600260037-8 Approved For Release 200610712hkej Pfz7B00446R000600260037-8 C. Our analysis by no means suggests that the Soviet economy will be unable to sustain a vigorous military and space program. 1. These expenditures may level off, or even shade down a little, between now and 1970. On the other hand, they might continue to rise by as much as 20 percent. In either event, the strain on scarce re- sources is going to remain, and perhaps even grow. 2. In short, we are not prepared to forecast that economic pressures are driving the Soviet Union into a corner where it will be willing to accept new arms control measures. XL.;, Our best guess is that the growth of Soviet Gross National Product for the rest of this decade will average between four and six per- cent a year. Just where it falls within this range will be determined to a considerable degree by weather and its effect on agriculture, and by future trends in defense spending. A. In any case, the more general problems of industrial maturity and backward agriculture are going to make it difficult to substain Approved For Release 2006107127'q~P`67B00446R000600260037-8 Approved For Release 2006/07/27: CIA-RDP67B00446R000600260037-8 SECRET a six percent rate of growth, and the rate is very unlikely to regain the seven percent level characteristic of the mid-1950's. B. The performance we envisage by the Soviet economy is not going to satisfy the Soviet leaders, and it will help stimulate renewed conflict within the Kremlin. C. At the same time, however, it will not really provide much comfort for us, because what- ever the difficulties, it will continue to furnish the Soviets the necessary wherewithal for their challenge to the Free World. Approved For Release 2006/07/ E(QM1T7B00446R000600260037-8