SOVIET AND EASTERN EUROPE ECONOMIC PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00274R000100060005-5
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 6
• Document Creation Date: December 20, 2016
• Document Release Date: March 21, 2007
• Sequence Number: 5
• Publication Date: January 1, 1982
• Content Type: REPORT

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11
SOVIET AND EASTERN EUROPE ECONOMIC PROB! I
Paradoxically, this has occurred at a time w.h-n the Soviet Union's town
domestic situation -- primarily economic -- is less than satisfactory.
ILLEGIB
INTRODUCTION
Mr. Casey and my colleagues have outlined for you the Soviet expansionist
.drive and Moscow's consequent involvement in many regions of the world.
Soviet economic problems are worsening to such an extent that the system
is less and less able to support the Brezhnev-era goals of an expanding empire
abroad', constant improvements in military strength, and economic gains and
well-being at home. Since Soviet economic developments will have such an
important bearing on that country's future, I shall examine this subject in
greater detail.
Soviet economic growth has fallen from nearly 4 percent per year during
most of the 1970s to less than 2 percent per year since 1978.
'While the slowdown has occurred in all major sectors of the economy,
the very low growth of the last three years is mainly the result of
three consecutive bad grain harvests;'output in 1981 was about 1/4
below plan.
-- Industrial production -- the traditional growth leader -- slowed from
around 6 percent per year in the early 1970s to less than 3 percent
per year since 1978.
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The impact of the economic slowdown has heen felt primarily in
smaller annual increments in goods and services allocated to
consumption and investment.
F4eanwhile the annual increment to defense remained unchanged at 4 to
5 percent per year.
Some of the reasons for the economic slo:,rdoon are clear.
Harsh weather conditions accounted for rmuch of the deterioration in
agriculture, but mismanagement and smaller increases in fertilizer
deliveries also played a role. Shortfalls in agriculture, of course,
held back food processing and light.industry.
The dominant factor, however,, in the industrial slowdown has been the
declining quality and quantity of cheap, easily accessible raw
materials (especially fuels) in the Western USSR,.and the need to
develop high cost, lower quality sources in the north and east-
.Soviet planners, . meanwhile, have not adjusted well to the changed
conditions in the economy. The ever-present tension in the economy
increased markedly.
(1) 'Demand for transportation services exceeded supply.
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(2) Production shortfalls in one sector reverberated through others;
stagnant or declining production of basic materials such as
steel, coal, and-cement disrupted and in some cases halted
construction activity and industrial operations.
(3) The productivity of labor: and capital resources combined fell.
(4) Soviet planners became less able to develop balanced annual and
five-year plans.
More fundamentally, the "command" economy, well-suited for the
building of the economy by massive inputs of capital and labor-in the
Soviets need to take two major steps.
early years of Soviet power, is now inadequate to the needs of an
advanced industrial society. Most Western economists agree that the
(1) Decentralization of planning and management and introduction of
elements of a'market economy to make the economy more flexible
and responsive to increasingly sophisticated and diversified
demands.
(2) A reform of the incentive structure to introduce greater
efficiency in the utilization of resources.
However, such reforms would threaten. the. party's control, violate Soviet
ideological tenets, and run up against entrenched bureaucratic interests.
3
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Consequently, though the Soviet leadership has paid, lip service to reform: in -
the past, it has not taken any serious action.
The outlook for the 1980s is not bright as, some of the conditions.
contributing to the slowdown worsen and others take hold.
-- Whether or not oil production falls, energy output is clearly going
to incr?ase'more slowly and become more expensive.
(1)
The entire increment in energy production must comm- from Siberia
where costs are high and infrastructure minimal. Thus, large
new investments must be made in roads, rail lines, and pipelines
-- large.ticket items with heavy up-front costs and long lead
times.
(2) Shifting the*fuel balance toward natural gas will require a
large buildup of distribution and storage facilities (i.e., more
investment).
(3)
Because smaller annual increments in total investment are
planned for 1981-85, energy exploitation and associated
infrastructure will absorb an increasing share of investment
-- On top of the investment crunch, increments to the labor force -
declining since 1977 -- will continue to decline until 1986 and will
not regain present levels until after 1990.
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(1) With labor productivity nearly at a standstill, demand for labor
-- especially skilled labor -- is likely to increase.
(2) But most of the new entrants will be from the Moslem areas of
the USSR where few of the'Soviet industries are located.
Moscow cannot look -- as' it has in the past few years -- to the foreign
'sector for much relief.
The USSR was hit in 1981 by a soaring agricultural import bill, oil prices in the West, and to disruptions in Polish trade. As a
result, the trade deficit more than doubled to about $6 billion.
The USSR's hard currency problem is almost certain to worsen in the
'coming years.
(1) .The.only large new source of hard currency earnings on the
horizon is the Yamal gas pipeline which is not expected to go
Into full operation until 1986. Moscow is banking on these. gas
exports in the face of its own declining oil export capacity and
the -uncertain world oil market.
(2) Soviet current arms sales are very large, but no new major
.:details are currently in negotiation.
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(3) Although gold sales can be stepped up, Moscow must be careful
not to spoil the market. _
(4) The prospects for stagnation or decline in Soviet hard currency
earnings indicate that Moscow will be unable to increase its
hard currency imports unless the West provides more credits and
Moscow accepts a larger hard currency debt.
As the Soviets look at their East European empire, they cannot be
sanguine about the economic prospects of those countries either. The COMECON
countries (excluding. the USSR) have an aggregate hard currency debt of over
$60 billion and are all faced with economic stagnation.
In sum, then, it is most likely that economic problems will force tough
decisions on the USSR and other East European countries. The policy debates
surrounding these decisions will probably become intertwined with the
succession struggles which will probably occur in a number of these
countries. The looming Soviet succession has been widely discussed. What is
sometimes overlooked is that the leaders of Bulgaria, Czechoslovakia, Hungary,
and East Germany are. also around 70. The death of these leaders, particularly
if this occurs-close together, will introduce additional uncertainties into an
already. complicated situation. The-Soviet reaction to the Polish crisis
suggests that in times of trouble the most tempting way out of immediate
:.difficulties is through the use. of force. The open question is. how long such ,
a policy can succeed in maintaining the Soviet empire_
6.
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