AN EVALUATION OF CIA WORK ON SOVIET ECONOMIC CAPABILITIES PROBLEMS AND PROSPECTS

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00364R001903730006-6
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• Document Page Count: 132
• Document Creation Date: December 21, 2016
• Document Release Date: May 7, 2008
• Sequence Number: 6
• Publication Date: July 7, 1983
• Content Type: REPORT

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AN EVALUATION CF
CIA WORK ON SOVIET ECONOMIC
CAPABILITIES, PROBLEMS, AND PROSPECTS
July 7, 1983
Classified by Multiple Sources
International Trade Administration
U.S. Department of Commerce
July 7, 1983
DECL: July 7, 2003
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TABLE OF CONTENTS
FINAL REPORT
(July 7, 1983)
Page
OVERVIEW
1
CIA's View of Soviet Economy
The Panel's Overall Assessment
3
FOREWORD
8
Background
8
Objective
8
Conduct of the Review
8
The Report
9
Standard for Evaluation
10
SUMMARY EVALUATION
11
Key observations
11
1.
General Assessment
11
2.
Methodology
14
3.
System Adjustment Capabilities
20
4.
Context
23
5.
Indication of Reliability
25
6.
Tone
25
7.
Underdeveloped Areas
27
Appendix
A.
Panel Members
34
Appendix
B.
Statement
of Mission and objectives
35
Appendix
C.
Subtopics
and Subcommittees
39
Appendix
D.
Tonality
in CIA Reporting
40,
Appendix
E.
A Note on the Accuracy of GNP Data
Needed for Decision-Making
49
SUBTCPIC EVALUATIONS AND RECOMMENDATIONS
53
I. National Accounting
5.4
1.
Introduction
54
2.
Methodology
55
3.
Empirical Estimation Problems
58
4.
Communication
62
5.
Conclusion
63
II. Growth Problems, Projections,
organizational and Policy Change .
64
III. Energy
70
1.
Introduction
70
2.
Methodology and Findings
70
3.
Recommendations
73
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IV. Agriculture and Food 76
1. Methodology 77
2. Findings, Interpretations
and Conclusions 79
3. Clarity of Presenting Findings 87
V.
Foreign Economic Relations
1.
Introduction
2.
The Global Context of
Soviet Trade & Finance
3.
The Conceptual Framework of Analysis
4.
Specific Methodologies
5.
Analysis of Soviet Behavior and
Foreign Trade Forecasts
6.
Intelligence Crucial for U.S. Policy on
East-West Economic Relations, 1980-83
88
88
88
89
90
93
94
VI. The Soviet Burden of Empire 99
1. Introduction 99
2. Major Conclusions 100
VII. Quality of Life, Morale,
and The Second Economy 105
1. Introduction 105
2. Methodology 106
3. Interpretations 109
4. Communication of Results 110
5. The Second Economy 114
VIII. The Effects of Slow Growth on
System Stress, and National Security 116
1. System Stress 116
2. National Security Impact of
Slow Growth 119
IX. Soviet Leadership Perceptions 123
1. Introduction 123
2. Findings, Interpretation, Conclusions 12.4
3. Methodology, Sources of Data,
and Date Base 127
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OVERVIEW
0
The Panel, established by the President's Foreign
Intelligence Advisory Board, was charged with the task of
assessing CIA's work on Soviet economic capabilities, problems,
and prospects. This is an overview of the Panel's findings.
CIA's View of Soviet Economy
The Panel takes the December 1982 statement of Henry Rowen
before the Joint Economic Committee to be the most
authoritative recent statement of the CIA's assessment of the
Soviet economy. The following is the Panel's summary of the
main points of that assessment.
1. Between 1950 and 1981 Soviet GNP grew at an average
rate of 4.6 percent per year. The central fact, however, is
that the Soviet growth rate has been declining, moderately
before 1978, and sharply thereafter. In the 1950'_s it was
growing at 6 percent per year; by 1979-81 it was down to less
than 2 percent per year.
2. The forecast is that the economy will continue to grow
in the forseeable future but at a slow rate, between 1 and 2
percent per year.
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3. The economy suffers from a great many weaknesses, such
as the depletion of its best natural resources, difficulties in
improving productivity and promoting technological progress,
and an agricultural sector that is both costly and
inefficient. But it also has a number of strengths, such as
its exceptional endowment of natural resources, its substantial
capital stock, and large and well-educated labor force.
Furthermore, while its centralized political control over the
economy and the population may be an economic millstone, it
does enable the leadership to mobilize resources to achieve
priority objectives.
4. Considering its strengths and its weaknesses, the
economy can be regarded as performing poorly in recent years.
This does not mean, however, that it is losing its viability.
There is not even a remote possibility that the economy will
collapse.
5. The major consequence of the slow growth rate is that
it is harder for the leadership to maintain all its past
commitments: to military and foreign policy goals, to the
raising of living standards and the quality of life, to the
promotion of economic growth by high investment rates, and to
the preservation of traditional methods of centralized economic
planning and management. Some of those commitments will have
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to be scaled down, but the decisions will be based primarily on
the leadership's own priorities and political judgments.
6. Though highly self-sufficient, the USSR is not
autarkic. Imports of Western capital, technology and grain are
important for the maintenance of economic growth, but due to
its basic self-sufficiency, Soviet vulnerability to economic
leverage is limited.
The Panel's Overall Assessment
The Panel, after studying CIA reports written over the
past five years and conferring with CIA analysts, is in general
agreement with the assessment just presented, and offers the
following observations:
1. CIA's quantitative estimates of past Soviet output
levels and rates of growth are the best available. Because of
the paucity of. published data, analysts of the Soviet economy
must use methods which are sometimes different from those used
by analysts of Western economies. The methods used by the CIA
have stood the test of the market-place; they are those
preferred by the great majority of specialists on the Soviet
economy. Analysts using other methods have produced estimates
some of which are higher than those of the CIA and some,
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lower. In the Panel's judgment none of the alternative methods
have been proven to be superior to those of the CIA.
2. Because of data limitations, the best estimates of
Soviet growth must be expected to have a greater margin of
error than similar estimates for developed market economies.
While there is no way of precisely stating the margin of error
in the CIA estimates, the Panel does feel that the CIA should
make more of an effort to establish an upper and lower bound
for the possible error. However, it is the Panel's best
judgment that the error is not likely to be so large that its
elimination would change one's assessment of the strengths and
weaknesses of the Soviet economy. Though one should not place
high confidence in the precise measure of past growth rates,
one can have a high degree of confidence in the broad facts:
(a) the Soviet growth rate has been declining; (b) its present
level is sufficiently low as to place national policy under
considerable strain, without being a harbinger of collapse. It
is these facts that are the most important for US policymakers
to know.
3. While CIA's measurements of Soviet economic
performance have been quite strong, its interpretations of
these measurements have at times been less so. The most
difficult task of intelligence analysis is to assess the
significance of the low Soviet growth rates for Soviet
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policymaking and for the condition of Soviet society. Unlike
the measurement of growth rates, there does not exist a body of
formal social theory and method upon which the CIA can draw for
such an assessment. At its best, the assessment should be
based on a sophisticated understanding of political and social
processes, on a thorough knowledge of Soviet/Russian history
and culture, and on the fullest available evidence on current
events and conditions in the USSR. The Panel finds that the
Agency's capability can be improved in a number of these
respects and has made several recommendations toward that end.
4. Furthermore, while the Panel endorses the Rowen 1982
assessment summarized above, it finds that past CIA reports and
testimony have frequently overemphasized the weaknesses,
problems, and vulnerabilities of the Soviet economy, and may
therefore have contributed to an excessively negative view of
Soviet economic conditions and prospects held by some
policymakers. This may have been due in part to the CIA view
that the policymakers were interested primarily in Soviet
weaknesses. The Panel finds, however, that there were other
reasons, among them (a) a tendency to underestimate the
capability of the Soviet leadership to respond effectively to
growing difficulties (e.g. in oil production, foreign trade);
(b) use of colorful and emotive language instead of
dispassionate and neutral prose in communicating research
findings; and (c) an unarticulated assumption that there is a
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simple causal link between poor economic performance and such
social ills as low morale, social unrest, lawlessness, and so
forth. The Panel offers a number of recommendations to improve
Agency analysis and reporting practice in such respects.
5. Most (although not all) of the recommendations for
improvement in CIA work on the Soviet economy discussed in this
Report relate to CIA's interpretation and communication of the
meaning of its estimates of Soviet economic performance, rather
than to the estimates themselves. Therefore, the weaknesses
referred to do not essentially diminish the confidence the
Panel has in CIA's quantitative measurements of Soviet output
and growth.
6. The Panel has the impression that policymakers'
concerns about analyses of the USSR have at times focused
excessively on the accuracy of CIA and alternative estimates of
Soviet GNP and its growth. While useful in assessing Soviet
economic strength and political viability, such aggregate
indices can provide only limited insights--particularly for
closed societies like the Soviet Union. Indeed, policy issues
typically involve such difficult questions as the ability of
the Soviets to sustain or increase their military capability
and the degree of stress on the Soviet system, issues so
complex and requiring consideration of so many additional
factors that final assessments would not likely be changed by
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the difference. between the actual and the estimated GNP levels
and growth rates. In the assessment, for example, of military
capability such factors as international tensions, specific
industrial capabilities, political conflicts, bureaucratic
inefficiencies, and ethnic strains may dominate the slowdown in
GNP growth. And in the assessment of system stress, such
factors as party and policy controls, interests vested in the
regime, traditional attitudes toward authority, and again
ethnic strains are involved.
7. CIA's growth forecast for the 1980s (1-2 percent per
year) is derived by means of standard methods and the Panel
finds the forecast reasonable. However, the uncertainty is
large in any medium to long-term forecast, including one of the
Soviet economy. The Panel believes the Agency should accompany
its forecasts with clearer warnings of the limitations in
confidence with which they should be viewed.
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FOREWORD
Background
The President's Foreign Intelligence Advisory Board
(PFIAB), in its first semiannual report to the President dated
2 August, 1982, noted that the Soviet Union will be facing
serious economic problems during the remainder of this decade,
and that accurate assessments of Soviet economic prospects may
be critical to future foreign policy decisions. The PFIAB
concluded that an independent review of the intelligence
community estimates in this regard would be prudent. On the
President's behalf, the National Security Council directed the
Department of Commerce to organize a Panel of highly qualified
experts, from outside the intelligence community, to undertake
such a review (members of the Panel are listed in Appendix A).
Responsibility for the management of this effort, as requested
by the PFIAB, was given to the Under Secretary for
International Trade, Lionel H. Olmer.
Objective
The basic objectives established for the Panel were as
follows (the full charge to the Panel is reproduced in Appendix
B):
1. to evaluate the methods and assumptions used by the
intelligence community in estimating Soviet economic
performance;
2. to assess the validity of intelligence community
findings, interpretations, and conclusions; and
3. to examine the clarity with which these findings,
interpretations, and conclusions are presented to
policymakers.
The Panel was not to review the measurement of Soviet
military expenditures (this being the subject of a separate
study under the auspices of the Director of the Central
Intelligence Agency), nor was it to analyze new foreign policy
options or examine past foreign policy decisions. The Panel
was not expected to undertake new research and, therefore, was
not expected to provide alternative estimates of Soviet
economic performance.
Conduct of the Review
The Panel divided its work into nine subtopic areas (not
all of equal importance), each to be examined by a subcommittee
of the Panel (see Appendix C).
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The Panel met six times in plenary sessions in addition to
meetings of its subcommittees. The focus of its investigation
was almost exclusively on the work of the CIA, which dominates
the study of the Soviet economy in the intelligence community.
At the beginning of its review, the Panel sent an extensive
list of questions to the CIA. The Agency, rather than
responding at length to these questions, preferred to have
Panel members read relevant CIA reports and confer with CIA
analysts.
The Panel read more than 100 classified and unclassified
reports, conferred with CIA analysts, met with representatives
of several key users of intelligence on the Soviet economy (the
Department of State, Department of Defense, and the NSC), and
read a preliminary report by a Department of Commerce team
(Michael Boretsky, et al.) on a methodological question
concerning CIA's measurement of Soviet economic growth. The
Panel, however, does not know which of the reports it reviewed
were widely read and discussed by policymakers; and it has not
had access to reports classified above the level of "Secret,"
or to informal memos, or oral briefings of policymakers. The
Panel, therefore, well realizes that there is still much it
could learn about the work of the CIA on the Soviet economy,
and it presents its evaluations with that consideration in
mind.
Furthermore, since the Panel did not survey the user
community in a systematic way, it will not comment on whether
the CIA adequately and in a timely manner addressed the
expressed concerns of policymakers.
The Panel wishes to acknowledge the excellent cooperation
of the CIA in providing documents and making the time of CIA
staff available to Panel members for discussions. This
cooperation was vital to the success of the Panel's review.
The Report
The Report is divided into two parts. The first is a
Summary Evaluation, containing the Panel's key observations and
recommendations. The second contains more detailed Subtopic
Evaluations and Recommendations.
The Summary Evaluation part of the Report represents a
consensus agreed to by all members of the Panel.(1)
The Subtopic Evaluations and Recommendations sections were
drafted by individual subcommittees. The main conclusions are
those of the whole Panel, and are reflected in the Summary
Evaluation.. However, though the subcommittee findings were
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discussed by the full Panel, the Panel did not attempt to agree on
the complete text of each subcommittee report.
The Panel recognizes that CIA has operated under a resource
constraint and has had to make choices among the topics it might
want to pursue. Consequently, the Panel realizes that if its
recommendations were to be implemented, CIA would require additional
resources.
Standard for Evaluation
To guide its evaluation, the Panel adopted the following
performance standard for intelligence community work on the Soviet
economy:
As a nation, we require continuous assessment of the Soviet's
economic capacity, now and in the future,
a) to establish, sustain, and use military power;
b) to project political and economic power in the world;
c) to maintain their socio-political system.
The intelligence community's assessment of Soviet economic
capacity should cover certain key aspects of Soviet economic
performance. First, we need an estimation of current and past
production levels and trends (the national accounts), and of the
resources used in production (labor, capital, land, and materials).
This estimation also requires the evaluation of efficiency and of
the role played by systemic elements in the determination of
efficiency. Second, there must be an estimation of the potential
for the Soviet economy to grow by increasing inputs, and by raising
productivity. And third, there must be an assessment of the
system's ability to adjust in response to accumulating problems,
external shocks and shifts in central priorities.
In the various aspects of its assessment of the Soviet economy,
the intelligence community should be expected to employ the best
methods available. And while innovation in methodology might
usually be left to the academic community, there are situations
where intelligence needs require that innovation in methodology be
pursued within the intelligence community.
The communication of assessments to policymakers is also an
important part of the intelligence process. Assessments should be
presented clearly with the range of uncertainty indicated.
Assumptions and data sources should be adequately identified.
Disagreements arising in the assessment process should be presented,
in an appropriate manner, to intelligence users. The language
employed should enable users to distinguish judgments.from facts in
the intelligence product.
Finally, it is necessary that intelligence analysis be
objective, free from prejudice and the desire to support particular
policies.
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SUMMARY EVALUATION
Key observations
1. General Assessment
The Panel finds the overall work of the CIA on the Soviet
economy to be of high quality--quite strong on measurement,
somewhat less so on interpretation. The methodologies employed
are generally state of the art, equivalent to those used by
leading academic specialists working on the Soviet economy.
And its research and analysis are as a rule conducted with care
and professional competence.
CIA's statistical estimates of past Soviet economic
performance are regarded by the Panel to be of high caliber
and, though subject to gaps in available Soviet data, and to
some problems of estimating methodology (see discussion below),
they are at an acceptable level of reliability. It is the .
Panel's best judgment that the error in CIA estimates of Soviet
national income and its rate of growth in the past is unlikely
to be so large that its elimination would significantly change
the assessment of Soviet economic strengths and weaknesses. It
is useful to bear in mind that, while data on the Soviet
economy can be expected to be less reliable than data on most
developed market economies, no nation produces error-free
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economic data. The key issue is how precise do the estimates
have to be to meet the needs of policymakers. With regard to
some estimates, for example the number of deployed Soviet
missiles, the precision required is quite high. But with
regard to most uses of aggregate measures of Soviet economic
levels and growth, US policyrakers do not need as high a degree
of precision.
The Agency's track record on quantitative forecasts of
Soviet economic growth has on the whole been good. The
forecasts appear to be generally accurate, with a tendency
(contrary to the commonly held view) for the Agency to predict
higher rates of growth in the 1960s and 1970s than it
calculated the Soviets actually achieved.
One notable exception to its generally good forecasting
record is CIA's 1977 prediction that Soviet oil output would
decrease substantially in the early 1980s--a prediction that
has not been borne out. Yet even here, the CIA record has some
strong points. For example, the CIA was the first, to our
knowledge, to predict that the 1980 target for oil output in
the 10th Five Year Plan (1976-1980) would not be achieved.
CIA's ability to recognize its mistakes and to learn from
them is considered by the Panel to be an important aspect of
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the Agency's performance. Here, too, CIA's record has been
good. Again, using oil as an example, the Panel's general
impression is that the CIA has learned from its experience,
that its current techniques for forecasting oil output are more
sophisticated than they were five years ago, and that the
quality of their forecasts is higher as a result.
The CIA has been criticized by some for "sending
contradictory signals" when it claimed that the Soviet economy
was experiencing increasing difficulties, that the Soviet rate
of economic growth was diminishing, but that at the same time
Soviet military expenditures continued to rise. The Panel sees
no necessary contradiction between these two CIA findings.
Given the national security objectives of Soviet leaders and
the centralized nature of the Soviet political and economic
system, it would not be surprising if the Soviets continued to
allocate a large and--if deemed necessary--a moderately
increasing share of national resources to the military sector
despite the decreasing growth of the economy. Whether, in
fact, this was the case in the recent past is a matter of
current controversy and reassessment.
The Panel's general assessment of CIA work on measurement
of the Soviet economy is quite positive; further aspects of
that work worthy of praise could be detailed in this Report.
The Panel's main purpose, however, is to contribute to the
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increased quality of the intelligence product by indicating
those areas of CIA's work where weaknesses exist and where
improvement is called for.
2. Methodology
Most CIA work on the Soviet economy employs state-of-
the-art methodology. In some cases, the methodology used by
the CIA is below the existing state of the art. And in some
cases, primarily those involving political-social issues, the
state of the art is poor, not capable of supporting effective
analysis. Some examples of each will be presented.
a. State of the Art
Much of the methodology used by the CIA is at the state of
the art. This is particularly. true in CIA work on Soviet
agriculture. In fact, the Panel finds that overall CIA work on
Soviet agriculture is of very high quality.
With regard to CIA's estimates of national income and
product, the Panel finds that they are calculated with
essentially state-of-the-art methodology and with a high level
of skill, attention to detail, and sophistication. The Panel
knows of no other set of estimates for the Soviet Union that
compare with the CIA's in reliability, and in scope, depth, and
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care of construction. At the same time, as the CIA itself
indicates at length in its published analyses, there are a
number of possible sources of error in its estimating
methodology that arise primarily because of the paucity and
deficiencies of Soviet data. Two possible areas of systematic
bias in its estimates are as follows:
1) The methodology used to estimate indexes of
GNP growth employs sub-indexes, often in physical terms, which
may not take adequate account of quality improvements over time
or introduction of new goods. CIA is fully aware of this
problem, but suggests there are countervailing factors in its
method of calculation. The Panel recommends that CIA
reconsider the possibilities of estimation by other methods
including the conventional procedure of deflation of end
.products, at least as a check on the present method.
2) The Panel notes that CIA comparisons of the
size of the US and USSR national income imply that the USSR is
in a more favorable position relative to the US than Soviet
official calculations show. It can be argued that in this and
in other instances the problem lies in CIA's understatement of
the general qualitative superiority of American goods and
services in the construction of ruble-dollar ratios. The Panel
believes that it would be desirable for CIA to provide some
explanation for this apparent anomaly in national income
comparisons.
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The Panel, however, is impressed with the state-of-the-art
international price comparison methodology used by the Agency
in its international comparison of consumption in the USSR.
This involved extensive, detailed quality comparisons of Soviet
and US consumer goods, including the testing by US laboratories
of almost 200 individual Soviet consumer goods, purchased for
the CIA in the Soviet Union. The Panel feels that when faced
with a choice between evidence and impressions, it must go
along with evidence. Until sufficient, equally thorough
evidence is presented to counter the CIA estimates,, CIA's
international comparison calculations of consumption in the
USSR should be. accepted.
CIA is to be commended for acquiring a state-of-the-art
econometric macromodelling capability through the development
of the econometric model SOVSIM., which it uses in the analysis
of medium and long-term growth prospects. An econometric model
can play an important role, along with other approaches, in
analyzing growth prospects, but it must be used carefully, with.
due regard to confidence ranges, and its limitations must be
recognized. Above all, the consumer of econometric model
projections must be made aware that the model does not
mechanically crank out projections. Model projections require
and are fundamentally based on the assumptions and judgments
made by analysts. Furthermore, given the CIA's stress on
Soviet oil in the late 1970s, extensive attention in the
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development of SCVSIM was devoted to the energy constraint on
economic growth. In future research in this area, greater
attention should be devoted to the linkages between foreign
trade and domestic production and to the relationships among
income, consumption, and labor productivity.
b. Below State of the Art
The dominating characteristic of Soviet growth performance
has been the decline in the growth rate, which has become quite
significant since the mid-seventies. The principal problem in
the analysis of Soviet growth is, therefore, the identification
of the sources of the growth decline. The method used by the
Agency is what may be called eclectic. It consists of the ad
hoc listing of a set of contributing factors: diminishing
returns to natural resources, declining allocative efficiency,
deteriorating incentives, declining growth of factor inputs,
and so forth.
The reports we have read lack a systematic analysis of the
process of growth decline. Different sources of the decline in
growth are cited in different reports, and their relative
importance is not assessed. Some sources of decline cited by
CIA appear not to have been carefully thought through, e.g.
declining factor productivity is described as a cause of growth
decline in a context in which it should be regarded as a
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consequence of that decline. The ad hoc listing of
contributory factors, in the absence of an effort at the
assessment of relative, importance, gives the impression of an
overdetermined explanatory system; any subset seems sufficient
to explain the decline, without reference to the others.
What is needed is a systematic methodology for the analysis
of the decline in growth. The Panel recommends that the Agency
explore the use of growth accounting for the systematic
quantitative analysis of the sources of the Soviet growth
decline. Growth accounting is now an established and tested
method, both the contributions and the limitations of which
have been fully explored in the economics literature.
Soviet foreign trade decisions and trade dependency have
been analyzed by CIA largely in terms of "import requirements"
and "export availability." That is an unacceptably simple view
of the complicated calculus that underlies Soviet foreign trade
decisions. In fact, it is apparent that decisions to export
and import in the Soviet Union reflect comparative advantage
considerations. The benefits derived from imports are weighed
against the alternative costs of producing imported products
domestically and against the costs of exports.
By underemphasing this benefit-cost comparison, the CIA
gives insufficient attention to important aspects of Soviet
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behavior--responsiveness to prices, allocation of investment
funds to export sectors and import substitution, and reaction
to aggregate budget constraints. The Panel recommends that the
Agency adopt a methodological approach cognizant of comparative
advantage and gains from trade for the analysis and evaluation
of Soviet foreign trade.
c. State of the Art Inadequate
CIA work in such areas as quality of life, system stress,
and leadership perceptions is hampered by the low level of the
methodological state of the art in these areas found generally
in the social sciences. A useful methodology linking economic
developments to social and political consequences is not
available. There is no theoretical framework that coherently
relates slow economic growth, worker demoralization,
alienation, food riots, strikes, and rising crime rates to
political and social stability. The unavailability of sucha
theoretical methodology leads to CIA analysis in these areas,
as is true of such work generally, that is mostly ad hoc and
intuitive.
There is a tendency to make assertions about causal links
that on the surface seem reasonable, but are not always
justified. To take just one example, CIA lays great stress on
the need for raising per capita consumption to avoid
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deterioration in work effort and hence in labor productivity.
Yet, the process by which the failure to increase per capita
consumption affects work effort is neither spelled out nor
obvious. To maintain incentives to work would seem to require
a supply of consumer-goods and services sufficient to satisfy
money demand, and a close connection between performance and
rewards. The balance between the supply and demand for
consumer goods and services could be achieved by raising
prices, reducing money incomes, or freezing money balances or
destroying their value, as well as by increasing the supply of
goods. Given a balance between supply and demand at prevailing
prices, it is not entirely obvious why incentives to work are
greater if consumption is rising than if it is falling.
The Panel feels that continued and expanded work by CIA
analysts in the difficult, soft areas of the impact of economic
events on social-political activity and stability is necessary
if CIA is to adequately serve the needs of policymakers. The
Panel, therefore, recommends that the Agency continue to commit
some of its resources to the development of a usable framework
for the analysis of economic-social-political linkages.
3. System Adjustment Capabilities
The Panel finds, in CIA's analysis of future Soviet
prospects, a frequent failure to take adequate account of the
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Soviet capacity to adjust in response to problems and events.
Again, in its work on Soviet agriculture, CIA does well in this
regard, but in other areas this is a common weakness.
A noteworthy example is CIA's oil forecasts. One of the
main reasons why the original 1977 oil output forecast and the
forecast that the Soviet Union would soon become a net oil
importer were off the mark was CIA's failure to sufficiently
take into account the capacity of Soviet leaders to respond to
the problem. The Agency did not adequately consider the
possibility that Soviet leaders would rapidly and decisively
reallocate investment and labor into the energy sector.
Another example is the Agency's analyses of Soviet foreign
trade prospects. The balance-of-payments projections made by
the CIA for the 1980s abstracted from Soviet adjustment
capacities--both in export generation and import substitution.
By ignoring Soviet behavior in their analysis, an image of
Soviet "passivity" was communicated. Adequate discussion of
Soviet response to shifts in market conditions or Western
policies was missing. Importation of Western goods and
technology and use of Western credit were too easily regarded
as vulnerability, rather than as a pattern of Soviet behavior,
under the given leadership preferences and the existing
external conditions.
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A further aspect of the system adjustment issue concerns
the tendency of CIA analysts, when they do address possible
Soviet responses to economic problems, to treat each possible
policy separately, rather than assessing the potential effect
of a combination of.policies. It is rare, in any economy, for
an individual policy or program by itself to have a dramatic
effect on the economy. But the sum of individual small
effects, including a possible synergistic element, may add up
to something more significant.
. In addition, the CIA usually puts too much emphasis in its
projections on the need for Soviet leaders to solve each of
their economic problems rather than to manage them. In all
economic systems, many problems are hardly ever solved; they
are generally simply managed.
The Panel recommends that CIA pay more attention to the
possible range of system responses to economic problems and
events, and to the development of improved methods of
evaluating the possible effects of such responses. In
addition, the policy of integrating political analysts into the
studies of Soviet economic prospects, pursued by CIA since the
formation of SOYA, should be continued and strengthened.
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4. Context
The Panel finds that CIA often does not put its analyses
into the proper comparative, historical, and systemic contexts,
necessary for policymakers to fully comprehend the implications
of CIA analyses. To accurately assess the Soviet situation,
policymakers need information about how Soviet economic
performance and problems compare with those of other nations.
CIA frequently provides such comparisons when presenting
economic data on past Soviet performance, but it rarely does so
when discussing the current situation or future prospects.
Policymakers also need to be informed whether current
Soviet problems are historically unique or have occurred in
past Soviet or Russian history, and if such problems have
occurred previously, what was the situation and outcome.
Finally, and perhaps most importantly, Soviet problems and
prospects need to be put into the context of the Soviet system
and Soviet society. There needs to be a consistent balance in
CIA.reports that takes into account both Soviet strengths and
weaknesses. CIA reports appear preoccupied with problems, and
in some cases the summary key judgments highlight pathologies
even more than the reports themselves. People who are familiar
with Soviet society understand that there is another side, that
there are strengths as well as weaknesses. But not all
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policymakers, who rely on the Agency reports, have this
background. When they read about declining rates of economic
growth and the problems of malaise, nationality tensions, food
shortages , falling health standards, and the like, they are
not in a position to put these matters into an appropriate
perspective. If they were reading about such US problems as
unemployment, racial tensions, poverty, urban decay, declining
educational attainment, they would understand the broader
social and historical context sufficiently to place such dark
facts about the contemporary US scene in a proper perspective.
Lacking a knowledge of the corresponding Soviet context, they
are likely to emerge with an exaggerated impression of the
.weaknesses of Soviet society relative to its strengths.
The Panel recommends that the Agency strive for more
consistent balance in its reports, taking into account Soviet
strengths and weaknesses, and that it put more of its analyses
in the relevant comparative and historical contexts. In order
to do this effectively, the Agency will need to recruit or
train, preferably at a major university center, more analysts.
working on the Soviet economy who are well grounded in Russian
area studies. Furthermore, it should make it attractive to
those with broad backgrounds and extensive experience to remain
as analysts rather than moving into managerial positions as the
only form of upward mobility.
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5. Indication of Reliability
U
The Panel believes that the Agency generally conveys an
impression of more confidence in the reliability of its
findings than is warranted. However, the Panel realizes that
this is a complicated issue. Users want point estimates in
quantitative analyses; and the danger in providing ranges of
estimates or alternative scenarios is that it forces users to
make a judgment that the CIA analyst is generally better
qualified-to make. Furthermore, the Panel is aware of past,
unsuccessful Agency attempts to employ "language codes" to
express predictive confidence. Nevertheless, the Panel feels
this is an important issue and recommends that the Agency
strive to increase its communication of the degree of
confidence to be placed on individual reports. It should also
indicate, where appropriate, the existence of disagreement
among analysts on its findings. And it should pay particular
attention to communicating. the degree of confidence in those
findings involving surprises as opposed to findings which
confirm previous findings.
CIA reports are usually well written. Material that is
potentially quite dull is presented in a lively, interesting
manner that succeeds in catching the reader's attention. The
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CUNFIDENTIAL
trouble, however, is that the liveliness of the prose is due to
a certain breeziness of style that produces impressions upon
the reader that are not always warranted by the underlying
analysis. Certain CIA reports, particularly those which
attempt a more general assessment of the Soviet economy, abound
with emotive language and negative buzz-words: dismal, bleak,
severe disruption, sluggish growth, malaise, stagnation.
Moreover, when an economy's growth rate is declining, the
growth rates of most of its individual branch outputs are also
declining. The sequential reporting of decline after decline
in individual sectors of the economy creates a cumulative
effect that is greater than the average of its parts. The
result may be to leave the reader with the feeling that the
Soviet economy is in more desperate straits and headed to a
more catastrophic future than the analyst may wish to imply
(see Appendix D for an analysis of the tone of CIA reports to
the Joint Economic Committee).
Clearly, it is important that policymakers read the
intelligence reports written by the CIA. But this should not
be accomplished by spicing up reports with racy, imprecise
language that is more appropriate for a popular journal than an
intelligence agency. The Panel strongly urges the CIA to avoid
the use of emotive words, even if it makes for less sparkling
prose. The Agency should use instead cool, precise,
calibrated, and unambiguous language. An intelligence agency
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cannot always control the message that policymakers will
receive, but it can do something about the tone and precision
of the message that it sends.
Before leaving the general area of communication, the Panel
wishes to commend CIA on its publications of Soviet national
accounts. On the whole, the presentation of methodology,
procedures and results in the published studies are models of
clarity and openness. These studies demonstrate the high
technical competence and sophistication of the SOVA analysts.
Moreover, the unclassified publication of most of these studies
represents a major contribution to the field of Soviet studies
and to the enlightenment of the educated public on these
matters. The profession and the public would be severely
deprived, it is fair to say, if this open publication policy
were changed. And the CIA, in turn, would be deprived of the
valuable feedback from the users of its published data in the
scholarly community. The Panel recommends that CIA maintain
its production. and open publication of Soviet national accounts
and other Soviet economic data.
7. Underdeveloped Areas
The Panel recommends that CIA expand its efforts and commit
resources to the areas discussed in this section of the Report.
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a. The Second Economy
Without a proper evaluation of the increasing role of the
second economy, we are now likely to receive an incomplete
picture of the economic situation and changes over time in the
Soviet Union. This may result in an understatement of Soviet
consumption levels as well as introducing errors in CIA
analyses of labor productivity, incentives, real income and
income distribution.
The Panel feels that the CIA is devoting insufficient
attention to the second economy. While various CIA studies
refer to numerous second-economy type activities and offer
anecdotal evidence, no attempt at generalization or of placing
the second economy in the general analytical framework has been
made.
It is probably premature to start constructing Soviet GNP
accounts which would fully incorporate second-economy type
transactions, but preparation of a separate set of accounts
(net and gross) for the second economy is highly desirable.
b. Social Indicators
In light of the recent decline in economic growth,
particularly the growth of consumption, the Panel feels it is
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important for CIA to develop a set of social indicators that
would help shed light on the changes in quality of life and the
effect of slow growth on system stress. These indicators would
include mortality and morbidity statistics and such
socio-demographic indicators as marriages and divorces, births
and abortions, alcoholism, mental health, crime, and the like.
The development of a theoretical framework for analysing the
links among economic, political, and social events, suggested
previously in this Report, would further help identify social
indicators useful to collect.
c. Regional Dimensions
0
In surveying the otherwise excellent CIA studies of
consumption and other issues related to Soviet people's
welfare, the Panel was struck by a persistent neglect of the
regional dimensions of the subjects covered. The CIA has
clearly recognized the importance of ethnic and nationality
issues in the USSR, but this recognition has not been extended
to regional economics. In the study of slow growth, quality of
life, and system stress, regional differentials are of
importance. What may appear to be an adequate index or measure
for the nation as a whole may conceal critical shortages in
certain geographic regions or republics, and these may lead to
increased ethnic frictions, affect the pattern of migration
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flows, and influence government allocation consumption and
investment funds.
d. Soviet-East European Relations
CIA has been paying insufficient attention to Eastern
Europe and CMEA relations. It has now become important for the
Agency to gain more of a CMEA perspective on a number of
issues--energy, trade, agriculture, and technology. There is
already a recognition of this problem by CIA with the
establishment of a new research effort on CMEA topics.
The organizational split between responsibility for the
Soviet Union (SOYA) and Eastern Europe (EURA) has created
conditions that may improve the quantity and quality of work on
Eastern Europe. But there are inevitable interface problems
which have to be attended to if a CMEA focus is to be
established and maintained.
e. Sources of Data
The Panel notes that in the last 4-5 years, the Soviets
have been withholding from publication an increasing amount of
important economic data and that Soviet authorities have
increased restrictions on the sending of printed matter from
the USSR. It is regrettable that, for procurement of Soviet
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data, the CIA relies on US Embassy personnel, libraries and
commercial outlets in the West and on occasional visits to the
USSR by US scholars and exchange students. It would be
desirable for CIA to explore the possibilities of alternative
sources of supply of Soviet data and/or of expanding and
strengthening existing channels for a systematic retrieval of
Soviet data.
f. CIA-Academia Relations
The Panel believes that the expansion of relations between
CIA and the academic world is important for maintaining and
increasing the quality of CIA work. CIA analysts on the Soviet
Union do participate in professional conferences and do publish
articles in the triennial JEC volume on the Soviet economy and
sometimes in professional journals. And groups of outside
specialists are on occasion invited to the Agency for
discussions with CIA analysts. The Panel feels that these
contacts should be increased.
The Panel believes that it would also be useful for the CIA
to reinstate its policy of open publication of unclassified
reports that it suspended about a year and a half ago. The
Panel realizes that several CIA publications in the past
generated considerable controversy and public debate. It is
understandable that the Agency should wish to avoid being the
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target of public criticism, some of which is uninformed and
ill-willed. Staff members are too busy to respond to all or
even most of the critiques;. often security considerations
prevent a point-by-point rebuttal. However, some of the
criticism has also been helpful. It has stimulated
reconsideration of the analysis and the underlying evidence and
has sensitized managers and staff to key issues and new
developments. Because CIA is the only intelligence community
organization with significant competence in Soviet economic
affairs, and is thus by far the dominant source on this subject
within the government, it is particularly important that the
Agency's intelligence product should be submitted, insofar as
security considerations permit, to the test of external
scrutiny in the general community of Soviet specialists.
Conference attendance and'open publications have a direct
bearing on raising the quality of CIA's output. These
activities are also critical measures of professional
self-identification, and are therefore significant in
recruiting and retaining quality staff. With the experience it
has just had of reviewing the broad scope of recent CIA work on
the Soviet economy, the Panel believes that greater
intellectual outreach, interaction and even competition with
the outside professional community are important for the
improvement of the Agency's analytical product.
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Appendix A
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Appendix B
INDEPENDENT REVIEW AND
ANALYSIS OF SOVIET ECONOMIC PROSPECTS:
Statement of Mission and Objectives
January 25, 1983
I. OBJECTIVE: An independent review and analysis of U.S.
intelligence findings on Soviet economic capabilities,
problems and prospects.
II. ORGANIZATION: The PFIAB has requested that the Department
of Commerce undertake this study. To accomplish the
review, two groups are formed:
o Commerce Steering Group
o Working Panel
III.COMMERCE STEERING GROUP
Task: To provide a written charter which both establishes
the Working Panel general objectives and specifies certain
key issues to be included in the review; to review the work
of the panel in order to assure its relevance and
consistency with the objectives of the project.
Composition: The Steering Group will be composed primarily
of Commerce Department officials. Interagency
representation is not an objective; however, persons from
outside the Department or outside the Executive Branch as
required may be selected to ensure a full range of Steering
Group expertise.
IV. WORKING PANEL
Task: The basic tasks of the Working Panel are: (1) to
assess the validity of the intelligence community's
findings, interpretations and conclusions derived from its
forecasts of the Soviet economy; (2) to evaluate
methodological approaches and underlying assumptions used
by the intelligence community in the calculation of Soviet
GNP economic growth rates, and other key economic indices
of Soviet economic performance; and (3) to examine the
clarity with which these forecasts, interpretations, and
conclusions are presented to policy-makers.
The tasks will neither require original research nor
include the development of foreign policy options. The
final report of the Working Panel will be presented as a
consensus document.
The portion of the task assessing the validity of the
intelligence community's findings and conclusions on the
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Soviet economy--reflecting analyses developed over an
extended time period--will include the following:
o an evaluation of the consistency of interpretative findings
and conclusions with the available data an relevant
qualitative assessments;
o. the presentation of an alternative assessment(s), if any,
of Soviet economic prospects with an evaluation of the
confidence attached to this assessment(s).
The portion of the task relating to methodological issues will
include the following:
o the review of major intelligence economic analyses of
Soviet growth prospects, with special emphasis on
methodological approaches and the underlying assumptions
used to calculate Soviet GNP, economic growth rates, and
other key economic indices;
o an appraisal of the validity of these approaches and
assumptions, and the degree of confidence which can be
attributed to the results produced
o the sensitivity of Soviet economic forecasts to changes in
major underlying assumptions;
o the identification of specific omissions/weaknesses in
existing methodologies and assumptions, with suggestions
for new directions or analytical approaches where
applicable.
Finally, the task dealing with the examination of the clarity
of presentation will include:
o review the techniques and means by which policy makers are
given a sense of the degree of confidence that can be
attributed to forecasts;
o to the extent practical, review the techniques and methods
for communication of analytical findings and determine
whether the general perceptions conveyed by written reports
are those intended.
Composition: A small group of individuals recognized for
competence in analysis of the Soviet economy and international
affairs; one of the group to act as chairman, tasked with
organizing and directing group efforts and producing a final
report, responsibilities demanding a major portion of his time
over the life of the project.
V. CONDUCT OF THE REVIEW
Timing (Revised): the report is to be submitted to the
President's Foreign Intelligence Advisory Board (PFIAB) by
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July 1, 1983. Interim steps leading to completion of the
report would include the following:
Steering Group-Working Panel's
discussion of conduct of the
review and the specific .
questions for CIA response and
Working Panel's analysis
Working Panel's meetings
as required
Mid-term Steering Group-
Working Panel review of
progress and problems
encountered, if any
Preparation of draft report
Steering Group-Working
Panel's review/discussion
of the draft report to allow
Steering Group requests for
clarification, amplification,
etc. (The Steering Group
may be expanded for purposes
of this review, to include
other government experts.)
Submission of final report
to PFIAB
Steering Group-Working Panel Relationships: The Working Panel
is responsible for the organization and conduct of the review
leading to submission of the report requested by the PFIAB.
The function of the Steering Group is to set the directions of
the review, monitor progress, provide the Working Panel
necessary support and ensure that the report is consistent with
the objectives of the charter.
To facilitate timely completion of the report, efficient use of
the Working Panel's time, and to provide focus for its efforts,
a set of questions dealing with issues to be examined by the
working panel will be prepared. These questions will be
forwarded by the Steering Group to the CIA for their responses.
Upon completion, the CIA responses will be provided to the
Working Panel for their review according to the guidelines in
this charter.
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Jan. Feb. Mar. April May June July
X X X X X X
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The Working Panel may range beyond the specific questions
transmitted to the CIA, identifying and examining other issues
not adequately treated in existing research or analyses.
Logistical Support
The Department of Commerce will provide necessary analytical,
administrative, logistic, and data support to the Steering and
Working Panel groups; the number and composition of personnel
will depend on the demands of the groups, but will include an
Executive Secretary responsible for liaison with and providing
Departmental support to both groups.
Role of the Executive Secretary: The Commerce Department
provided Executive Secretary will work closely with the Working
Panel to facilitate efficient, timely completion of its work.
The Chairman of the Working Panel may, at his discretion, task
the Executive Secretary with:
o drawing on internal DOC expertise on the Soviet
economy;
o arranging meeting dates and places, notifying Panel
members, preparation of agenda, etc.;
o providing secretarial services for preparation of
minutes of meetings, draft and final reports, etc.;
0 providing specific data and/or analyses that may be
required;
o providing day to day liaison with the Steering
Group, the CIA, other government agencies, etc.;
o formulation, drafting, review, or editing of
administrative or substantive papers relating to the
Panel's work or segments of its report; and
o other appropriate administrative, logistical, data
collection and liaison functions relevant to the
Panel's mission.
0
Confidentiality: The existence of the Working Panel, its
mission and deliberations, content of the report, and all
associated matters are to be treated by all participants as
classified information and are not to be revealed to
unauthorized persons.
Working Panel Report: The final report should be a synthesis
document highlighting key conclusions and recommendations,
suitable for high level executive reading.
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Appendix C
CD
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Appendix D
A Study of Tone of Communication
in the
Annual CIA Statements
to the
Joint Economic Committee
1977-1982
1. Introduction.
Among the items read by the Panel were the annual Agency
statements to the Congress, generally titled, "Allocation of
Resources in the Soviet Union and China." These documents,
presented from 1977 through 1980 by Stansfield Turner and in
1981 and 1982 by Henry Rowen, summarize the conclusions of the
CIA about the performance of the Soviet economy. They thus
appear to represent a fair statement of Agency conclusions on
the Soviet economy across time.
By and large, the reports from 1977 through 1981 left the
impression on most members of the Panel that the Agency
perceived the Soviet economy as in a "state of crisis', while
the 1982 report, with its much greater emphasis on the
strengths of the economy, suggested a Soviet economy in
trouble, but with considerable capacity for adjusting to
difficulties and somehow "muddling through." At the same time,
it is worth noting that CIA's quantitative forecasts of Soviet
economic growth were lower in 1982 than in 1977.
To provide the Panel with a systematic basis for examining
these changing Agency interpretations, the present study was.
undertaken. Its objective is to analyze, systematically, the
tone of CIA judgments on key issues in the Soviet economy
across time. To accomplish this, a combination of quantitative
and qualitative textual analysis is employed. The quantitative
aspect of the analysis is limited to the identification and
recording, via special computer program, of the text of all
statements about the key issues under study. This process
makes possible systematic comparison and evaluation of Agency
judgments while avoiding the biased selectivity that often
accompanies qualitative analysis.. Qualitative comparisons are
then made regarding two matters,of interpretation: (a) the
degree of severity of the problem under study; and (b)
prospects for either dealing with or overcoming the problem..
Agency judgments are examined respecting the following four
issues (as identified by the occurrence in the texts of the
indicators noted in parentheses): Performance of the economy
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(GNP, economic growth, economic performance), Consumption
(consumption), Energy production and conservation (energy,
conservation), and Dependence on the West (trade, import).
2. Performance of the Economy
The 1977 Agency report contained only two judgmental
statements about the current levels of Sovet economic
performance. The first noted that "things have not been going
well for the Soviet economy recently," while the second
observed that "GNP has been trending downward." While these
appear to be temperate judgments consistent with the data
presented, from the text it is not clear that what is "trending
downward" is not GNP but the growth rate of GNP.
Judgments made in the 1977 report about future prospects
for economic performance stress the expectation of continuing
slowdowns in economic growth through the mid-1980s. The major
source of the economic slowdown is seen as the anticipated
"sharp slowdown in energy production." While noting that
"forecasts for Soviet economic growth must take account of the
uncertainty in the future trends and the policy options
available to the Soviets," the report, in its projections,
conveys an impression of substantial pessimism, based upon a
sense of severely limited Soviet options. The following
statements are typical.
"Soviet energy consumption has closely paralleled the
growth of the economy, as a result, a sharp slowdown in energy
production threatens to constrain economic growth unless Moscow
succeeds in conserving massive amounts of energy and/or allows
a major turnaround from a net export to a net import position
on energy trade."
"Even a combination of measures to sustain investment
coupled with measures to obtain additional manpower would
probably raise economic growth only slightly.w
'Let me emphasize that these are average figures:
performance in some years could be better, but also worse, with
zero growth or even absolute declines in GNP a real possibility
if oil shortage and a bad crop year coincide."
Energy output continued to be perceived in the 1979 report
as the key factor in reduced growth, accounting for at least
one percentage point of the projected decline; and the decline
in the rate of growth in the 1980, was seen as inevitable.
The 1980 Agency report evaluated the Soviet economic
outlook as "grim," and the economic reforms thus far adopted as
having "no appreciable effect." Moreover, it suggested that a
"signi-ficant boost in economic growth cannot be achieved
without major structural reforms," implying an almost complete
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lack of options within the framework of the present Soviet
system. Beyond these assertions, however, most of the
judgments in this report focused on current trends in the
economy. Each of the relevant statements was limited to simple
description, containing little evaluative content. The
following are illustrative examples: -
"...economic growth declined (in 1979) to its lowest rate
since World War II."
"The decline in GNP growth...has been the result of a sharp
reduction in the efficiency with which these inputs have been
employed."
The 1981 Agency report characterizes the Soviet economy as
in the "doldrums," and "worse than we anticipated." Economic
growth is described, once again, as "at its lowest level since
World War II." In contrast to previous years' projections,
however, the 1981 report suggests at least the possibility of
some rebounding of economic growth, though it forecasts that
"even with a return to more normal harvests, we expect problems
in industry and other sectors of the economy will cause GNP
growth to fall to about 1.5-2 percent per year by the
mid-1980s.' Rather than energy being cited as the key variable
in an economic slump or upturn, now the focus is on the Soviet
harvest:
"It should be stressed that these figures are just
averages. In poor harvest years, GNP could actually decline,
while in bumper crop years growth could be as high as 3-4
percent."
While the 1981 report adopts a generally negative tone on
the issue of economic performance, and continues to see
improvement as unlikely, it nevertheless lacks the dogmatic
sense of the "inevitability" of continuing decline of the 1979
report.
The 1982 Rowen report is distinguished from each of the-
earlier reports examined not by differences of fact, or even of
assessment of problems the Soviet economy faces in sustaining
economic growth. Rather, this report differs from its
predecessors in its deliberate use of comparative analyses to
provide a more balanced basis for drawing inferences about the
meaning of figures cited. Moreover, the report, for the first
time, is explicit in setting limits to the implications that
should be drawn from its findings.
The pattern of slowdown in economic growth predicted in the
early reports and observed in later ones is reported again in
the 1982 study, in words almost identical to those used
earlier: 'The average annual rate of increase in GNP was about
6 percent during the 1950s, 5 percent during the 1960s, and
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nearly 4 percent between 1970 and 1978. In 1979-1981, yearly
growth averaged less than 2 percent. This year we expect GNP
growth to be about 1.5 percent."
The essentials of the analysis of why Soviet GNP has slowed
remain the same as in earlier reports: "The slowdown partly
reflects declining increments to the supply of labor and the
stock of capital and sharply increased costs in producing and
transporting vital energy and raw materials. But it also stems
from the inability of the system to offset these constraints by
bringing about substantial increases in efficiency and
productivity."
(0
Rather than the "severe," if largely unspecified
difficulties for the Soviet economic and political systems
implied by earlier reports, the 1982 study limits its
projections of consequences to the prediction of "much harder
choices for the leadership in allocating resources to
consumption, investment, and defense."
Some comparative context is provided by noting that, "to a
remarkable degree, the slowdown in Soviet economic growth has a
parallel in OECD countries.' Further comparative balance is
-provided by the observation that, "Soviet GNP in 1982 will
equal about $1.6 trillion, roughly 55 percent of US GNP this
year. Per capita GNP is almost $6,000." A similar sense of
comparative perspective is offered when the report notes that
'Western observers have tended to describe Soviet economic
performance as 'poor' or 'deteriorating' at a time when Soviet
defense spending continues to rise, overall Soviet gross
national product in real terms continues to increase, and
Soviet GNP is second in size only to that of the US." These
statements mark the first time in these reports that Soviet
economic performance, with the exception of defense spending,
is compared with that of other nations.
To leave no doubt in the reader's mind regarding the basic
resiliency of the economy, the study affirms that "in fact, we
do not consider an economic 'collapse'--a sudden and maintained
decline in GNP--even a remote possibility." "Indeed, we expect
GNP to continue to grow, although slowly." The fact that the
economy has performed "poorly" in comparison with its own past
record of growth, the 1982 report asserts, 'does not mean that
the Soviet economy is losing its viability as well as its
dynamism."
3. Consumer Welfare
The 1977 through 1981 Agency reports are unvarying in their
conclusion that 'the reduced growth potential means that the
Soviet consumer will fare poorly during the next 5 to 10 yea.-:s
relative to his gains since the current leadership came to
power."(1977) Similarly, each of the reports duly notes the
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difficult trade-offs between investment, defense and
consumption, trade-offs made only more difficult by the
perceived requirement that consumption levels improve if labor
productivity is to rise. Even the 1977 report, which tends to
have the most negative tone overall, expresses the belief that
"consumer pressures will remain manageable."
Looking at possible policy options a successor leadership
might face in the 1980s, the 1980 report proposes as one,
"imposed austerity," under which "consumption would suffer and
the draconian measures of the past might be needed to keep the
labor force working." Alternately, a new regime might favor
consumption over defense. Without choosing between these
alternatives, the 1980 study makes clear that for the short
term the Agency expects "the rise in living standards in the
USSR will come to a halt." The tone of all the analysis
regarding consumer welfare in the 1977 through 1981 reports is
one that emphasizes anticipated declines in consumer
well-being, and the likelihood that regime policies, rather
than alleviating the consumer condition, will lead to its
worsening.
After noting once again that "per capita consumption could
level off or even fall slightly," the 1982 report observes:
"It appears that consumer interests are now being treated
somewhat less cavalierly." The evidence is that "breaking
precedent," the 11th five-year plan calls for capital
.investment to grow more slowly than consumption. Such a
change, in sharp contrast to the tone of previous reports'
assumptions about the priority of the consumer in Soviet
planning, it is suggested, "probably also stems from a
political decision to protect Soviet consumers in a time of
tightened economic constraints."
4. Energy and Energy Conservation
Energy, together with manpower, productivity, and
agriculture, has been seen by the Agency as among the most
significant factors accounting for the observed and predicted
future slowdown in Soviet economic growth. Reflecting this
view, energy as an issue received more attention in the annual
statements (85 mentions), than any other question examined
here. In spite of differences in details, the tone of Agency
reports from 1977 through 1981.remained largely negative,
focusing especially on the projected fall in oil production and
its anticipated consequences...,In 1982, however, with the
analysis of the oil problem more flexible in setting dates for
the onset of the oil decline, the tone of the Agency report
changed dramatically in its assessment of energy production
overall as a "plus" for,the Soviet economy.
The essential Agency assessment of the Soviet energy
problem is summarized in this 1977 statement:
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"Because of the continuing fall in oil production and even
if the development of other energy resources--especially gas
and coal--is pushed to the maximum, we expect a sharp slowdown
in the rate of growth of total energy output."
The 1980 report, if anything, adopts a dimmer view on
Soviet energy prospects. Asserting that the "worst problem'
the Soviets' face is 'energy,' the report proposes that "a
sharply declining energy growth will be the biggest new
constraint on economic growth.' in elaboration, the report
projects a drop from a past 5 percent energy growth rate to 1
percent by 1985, "even if Moscow sharply raises the amount of
investment in this sector--as seems likely." One consequence
of this anticipated decline, 'as energy production falters," is
seen as "first a rapid fall, and then the disappearance of oil
exports." Even Soviet gas exports, the report argues, "will
not be enough to prevent the USSR's present surplus in energy
trade from turning into a deficit."
The 1981 report once again affirms the Agency's belief in
the essential validity of its 1977 projections: 'our forecast
in 1977, that Soviet oil production would peak no later than
the early 1980s and then go into decline, remains essentially
valid." In contrast to earlier reports, however, this one does
give somewhat greater consideration to prospects that increases
in gas and nuclear power may offset losses in oil production.
For example, the statement notes, "with roughly one-third of
known world gas reserves, gas output will contribute roughly 90
percent of the net increase in Soviet primary energy production
during the 1980s." The report concludes, however, "despite the
rosy outlook for gas output, the domestic economy will still be
hard hit by the decline in total energy growth..." Considering
the role of energy exports, the 1981 study suggests principally
that "Moscow can cushion the effects of declining oil
production and increasing demand for the next few years by
cutting exports to the West, but the Soviets will have to
choose between the need to export energy to pay for high
priority imports and the direct requirements for energy in
their domestic economy.'
In contrast to these sharply negative interpretations and
projections, the 1982 report shows that "overall, energy
production might be considered a plus." The report goes on to
note that production of all'-Aiajor forms of energy rose in
1982. Although the evidence on natural gas production and
reserves seems to have changed,only slightly (in 1981 Soviet
gas reserves were reported as-1/3rd of world proved reserves,
while in 1982 this figure was increased to 40%), the tone of
statements, especially regarding gas's role as a substitute for
oil, became more optimistic:
'Natural gas has been a major Soviet success story. It
will play a pivotal role in meeting the energy needs of the
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economy in the 1980s, particularly as a substitute for crude
oil in industry and in home use but also as a potential hard
currency earner."
The CIA reports identify four approaches the Soviets seem
to be pursuing or might adopt to deal with their energy
problem: (a) increase production of primary energy; (b)
alter the energy balance; (c) modify the structure of exports;
and (d) undertake extensive conservation measures. We will
focus here on CIA's view of Soviet prospects for energy
conservation. Cverall, the Agency reports pay very little
attention to prospects for energy conservation.
The 1977 report confines itself to a simple mention of the
importance to Moscow of "conserving massive amounts of energy,"
while abjuring any judgment about the likelihood of success.
The 1979 report notes that "some gains in energy conservation
were achieved last year," but stresses the difficulty of
achieving substantial savings. The 1980 report does not
discuss the problem of conservation. The 1981 study addresses
the issue in considerable detail, and concludes that "they will
achieve only minimal success in conservation by the
mid-1980s." The 1982 study does not cover the issue of energy
conservation.
5. Imports: Capacity and Dependence.
The annual reports have varied in their attention to the
issue of Soviet trade. In the 1977 report, the issue was
referenced 8 times, but only 2 and 5 times respectively in the
1979 and 1980 studies. In contrast, the 1981 and 1982 reports
each made 18 references to the issue. Each of the reports
looked at the question of Soviet hard currency import
capacity. Most of the attention in 1977 and 1979 was focused
on the impact of the anticipated oil shortage on import
capacity, particularly the anticipated trade-offs between hard
currency imports and supplying Eastern Europe's energy needs,
while the later reports gave more attention to grain and other
Soviet imports.
The question of Soviet-dependence on imports from the West
is addressed only in the 1981 and 1982 reports.
The tone of reporting on Soviet import capacity mixes
praise of actual Soviet trade accomplishments with warnings
about anticipated future difficulties in sustaining the current
level of trade. The 1977 report, showing the influence of
CIA's oil output forecast, is the most negative regarding
expected problems. It makes no positive assessments or
statements respecting Soviet import capacity. Its tone is
overwhelmingly gloomy:
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"The oil problem could have disastrous effects on the
USSR's ability to import from the West.*
'Most importantly, a looming oil shortage-may create
bottlenecks and will almost certainly force curtailment of
critical imports from hard-currency countries."
The 1977 study suggests that the Soviet oil crisis will
create "added incentive to establish strong political influence
on oil-producing states to secure oil imports on favorable
terms." The report does note, however, that "achieving this
objective will be very difficult.' .
In contrast, the 1979 report finds the USSR's ability in
the previous several years to continue to make large hard
currency outlays for grain to support its livestock program
'The one area in which the Soviets have achieved a major
success.' At the same time, this study argues that, if Agency
oil projections are correct and if Moscow "continues present
policies," the USSR "will be hard pressed to even maintain
their hard currency import capacity."
The tone of the 1980 report is almost identical to that for
1979. The USSR's "trade and payments situation' is described
as "a bright spot in the Soviet economy." At the same time,
the study repeats its prediction that by the late 1980s, even
"the additional hard currency generated by using gas exports
will not be enough to prevent the USSR's present surplus in
energy trade from turning into a deficit."
In the 1981 report, improvements in Soviet import capacity
are described as "large windfall gains," rather than as a
"bright spot." Instead of emphasizing the improvement in
Moscow's financial position, as in the 1980 report, the 1981
study argues that the "favorable shift in the terms of trade"
has enabled the USSR to "turn to the foreign trade sector for
relief from its domestic problems." Looking at future import'
capacity, the report observes that "we expect Moscow to close
out.1981 with a current account surplus, albeit one much
reduced from the 1980 level." Moscow's trade position is
described as having "taken a turn for the worse, and future
deterioration may be in the offing.' The report states that
"if the trade trends evident since 1979 continue, the USSR
could experience a decline in its hard currency exports before
the mid-1980s."
The 1982 report adopts a more cautious, balanced tone on
this issue, as on most others. Rather than specific
expectations of "declines" in hard currency earnings, the study
suggests that "primarily because of the softening of energy
prices, Soviet terms of trade vis-a-vis the West will be less
favorable in the 1980s than they were in the 1970s.'
Respecting current import capacity, the report notes a
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"substantial improvement in the current hard currency balance
of trade." This positive assessment is based not on an
expected Soviet hard currency trade surplus in 1982, but on the
expected reduction by 50% of the hard currency trade deficit
compared with the previous year.
The 1981 report contains only one reference to the issue of
Soviet dependence on imports from the West: "Without
agricultural imports the Soviet diet would have deteriorated."
the importance of Soviet imports of steel and machinery is
noted in this and earlier reports, but only in general terms,
with no attempt to deal with the "dependence" aspect of the
problem.
The tone of the 1982 report balances observations of the
"importance" and even "critical" role of some Soviet imports
with assertions of the essential "viability" of the economy in
the absence of such imports. The most important change in
tone, hwoever, arises from an effort to examine the benefits,
or advantages of trade to the Soviet economy, as well as the
costs of trade. This new tone is evidenced in the following
statements from the 1982 study:
"Imports, particularly from the West, can play an important
role in relieving critical shortages, spurring technological
progress, and generally improving Soviet economic performance."
"Imports from the West have become critical to the Soviets
efforts to improve, or simply maintain, the quality of the
Soviet diet."
"The Soviets now must rely on western imports of capital
and technology to increase or maintain production of some of
the raw materials in which they are abundantly endowed and
self-sufficient."
These statements are placed into a larger perspective with
the observation that "the ability of the Soviet economy to
remain viable in the absence of imports is much greater than
that of most, possibly all, industrialized countries."
6. Conclusions.
This study has sought to document the considerable
variations in tone across a series of annual Agency reports.
The essential pattern is one of emphasis on substantial
anticipated difficulties in the 1977 through 1981 reports. The
1982 study, in contrast, creates a very different impression
through the way in which evident problems are placed in a
fuller, comparative context.
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Appendix E
A NOTE ON THE ACCURACY OF
GNP DATA NEEDED FOR DECISION-MAKING
0
Although it is impossible to establish general rules for
margins of error in macroeconomic data that can be tolerated in
decision-making, it is possible to offer some background that
may provide perspective.
In the United States, national income and product
statistics consist of a series of successive approximations
based on increasingly complete and reliable information.
Unofficial current quarterly estimates, seasonally adjusted,
are prepared 15 days before the end of each quarter and
official estimates 15, 45, and 75 days after the end of the
quarter. Annual estimates for each year (besides those
obtained at the end of the year as the sum of quarterly
estimates), are published in each of the three or four following
Julys, and result in further revisions of quarterly series.
About every five years a benchmark revision--stemming mainly
from information that becomes available infrequently or with a
long lag--is introduced, and this again changes the annual and
quarterly numbers. Minor changes occur even later. GNP
estimates are constructed both as the sum of expenditures for
final products and as the sum of national income and other
charges against GNP. These estimates serve to check one
another as well as to provide different information. Insofar
as they cannot be reconciled, differences appear as the
statistical discrepancy in the national accounts.
Final data are considered accurate but the error in them
(as in other statistics) cannot be actually measured. The
revision record can, however, be studied; it does, to a certain
extent, provide an indication of the error in GNP data used by
US policymakers. In the 1964-69 period the average revision in
the quarterly rates of growth, expressed at annual rates, from
the first (+15 day.) official estimate to the third July
revision was 1.0 percentage point for current-dollar GNP and
1.4 percentage points for real (constant-dollar) GNP.
One-tenth of the time the revision lowered the growth in the
current-dollar GNP by 2.1 percentage points or more, or raised
it by 2.3 percentage points or more; corresponding figures for
constant-dollar GNP were 2.0 and 2.9 percentate points.(l)
How often did the seemingly large errors in preliminary
estimates affect appraisals of the economic situation on which
(1) Note that, as in Commerce Department press releases, these
percentages refer to changes expressed at annual rates, which
are four times as big as revisions in actual changes in GNP
from quarter to quarter.
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policymakers relied? The Advisory Committee on Gross National
Product Data Improvement, reporting in 1977, found that "In the
three decades (120 quarters) following the end of World War II,
major revisions affecting appraisal of the overall state of the
economy have occurred on seven occasions."2 Three of the
errors were initial overstatements of the declines in GNP shown
by one or both of the GNP measures in the recessions of
1984-49, 1953-54, and 1957-58. Fourth, the strength of
expansion in 1965 was initially understated. Fifth, the impact
of recession on corporate profits in 1969-70 was understated.
Sixth, the initial estimates for the first three quarters of
1971 overstated the buoyancy of the recovery from the 1969-70
recession. Seventh, initial estimates understated the buildup
of nonfarm inventories in the winter of 1973-74 and understated
farm income and increases in farm inventories all during 1973.
The principal error disclosed by revisions since the committee
report was issued consisted of understatement of private saving
and investment, and of corporate profits, beginning in 1973;
this error was eliminated only in the December 1980 benchmark
revision and the July 1982 revision.
All seven of the revisions that the committee viewed as
affecting appraisal of the overall state of the economy refer
to expansions and corrections over the course of the business
cycle, fluctuations in either total GNP or its cyclically
sensitive components. Accurate knowledge of current cyclical
movements in the domestic economy is important for governmental
formulation of stabilization policy and for business
decision-making. Knowledge of similar movements in most other
major countries is of interest because these movements may
affect our foreign trade and investment. However, we have no
similar need for current short-term macro information about the
Soviet economy. The USSR does not display short-term demand
related expansions and contractions such as are typical in the
West, and the US would have no responsibility for its
stabilization policy even if it did. Our trade and investment
with the USSR have been too small to affect economic
fluctuations in our own economy. Agriculture is the exception
to this statement, and farm production is subject to_large
irregular movements; however, less-than-annual data can be
constructed for farm production only by convention. The United
States does not need, and CIA does not provide, quarterly GNP
estimates for the USSR. Even annual data are needed (except
for agriculture) mainly to keep analyses of longer term trends
up to date.
Gross National Product Data Improvement Project Report.
Report of the Advisory Committee on Gross National Product Data
Improvement, October 1977. Issued by the Office of Federal
Statistics Policy and Standards, U.S. Department of Commerce.
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Of the important revisions in the united States estimates
since World War II, only that of saving and investment after
1972 was of possible: importance for analysis of longer term
developments in the economy, or in economic policy other than
stabilization policy.
The margin of possible error in the CIA's annual series for
the USSR is unknown, but undoubtedly it is larger than that in
the annual GNP series for the United States. However, it is
likely to be less than the revisions in the first estimates of
quarterly rates of growth (at annual rates) in the USA, and
thus may not distort general appraisals of Soviet economic
performance.
Another approach to the issue is presented in the following
table, which compares growth rates of output per employed
person in seven major countries. The USSR is shown to have
raised this measure of economic performance much less than
Growth Rates of Gross Domestic Product per Employed
Person, Selected Countries and Periods
Subperiods
0
(1)
1948-81
(2)
1948-73
(3)
1973-81
(4)
Decrease
((2)-(3))
Japan
6.3
7.6
2.9
-4.7
Germany
4.5
5.2
2.5
-2.7
France
4.1
4.7
2.4
-2.3
USSR
2.8
3.3
1.4
-1.9
United Kingdom
2.2
2.5
1.3
-1.2
Canada
1.9
2.6
0.1
-2.5
United States
1.6
2.1
0.2
-1.9
Source: All except USSR from U.S. Department of Labor,
Bureau of Labor Statistics, Bulletin 2172, p. 69. USSR
based on CIA and Bureau of the Census estimates. Output is
labeled gross national product but method of estimate, is
more appropriate for gross domestic product. USSR
estimates for 1981 are approximate.
0
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Japan, Germany, or France but more than the United Kingdom,
Canada, or the united States. The table also shows that all of
the countries experienced very large drops in their growth
rates after 1973.
To alter this assessment of comparative Soviet growth,
large changes in the CIA estimates for the USSR would be
required. For example,.the 1950-81 Soviet growth rate would
have to be raised 48 percent to bring it up to the next-highest
of these countries, or lowered 23 percent to bring it down to
the next-lowest.
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SUBTOPIC EVALUATIONS
AND RECOMMENDATIONS
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v va.s a &afl a i s-aa+
Ili
I. National Accounting
1. Introduction
By national accounting we mean measurement of economic
activity of the economy as a whole and of its major component
elements. This activity is conceptualized as a set of annual
flows in a GNP model of the economy.
We view the boundary between the purview of this
subcommittee and that of others, particularly "growth", as
defined by the difference between the problems of measurement
and those of interpretation of the results. The line is not
neat, but it is probably serviceable for present purposes.
Any intelligence organization concerned with the economic
health, progress, and prospects of a foreign state will need to
be concerned with national accounting indicators for that
state. The national accounts provide a general prism for
examination of economic activity. Given the policymaker's
concern with Soviet military economics and foreign trade
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behavior, given his interest in the effect of economic progress
or stagnation on Soviet internal stability and external
expansion, the U.S. intelligence community must be able to
provide comprehensive and reasonably up-to-date measures of
Soviet economic activity set in the framework of national
accounting. For the past few decades, the CIA has been the
only organization in the intelligence community with the
experience, knowledge and human skills required to perform the
task. It is unlikely that any other element of the community
will be able to supplant the Agency in this area in the
indefinite future.
2. Methodology
a. National Accounts in a Given Year
The subcommittee has not examined CIA's most recent report,
Soviet Gross National Product in Current Prices, 1960-80.
Therefore, our observations concern only the current price
accounts for 1970, previously published.
The CIA GNP accounts at current prices represent a
continuation and particular refinement of the accounting and
valuation framework first developed by Abram Bergson. As such,
they seem entirely appropriate to the requirements.
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Subtopic Evaluations and Recommendations (cont.)
The CIA accounts are centered on the estimation of GNP. It
would be useful, in addition, to have measures of Net National
Product and National Income. Moreover, there is much to be
said for calculating Net Material Product. This would permit
direct comparison with Soviet official statistics. The series
is also of interest because it measures output by the
definition that the Soviets themselves use to appraise their
performance.
At established prices, a key problem for Western estimation
of Soviet national accounts concerns the role of the second
economy. Clearly, some elements of second economy activity are
already accounted in the CIA studies; other elements should not
be (e.g., income from activities universally declared illegal,
such as murder-for-hire). The most interesting questions
concern activities that are legal by most Western standards,
but are illegal in the USSR. The national income implications
of the study of the second economy were debated a few years
ago. It is probably desirable to reconsider that question in
the light of the increasing flow of information on and
quantitative measures of the second economy.
SOVA's factor cost adjustments. of flows at current
established prices represent a substantial improvement over the
estimates by Abram Bergson and Abraham Becker (or by most other
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Subtopic Evaluations and Recommendations (cont.)
western scholars), inasmuch as they use the 1972 input-output
table to calculate the adjusted flows.
The subcommittee suggested to SOVA analysts that it may be
timely to consider conceptual and empirical development of a
valuation system additional to adjusted factor cost, namely,
market prices. The question is raised by consideration of the
significance of second-economy phenomena in the USSR and the
evidence of market prices developed in Western studies of the
second economy which would serve as the empirical basis for
estimation. In view of the limited resources available in SOVA
for research on Soviet national accounts, the Agency might wish
to consider using external contracts.
b. Growth Indexes
CIA estimates GNP growth from the sector-of-origin side by
extrapolating sector value added in the base year by indexes of
production. The Agency recognizes that this is not the usual
method but justifies its procedure on the grounds that the
methods of deflation are not practicable for the USSR because
of lack of information. The 1982 JEC study, USSR: Measures of
Economic Growth and Development, 1950-80 provides a
considerable discussion of the conceptual differences and
implications. It has been suggested to SOVA analysts that they
explore an alternative approach, modified commodity flow, which
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Subtopic Evaluations and Recommendations (cont.)
consolidates the stages of fabrication of manufactured goods
and thus provides a more appropriate weighting system.
The CIA time series are intended to approximate measures of
production potential. A closely related complementary concept
would be command over goods and services resulting from current
production. This would require deflation of net exports by
import prices, as opposed to subtracting imports deflated by
import prices from exports deflated by export prices. It would
be useful to determine whether this measure can be implemented
empirically.
c. International Comparisons
The methodology is similar to that of the International
Comparison Project headed by Irving Kravis and is, thus, state
of the art. The issues of national accounting methodology both
at a point in time and over a time interval that were raised
above also apply here.
3. Empirical Estimation Problems
a. National Accounts in 1970
Given the limitations of information from Soviet sources,
which have become more troublesome since the mid-1970s, it is
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Subtopic Evaluations and Recommendations (cont.)
not surprising that there are a number of gaps and
uncertainties in the estimates. Among the most important murky
areas are changes in the cash hoards, accounting treatment of
prison labor, the treatment of operating subsidies by
unprofitable enterprises, the reconcilability of independent
CIA estimates of Soviet defense spending with the GNP accounts,
and the accounting treatment of foreign transactions.
Subsidies to agriculture have become more varigated as well
as larger in recent years. It is not clear that the CIA
estimates fully account for the subsidization of agricultural
inputs--machinery, fuel, electric power, and fertilizer.
CIA has discussed in detail the reconciliation of its
estimate of defense spending with that of GNP in only one paper
(USSR: Toward a Reconciliation of Marxist and Western Measures
of National Income, October 1978). This reconciliation is
somewhat outdated now and moreover does not deal with the
so-called "broad" definition of defense, designed to
approximate Soviet perceptions more closely, which would
include such components as outlays on construction troops and
civilian space R & D. The CIA should undertake an up-dated
reconciliation.
The Agency should also reconsider the possibility of
breaking out inventory investment from its public sector
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Subtopic Evaluations and Recommendations (cont.)
residual. This is an important magnitude and, therefore, some
effort to overcome information gaps would be worthwhile.
b. Growth Indexes
As the Agency acknowledges, the effect of estimating time
series of value added by extrapolation on the basis of quantity
indexes may be to understate growth due to quality change and
sample representativeness. There are possibilities for a
countervailing bias due to the use of selected gross value of
output data for several machinery subbranches. It has been
suggested in a Department of Commerce study (Boretsky, et al.)
that application of the CIA procedures to the national accounts
of both the FRG and the US produces growth rates below those
calculated by the statistical agencies of those two countries
with the standard methods of deflation. The Panel does not
endorse this study, but believes it should be carefully
reviewed by the CIA.
e-;
The CIA notes that the end-use residual (GNP less the sum
of deflated consumption plus investment) behaves peculiarly
after 1978. This may be due to overestimation of the growth of
consumption or investment (as an alternative to the conclusion
that GNP growth has been underestimated). It would be
advisable to restudy the problem and the possibilities of
deflating new fixed investment, now largely taken from Soviet
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Subtopic Evaluations and Recommendations (cont.)
statistics, in view of the mounting evidence of the inflation
in Soviet investment prices. A particular issue here is the
treatment of imported machinery, whose prices may have risen
substantially during the second half of the 1970s.
If the current studies of the 1982 price reform are at all
fruitful, the Agency should attempt to develop price indexes
for at least major benchmark years to deflate end-use
components more systematically and then to develop deflators
for the sector-of-origin series.
c. International Comparisons
The Panel notes that CIA implied comparisons of the size of
US and USSR national output are more favorable to the USSR than
Soviet official calculations show. It has been argued that the
problem lies in understatement of the general qualitative
superiority of the American goods and services used in the
price comparisons. The CIA should examine this apparent
anomaly.
On the other hand, the Panel is impressed with the
state-of-the-art international price comparison methodology
used by the Agency in its international comparison of
consumption in the USSR. This involved extensive, detailed
quality comparisons of Soviet and US consumer goods, including
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Subtopic Evaluations and Recommendations (cont.)
the testing by US laboratories of almost 200 individual Soviet
consumer goods purchased for the CIA in the Soviet Union. The
Panel feels that when faced with a choice between evidence and
impressions, it must go along with evidence. Until sufficient,
equally thorough evidence is presented to counter the CIA
estimates, CIA's international comparison calculations of
consumption in the USSR should be accepted.
4. Communication
On the whole, the presentation of methodology, procedures,
and results in the published studies are models of clarity and
openness. These studies demonstrate the high technical
competence and sophistication of the SOVA analysts. Moreover,
the unclassified publication of most of these studies
represents a major contribution to the field of Soviet studies
and to the enlightment of the educated public on these
matters. CIA is to be highly commended for these open
publications and it is to be hoped that this policy will be
maintained in force. The profession and the public would be
severely deprived, it is fair to say, if this open publication
policy were changed. And the CIA in turn, would be deprived of
the valuable feedback from the users of its published data in
the scholarly community.
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Subtopic Evaluations and Recommendations (cont.)
Our only criticism of the presentations is that given the
multiple uncertainties and gaps in the underlying data, the
Agency's self-appraisal of the results conveys somewhat more
confidence in their reliability than is probably warranted. A
somewhat more agnostic attitude would not detract at all from
the overall evaluation of high professional quality at which
most readers of these studies are likely to arrive.
5. Conclusion
Because of the centrality of the national accounts
estimates to empirical work on the Soviet economy, we consider
it important to stress the great desirability of continuing
this work, adequately staffed and funded. We want to
underscore our concern that research and publication in this
area be maintained at its current high qualitative level.
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Subtopic Evaluations and Recommendations (cont.)
II. Growth Problems, Projections,
Organizational and Policy Change
The CIA has identified the principal sources of the growth
rate decline and has devoted full attention to the analysis of
those sources. Its growth forecasting record has been good and
its long-run econometric forecasting model SOVSIM approximates
the state of the art. It has closely monitored the ongoing
organizational and policy changes and has endeavored to assess
their success. It has identified the main policy options
facing the leadership and has sought to forecast the likely
choices among policy alternatives.
The Panel has a number of recommendations that may assist
the Agency in its work on these matters and enhance the quality
of the analysis.
1. The analysis of the growth rate decline would b
advanced if the relative importance of the contributing causes
could be assessed. In the absence of measures of relative
importance, the explanatory system appears to be
overdetermined; various subsets of causes seem sufficient to
explain the decline fully, without. reference to other causes.
We recommend the exploration of the method of growth accounting
for a more systematic quantitative analysis of the sources of
the growth decline. A growth accounting framework would also
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Subtopic Evaluations and Recommendations (cont.)
facilitate the comparison of the Soviet growth slowdown with
the similar slowdown in the Western industrial countries,
thereby enriching the analysis.
2. We have the impression that past long-run growth
forecasts have tended to be somewhat on the high side. An
analysis of the sources of the differences between past
forecasts and actual performance as measured by the CIA would
be helpful in improving the accuracy of future forecasts.
3. The SOVSIM model has served as a useful aid in
medium-term and long-term forecasting and in simulating the
effects of alternative assumptions and policies. Its
limitations are understood by the analysts and described in the
reports. We feel, however, that the results are presented with
greater confidence than is warranted. In particular, we note
the heavy emphasis on the energy-constraining mechanism, the
absence of behavioral content in the model, and the dependence
on assumptions about such significant exogenous variables as
technological change. The degree of confidence in the results
of the simulations, as communicated in the Agency reports,
strikes us as too high in light of the limitations of the
model. We recommend that the analysts devote more attention to
the assessment of the levels of confidence to be placed on the
results and to the communication. of the appropriate confidence
levels to the policymakers.
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Subtopic Evaluations and Recommendations (cont.)
4. 'SOVSIM should not be regarded as the sole forecasting
instrument but as an aid in the process of forecasting along
with less sophisticated- techniques, experience, and judgment.
At times, CIA has preferred to submit multiple scenarios to
policymakers rather than commit themselves to one specific
forecast. Economic forecasting is a difficult business and can
even at times become detrimental to solid analytical research.
However, the discipline imposed by forecasting does have
certain advantages. First, one cannot forecast without dealing
with behavioral issues. Analysts must argue over behavioral
specifications and resolve their differences by observation and
empirical tests where possible. Second, forecasting and
retrospective evaluation helps in the allocation of scarce
analytical resources. It identifies where past errors were
most serious and where current research should be
concentrated. Third, the presentation of multiple scenarios to
policymakers is often interpreted as an implicit forecast
anyway. Policymakers will apply their own probability weights
to alternative outcomes, and their assessment of likelihoods is
seldom as informed as those made by the analysts.
5. An important part of the Agency's work is the
forecasting of economic policies and structural reforms. We
have not found any extensive analysis by the CIA of the
probable effects of the policy and systemic changes that may be
entertained by the new leadership. It would be useful, for
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example, to consider the alternative forms that a
Hungarian-type reform might take in the USSR and the inferences
that can be drawn from the Hungarian experience about the
benefits and the problems that would ensue. The Agency has
addressed the question of whether a hard line or a soft.line is
more likely to be adopted, but the analysis is very brief and
.sketchy and not tightly argued. It would be helpful to try to
work through the possible effects of both of those policy
lines, informally by qualitative and quantitative analysis and
formally by SOVSIM simulation. It would help the Agency to
.sharpen its analytic apparatus by identifying and assessing
,those policies that in its judgment would best contribute to
the acceleration of the Soviet growth rate.
0
6. The evaluation of past organizational changes and
reforms is clearly a difficult task. In any economy most such
changes yield small positive results that are difficult to
isolate from other influences and difficult to measure. But a
large number of small improvements may make a significant
difference over time.
It is our impression that the Agency tends too readily, in
its discussions of organizational changes, to disregard effects
that, though small, should be regarded as significant. When
quantitative estimates of policy or organizational changes are
made, small positive effects of the order of 0.1% to 0.5% are
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Subtopic Evaluations and Recommendations (cont.)
sometimes treated by CIA analysts as negligible. For example,
a policy that would raise Soviet per capita consumption by 0.5
percentage points per year (from 0.8% to 1.3%) was thought not
to be significant because differences in per capita consumption
of such magnitudes would be barely perceptible. Such judgments
reflect a misunderstanding of the limits of economic policy in
any economic system. The following remark by John Kendrick
(AER, May 1980, p. 233) is illustrative:
We should not be discouraged, however, when
any given policy measure is estimated to
produce growth effects of only 0.1 or 0.2
percentage points. When a number of such
complementary policies are pursued, the
combined effect can sum to one or more
percentage points which, when compounded,
can make a very big difference to'the
long-run economic outlook of the nation."
7. When the Agency's assessments of policy and
organizational changes are based on qualitative evidence, the
assessments also tend to be excessively pessimistic. Sometimes
that tone is communicated by the improper use of anecdotal
evidence of wastefulness and static inefficiency as part of the
explanation of the growth-rate decline; evidence of
inefficiency cannot explain that decline unless it can be shown
that inefficiency is increasing. The major problem of
assessment, however, is the application of inappropriately high
standards. Sometimes a set of changes are judged to be of
little consequence because their benefits are not equivalent to
what a free-market reform would presumably bring; by that
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Subtopic Evaluations and Recommendations (cont.)
standard few organizational changes are likely to be judged
significant.
Sometimes a particular measure or set of measures is judged
to be of little importance because it will not reverse the
growth rate decline; few individual measures are ever likely to
have so large an economic effect. The Agency should not reject
"second best" solutions in its evaluation procedures. The
analysis should be more open to the possibility that a given
policy or organizational change may be helpful even if it does
not succeed in reversing the growth-rate decline or matching
the performance of a competitive market system.
(D
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Subtopic Evaluations and Recommendations (cont.)
III. Energy
1. Introduction
Five areas are important for evaluating the Agency's work
on Soviet energy: (a) the CIA forecasting record on Soviet
energy; (b) the adequacy of CIA analyses of links between
energy and the economy; (c) the quality of work on the Soviet
energy balance as a whole; (d) communication of research
results; and (e) prospects for Soviet energy in the 1980s.
2. Methodology and Findings
The Panel is impressed with the quality and quantity of the
effort the CIA has put into its study of Soviet energy over the
years,,even though they have made mistakes in some of their
major forecasts. The fact that others suggested forecasts
which will likely turn out closer to what actually transpires
is less important than it might seem on first glance, since it
is quite possible that those forecasts will be right for the
wrong reasons.
Traditionally, Western forecasts of Soviet energy
production, when they have been offered, have been heavily
influenced by official Soviet plans. The CIA saw earlier than
most (in 1977) the error in assuming that Soviet energy output
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Subtopic Evaluations and Recommendations (cont.)
plans are so carefully drawn up that they will serve well as
projections of what will actually transpire. Now, in the
1980s, the CIA and the-rest of us are still trying to figure
out how to judge whether, in fact, the plans are accurate.
Why did the original oil estimates for 1985 and 1990 err,
and what has the Agency learned from that? There were
apparently.two major miscalculations involved in the September
1977 estimates: (a) the CIA reserve estimates were too low;
and (b) the CIA had not counted sufficiently on Soviet
willingness in the middle of the five-year plan to
substantially reallocate resources to oil and gas and away from
other sectors in order to forestall a decline in energy output.
On reserves, the basic argument was that the CIA had relied
primarily on open Soviet literature to guess at the reserve
estimates (the actual estimates are a state secret), and
that--ironically--some of the literature they used was overly
pessimistic about the reserves. They subsequently learned from
interviews with well placed emigres that the reserve data on
which they put the greatest reliance in the literature was
considerably lower than data officially approved by the
government commission, which must approve all reserve estimates
before exploitation begins. A good guess about the source of
the bias is that the low estimates were a symptom of a
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Subtopic Evaluations and Recommendations (cont.)
bureaucratic battle for resources, and not an unbiased attempt
to get at the truth.
Our general impression concerning the current CIA
techniques for forecasting oil output is that they are more
sophisticated than they were five years ago, and that the
quality of the forecasts is as a result, higher. In correcting
its forecasts the CIA has learned--as we all have--that the
really interesting issues regarding the energy sector are the
interactions between it and the economy as a whole. As the
energy sector draws away capital from the remainder of the
economy, that affects economic performance; as economic
performance improves or deteriorates, that affects the demand
for energy.
One of the evident weaknesses in CIA work on Soviet energy
has been the disproportionate amount of time spent on oil, to
the detriment of work on the other energy carriers and on
energy consumption. Efforts devoted to the balance as a whole
are roughly as follows:
Energy Supply (Person-years***)
Oil 10-15* (4-6)**
Gas 1
Coal less than 1
Energy demand 2
* During the last year and a half when the oil estimate
was being revised.
** "normal" level of effort
*** excludes consultants.
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Subtopic Evaluations and Recommendations (cont.)
There is now just beginning an NIE on "Soviet Energy
Prospects into the 1990s" which will take a comprehensive look
at the balance overall. -We suspect that this NIE will exert a
strong positive influence on SOYA, pushing the energy estimates
into the mainstream of current estimates, and--more
importantly--nudging SOVA towards a somewhat more even-handed
effort to estimate the entire balance.
Further work on the consumption side of the balance is
imperative. CIA efforts in this area have traditionally been
weak. We need to know much more than we now know about the
possibilities for the Soviets to achieve significant gains in
energy conservation without major economic reform, and we need
informed speculation about how efforts at economic reform might
affect energy consumption. Unless equal care is put into the
demand and supply sides of the energy balance, the resulting
estimate of net energy exports will suffer; estimates of oil,
gas, or energy exports for the USSR (or any country) are only
as reliable as the least reliable estimate in the balance from
which they come.
3. Recommendations
The Panel has several recommendations which it feels would
improve further CIA work in this area.
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Subtopic Evaluations and Recommendations (cont.)
a. SOVA should reallocate resources devoted to oil
into work on the other energy sources and on energy
consumption, in the process shifting the focus of their effort
from the supply side, and in particular from oil, to the
balance as a whole. Our ultimate interest in Soviet energy
lies in the prospects for Soviet energy exports, and the
implication of these prospects for hard currency earnings.
Given that, it is only sensible to forecast the total balance
in order to estimate exportable energy, which can then be
disaggregated into oil, gas, coal, and primary electricity.
We encourage the Agency to move in that direction, in fact
to move far enough so that they do not issue simply an "oil
estimate", but rather periodic forecast of the entire balance.
b. We also recommend that the Agency consider
devoting somewhat fewer resources to energy as a whole than it
does now. The important issue is total economic performance,
and the energy sector is only one determinant of that. It is
an important determinant, but no more important than
agriculture, investment, or changes in economic policy and
economic oeganization. Some reallocation of effort away from
energy towards these other issues might prove beneficial to our
overall understanding of economic and, indeed, energy prospects
for the Soviet economy.
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Subtopic Evaluations and Recommendations (cont.)
c. In the work which is done on the energy balance
the Agency should focus on technological options open to the
Soviets in the 1980s. -Prospects for coal, for example, are
determined in large measure by Soviet ability to identify and
exploit economical ways to treat Kansk-Achinsk coal via, say,
liquifaction. Prospects for gas exports, which in view of the
"oil and gas glut" now appear fairly limited, could force the
Soviets to think about gas derivative products, for example,
methanol. Because our basic interest is in hard currency
earnings from energy, these possibilities should be carefully
explored.
d. The Agency needs to do a great deal more work than
heretofore on East European energy balances, and on the ability
and willingness of Eastern Europe to absorb increasing
quantities of Soviet gas, while oil deliveries possibly fall.
No one knows what the actual possibilities are, yet the issue
is an important one. It is clear that in the 1980s the Soviet
Union will be faced with increasing domestic gas surpluses
along-side possible oil shortages. In that situation they will
be seeking to export their gas, first to Western Europe, but
failing full realization of their goals there, then to Eastern
Europe.
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,Subtopic Evaluations and Recommendations (cont.)
.IV. Agriculture and Food
The most important roles of the intelligence community in
assisting policy makers with respect to Soviet food and
agriculture are:
to provide projections of the performance of
agriculture for the short run (annual) and the medium
run (one or two plan periods) on the basis of
announced plans, policies and resource commitments;
(b) to provide analyses and projections of the anticipated
developments of Soviet agriculture in the
international markets for agricultural products;
(c) to indicate to policymakers the effect of agricultural
performance upon the rest of the economic system and
to analyze the degree to which shortfalls in
agricultural production create significant
vulnerabilities;
(d) to provide the appropriate background and analysis
that might indicate whether the current mix of
agricultural and food policies will be significantly
modified during the 1980s, or whether it's more
likely, given the recent efforts at devising a new
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Subtopic Evaluations and Recommendations (cont.)
food and agricultural program, that there will be
little in the way of reform and reorganization during
the 1980s;
(e) to indicate that if policies are modified, what are
the possible features of the economic reforms and
administrative changes that might be undertaken.
1. Methodology
a. Measurement of Agricultural Production
U
Since the 1950's, specialists at CIA have developed and
refined the major Western database for evaluating Soviet
agricultural production. Details on crop production, livestock
herds, animal production and agricultural imports are gathered
from Soviet sources, with adjustments necessary as in the
corrections for moisture and waste in grain. The methodology
used at CIA has been extensively reviewed by the profession and
is both respected and used by specialists everywhere. This
database was developed to serve two major purposes: (a) to
estimate agricultural value-added in the calculation of Soviet
GNP; and (b) to provide the structural data necessary to enable
analysts to apply quantitative methods in the measurement of
productivity and the construction of models for simulation and
forecasting purposes.
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Subtopic Evaluations and Recommendations (cont.)
b. Application of Quantitative Methods
In its quantitative analysis, the CIA has been an important
innovator in some areas and a competent follower in others.
These methods are used for both short-term forecasting of grain
and livestock and for long-run projections of five years to
twenty years. Our review suggests that the CIA's application
of quantitative methods has been successful because the
essential role for analyst judgment has been maintained.
c. Projections
The CIA provides projections of probable outcomes of
five-year plans and of particular campaigns, such as the
non-black earth area (non-chernozem) program or the industrial
livestock complexes. The Agency has utilized a number of
methodologies, modified to some degree to meet their special
needs, to assist them in their projections. The projections of
agricultural output for five-year plan periods and for other
periods of several years are based upon the use of a production
function approach. Future output levels are dependent upon the
changes in the quantities of inputs and in productivity. The
coefficients in the production function, which is a
Cobb-Douglas function, have been estimated from factor shares.
Recent five-year plans provide sufficient data to permit
estimates of planned input changes for the major inputs--land,
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labor, capital, and current purchased inputs. Combined with
judgments concerning productivity change, the probable growth
of output can be indicated.
2. Findings, Interpretations and Conclusions
Our review of the Agency's major findings on Soviet
agriculture indicates that the record is an excellent one.
Any review of the Agency's interpretations of agricultural
developments must recognize that agricultural production is
subject to the significant influence of exogenous natural
factors, such as rainfall, temperatures, diseases, and insect
infestations. We do not yet have the ability to predict the
course of climatic variables for any extended time period, nor
in most cases can disease and insect incidence be predicted.
And even where the climatic variables can be observed ex post,
as in the United States, our models relating climate and crop
production predict output with a significant error. In
addition, Soviet crop production is especially vulnerable to
weather phenomena that occur with suddenness, such as the hot
dry (sukhovy) winds, or rain or snow at the beginning of the
harvest in regions with a short growing season. Consequently,
while climatic conditions can be favorable for most of the
season, sudden adverse events can turn what was a very good
crop growth pattern into an unfavorable outcome.
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Due to the climatic conditions affecting agriculture and
the agronomic practices followed in the USSR, crop production
not only. varies significantly from year to year, but there are
important differences in crop yields from one period of five
years to another that must be attributed to climatic
variations. The Agency has devoted considerable resources to
the study of both short-term and long-term climatic change.
This work resulted in the very important conclusion, which was
published in 1976, that a significant part of the agricultural
output growth during the decade ending in 1974 was due to
favorable climatic conditions. Over half of the increase in
grain production realized during 1962-1974 was attributable to
climatic change. Based on this analysis the projection of
grain production for 1976-80 was very close to actual
performance. The most likely projection as made in October
1976 was for an average grain output of 200 million tons per
year for 1976-80. The climatic research was the basis of
.projections in 1979 of grain output for 1985 of 235 million
tons, if weather were normal or average, in contrast to the
plan objective of 255 million tons. Subsequent use of the
analysis resulted in a set of projections for 1981-85 for
weather ranging from poor (average of the early 1960s) to good
(average of 1970-74) of 183 million to 230 million tons. The
plan goal for these years was 239 million tons.
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Little attention was given to projections of meat
production prior to 1980. Prior to 1980 meat output was
projected on the basis of past trends and consistency with
other plan goals, such as grain and feed output. This approach
was appropriate when the grain and feed output goals were
approximately met but a different approach has been required in
recent years. In September 1982 meat output for 1985 was
projected on the basis of anticipated levels of grain output of
215 million tons and grain imports of 34.4 million tons. While
the plan figure for meat production for 1985 is 18.2 million
tons, the estimated output is 16.5 million tons or a shortfall
of approximately 10 percent.
One characteristic of Soviet agricultural policy has been
its "campaign approach"; this is a strategy in which large
amounts of resources are concentrated upon a particular
objective. These objectives, at least when announced, are
generally over and above what has been included in the plan.
We reviewed the Agency's analysis of three such campaigns--the
new lands program of the 1950s, the non-chernozem program
announced in 1974, and the industrial livestock complexes.
With the exception of the new lands program, it is hard to
fault the Agency's evaluation of the prospects of programs.
The industrial livestock complexes, which are large scale
producing units for livestock and poultry, generally in
confined facilities, have made a rather modest contribution to
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meat output. The generally negative evaluation of the Agency
now appears to have been accepted by Soviet policy makers,
since emphasis has now been shifted back to the improvement and
modernization of livestock production facilities on the regular
farms. The livestock complexes, as a rule, have been
established as independent enterprises. As a result of the
development of the complexes, feed supplies were diverted from
the farms and many farms gave up all or most of their livestock
and poultry. This resulted in a waste of labor.
The Russian Republic non-chernozem program was designed to
double the output of agriculture in this region of the RSFSR.
The program called for a substantial concentration of resources
devoted to land improvement, including drainage and irrigation,
and increases in purchased inputs, such as lime and
fertilizer. The Agency evaluation of the program was a
negative one, even though there is general agreement that this
region, which was once an exporter of agricultural products to
the rest of Russia and to world markets, has significant
agricultural potential. The negative evaluation has been
justified by performance--agricultural output of the region in
1976-80 failed to increase over that of the previous five year
period, while the planned increase in output was more than a
third.
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The evaluations of the new lands program, which were done
in the mid-1950s, can be criticized on the basis of hindsight,
though at the time the projection was made that the net
economic benefit of the new lands program would be small seemed
reasonable. The original evaluations, though generally
correct, can be criticized on two grounds. One is that there
was no recognition of the possibility of yield improvement
through technological change; the other was that the yield
potential of the area under favorable climatic conditions was
underestimated. It should be said that both of these
limitations of analyses of crop production potentials have now
been corrected. In recent efforts the effects of technology
and climate are uniformly considered in the projections. It
may be noted that it now appears'that the failure to consider
the possibility of yield improvement due to technological
change was an unimportant omission, the substantially higher
grain yields during the 1970s in the new lands area than during
the 1950s and early 1960s can be attributed primarily to
climatic change.
An important variable in the consideration of Soviet
agriculture is its role in international trade. In an analysis
published in 1979, the Agency projected average grain imports
.in the 20 to 30 million ton range during 1981-85. It was
C noted, of course, that the magnitude of the imports would
depend upon climatic conditions and Soviet grain production.
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Actual grain imports have been greater than this but Soviet
grain production has been below the lowest levels projected by
the Agency, even with the assumption of bad weather.
Projections of net trade are subject to substantial error since
net trade is a residual derived from the difference between
domestic consumption and production; an error of just 5 percent
in production could result in an error of as much as 30 percent
for imports if imports are one-sixth of production.
During the 1970s there were times when it appeared that
port capacity imposed a limit upon the quantity of bulky
agricultural imports, such as grains and other feeding
materials, that could be imported. We satisfied ourselves that
the Agency had adequately anticipated the changes in the
capacity of Soviet ports to handle grain.
Another area that has commanded the attention of the Agency
has been the frequent policy and administrative changes that
have occurred in agriculture over the past three decades.
These changes have generally been of three different
sorts--changes in incentives (higher output prices, increased
wages and pensions), increases in investment and current
purchased inputs, and administrative changes. The Agency has
found that changes in incentives and increases in inputs
committed to agriculture had positive impacts upon agricultural
production at least up through 1978. However, the results are
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not always as expected. For example, significant increases in
labor income on collective farms after the mid-1960s did not
result in either a greater total commitment of members' time
nor an improvement in the seasonal distribution of labor
available to the collective farms. The Agency has devoted
resources to the evaluation of the impacts of increased
fertilizer availability upon grain and other crop output and
their analysis has been very reasonable.
The Agency undertook an extensive review of the widely
heralded Brezhnev Food Program,. which was announced in May 1982
after at least two years of preparation. The bottom line in
the CIA analysis is the conclusion that the expectations of
Soviet officials that the new program would have significant
positive effects on production within two or three years were
unrealistic and would not be fulfilled. The new program was
described as being very unimaginative, primarily consisting of
a continuation of past efforts--including another round of
output price increases. The unimaginative character of the new
program was attributed to an inability at the highest policy
.level to agree upon more decisive action. The food program
included some administrative changes that could easily have
negative output effects. New committees were created to
provide for coordination of the "agroindustrial complex" at the
national, oblast, kray and autonomous republic levels. These
coordinating efforts could add to more confusion. and
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indecisiveness. A new set of institutions were to be created
at the rayon level--rayon agroindustrial associations (RAPO).
The RAPOs are to coordinate all agricultural activities at the
local level; it is not clear how the activities of the RAPOs
will be coordinated with the functions carried out by the
ministries. The Agency has followed the subsequent reactions
of numerous Soviet officials and scholars to the food program,
including the RAPO innovation.
An important policy that has been maintained for the past
two decades has been that of stable prices for major food
products, such as meat, dairy products and flour and bread,
sold in the state stores. However, in the effort to expand the
output of farm products, prices paid to farms have increased
significantly over the years. Consumers now pay less than half
the cost of bringing meat to the retail store and the total
subsidies to agriculture, including some 5 billion rubles on
industrial products sold to agriculture, approach 58 billion
rubles in 1983. The low food prices have resulted in a
substantial excess of demand over supply, resulting in long
queues, bare shelves, and various forms of rationing of scarce
supplies.
One important issue is whether the cost of food and
agricultural subsidies constitutes such a burden on the
financial system and the economy as to require the policy of
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stable retail prices to be abandoned. The Agency believes the
subsidies, which now account for about 16 percent of the total
budget, can be maintained into the indefinite future without
undue strain upon the financial system. This is an important
conclusion and tends to support the view that the present food
and agricultural situation is a tolerable one and one that does
not demand radical change. This conclusion does not mean that
change will not occur, but it does mean that even if the change
or changes have little positive effect upon output that there
will be time for further efforts to improve the situation.
3. Clarity of Presenting Findings
Because of the complexities of the factors that affect
outcomes in agriculture, the clarity of findings may well be
perceived differently by those who have familiarity with
agriculture and by those who do not have such familiarity.
However, our review of a number of findings indicates that the
findings are stated with adequate clarity, though some readers
may have difficulty in fully understanding the process by which
the findings were derived.
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V. Foreign Economic Relations
1. Introduction
In the assessment of Soviet foreign economic relations, one
is ultimately concerned with the contribution of such relations
to Soviet capabilities to project military and economic power.
In this area, the panel was concerned with the following broad
areas:
(a) the conceptual framework;
(b) specific choice of methodology;
(c) treatment of behavorial issues; and
(d) the precision and balance of CIA communication.
2. The Global Context of Soviet Trade and Finance
0
Since the late 1970s, the CIA has recognized the growing
importance of world trade and international finance and has
sought to increase its expertise and contacts in those areas.
One consequence of this shift in attention has been a transfer
of resources--particularly skilled analysts--away from the
Soviet trade and financial area. Certainly, the CIA's gain in
understanding global markets has contributed to a more
realistic appraisal of Soviet participation in such markets.
For example, two studies published in 1981 provided an
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Subtopic Evaluations and Recommendations (cont.)
excellent assessment of Soviet participation in world markets
for non-fuel minerals and metals.
Unfortunately, however, the establishment of broad
competence on such issues as East-West trade, LDC debt, and
technology transfer has often been at the expense of specific
research on Soviet trade and debt. Over the past three years,
the Soviet-trade branch operated with only three full-time
analysts, none of whom had been.in the branch before 1979.
Problems also arise because responsibility for some components
of the Soviet balance of payments remain outside SOVA itself,
e.g., agricultural trade and arms sales in OGI.
3. The Conceptual Framework of Analysis
Soviet comparative advantage and gains from trade seem to
be the most useful foundation on which to construct an accurate
model of Soviet foreign trade decision-making. True, the gains
from trade and comparative advantage considerations do not play
the same role in Soviet central planning as they do in Western
economies. Nevertheless, it is apparent from Soviet foreign
trade decisions observed in the past that trade flows do adjust
in ways which suggest an underlying mechanism operating to
weigh the costs and benefits of various policy alternatives in
the foreign sector. Consequently, the terms of trade and
appropriate valuation should be of concern to Western analysis,
CUNP'Ibr;NT1AL
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not only for hard currency trade but for Soviet trade with
client states and other socialist countries.
Unfortunately, Soviet foreign trade has been evaluated by
the CIA largely in terms of "import requirements' and "export
availability.' CIA reports on Soviet foreign trade activity
seldom consider important aspects of behavior--responsiveness
to price, domestic allocation to export sectors and import
substitution, or reaction to aggregate budget constraints. In
this important area, CIA analysts have chosen not to apply the
conceptual models developed by academic specialists to evaluate
foreign trade under central planning.
4. Specific Methodologies
Trade estimation includes analysis of both official trade
statistics and mirror statistics, with attention given to
commodity composition and prices within various regional
categories. Considerable attention was given to the
reconciliation of foreign trade statistics (Soviet-West) during
the 1970s. This was a major contribution, but a comparable
effort was not made for intra-CMEA trade, and additional work
on Soviet-LDC trade has only recently begun.
Issues of appropriate pricing in foreign trade have become
critical because of the wide swings in relative prices.
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Additional expertise on intra-CMEA trade and pricing exists in
the East European group, but the CMEA perspective is still weak
in SOVA analysis of Soviet foreign trade. Eastern Europe is
still evaluated more as a fixed liability for the Soviet
economy rather than as a varying balance of liabilities and
assets.
The linkage of trade flows to domestic and foreign
activities is crucial for the projection of Soviet trade. In
the construction of SOVSIM, few aspects of Soviet foreign trade
were modeled explicitly in a behavioral sense. Energy exports
were determined by availability, grain imports by domestic
requirements; and machinery imports by a financing limitation.
Imported capital measures appear for the machine-building,
chemicals and petroleum branches, but have no differential
productivity effect on production. Total machinery imports do
impact domestic capital investment.
Another category of analysis involves financial issues, the
intertemporal management of balances on goods and services.
The CIA was a leader in the estimation of the Soviet balance of
payments and its estimates remain widely used and respected
among specialists. The principal problem with those estimates
has been the large residual between financing activity and
current account balances. SOVA now believes that Soviet net
lending of hard currency to certain client states--Cuba and
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Vietman--and export credits to developing countries are
probably the largest components of the 'errors and omissions'
residual.
There remains an inconsistency in CIA's position concerning
the contribution of Western machinery to Soviet economic
growth. Imported machinery (from the West or Eastern Europe)
is not granted a differential impact on Soviet capital
productivity in SOVSIM and seldom considered as a major factor
in Soviet growth prospects for the 1980s. However, earlier
microeconomic studies by CIA suggest that Western machinery has
been very important in the growth of certain branches such as
petroleum, chemicals, and vehicles.
Another significant area concerns the strategic
non-economic dimensions of Soviet economic relations with the
outside. Soviet activities in commerce and finance serve a
variety of intelligence and military objectives beyond purely
economic advantage. Several studies by CIA analysts have made
significant contributions to Western understanding of such
Soviet activities in banking, shipping, fishing and other
commercial transactions.
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5. Analysis of Soviet Behavior and Foreign Trade Forecasts
Estimation of historical flows and stocks provides a
valuable database, but forecasts based on such data require
judgments concerning Soviet objectives in foreign economic
relations and the resulting behavorial patterns, both short-run
and long-term. Among the most misleading of exercises is
mechanical extrapolation, and recent CIA assessments of Soviet
hard-currency constraints in the 1980s (using SOVSIM and the
BOP accounting model) appear to be more of this character than
careful judgments of likely Soviet behavior.
In the last five years, CIA has sought to avoid forecasting
Soviet trade and debt. Instead, they have preferred to provide
multiple scenarios and qualitative statements about future.
conditions, e.g., a hard currency "bind" in the 1980s. In
their quantitative analysis of Soviet growth prospects, the
foreign sector has been determined largely by judgments about
domestic conditions. The most critical example was the energy
estimate of declining oil production which, under the
assumptions made, indicated a major Soviet shortage of hard
currency in the early 1980s.
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6. Intelligence Crucial for U.S. Policy on East-West
Economic Relations, 1980-1982
East-West economic relations have become a significant
issue for US foreign policy. Therefore, intelligence that
dealt specifically with such issues as sanctions, denial,
dependency and vulnerability since 1979 were of particular
interest to the Panel. We have found in a number of recent CIA
reports a tendency to overstate the vulnerability of the USSR
to external economic pressure. One notable--and extremely
important--exception to this has been the CIA reports on the
Siberia-to-Western Europe natural gas pipeline. CIA issued
several reports which accurately emphasized Soviet commitment
and ability to complete the line essentially on time.
One month after the Soviet invasion of Afghanistan, a study
entitled the "Impact of Economic Denial measures on the USSR"
(ER80-10037, January 1980) was submitted by CIA. Although this
assessment quite properly emphasized the importance of all
Western countries' cooperation for a successful embargo on
credits and manufactured goods exports to the Soviet Union,
there were several important points where the analysis was
faulty and misleading in tone. Even as oil prices were rising
sharply it was asserted that Soviet hard currency earnings were
expected "to fall drastically as Soviet oil exports decline."
The US partial grain embargo was judged to be "tantamount to a
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total embargo" since alternative supplies were unavailable that
season, and the shortage of feed was expected to reduce meat
production by 1 to 1-1/2 million metric tons in 1980. In fact,
oil revenues continued to grow in 1981-82, the USSR was able to
import grain in the volume desired (although composition and
cost were less favorable), and meat production was maintained
at around 15 million tons. It was further asserted that the
impact on Soviet consumer programs would be "marked," and that
there would be a "psychological blow to the Soviet population
when it learns of the embargo from the VOA, BBC, and the Munich
radios .w
One year later a more accurate and balanced assessment was
submitted ("USSR: Impact of Economic Denial Measures,"
ER81-10021, January 1981). Here, it was acknowledged that the
impact of US measures on the USSR had been negligible in 1980.
and would wane further in 1981. This study also identified
specific industrial sectors which might be vulnerable to
Western sanctions.
The meanings of such terms as "leverage" and
"vulnerability" were never precisely defined in the studies
which we have reviewed. In foreign policy terms, "economic
vulnerability" involves at least three important aspects--
reliance, substitution costs, and instrumentality. In many
areas of industrial technology, the USSR had chosen to rely
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extensively on Western suppliers. That was usually what was
documented in CIA studies. Should supplies be denied, what
would be the consequences of substitution in higher costs for
any given performance level and the delays associated with
disruption and alternative contracting? These questions were
much more difficult than the estimation of reliance itself, and
appropriate efforts to answer them and provide those answers to
policymakers were not always made. Finally, "instrumentality"
involves the feasibility of imposing sanctions on trade--an
estimation of economic costs imposed on Western interests and
the political costs involved in multilateral policymaking.
0
The imposition of martial law in Poland in December 1981
led to another round of US sanctions against Poland and the
USSR. A new assessment of "Soviet Economic Dependence on the
West" (SOV 82-10012, January 1982) reviewed the growing Soviet
dependence on Western machinery, technology and food during the
1970s. It asserted that hard currency imports would 'be more
crucial in the 1980s than before." A new projection of the
Soviet balance of payments suggested a "hard currency bind with
no relief in sight," which would lead to reductions in Soviet
trade with the West. This would cause disruption in key
sectors of the Soviet economy and--given its limited capacity
to adjust--would entail significant losses for the Soviet
economy.
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Three months later, "The Soviet Bloc Financial Problem as a
Source of Western Influence" (NIC M82-10004, April 1982) was
more ambivalent on Western leverage and policy implications.
It asserted that this was an "unusual opportunity to influence
Soviet Bloc developments, although there exists little direct
leverage on these countries' policies." While it was
recognized that "Soviet reaction might be aggressive or
accomodating" to the exercise of western leverage, it concluded
that pressure might well limit Soviet non-core activities in
the Third World that had high hard currency costs.
In May, SOVA's assessment became very supportive of
"resource denial strategies" just before the attempt to impose
sanctions on West European firms transfering US technology to
support the Soviet pipeline. It argued that a Western policy
restricting credits to the Soviet Union would play an important
role in avoiding "overexposure by private banks and costly
claims on Western budgets," and would also "put pressure on
Soviet authorities to re-examine priorities.' 'Even modest
declines in imports' could greatly complicate Soviet problems
and make allocational decisions more painful. The ultimate
payoff for the West would be a squeeze on Soviet military and
foreign policy programs during the 1980s, weakening capacity to
project power in the Third World, and perhaps influencing
evolution of the regime toward a less aggressive posture.
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Subtopic Evaluations?and Recommendations (cont.)
Although the reports discussed above tended to overstate
Soviet vulnerability to economic pressure, their effect is
counterbalanced somewhat by the analysis provided by SOVA of
sanctions relating to the Siberia-to-Western Europe natural gas
pipeline. Throughout 1982--when the US was pursuing efforts to
stop, or at least delay, the pipeline--SOYA consistently
j
emphasized that Soviet leaders had both the will and capability
to finish the line essentially on schedule, and to meet
commitments for new gas deliveries, (see especially SOV
82-10023X,. February 1982; and SOV 82-10120, August 1982). On
this very important issue the CIA provided US policymakers with
well-founded analysis concerning the limited impact which US
economic sanctions could have on the Soviet gas industry.
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,Subtopic Evaluations and Recommendations (cont.)
VI. The Soviet Burden of Empire -
1. Introduction
The Panel identified a set of issues in the category
"burden of empire" that it felt may possibly bear on
assessments of Soviet economic performance. They are: (a)
Soviet economic relations with the CMEA countries of East
Europe (Poland, GDR, Czechoslovakia, Hungary, Romania, and
Bulgaria) and the subsidized character of those relations; (b)
Soviet economic and military aid to communist and non-communist
LDCs; and (c) the unevenness or variations of economic life and
development among the USSR's regions and republics.
A number of definitional problems arise which, once
mentioned, may be set aside. Given that the purpose of the
entire Soviet power establishment, including the armed forces
and the security police, is to protect and to expand its
control, even at the cost of efficient, productive economic
life, the economic burden of empire is pervasive and
unquantifiable. In one sense, such expenditures are
cost-effective to Soviet rulers because they produce the
satisfactions of empire. In another sense, the sacrifices of
resources and economic rationality made in the name of
political control may become so great or unleash such social
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Subtopic Evaluations and Recommendations (cont.)
forces as to threaten control itself, as we have witnessed in
other Soviet clients, and, hence, contributes to warning of
problems that may become political and international crises.
Trends in Soviet aid to communist and non-communist LDCs
illuminate Soviet foreign policy and strategic priorities.
We are mindful that much of the Agency's analysis of Soviet
economic dealings with Eastern Europe and with LDCs has
purposes other than measuring their impact on Soviet economic
performance. Analysis in these areas offers important insights
into the economic prospects of the East European countries and
2. Major Conclusions
The Agency does a substantial amount of analysis on Soviet
economic relations with Eastern Europe and on economic-military
aid to LDCS on a continuing, routine basis, as well as to
suppport specific regional or country contingency analysis.
The routine reporting appears in only a limited number of
topical or serial products (e.g., JEC or State Department
issuances), somewhat disguising the total effort underlying
it. By contrast, there is apparently very little analysis done
on the economies of Soviet regions/republics as such, largely
because of limited personnel.
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Subtopic Evaluations and Recommendations (cont.)
The Agency has made estimates of the dollar value of Soviet
subsidies and aid to its East European, other communist, and
non-communist clients; in other words, estimates of the
external burden of empire. There are admitted methodological
problems (such as valuation of Soviet imports/exports in trade
with Eastern Europe) and personnel constraints that have
limited the depth of analysis in these areas (although
personnel resources are increasing).
We have found no evidence or inferential basis for
concluding that: (a) the economic impact, of Soviet imperial
dealings with this set of external entities, on Soviet economic
performance, is so great that it overwhelms political
considerations; or (b) that the Agency's estimates of the
magnitudes and trends of these burdens is likely to be
seriously in error. Thus, if Soviet political leaders decided
that they should be more generous with various. clients (e.g.,
Poland) for their own political reasons, they could do so on
economic grounds.
At the same time there is.r.eason for concern about the
adequacy of analysis of Soviet economic relations with client
states with regard to the character and extent of subsidies in
trade with Eastern Europe. Data and methodological problems
along with the relatively low volume of work in this area,
leave open some possibility that phenomena are occurring of
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greater importance to the Soviet economy than we realize (their
importance to East European economies is much more obvious).
The fact is, for example, that the Soviets are striving to be
less generous toward their East European dependencies
currently, despite contrary political pressures.
Agency analysis of Soviet relations with Eastern Europe
displays a paradoxical situation, the understanding and
observation of which is clearly very important. Patterns of
trade between the USSR and the East European states lead to
charges of exploitation from both sides. The Soviets sell
basic resources at subsidized prices, sacrificing potential
hard currency earnings. In return, they get finished goods of
less than world standards, but better than their own, and, of
course, strong political influence. More or less, for better
or worse, Soviet and East European decisionmakers have accepted
a closed system of backwardness that helps preserve political
arrangements within and among them, at the cost of economic
performance. The USSR has avenues to the outside by virtue of
size; Hungary has them to a degree by virtue of political
license. On the whole, the system is muddling down, not
through, most catastrophically in the case of Poland.
The key question that economic analysis helps to illuminate
is basically a political one: does the system work
sufficiently to keep political controls intact? One
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comprehensive report done for the Agency's Office of European
Analysis concludes that, on the whole, it does not. Because of
declining growth rates (negative growth in some cases), rising
expectations, Western influences, and resentments all around,
current Soviet means of managing Eastern Europe are becoming
less and less tenable, according to this analysis. Either the
Soviets must increase their economic largess, give the East
European countries more license for reform and Western trade
(to which local leaders may or may not be able to respond), or
move in the direction, perhaps with military action, of more
Stalinist measures. Something has to give.
The Panel reaches an ambivalent judgment on the adequacy of
Agency analysis in this clearly important area. A good deal of
analysis is done. Resources are being added. The importance
of the.area is recognized. However, it remains of secondary
priority except where crisis demands attention (Poland).
Personnel needs are magnified by the diversity of countries
(e.g., language requirements). The location of East European
and Soviet analysis in separate offices creates special
interface problems which require an enduring remedy. A more
general but important concern is that overall work on the
Soviet economy appears insufficiently attentive to the "CMEA
dimension," that is, to the fact that trade with Eastern Europe
is the largest portion of Soviet foreign trade. It, therefore,
remains an open question whether the level of attention to
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Soviet-East European economic relations at the Agency is
commensurate with its significance for US national security
policy.
The Panel believes that the Agency's very limited attention
to the economies of the USSR republics and regions could
profitably be increased somewhat, for three reasons: (a) as
the Agency's analysts recognize, a fundamental aspect of the
problem of Soviet economic growth is regional in character:
the capital is in the northwest region, the labor in the south
and southeast, and the natural resources in the northeast;
(b) as centralized as it is, the decisionmaking system of the
USSR has a republic-based substructure whose interests
influence policy to some extent; and (c) economic diversity
among Soviet regions and republics is such as to make its
illumination of some importance to non-specialists among the
Agency's consumers in understanding the strengths and
weaknesses of the Soviet economy. It would seem that for us to
understand the Soviet economy, and also to understand how
Soviet leaders understand it, more effort and resources on the
study of Soviet Republics and regions would be warranted.
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Subtopic Evaluations and Recommendations (cont.)
VII. Quality of Life, Morale, and the Second Economy
1. Introduction
The quality of life has received low priority in CIA's work
on the Soviet economy. Evidence of this is found in the fact
that only two major studies in this area were provided for the
Panel's review.
There are three important reasons why the Agency should
study the quality of life. First, such knowledge is useful in
understanding the political choices that Soviet leaders have to
make. Second, the capacity of the Agency to forecast economic
and political events will be enhanced by its ability to monitor
changes in quality of life. Third, apart from forecasting, the
analysis of economic policy requires attention to a variety of
quality of life data.
Recognizing that for these reasons the Agency should
conduct a program of research on quality of life, a note of
caution is in order. These things are terribly difficult to
pin down. There is no strong body of social theory to support
judgments of cause and effect, and quantitative relationships
rarely can be established. In view of such limitations it is
important not to promise too much or to overstate the
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Subtopic Evaluations and Recommendations (cont.)
confidence with which the causes and consequences of quality of
life changes'are reported.
2. Methodology
In assessing the methodologies employed by the Agency in
reaching conclusions about the quality of life and its impact,
it'is important to distinguish between the methodologies
utilized to measure the "objective* components of the standard
of living and the much more "subjective" process of drawing
inferences about the significance and consequences implied by
the "objective" data. In the studies read, a number of aspects
of the quality of life are examined. Often different
methodologies are employed in the analysis of each issue. The
issues addressed include: consumption levels, health care,
criminal corruption, alcoholism, ethnic discontent, and
political, cultural, and religious dissent.
The kinds of evidence cited in the reports can provide some
insight into the underlying methodologies. In general, the
processes of arriving at conclusions about the "objective"
.indicators of quality of.life appear to meet academic
-standards. That is, to the extent possible, statistics are
systematically gathered, evaluated, and compared with figures
for Western countries. The work of Schroeder on consumption is
a particularly good example here. Data on health care is more
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sketchy. Heavy reliance is placed by the analysts on certain
demographic statistics related to health developed by the
Commerce Department on the basis of Soviet data.
While the evidence for a leveling off in the Soviet
standard of living is apparently quite good, and while
conclusions about widespread social ills are based upon a
careful reading of admittedly less-than-ideal evidence, by and
large, the methodologies employed in examining the "objective"
components of quality of life are at least as adequate as those
found in the best academic research. Given what appear to be
generally acceptable, if not fully satisfactory, methods of the
profession in measuring some aspects of social reality, the key
problem becomes the methods by which inferences are drawn from
these measures.
C
The essential problem in this regard is that the state of
the art does not provide us with a way of knowing what the
relationship really is between consumer welfare and social
well-being on the one hand, and either regime legitimacy or
labor productivity on the other. The evidence upon which CIA
analysts base their conclusions consists primarily of
statements by Soviet political leaders which posit such
relationships, and other evidence which seems to suggest that
the leaders take such relationships seriously.
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Subtopic Evaluations and Recommendations (cont.)
Another problem in CIA's analysis of the quality of life
and morale is the frequent lack of historical perspective.
Discontent has been common in Soviet history, and virtually
every Soviet regime has berated the young generation for not
understanding and accepting regime values more fully. Yet, the
Soviet government has up until now proven itself fully capable
of managing its own survival in the face of low living
standards, mass discontent, and cynicism among the young. Of
course, it is true that Soviet society is entering a period of
relative austerity after a prolonged period of improving
welfare. But, given the considerable capacity of the Soviet
people to endure suffering, and the demonstrated capacity of
the regime to maintain control in the face of apathy and
discontent, it would seem prudent for intelligence analysts to
be cautious in any estimates of the consequences of presently
observable problems. It would appear that the CIA analysts who
participated in writing the most recent study of quality of
life were not only aware of these analytic problems, but made
conscious efforts to address some of them.
The Panel recommends that CIA devote resources to the
development of an analytical framework for handling quality of
life issues. It should also develop a formal program for
tracking Soviet society by means of social indicators. This
would have several advantages: (a) it may provide for some
useful comparability between the USSR and other countries, in
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Subtopic Evaluations and Recommendations (cont.)
the absence of which the USSR alone may look particularly bad
or particularly good in various respects; (b) it would enable
the analyst to evaluate Soviet quality of life in terms of time
trends, which would provide a clearly useful additional
dimension for evaluation; and (c) a systematic array of social
indicators may provide a more balanced assessment of quality of
life: things that may be improving (perhaps housing and
education) would be juxtaposed against the things that are
deteriorating, in the absence of such juxtaposition CIA
analysts tend to focus on the negative.
3. Interpretations
The Agency's principal conclusion is that the quality of
life has been deteriorating. That fact is seen both as a
consequence (in part) of the decline in the rate of economic
growth to very low levels, and at the same time as a cause of
that decline. The major link in the chain of causation is the
set of relations between consumption and labor effort:
declining growth of output leads to declining growth of
consumption which leads to declining effort which leads to
declining growth of output. Yet, this causal chain is not
clearly analyzed.
Given the importance of this issue, we recommend that the
Agency make an explicit study of the relationships between (a)
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Subtopic Evaluations and Recommendations (cont.)
levels and rates of change in consumption and productivity; (b)
.levels and rates of change in consumption and regime
legitimacy; and (c) other indicators of quality of life and
productivity and legitimacy. On the basis of such studies, the
Agency would be able to adopt a more consistent position in its
interpretation and avoid simplistic assumptions that bad
economic developments always lead to bad social and political
consequences.
4. Communication of Results
Four issues are noted here: (a) the language in which the
evidence of the declining quality of life is reported; (b) the
reporting of the strengths as well as the weaknesses of the
system; (c) the consumption-incentive relation; and (d) the
reliability of the results as communicated to readers.
First, our impression is that the darker sides of Soviet
life tend to be reported in terms that are vivid, racy and
emotive. This seems an inappropriate style for an intelligence
agency. Dispassionate, cool appraisal should replace breezy
language and rich metaphor.
In an effort to understand the sources of the tendency to
C relatively loose, breezy language, the subcommittee raised this
issue with Agency analysts. They acknowledged that the racy
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111
and breezy tended to predominate in much of their writing. It
was the their view, however., that the reasons for this were to
be found in the incentive structure within which they operate
rather than in.a lack of discipline or professionalism on their
part. In their view, the pressures for colorful language arise
from a system in which rewards are based upon attracting the
attention of significant policymakers. Dull, overly objective
writing is seen as one certain way never to attract, let alone
hold, the attention of busy executives. While key staff people
are the main audience for the substantive parts of reports,
even here, it is believed by analysts, a light breezy style is
valued. These beliefs are reinforced by an evaluation system
within the CIA which places considerable weight on evidence of
attention to products by key Executive Branch officials.
Within the CIA, the subcommittee was told, there are
periodic shifts in policy regarding the desirability of
caveats, explanatory footnotes, and other cautionary, but often
uninteresting elements in Agency reports. The current posture
,seems to be that footnotes are undesirable, that crisp,
interesting, appealing prose is appropriate and will be
rewarded. These policies are reportedly "enforced" through the
four-tier internal review process for CIA manuscripts.
The subcommittee is not fully convinced, although doubtless
the analysts reported accurately, that this is a sufficient
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explanation. These same policies were in effect over the past
year or more, yet, within this period, there is considerable
variation in the degree of caution and balance evident in CIA
reports.
Second, CIA reports tend to concentrate on the darker side
of Soviet life. People who are familiar with Soviet society
understand that there is another side, that there are strengths
as well as weaknesses. But not all the policymakers who rely
on the Agency reports have this background. Reading about the
problems of malaise, nationality tensions, food shortages and
so on, they are not in a position to make the necessary mental
correction in order to place these things in perspective. If
they were reading about such US problems as unemployment,
racial tensions, poverty, declining educational attainment,
they would understand the broader social and historical context
sufficiently to place such dark facts about the US quality of
life in a proper perspective. Lacking a knowledge of the
corresponding Soviet context, they are likely to emerge with
an exaggerated impression about the weaknesses of Soviet
society relative to its strengths. It is, therefore, important
that the Agency call those strengths to the attention of the
readers of its reports.
Third, a distinction should be drawn between the effect on
incentives of (a) monetary disequilibrium, or repressed
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Subtopic Evaluations and Recommendations (cont.)
inflation, and (b) consumption growth. To the extent that the
former is the source of-the sentiment that "there is nothing to
buy anyway,' a strong case can be made for a possible erosion
of work incentives; the money wage begins to serve less and
less as an inducement to work. The remedy in that case might
be a monetary reform to restore macro equilibrium, though this
would present significant political difficulties.
Fourth, quality of life is expressed in two kinds of
terms: observable indicators like death rates, alcoholism and
corruption; and subjective states, like the mood of the
population, malaise, shrinking patience, and so forth. The
Agency reports tend to make assertions about the subjective
states as if they were of the same order of reliability as the
observable indicators. While such assertions about
psychological states are sometimes based on actual evidence,
such as reports of conversations and Znania lectures etc., for
the most part they are simply common sense extrapolations from
other evidence: if meat supplies are lower this year than
last, consumer patience must obviously be shrinking. The
Agency should take a much tougher stance with regard to such
reporting. It should clearly distinguish what it knows from
what.the implications may possibly be.
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Subtopic Evaluations and Recommendations (cont.)
5. The Second Economy
There are two areas in which the quality of life and the
second economy overlap: (a) to the extent that the second
economy fosters political and moral corruption, it is an aspect
of quality of life; and (b) to the extent that the second
economy affects consumption levels, it affects the quality of
life.
For both of these reasons, the subcommittee recommends that
the CIA increase its effort to develop systematic data on the
second economy. Agency reporting on the second economy should
be done within a comparative context. It is known from the
experience of many countries that illegal business behavior can
be fairly extensive, and therefore undoubtedly corrupting,
without being of momentous consequence for the society, and
without counting very much in our assessment of the society and
of the choices facing their leadership.
It would also be useful to distinguish carefully between
the legal and illegal components of the second economy. It is
true that the two are interconnected in that theft of state
property supports much of the legal second economy.
Nevertheless, insofar as corruption and illegality are
concerned (as parts of quality of life), it is important to
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Subtopic Evaluations and Recommendations (cont.)
distinguish the perfectly normal household plot and related
activities, from the running of an illegal factory.
With respect to the effect of the second economy on
L"
consumption, two points should be made:
(a) By increasing the supply of consumer goods and
services, the second economy performs a number of very useful
functions for the leadership: in particular, reducing the
negative effects of the declining growth rates of
state-supplied consumption.
(b) The second economy redistributes income among
households, classes (particularly rural and urban), and ethnic
groups.
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VIII. The Effects of Slow Growth on System Stress, National
Security
1. System Stress
"System stress" is a nebulous concept. We are primarily
concerned with forces that may affect internal political
stability or that may carry the potential for altering the
Soviet political system's essential character. The first
question that naturally arises to social scientists reviewing a
complex area of investigation is whether there exists a body of
theory. that may be applied to the particular case. It should
then be possible to formulate a model, however crude, of the
phenomenon to be investigated and to construct a set of
questions to guide the investigation. On that basis a
methodology would be developed for collecting data and evidence
in analytically relevant categories.
While we have not pursued the investigation extensively, it
does not appear to us that the economics literature provides an
analytical model on body of theory to serve as a guideline for
research in this subject area. Sociology and political science
provide various theories of social-political change and
conflict which may furnish many useful particular insights.
However, it is clear that a conceptual framework for our
subject is not to be found on the shelf of any of the standard
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disciplines. As a consequence, the CIA analyses we have seen
exhibit a, tendency to "ad hocism." There are references to
social unrest, popular alientation, worker demoralization, food
riots, rising crime rates and other indicators but these
phenomena have not been linked in a coherent analysis.
It is only in recent years that much attention has been
paid to the topic of system stress in the intelligence
community. To some extent, this may be explained by the fact
that the sharp downturn in growth rates, as opposed to the
gradual postwar deceleration, dates only from the late 1970s.
However, many of the phenomena being reported were visible
earlier, as we are now becoming aware. The subject is still
conspicuous by its absence also in the unclassified studies
published in the JEC reports, except for passing mention in
articles devoted largely to other issues. It is not clear to
us how the current appreciation of the importance of the
subject is embodied in the Agency's program and resource
planning.
We detected differences in evaluative nuance among the CIA
reports we read. In some the tone seems to suggest actual
danger of radical system change--if not tomorrow, then perhaps
the day after. In others, the reader may infer that the
outcome is not nearly so threatening for the regime (witness,
for example, the Rowen 1982 report).
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From reading the CIA pieces it is never clear just who
constitutes 'the leadership' that shows concern about slow
growth and system stress from time to time, nor which are the
most-important institutions/analytical centers preparing
estimates and data for the elite. Further, we do not gain a
very clear understanding of whether the Soviets themselves have
valid information on which to base their own analysis.
We believe there is no more important task for the CIA with
respect to the issue of system stress than to develop a
conceptual framework and corresponding methodology of
measurement. It is unlikely that it will prove possible to
quantify the various dimensions of the problem and aggregate
them with one common metric. Nevertheless, it would be useful
to attempt to define discrete'states of the different variables
and as a first order generalization to frame conclusions about
the effects of growth retardation in terms of the range of such
state indications. This might provide an effective vehicle for
communicating conclusions to policymakers.
System stress is a subject cutting across discipline
lines. However, some of the required disciplines for this
analysis, such as sociology or social psychology, are not
adequately represented in SOVA at present. Every effort should
be made to broaden the recruiting base of disciplines.
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In addition, there is still considerable scope for
improving interdisciplinary sensitivity of analysts, although
the regional reorganization of the CIA has brought a
significant improvement in this regard. It would be desirable
to press further for forms of research organization and
management that would make economic analyses more sensitive to
socio-political ramifications, and political-military analyses
more cognizant of the social and economic dimensions of the
problems treated.
More attention needs to be paid also to the possible
regional and ethnic-national impacts of economic decline.
Regional analysis is one of the weak points of SOVA's research
in a number of subjects.
2. National Security Impact of Slow Growth
This subtopic concerns the effects of sharp decline in the
rate of economic growth on the Kremlin's resource allocation
priorities and the manner in which the USSR's ability to
conduct foreign policies will be impaired or constrained. We
focus on the trade-offs between defense and other sectors of
the economy and on the foreign policy ramifications of slow
growth. Particular questions regarding defense production or
organizational changes are not addressed.
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The CIA has clearly indicated that the USSR faces a
resource allocation dilemma in this decade and that critical
choices will have to be made. A casual reader of the estimates
would be made aware of the resource dilemma facing the
leadership. He would also be made aware that the regime
recognizes the existence of the problem. It is not so apparent
whether the regime's appreciation of the severity of the
problem matches that of Western observers and this issue is not
always clearly focused in the estimates.
The CIA has also clearly concluded that a reduction in the
rate of growth of defense expenditures would not result in
appreciable improvements in GNP; that is, it would take a
sizable reduction in absolute spending in order for the USSR to
achieve a surge in GNP. However, somewhat greater improvement
in consumption could be gained from slowing the rate of growth
of defense expenditures.
These conclusions are clear to a reader who is very
familiar with all of the documents available; they are less
apparent to a casual reader scanning the key judgments. The
CIA needs to do more to highlight these findings that have such
direct relevance for policymakers.
The Agency has dealt with these problems on a continuous
basis and early on called to our attention the approaching
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Subtopic Evaluations and Recommendations (cont.)
dilemmas. Discussions of these questions were generally
couched in very conditional terms. The possible force changes
that might result from a decision to cut back the growth of
military expenditures have been examined. The Agency also
considered the production trade-offs that might be most easily
effected if such a decision should be taken. However, CIA did
not specifically forecast that resource reallocations would be
made nor did it predict the structure of these reallocations,
if they were ordered. Given the evidence available to the
intelligence community, predictions of investment shifts or
defense program modifications would have been purely
speculative and could have misled policymakers.
Still, the majority of the estimates we saw gave the reader
the impression that, despite the magnitude of the economic
problems, the Soviets would most likely continue their
traditional 4-5 percent annual increment to the defense
sectors. While this judgment was buttressed with some hard
evidence, it turned out to be flawed, at least for the most
recent past. The explanation for the recent change, however,
is still in dispute. t
Was the Agency on the look-out for changes? We must
reemphasize the difficulty in predicting changes in the Soviet
resource allocation scheme. We have little reliable evidence,
it appears, regarding the manner in which these gecisions are
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made (e.g., how Gosplan 'works these issues," what goes before
the Defense Council, who exactly is on the Council, how these
trade-offs would be affected by the coming succession
struggle). We know-even less regarding the mind-set of the
responsible people who adjudicate the debate over reallocations
and cannot fully identify the spokesmen (or the extent of their
influence) for a diversion of resources into consumption or
investment. The Agency, in contrast to many outside observers,
has been properly cautious in rendering its judgments.
A larger question, however, given this evidence problem is
whether or not the CIA made a concerted effort to establish a
systematic methodology for identifying the indicators that
would give warning of impending or on-going resource allocation
shifts. As noted in the critique of the Agency's work on
system stress, there does not seem to be a clear collection
plan in the work we have reviewed, designed to. bring attention
to preliminary indicators of policy change.
The CIA has done substantial work on the national security
trade-offs that might be impelled by economic growth rate
declines and certain other economic shortcomings. However,
there appears to be no single document that addresses the range
of possible effects of the economic slowdown--i.e., on military
expenditure, force structure, arms control policy, foreign
policy. The Panel urges that such a document be 'prepared.
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IX. Soviet Leadership Perceptions _
1. Introduction
Accurate perceptions of how the Soviet leadership views the
Soviet economy and its basic trends are a necessary
prerequisite to understanding Soviet economic policies and to
formulating US policy towards the USSR. Does the picture of
the Soviet economy as drawn by the CIA square with the
perception of the Soviet leaders? If substantial differences
exist between the two, how and why do they differ and what are
the implications for both the long-term and the short? Do the
CIA and the Soviet leadership perceive the same problems,
within the same contexts, the same order of priorities, the
same trade-offs, and the same future? To what extent are the
differences between the CIA and the Soviet leadership's
assessments due to different criteria and reference points of
measuring performance, and differing conceptions of the
purpose, role and function of the Soviet economy in the Soviet
system? To what extent is the Soviet leadership an inadvertent
victim of its own mindset'and to what degree may this misdirect
the Soviet leadership in accurately defining problems and
issues and the choice of policies in dealing with them? And
finally, to what extent does the CIA's methodology reflect the
academic and philosophical culture of the United States and
,y and its
thus inadvertently mirror-image the Soviet econov
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Subtopic Evaluations and Recommendations (cent.)
problems and perceive it through an American prism rather than
a Soviet?
2. Findings, Interpretation, Conclusions
CIA analysts recognize that the Soviet leadership's
perceptions of the Soviet economy diverge from those of the
CIA. In a study which documented the growth of Soviet military
power and international influence ("The Soviet Challenge to
U.S. Security Interests," 10 August 1982--National Intelligence
Estimate), the deficiencies of the Soviet economy were listed
in detail at the beginning of the study, after which the
following observation was offered:
It is likely that Soviet percepticns of
their own predicament are less pessimistic
than. those of Western analysts, thus
reducing the likelihood of major economic
reforms."
Among the possible reasons for these differences in
perceptions by the CIA and the Soviet leadership are the
following:
a. The Soviet economy, unlike the American and other
Western economies, is an explicit instrument of the political
system. The relative optimism of Soviet leaders with respect
to their economic problems, in contrast to the generally
pessimistic tone of CIA and other Western analysts, derives
from the Soviet leaders' perch at the apex of tl-e Soviet system
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and their control of the levers of society, including the
economic system.
b. The Soviet leaders have access to data on the
state and performance of the Soviet economy, which the CIA does
not have. This may be an obvious observation, but the
different perceptions of the Soviet leadership may reflect
greater knowledge of the actual situation and thus result in
greater confidence that the consequences, which the CIA
forecasts, can be successfully avoided or ameliorated.
c. Puny economic problems in all systems are hardly
ever solved but simply managed at newer and later levels of
development. The 'solution" of one set of problems often
generates another set; the issue really becomes not one of
"solution,' but of deciding what kinds of problems the Soviet
leaders are prepared to live with and what kinds they find
intolerable or unacceptable. These decisions are often
determined by political or ideological considerations. Just as
in the American economic scene, some sectors of the public
would rather live with the problems of high unemployment rather
than high inflation; whereas others might find the opposite
more tolerable. In the Soviet situation, Soviet leaders must
decide what set of problems to live with and manage, what set
of problems to "solve," and what set of problems to avoid.
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126
For these reasons and others, the CIA has tended to
underestimate the Soviet. leadership's capacity for
resourcefulness, improvisation, adaptation, accommodation,
adjustment, manipulation and management of the total Soviet
system, of which the economy is an integrated and subordinate
component. This failure to accurately gauge Soviet leadership
perceptions is in part responsible for the pessimistic tone of
the CIA assessment over the past decade compared to the
relatively optimistic view of the Soviet leadership. During
the period when the CIA has forecast declining growth rates
(which were accurate as such) and described the Soviet economy
as in decline, the Soviet Union registered some of its most
impressive achievements on the world scene, and emerged as an
authentic global power that may have achieved military
superiority (strategic, conventional and in some sectors,
technological) over the United States.
During the decade under review, the Soviet GNP grew from
1.1 trillion dollars in 1970 to 1.6 trillion in 1981 and by the
end of this decade, it may grow to almost 2 trillion dollars.
The prospect of a 2 trillion dollar GNP by 1990 must be some
source of comfort to the Soviet leadership as they develop
policies to cope with their economic problems.
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3. Methodology, Sources of Data, and Data Base
Since little systematic work has been produced by the CIA
dealing explicitly with and focused exclusively upon Soviet
leadership perceptions of the Soviet economy and Soviet
economic performance, no comprehensive methodology is
apparent. Rather, the work is methodologically eclectic, but
this is neither unusual nor necessarily an inadequacy. Dealing
with perceptions is a difficult matter under the best of
conditions and dealing with Soviet leadership perceptions is
particularly difficult. The data base for examining
perceptions is usually furtive, of uneven and frequently
unknown reliability, and scanty. No methodological consistency
or uniformity of interpretations is possible or even desirable,
since the fragmentary and unreliable character of the data base
invites considerable informed speculation and interpretation to
fill in the lacunae.
This is particularly true of the CIA work on leadership
issues, succession, leadership behavior and outlook. These
studies, whether individual-reports, or segments of the Monthly
Review are of high quality. It must be emphasized, however,
that such studies are speculative; they are typically not as
reliable as reports based on hard intelligence. Nevertheless,
policymakers require evaluative and informed speculative
studies of this character, so that they can appreciate the
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Subtopic Evaluations and Recommendations (cont.)
128
range of informed interpretation of this type of data, and
understand the limits of reliability and validity involved.
Such an understanding can give them an additional reference
point against which to measure and evaluate their own judgments
of the same data.
Much of the CIA's leadership and perception studies
utilizes the various standard techniques of what is known as
Kremlinology and Sovietology, and the CIA specialists are
skilled and careful practitioners of this art. Both structured
and unstructured content analysis are used in developing and
analyzing the information; in some studies quantitative
information is utilized extensively and in a very imaginative
way. Other studies of equal quality rely less upon
quantitative manipulation of data. These studies deal with a
wide range of leadership perceptions of domestic and foreign
policy issues, including perceptions of the economy, but are
not specifically focused on economic perceptions.
Many of the studies under review, although of high quality,
appear to use the various types of data available, whether
hard, soft, of uncertain reliability or uncertain provenance,
whether it be rumor, gossip or opinion, somewhat
indiscriminately. As a result, the studies have the appearance
of being more anecdotal and impressionistic, than analytical.
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Subtopic Evaluations and Recommendations (cont.)
Since methodologies are often more important for the
assumptions structured and buried within them than how they
process the data, CIA studies should distinguish between what
is assumed (structurally or otherwise) and what is known.
Although it is well known to specialists, policymakers are not
always aware that built-in assumptions may prevail in the
discipline or subdiscipline at any particular time and if they
are changed, the analysis will change accordingly.
In its study of the Soviet economy, the CIA has paid little
systematic attention to what Soviet leaders consider immutable
or near immutable in the structure of the Soviet economy and
society as distinguished from those aspects of the Soviet
economy that can be altered, re-arranged or re-structured.
More systematic attention should be directed to the scope of
tolerable changes in the Soviet economy, how and why this is
defined, and under what conditions the Soviet leadership might
allow the current constraints to be burst in order-to find.
solutions outside existing Soviet parameters.
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