SOVIET ECONOMIC PROBLEMS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-01137R000100050007-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 41
• Document Creation Date: December 12, 2016
• Document Release Date: August 9, 2001
• Sequence Number: 7
• Publication Date: July 1, 1977
• Content Type: REPORT

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Soviet Economic Problems and Prospects
ER 77-10436U
July 1977
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Soviet Economic Problems and Prospects
Central Intelligence Agency
Directorate of Intelligence
July 1977
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Soviet Economic Problems and Prospects
Central Intelligence Agency
Directorate of Intelligence
July 1977
Summary
The Soviet economy faces serious strains in the decade ahead. The
simple growth formula upon which the economy has relied for more than a
generation-maximum inputs of labor and capital-will no longer yield the
sizeable annual growth which has provided resources needed for competing
claims.
In the past, rapid growth enabled Moscow simultaneously to pursue
three key objectives:
? catching up with the US militarily;
? steadily expanding the industrial base; and
? meeting at least minimal consumer expectations for improved
living conditions and welfare.
Reduced growth, as is foreshadowed over the next decade, will make
pursuit of these objectives much more difficult, and pose hard choices for
the leadership, which can have a major impact on Soviet relations with
Eastern Europe and the West.
This study examines the causes of the slowdown in growth, its impli-
cations, the policy choices open to the Soviet leadership, and their possible
impact on defense, the consumer, foreign trade, and US relations.
Causes of the Slowdown
Factors tending to slow down the rate of growth have been apparent
for some time.
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? The drying up of rural sources of urban labor force growth;
? A slowdown in the growth of capital productivity;
? An inefficient and undependable agriculture which may be hit
hard by a return of the harsher-but probably more normal-
climatic patterns that prevailed in the 1960s;
? A limited capacity to earn hard currency to pay for needed
technology imports and intermittent massive grain purchases.
These problems are not new. The Soviet leadership has tried to offset
their effect by improvisation and palliatives, without impairing the priority
development of defense production. They did not succeed, however, in
preventing a steady fall-off in economic growth from its earlier high rate.
Looking toward the next five to ten years, these long-standing problems
are likely to intensify, and will be joined by two new constraints which will
greatly aggravate the resource strain: a sharp decline in the growth of the
working age population and an energy constraint.
Labor force. In the 1980s the rate of growth of the labor force is expected
to drop sharply (to less than 1 percent beginning in 1982) because of the
depressed birth rates of the 1960s. Moreover, additions to the labor force
will come mostly from ethnic minorities in Central Asia who do not readily
move to the northern industrial areas.
In anticipation of this labor force constraint, the Soviet government is
planning for an accelerated growth in the productivity of both labor and
capital in the current 5-year plan (1976-80). But for years productivity gains
have been slowing, and this trend is likely to continue given the sharply
rising resource costs facing the economy. The more readily accessible fuel
and mineral reserves west of the Urals are being rapidly depleted, while the
abundant but more remote resources of Siberia and Central Asia require
enormous investment outlays.
Energy. The most serious problem is a looming oil shortage. Soviet
exploration and extraction policy has long favored increasing current output
over developing sources of future output. As a result, new oil deposits have
not been discovered rapidly enough to offset inevitable declines in older
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fields. Consequently, production will begin to fall off in the late 1970s or
early 1980s. The current level of oil production is close to the estimated
maximum potential of 11 million to 12 million b/d. By 1985 oil output is
likely to fall to between 8 million and 10 million b/d.
The decline in output may or may not be a temporary phenomenon.
The USSR is counting on large new supplies of oil and alternative energy
sources-coal, natural gas, and hydroelectric power-coming onstream
beyond the mid-1980s. But most of these energy sources lie east of the
Urals, far from major industrial and population centers: their development
would take years and require massive capital investment.
In the near-term, however, even if the development of alternative
energy sources is pushed to the maximum, overall energy output will grow at
a sharply declining rate. Under a plausible set of assumptions, it would
decline from 4 percent in 1976-80 to slightly above 1 percent in 1981-85.
Since Soviet energy consumption increases in close parallel with the growth
of the economy, a sharp slowdown in energy production would seriously
constrain economic growth unless Moscow finds ways of conserving large
amounts of energy or covers its shortfall by becoming a net oil importer. The
Soviet government appears to be aware that it has an energy problem but has
not yet made the difficult choices which will be needed to deal with it. The
longer the delay in adoption of a top-priority energy program, the greater
will be the economic impact in the 1980s.
Policy Choices
Measures for grappling with these varied problems must meet two tests:
first, they must be designed to remedy particular elements of the prob-
lem-the labor force, productivity, and energy constraints; second, they must
be shaped with the recognition that the problems are interrelated, and that
measures aimed at easing one problem may aggravate another.
Even on the first level, it will not be easy to find solutions that will do
more than alleviate the component problems. Powerful remedies are either
not readily available or not politically feasible.
The labor force constraint could be eased somewhat by such measures
as retaining older workers longer in the labor force, shortening secondary
education, and reducing military manpower by cutting the term of service.
But such measures would have only a one-time impact.
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Moscow's options for raising the rate of growth and productivity of
plant and equipment are even more constrained.
? They could convert industrial capacity from defense to the
production of investment goods. They would be reluctant, how-
ever, to impair their defense production capability. Moreover,
specialized defense resources are not easily transferred on short
notice.
? They could stretch out R&D programs and production schedules
and slow the rate of expansion of defense-oriented industrial
capacity, but this would have limited effect in the short run.
? They could institute incentive-enhancing reforms of economic
management. Such reforms, however, will be resisted by powerful
vested political and bureaucratic interests.
Even a combination of these measures-such as a leveling off of defense
production, coupled with measures to obtain additional manpower-would
probably raise economic growth only slightly.
Options for dealing with the energy problem are similarly constrained.
Opportunities for conservation are less obvious in the USSR than in the
West-for example, there are few automobiles and most are for commercial
or industrial use. Consequently, conservation measures alone are unlikely to
yield large oil savings. The leadership thus will probably have to rely on some
combination of the following measures:
? importing substantial amounts of oil from non-Communist
countries;
? cutting oil exports to Eastern Europe; and
? severely rationing oil to domestic users.
Moving from a position of major oil exporter to that of a net importer
would be particularly painful. Last year Soviet oil exports of $4.5 billion
accounted for almost one-half of its hard currency earnings. If current trends
are projected with no change in present policies, Soviet oil import require-
ments by 1985 could cost $10 billion at today's prices. Even with high
priority measures to boost other exports, including gold sales, oil imports at
iv
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that level would absorb most of the Soviet hard currency earnings in the
1980s, and largely foreclose the import of other goods from the West,
including badly needed Western technology.
Cutting oil exports to Eastern Europe would ease this problem by
forcing Eastern Europe to share the burden of the oil shortage. Any substan-
tial cut in the Soviet oil supply commitment to Eastern Europe, however,
would worsen that area's already difficult economic situation.
Placing the burden of the oil shortage on the domestic economy would
mean curtailing oil rations to producing enterprises. Such cuts would almost
certainly impede production, though the impact would be less severe if
reductions were more gradual as part of a long-term energy-saving program.
Implementing the foregoing solutions is complicated by the fact that
the problems are interrelated and the solutions impinge upon each other. For
example, pressure on enterprises to save labor will be much less effective if
they must also save energy. If the energy shortage is eased by allocating
foreign exchange to import oil, the resulting decline of imports of foreign
machinery and technology would adversely affect productivity and eco-
nomic growth within a few years. Failure to import large amounts of energy
equipment and technology from the West would substantially worsen the
USSR's prospects for raising oil and gas production in the longer-term.
We conclude that a marked reduction in the rate of economic growth in
the 1980s seems almost inevitable. At best, Soviet GNP may be able to
continue growing at a rate of about 4 percent a year through 1980, declining
to 3 - 3 1 /2 percent in the early and mid-1980s. These rates, however,
assume prompt, strong action in energy policy, without which the rate of
growth could decline to about 3 1/2 percent in the near-term and to 2 - 2
1/2 percent in the 1980s.
These are average figures; in some years performance could be better,
but in others, worse, with zero growth or even declines in GNP a possibility
if oil shortages and a bad crop year coincide.
Potential Impact on Defense The slowdown in economic growth could
trigger intense debate in Moscow over the future levels and pattern of
military expenditures. Military programs enjoy great momentum and power-
ful political and bureaucratic support. We expect defense spending to con-
tinue to increase in the next few years at something like recent annual rates
V
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of 4 to 5 percent because of programs in train. As the economy slows,
however, ways to reduce the growth of defense expenditures could become
increasingly pressing for some elements of the Soviet leadership.
On Consumers The reduced growth potential means that the Soviet con-
sumer will fare poorly during the next five to 10 years compared to recent
gains. Under the projected growth rates, per capita consumption could grow
no more than 2 percent a year in contrast to about 3.5 percent since 1965.
As a result, there will be no progress in closing the gap in living standards
with the West or, for that matter, with most of Eastern Europe. Moreover,
rises in wages over the next ten years combined with a slower growth in the
availability of consumer goods would result in higher prices, more wide-
spread shortages, and increasing consumer frustration.
On Relations with the US Moscow's economic problems in the 1980s will
affect its relations with the West, especially the United States. Since the
USSR's ability to pay for imports from the industrial West in the early and
mid-1980s will be strained, Moscow may seek long-term credits (10-15
years), especially to develop oil and gas resources. Much of the needed
energy technology would have to come from the US.
Stresses upon the Leadership
These serious problems ahead seem most likely to prompt Soviet
leaders to consider policies rejected in the past as too contentious or lacking
in urgency. Some leaders might be persuaded that basic organization and
management reforms in industry are necessary. But that will raise the spectre
that such reform would threaten political control. Consideration of other
options-such as accelerating investment at the expense of defense or con-
sumption, or reducing the armed forces to enhance the civilian labor
force-could also result in strong leadership disagreements. Soviet responses
to these problems could be further complicated by the fact that leadership
changes will almost surely take place during the coming period. Even a
confident new leadership would have difficulties in coming to grips with
the problems ahead
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Page
Background . . . . . . . . . . . . . . . . . . . . . . . . . 1
Soviet Development Strategy . . . . . . . . . . . . . . . . . 1
Recent Performance . . . . . . . . . . . . . . . . . . . . . 2
The Problem of Productivity . . . . . . . . . . . . . . . . . 3
Changes in the Economic Environment . . . . . . . . . . . . . 3
Slowing of Labor Force Growth . . . . . . . . . . . . . . 3
Possibility of Less Favorable Weather
for Crops . . . . . . . . . . . . . . . . . . . . . . . . 5
Rising Costs of Fuel and Raw Materials . . . . . . . . . . . 6
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Prospects for the Economy . . . . . . . . . . . . . . . . . . . 8
Leadership Intentions and Plans . . . . . . . . . . . . . . . . 8
Plans Still Overly Optimistic . . . . . . . . . . . . . . . . . 9
Possibility of Material Shortages . . . . . . . . . . . . . . . . 10
What the Leadership is Counting On . . . . . . . . . . . . . . 12
Some Options for the Leadership . . . . . . . . . . . . . . . 13
Material Supply . . . . . . . . . . . . . . . . . . . . . 13
Manpower Measures . . . . . . . . . . . . . . . . . . . . 14
Possible Investment Strategy . . . . . . . . . . . . . . . . 15
Economic Reform . . . . . . . . . . . . . . . . . . . . 16
Outlook for Economic Growth-
Some Policy-Conditioned Projections . . . . . . . . . . . . . 16
Base-Line Case . . . . . . . . . . . . . . . . . . . . . . 17
Business-as-Usual Case . . . . . . . . . . . . . . . . . . . 18
Best Case . . . . . . . . . . . . . . . . . . . . . . . . 18
General Assessment . . . . . . . . . . . . . . . . . . . . 21
Implications for Foreign Trade . . . . . . . . . . . . . . . . . 21
Potential for Increasing Exports . . . . . . . . . . . . . . . . 22
Soviet Hard-Currency Import Capacity . . . . . . . . . . . . . 24
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CONTENTS
(continued)
Page
Political Implications . . . . . . . . . . . . . . . . . . . . . 25
The Burden of Eastern Europe . . . . . . . . . . . . . . . . 28
Communist Oil Policy in the Middle East . . . . . . . . . . . . 28
Table 1: USSR: Indicators of Economic Growth . . . . . . . . . . 2
Table 2: Policy-Conditioned Forecasts of Soviet Growth . . . . . . 17
Figure
1: Incremental Output-Capital Ratios
(5-year moving average) . . . . . . . . . . . . . . .
Figure 2: USSR: Population of Working Age, 1970-1990
(annual increment in million persons) . . . . . . . . . 5
Figure 3: USSR: Primary Energy Production,
1966 and 1976 . . . . . . . . . . . . . . . . . . . . 7
Figure 4: USSR: Annual Growth Rates of Inputs
to the Economy-the Base Case . . . . . . . . . . . . 11
Figure 5: USSR: Annual Rate of Growth of Inputs
to the Economy, Under Different
Investment Assumptions . . . . . . . . . . . . . . . 19
Figure 6: USSR: Annual Rate of Growth of Inputs
to the Economy Under Different Investment
and Manpower Assumptions . . . . . . . . . . . . . 20
Figure 7: USSR: Capacity to Import Hard Currency
Goods and Services Other than Oil and Grain . . . . . . 26
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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Soviet Economic Problems and Prospects
Background
With the second largest economy in the
world, the USSR has great crude economic
strength-a wealth of natural resources, a labor
force half again as large as that of the United
States, and a tough, unchallenged leadership
dedicated to continuous growth in economic
and military power. During much of its develop-
ment, the Soviet economy has grown at rates
comparable to those of Western Europe but
considerably faster than the United States. As a
consequence, Soviet gross national product
(GNP) has risen since 1955 from about one-
third to roughly one-half that of the United
States.
Soviet Development Strategy
Soviet growth strategy has been based largely
on the enforced mobilization of capital and
labor. By restricting the growth of con-
sumption, the USSR has been able to devote a
high and rising share of annual output to
investment; in 1975, investment comprised
nearly 30 percent of GNP, compared with 16
percent in the United States. In recent years a
small but growing portion of new plant and
equipment has been imported from the West.
Growth of the labor force has been unusually
rapid, and participation rates are the highest of
any industrialized country. Moreover, large
numbers of workers have been shifted from
agriculture to industry and services, and sub-
stantial investment has been poured into ed-
ucation and training programs. Finally, rapid
exploitation of relatively cheap and abundant
natural resources, especially oil and gas, has
played a key role in Soviet development.
An overriding objective of Soviet policy-the
acquisition of a strong military capability-has
dictated the pattern of industrial growth. The
tradition of using national resources first for
military goals is deeply rooted in Russian as
well as Soviet history. Today there is consid-
erable popular as well as official pride in the
achievement of rough military parity with the
United States. Indeed, military growth is what
the Soviet economy does best and the arena in
which it competes most effectively with the
United States.
Precisely how the Soviet leaders view their
specific needs for additional military power is
not clear. It is obvious, however, that they
recognize the possibility of general war and
believe that having a capability to wage such a
conflict is a necessary condition for averting
one. Defense expenditures have been rising by 4
to 5 percent annually in recent years and have
absorbed a steady 11 to 12 percent of GNP over
the past 15 years.' Defense impacts heavily in
high-technology areas, where it has a priority
claim on manpower and output. For example,
1 This share of GNP is based on the concept of defense activities
as defined in US budgetary accounts. Under a broader
definition-as the Soviets might account for their defense
effort-the appropriate figure would be 12 to 13 percent.
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in electronics, defense requirements account for
most of the output of integrated circuits. De-
fense also takes a particularly large share of the
products of major investment goods industries
such as machine building (about one-third),
metallurgy (about one-fifth), chemicals (one-
sixth), and energy (about one-sixth).
The emphasis on industrialization character-
istic of early Soviet history has been relaxed
under Stalin's successors in favor of more at-
tention to agriculture and consumer goods. Fol-
lowing decades of neglect, the Soviet people
have experienced marked gains, with per capita
consumption more than doubling in the past
quarter century. Consumer gains have dimin-
ished in recent years, however, with the slow-
down in overall economic growth. Moreover,
now that basic needs for food, clothing and a
few durables have been met, consumers want
better quality and more variety in the products
they buy as well as a host of services. But the
economic system is better suited to providing a
basic assortment of goods and services than to
responding to the shifts in consumer demand
induced by higher incomes. Unsatisfied demand
has found expression in lengthening queues for
quality goods and in a resort to black or gray
markets.
Although a major industrial power, the USSR
is still far behind in terms of technological de-
velopment. Except in military production, So-
viet manufactured products are generally poor
in quality and often technologically inferior.
Because of the poor quality of manufactures
and an inability to provide a reliable flow of
spare parts and services, Soviet exports to the
West consist almost entirely of raw and semi-
processed materials--a trade pattern that is
unique among industrialized countries. Mean-
while, the USSR has turned increasingly to the
West for grain to offset harvest shortfalls and
for machinery to modernize the economy.
Recent Performance
Since the 1950s the effectiveness of the So-
viet development formula has been steadily di-
minishing. A slowdown in growth, which af-
fected nearly all sectors of the economy, con-
tinued through the 1960s and into the 1970s
(table 1). Even industry, which has always been
favored in investment allocations, has not
escaped. In 1976 the growth of GNP was only
3.7 percent-the same as the average annual gain
during 1971-75-despite a record grain crop.
Industrial growth was the slowest since World
War H. Although the poor industrial perform-
ance in 1976 largely reflects the aftermath of
the disastrous 1975 crop, the falloff was unu-
sually sharp and has continued well into 1977.
Severe problems were encountered in bringing
new capacity into operation. In the consumer
sector, widespread food shortages occurred
throughout the year and continued into 1977.
Queuing and expressions of popular discontent
remain at unusually high levels.
The marked year-to-year fluctuations in GNP
growth-usually because of wide swings in farm
GNP
5.8
5.1
3.7
Producing sectors
Agriculture
4.4
3.8
-0.6
Nonagriculture
6.5
5.6
5.0
Industry
10.2
6.4
5.9
Other
5.0
5.2
4.5
Principal end uses
Consumption
(per capita)
3.8
3.3
2.9
Investment
11.1
6.6
5.4
New fixed
investment
12.7
6.9
7.0
Defense
NA
about 5
4-5
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production-are an added headache for the lead-
ers. Since 1960 annual GNP growth rates have
been as high as 9 percent (1964) and as low as
-0.1 percent (1963). Expensive programs in-
tended to expand crop production in more
weather-reliable areas have made little headway
thus far. Moreover, the instability in agricultural
output has occurred despite a long period of
unusually favorable weather; between 1962 and
1974 approximately half of the increase in grain
production can be attributed to better weather.
Even under these relatively favorable condi-
tions, however, the USSR has had to import
substantial amounts of farm products.
The Problem of Productivity
To some extent, the general economic slow-
down reflects the exhaustion of the factors that
fostered rapid development, especially the
abundant supplies of labor and cheap, widely
available fuels and other natural resources. More
importantly, it reflects a secular decline in the
growth of overall productivity. Growth in out-
put per man hour slowed by nearly one-half
between the 1960s and the first half of the
1970s. The productivity of additions to the
stock of plant and equipment also slumped. As
a result, overall resource productivity (output
per unit of combined inputs of labor, capital,
and land) actually declined in 1971-75.
The reliance on mobilization of additional
resources for the major share of economic
growth has distinguished Soviet development
from that of other modem industrial nations.
The level of factor productivity is well below
that of the US, Japan, and most of Western
Europe; in agriculture, which still employs one
out of every four Soviet workers, labor produc-
tivity is about one-tenth that of the United
States. To a considerable extent, productivity
levels mirror differences in levels of technology.
Slow growth of productivity reflects slow prog-
ress in closing the technological gap with the
West.
Over the past decade the Soviets have taken
two important steps to try to boost produc-
tivity growth. First, they embarked on a spend-
ing spree in Western markets for machinery and
equipment: imports of thcse goods rose nine-
fold, from $510 million in 1965 to roughly $5
billion in 1975. Second, the Soviets maintained
high rates of growth of domestic investment
and channeled a large share of it into agriculture
and high technology industries, despite de-
clining rates of return.
Falling returns on new fixed investment have
led to recurrent campaigns to reduce the
amount of unfinished construction and upgrade
technology. Nonetheless, the amount of output
produced per ruble of fixed capital has declined
steadily, especially in agriculture (see figure 1).
Changes in the Economic Environment
Future Soviet attempts to halt adverse trends
in output and productivity must overcome re-
source problems quite different from anything
experienced since World War II. In addition to
the continuation of chronic difficulties related
to low efficiency, several new problems will
beset the regime. The rate of growth of the
labor supply will be close to recent experience
in the rest of the 1970s but will decrease
sharply in the early 1980s. At the same time,
the cost of obtaining raw materials will rise
sharply. And in the case of crude oil, past
improvidence will bring about a serious short-
age. The USSR's economic problems will be
further exacerbated if weather patterns return
to the harsher but more normal conditions that
prevailed before the mid-1960s.
Slowing of Labor Force Growth
The decline in birth rates in the 1960s,
already reflected in a fall in the number of new
entrants to the labor force, will become much
more acute in the early and mid-1980s; the
growth of the working-age population then will
be less than one-half percent annually compared
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0 GNP
Q Capital
0
1955
Incremental Output-Capital Ratios
(5-year moving average)
with an average of 1.7 percent during the 1970s
(see figure 2). Moreover, the reservoir of redun-
dant farm labor has already been siphoned off
to develop other sectors, leaving a residue of
largely elderly, unskilled farm workers who fail
to provide agriculture with the efficient labor it
needs. A further complication for the Soviet
eiI lgai.9 cl CIcG Itur
foo p oceSin
leadership is that most of the increase in the
labor force in the late 1970s and nearly all of it
in the 1980s will be among non-Slavic (princi-
pally Turkic) minority populations who have
consistently avoided migrating from Central
Asia to labor-short industrial areas in the Euro-
pean USSR.
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}; Figure 2
H ED ii Population of Working Age
U
(annual increment in million persons)
3
2
I' III I I
it
1 -
0000
1970 1975 1980 1985 1990
bMIOS 7,77 CIA
Possibility of Less Favorable Weather for Crops ended with the severe drought of 1975. If the
It is highly probable that normal weather climate in the principal grain areas returns to a
conditions will return after more than a decade more normal pattern, average annual produc-
of mostly above average precipitation in the tion while above the average for 1971-75, prob-
Soviet farm belt. About half of the increase in ably will be well below both official targets and
Soviet grain production since 1963 is due to a actual requirements. This would further com-
favorable climatic deviation that may have plicate the USSR's foreign trade situation by
5
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forcing the Soviets to increase grain purchases
during a period of increasing hard-currency
stringency.
Rising Costs of Fuel and Raw Materials
Fuels and raw materials will become more
expensive for the USSR in the years to come.
Ores, fuels, electric power, and timber are all
being produced at increasing costs-largely be-
cause of the depletion of reserves west of the
Urals and the costly effort to develop resources
in Siberia and Central Asia for the use of exist-
ing industrial areas.
Ore extraction is becoming more difficult
and costly. A steady decline in the quality of
Soviet iron ore has forced the steel industry to
allocate a growing share of its investment funds
to new ore mining capacity, facilities to upgrade
the ore, and sintering and pelletizing facilities to
improve the quality of the iron charge for the
blast furnace.
In the case of oil, the Soviets face both rising
costs and declining output in the near future.
Because the drop in crude oil output will have
such a profound effect on the entire economy,
the outlook for Soviet energy is discussed in
more detail in the following section.
share of total energy output-44 percent of the
total, compared with 37 percent a decade
earlier (see figure 3). Last year's production of
10.4 million b/d, however, was close to the
estimated maximum potential of 11-12 million
b/d. We expect oil output to fall to between 8
to 10 million b/d by 1985. In addition to the
failure to find enough new deposits to offset
depletion, production techniques now in use-
such as excessive waterflooding-focus on
short-term gains at the expense of maximum
life-time recovery.
All growth in oil output through 1980 is to
come from West Siberia, where the inhospitable
climate, difficult terrain, and vast distances
greatly complicate operations. In 1976 approxi-
mately one-fifth of national production came
from the giant Samotlor field on the Middle Ob'
River. This field will reach peak production in
the next year or so and will hold peak levels for
no more than four years. Because of extensive
waterflooding, it is already experiencing rapid
water incursion (a water share of about 45
percent) and increasing quantities of fluid
(water plus oil) must be lifted to recover a given
quantity of oil. New fields are being discovered
in West Siberia, but no giant ones comparable
to Samotlor have been found.
Energy
Although the USSR has vast energy re-
sources, the supply of oil will be its most crit-
ical resource problem. New deposits of oil are
not being found and developed rapidly enough
to offset declines in older fields. As a result,
production will begin to fall in the late 1970s or
early 1980s. Production of other major energy
sources is being pushed about as hard as Soviet
industrial capabilities permit, even with the help
of imported Western equipment. Thus, even
with a major step-up in investment allocations
to the fuel producing sectors, growth of domes-
tic energy production will be sharply reduced in
the 1980s.
Oil production has grown rapidly (8.1 per-
cent per year since 1960) but will soon peak,
perhaps as early as 1978 and certainly not later
than the early 1980s. As a result of this rapid
growth, in 1976 oil accounted for the major
The Urals-Volga region, currently the leading
oil producer in the USSR, probably will be
surpassed by West Siberia this year. In the mid-
1960s, Urals-Volga accounted for about 70 per-
cent of total oil output. After 25 years of
production, many of these deposits are ap-
proaching exhaustion and output has recently
leveled off and will soon fall. Sizable produc-
tion increases were expected from the oilfields
in the Mangyshlak Peninsula in western Kaz-
akhstan, but because of improper waterflooding
procedures and complex drilling problems out-
put has not risen nearly as fast as anticipated.
The downturn in oil production seems inevi-
table, probably will be sharp but its timing is not
as predictable. Although the discovery of new
fields may arrest or slow the decline, such re-
spites are likely to be temporary because deple-
tion of existing fields is now very rapid and
exploration and development of frontier areas is
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Nuclear
Hydro
1966
5734m 7?n
a slow and costly process. To stave off or slow
the expected fall in production, the Soviets will
need high capacity lifting equipment involving
US technology-gas lift and electric submersible
pumps. Without them, oil production will fall
sooner than would otherwise be the case.2
2During 1972-77 the USSR has ordered more than $3.1 billion
of Western oil field equipment and oil and gas pipeline
1976
Nuclear
ydro
H
equipment, and an additional $4.1 billion for steel pipe. US
sales have totaled more than $550 million, of which $148
million was for downhole electric pumps. Over the next few
years (1977-80) annual orders for such equipment will probably
increase since Soviet pipeline construction will increase, and oil
lifting equipment orders will rise sharply. Gas lift projects for
Samotlor and Federov oil fields-now under negotiation-will
involve Soviet purchases of $1.2 billion to $2.0 billion,
depending upon the number of units and horsepower
requirements.
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Primary Energy Production
Percent
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We expect natural gas output to expand to an
estimated 9.4 million b/d of oil equivalent by
1985-roughly double production in 1975-
probably exceeding crude oil output in caloric
terms. The key to growth will be the pipeline
capacity needed to carry large volumes of gas
from huge new West Siberian fields to the west-
ern USSR and Europe. The main bottleneck
will be high-capacity compressors; most of these
are imported from the West and have long lead
times for negotiation, manufacture, and de-
livery.
Gas consumption will continue to increase
substantially in industrial sectors that are al-
ready large gas consumers, particularly chem-
icals. While the possibilities for substituting gas
for coal have been all but exhausted, gas could
be substituted for oil in some industrial uses,
notably as fuel for industrial boilers. Household
use of gas will also increase but will not involve
gas-for-oil substitution, since oil has not gener-
ally been used directly for heating or other
purposes.
Coal production will grow slowly-probably
at an average annual rate of 2 to 3 percent-
during the next 10 to 15 years. The actual rate
will depend largely on the speed with which the
Soviets develop the eastern coal basins. This
coal, though inexpensive to mine, is expensive
to transport over long distances to the main
consuming centers and much of it is of poor
quality. An increasing share of output probably
will be allocated to electric power production,
in part to offset a decline in fuel oil supplies.
Beyond the mid-1980s, the USSR is un-
doubtedly counting on large new supplies of oil
and the development of alternative energy
sources-coal, natural gas, and hydroelectric
power. Even if new major sources are de-
veloped, most of these lie east of the Urals, far
from major industrial and population centers,
and their development will take years, require
massive capital investments, and incur contin-
uing high transportation costs. Nuclear power
will constitute only about 2 percent of national
energy production in 1985.
Even under optimistic assumptions concern-
ing future growth in output of nonoil fuels, and
assuming the middle case of the projected range
of oil output, annual growth of energy output
would decline from 5.4 percent in 1971-75 to 4
percent in 1977-80, and 1 percent in 1981-85.
The demand for energy will grow much faster
than. this. The relationship between growth in
Soviet domestic energy use (DEU) and GNP has
been historically very close. Assuming GNP
growth at 4 percent during 1976-80 and 3
percent during 1981-85, historical relationships
yield a total energy consumption of 29.7
million b/d, in 1985. Oil consumption would be
about 10.1 million b/d3 assuming current So-
viet policies for fuel substitution: that is, there
will be no unusual efforts to substitute other
fuels for oil beyond a halt to building new
oil-fueled thermal power plants and the substi-
tution of coal for oil in some existing oil-fueled
power plants.
The USSR cannot accept the consequences
of a business-as-usual program. If Moscow con-
tinues its present energy policy, oil output
would drop to 8 million to 10 million b/d by
1985 while consumption would rise to some-
what more than 10 million b/d. The implica-
tions of this shortfall for hard-currency earnings
and Soviet ability to supply oil to Eastern
Europe are disastrous. The implications for the
economy if the shortfall were taken out of
domestic consumption rather than by shifting
from net exports to net imports are serious.
Energy conservation is an obvious goal, but
exceedingly difficult to achieve. Help may be
sought from the West.
Prospects for the Economy
Leadership Intentions and Plans
Soviet plans and apparent intentions for the
balance of the seventies reflect an intent to
3Growth in domestic use of oil is estimated at about 5 percent
annually during 1976-80 and 3 percent per year in 1981-85.
Both rates are a considerable reduction from the average of 7.1
percent in 1971-75.
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adopt a new growth strategy and hopes that
major breakthroughs in productivity can be
achieved. The leadership may believe that cur-
rent programs to improve efficiency will coun-
teract the effect on growth of smaller incre-
ments to the labor force. We do not know what
the Soviet leaders really expect in the way of
economic growth beyond 1980. A 1976-90
long-term plan, promised for some time, has yet
to appear. The harsh realities of the resource
situation in the 1980s may explain the delay in
part.
In a substantial departure from previous
plans, the current (1976-80) Five-Year Plan
projects a relatively low rate of growth~by his=
torical standards-for industry (6 percent per
year) and a marked slowdown in the growth of
new fixed investment (about 3 percent per year
compared with 7 percent per year in 1971-75).
The current plan sharply curtails the growth of
new construction starts in favor of: (a) investing
in advanced machinery and equipment, (b) ren-
ovating and reequipping old plants, a quicker
and cheaper process than building on greenfield
sites, and (c) mechanizing activities such as
materials handling, still done manually in large
part. In this way the leadership intends to em-
phasize concentration and modernization at the
expense of traditional patterns of expansive
growth.
The leadership also plans to retrench in the
consumption sphere. The current five-year plan
recognizes that Brezhnev's program to raise per
capita meat consumption to Western levels will
suffer a setback because of forced herd reduc-
tions-the result of the poor 1975 harvest and
the inefficiency of the Soviet livestock industry.
This program has cost the USSR dearly in grain,
which must be imported at the margin. The new
plan calls for only a 14 percent growth in total
meat output in 1976-80, compared with 23
percent in 1971-75. Thus, even if the plan is
met, per capita meat consumption would be a
little higher in 1980 than in 1975.
While goals for defense are not announced,
the present upward momentum of Soviet de-
fense programs is likely to continue. First of all,
future Soviet military budgets will continue to
be strongly influenced by programs already in
motion. To maintain forces now in being will
require large and unavoidable expenses. Weap-
ons deployment programs now under way in
both the strategic and theater forces and new
weapons systems well advanced in their de-
velopment cycles presage additional procure-
ment commitments. When deployed, the new
systems will contribute to higher operating and
maintenance costs. Although new programs re-
place old programs, new weapons are more
complex and, hence, more costly than those
they replace. This systematic increase in unit
costs means that maintenance and moderniza-
tion of existing force levels leads to ever-
increasing expenditure levels. Moreover, cost
escalation appears to be much more rapid in the
USSR than in the United States.
Institutional factors also support continued
growth of Soviet defense programs. The Soviets
consider expansion of defense industrial ca-
pacity as a major national goal. The natural
alliance between defense industrialists and mili-
tary leaders makes it difficult in the short run
to make major cutbacks of investments in de-
fense industries in favor of nondefense goals.
In sum, the scale and pace of Soviet weapons
programs show no signs of abating at this time,
nor are there indications of intent to slow the
growth of military industry or to reorder na-
tional priorities so as to lessen the rate of
growth of defense in favor of investment or
consumer goods. We therefore expect a continu-
ation of the current 4 to 5 percent annual
growth in defense spending during the next few
years.
Plans Still Overly Optimistic
Although less ambitious than previous plans
in regard to productivity, the 1976-80 plan
reflects unrealistic expectations about produc-
tivity growth. The problem can be seen in the
accompanying tabulation.
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Average Annual Rate of Growth of GNP,
Inputs, and Productivity
1971-75
1976-80
1951-60
1961-70
Plan
Actual
Plan
GNP
5.8
5.1
5.8
3.7
5.0
Inputs
4.6
4.3
3.8
4.3
3.5
Manhours
1.3
1.8
1.6
1.9
1.5
Capital
9.4
8.1
7.1
7.9
6.5
Land
2.4
0.4
0.5
0.8
0.5
Factor
produc-
tivity 1.2 0.8 1.9 -0.6 1.5
The implied productivity growth of 1.5 per-
cent annually to meet planned growth in output
in 1976-80 is twice the rate realized in the
1960s; in 1971-75, productivity actually de-
clined, largely as a consequence of the bad
harvests of 1972 and 1975.
At the same time, dependence on produc-
tivity gains is increasing because input growth
is slowing down. In 1976, total inputs to the
economy grew by 4 percent (see figure 4). By
1980, the annual growth in combined inputs
dips to 3.25 percent, and by 1985 to below 2.5
percent.4 Carried out to 1990, the calculation
shows the yearly percentage increment of in-
puts to labor, capital, and land falling to little
more than 2 Percent.' The converse of the
falling rate of growth in the supply of produc-
tive factors to the economy is the acceleration
in productivity gains necessary to sustain
growth of Soviet GNP. By way of illustration, a
5-percent growth in GNP requires productivity
4Th calculation assumes that in 1981-90 investment in new
plant and equipment grows at the same rate as planned
investment in 1976-80 (3.2 percent per year).
5Unlike in earlier periods, future opportunities for exceeding
growth targets for labor and capital are slim. Much of the
above-plan growth in labor in the past was due to
Percentage Increase in Productivity Needed
To Maintain GNP Growth at 5 Percent
1976 1980 1985 1990
1.0 1.7 2.5 2.8
to rise by the percentage amounts through 1990
shown in the tabulation. Nothing in past Soviet
economic history suggests that an acceleration
of this magnitude can be achieved.
Some decline in GNP growth in the 1980s
probably appears both inevitable and acceptable
to planners and high party officials alike. Never-
theless, the Soviet leadership probably believes
it can maintain a growth of GNP of at least 4
percent per year in the 1980s by pushing pro-
grams to raise efficiency. Even with some relax-
ation in goals for economic growth, however,
the implied productivity targets are extremely
demanding. This is especially so in view of
threatened shortages of energy and other indus-
trial raw materials.
Possibility of Material Shortages
Since the late 1950s, potential shortages of
industrial raw materials could generally be
ignored in assessments of Soviet growth pros-
pects. This is no longer the case. In at least two
key sectors-steel and fuels-unexpected short-
falls in production could wreak havoc on indus-
trial output. Because Soviet planning is charac-
teristically taut, the effects of shortages of
widely used materials would reverberate quickly
through the economy.
An immediate problem for Soviet planners is
steel. Growth in output of crude steel, which
averaged 5 million metric tons annually since
higher-than-expected participation rates, especially for women.
Since these rates have now, reached realistic maximums, future
increases in labor inputs will depend on predictable trends in
the able-bodied population. Above-plan growth in capital stock
has been achieved by holding retirement rates of old plant and
equipment below slated levels. As discussed below, this policy
can be continued only at a penalty on growth in productivity.
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the Economy, The Base Case
o Annual Growth Rates of Inputs to
the 1960s, dropped to 3.4 million tons in 1976
and imports from Western suppliers rose
rapidly. In first quarter 1977, production was
actually below the first quarter 1976 level. The
lost production will not be easy to make up.
Construction of new steel-making capacity has
lagged badly. During 1971-76, less than 2 mil-
lion tons of new capacity were brought on
stream each year-only half the amount
planned, As a result, retirements of older, ineffi-
cient facilities have been deferred and operating
levels raised so high that routine maintenance
suffers.
As noted above, fuel supplies may well dic-
tate the pace of economic growth. If the plan-
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ners do not adapt quickly to the expected
abrupt decline in oil liftings, severe shortages
will be hard to avoid and a recession could
result.
What the Leadership is Counting On
With less reliance on investment and greater
stress on efficiency, the 1976-80 plan requires
the Soviet economic system to produce results
quite different from any achieved in the past 50
years. Although a great deal seems to depend on
better management, the measures proposed to
improve economic management have little
merit.6
The leadership is on firmer ground, however,
in expecting that labor will be used more effi-
ciently at the level of the individual factory and
farm. Because of the wasteful use of labor in
the Soviet economy, some efficiency gains can
be achieved under concerted pressure. The
tightening labor market could be the catalyst
for a boost in labor productivity.
Indeed, the experience in. industry during
1971-75 (a slowdown in growth of the work-
force to 1.5 percent per year compared with 3
percent in 1966-70) suggests that the process of
forcing out redundant labor has had some
success. The average annual rate of growth of
output per industrial worker has increased as
employment growth declined. During 1976-80
industry is expected to add fewer than 1-1.5
million new workers. A decade ago, Soviet in-
dustry was adding more workers than this every
year.
6The most publicized measure now under way is the program to
group enterprises into large associations. Gains in efficiency
resulting from such mergers have been small thus far, however.
The associations must deal with the same inflexible plans as
before, and their actions and rewards will be monitored by the
same bureaucratic agencies. To encourage enterprises to
improve product quality and adopt new technology the plan
uses traditional methods-bonuses for meeting plans for
innovations and for raising the quality of products to world
standards. But since the measurement of quality or the utility
of an innovation is controversial, the bureaucracy is likely to
administer these incentives much as before.
Industrial
Production
Industrial
Employment
Output
per Worker
1961-65
6.7
3.9
2.7
1966-70
6.7
2.9
3.7
1971-76
5.7
1.5
4.1
One concrete approach to raising labor pro-
ductivity is the program to mechanize and
automate labor-intensive auxiliary processes,
such as loading and unloading operations. More
than half of all industrial workers in the USSR
perform manual work, and this share has been
declining at a snail's pace-about one-half a per-
centage point each year. Success in mechanizing
these processes depends on the ability of the
domestic economy to turn out large quantities
of labor-saving equipment, which often must be
tailored to specific uses. Complaints are already
being heard that many types of small-scale
mechanization are not included in the plan and
that resources for their production are not
being provided. Thus, we believe that the con-
tribution of mechanization to productivity will
fall short of plan.
The USSR also hopes to raise the productiv-
ity of new investment. The plan calls for:
? A shift in the structure of investment in
favor of equipment rather that buildings and
structures.
? A reduction in the backlog of unfinished
investment in .new plant and equipment.
? More rapid assimilation and diffusion of
imported and domestically generated tech-
nology.
The first two objectives, recurrent features of
earlier Soviet plans, are even less likely to boost
productivity than in the past. The changing
sources of energy and raw materials and the
uneven geographic distribution of labor force
growth suggest that fixed investment should not
be focused at existing sites. Moreover, a concen-
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tration on project completions could lead to
imbalances in production capacity.'
The impact of imports of Western technology
over the next 14 years cannot be determined.
The Soviets look to the West primarily for
advanced technology and equipment to help in
their modernization drive. In certain vital indus-
tries, such as chemicals and oil and gas extrac-
tion, Western equipment will continue to play
an important role. The level of total machinery
imports will rise for a time but may drop
precipitously if crude oil exports are cut back.
The most difficult question concerns thein-
direct effect of imported equipment and tech-,
nology. Imports from the West have accounted
for about 5 percent of total Soviet investment
in machinery and equipment over the last five
years, and, once assimilated, directly influence a
relatively small portion of the USSR's stock of
fixed capital. The payoff would be much larger
if the imports had a demonstration effect that
spread quickly beyond the immediate point of
application through research, engineering, and
production. Slow assimilation and diffusion of
technology have been widely noted in the
USSR, and a series of decrees have endeavored
to improve the performance of management,
R&D, and educational institutions in this area.
In view of the slow progress registered thus far,
it seems unreasonable to count on a break-
through over the next several years.
Against the efficiency gains that the Soviets
may achieve in the management of labor, capi-
tal, and R&D resources some important oppos-
ing trends must be considered. The increasing
costs of obtaining raw materials already have
As the inister of Coal Industry told the 25th Party Congress:
The CPSU Central Committee draft for the 25th
Congress outlines the development of the Kansk-
Achlnsk Basin. But the five-year plan does not pro-
vide for resources for starting and construction of
new projects. We ask the USSR Gosplan to allocate
the necessary material and financial means, when it
amends the 1976-80 plan, bearing in mind that it will
take 10-15 years to create enterprises in new, sparsely
inhabited areas.
been noted. Transportation costs are rising, and
in some cases like coal and ore, the raw mate-
rials must be upgraded at great expense. When
the capital cost of supplying intermediate prod-
ucts rises, the productivity of resources in sup-
plying final goods and services tends to decline.
Moreover, the shift in investment needed to
move the energy balance away from oil will
increase capital requirements over a broad range
of the economy, further depressing produc-
tivity.
All in all, we do not believe that the Soviet
leadership can continue on its present course if
a marked slowdown in growth is to be avoided.
The resource situation and the ineffectiveness
of the measures designed to raise productivity
will force the leadership to develop new
policies.
Some Options for the Leadership
Searching for ways to overcome the currents
retarding Soviet economic growth, the planners
will consider a range of options. They will have
to do something about material supply and
could adopt some fairly stringent measures with
respect to manpower and investment. Serious
economic reform, while certain to be on the
agenda for discussion, is much less likely to be
included in a policy package.
Material Supply
Turning to the problems raised by the possi-
bility of critical industrial material shortages, the
near-term options open to the leadership nar-
row down to conservation, increased imports,
and reallocations toward preferred uses. For a
commodity like steel, conservation has little
short-run potential. Steel import tonnage has
doubled since 1970, mainly in the categories in
short supply in the USSR-large-diameter pipe,
cold rolled steel, and high-quality tubing and
electrical sheets. Planners have used a soft world
steel market to offset domestic shortfalls in the
past. Anticipated constraints on hard-currency
availability, however, will severely limit Mos-
cow's ability to obtain steel in the West in the
1980s. At the same time, there is some room
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for saving steel used in the production of the
big ticket consumer durables that have been
produced in increasing quantities in recent
years. Nonetheless, over the longer term short-
ages of steel or other raw materials need not last
if investments are directed wisely. Although
costing more, materials such as iron ore, timber,
and nonferrous metals can be made available.
Ensuring an adequate fuel supply will be
much more difficult. The USSR can offset some
effects of the anticipated decline in oil produc-
tion by launching high priority programs to
conserve energy and substitute other energy
sources for oil. Such programs would be costly
and take time. Success is, moreover, far from
certain. Central control over fuel allocations is
as strict as in any country in the world, but
large sources of oil saving are more difficult to
identify in the USSR than in the West. For
example, the bulk of automotive transport in
the USSR is for commercial and industrial use,
whereas in the West much is for private use, and
only about 3 percent of total oil is used directly
by households in the USSR compared with 12
percent in the US. As a result, opportunities for
oil conservation that would not hinder produc-
tion are more limited in the USSR than in
Western countries. A vigorous conservation pro-
gram, however, would enable the USSR to
avoid widespread domestic oil shortages-at
least in the period before Soviet oil production
slumps badly.
The greatest opportunity for oil savings lies
in the substitution of natural gas and coal for
oil generation of electricity. At present, about
two-thirds of the residual fuel oil produced in
the USSR is used in thermal power plants. Cur-
rent plans provide that no new thermal power
plants producing only electricity-as opposed to
those producing both electricity and steam
heat-are to use oil as a fuel, and that low-
quality coal will be the primary fuel source. At
the 25th Party Congress, Kosygin stated that a
number of large power plants in the Urals and
Volga regions would be converted to burn coal
instead of oil. While conversion to gas is
14
technically feasible, conversion to coal is im-
practical unless the plant was originally built to
use both oil and coal.' Substitution of natural
gas will be limited by the level of gas produc-
tion and demands of competing users. Natural
gas might be used in place of oil in some
chemical processes. The USSR also has plans to
begin to use gaseous fuels, or liquefied gas, as
fuel for motor vehicles, and some savings in use
of gasoline and diesel fuel can be affected by
substituting lighter plastics and aluminum for
steel in motor vehicles.
We judge that the USSR probably could save
about 2.5 percent of the energy use projected
on the basis of the historical relationship
between GNP and energy demand. This is a
highly subjective estimate, based on general
knowledge in the absence of specific informa-
tion. Such savings, if all focused on oil con-
sumption, would enable the USSR to cut oil
consumption to 9.4 million b/d by 1985,
compared with 10.1 million b/d under a busi-
ness-as-usual regime.9 If production in 1985
turns out to be in the upper portion of our
projected range (8 million to 10 million b/d),
domestic requirements could be covered. Even
then, however, the USSR would lose its exports
of oil for hard currency and would have to cut
back oil shipments to its client states in Eastern
Europe. On the other hand, if production falls
below 9 million bid in 1985, successful conser-
vation and substitution measures that reduced
domestic demand to 9.4 million b/d would not
prevent the USSR from having to import a great
deal of oil on its own account.
Manpower Measures
In the past, failure to reach plan production
goals has usually led the USSR to first try to
put more labor into industry than a given plan
a Conversion of a plant originally designed to use oil would
require construction of an entirely new boiler house and expen-
sive coal and ash handling facilities.
9The estimates for energy (and oil) consumption in 1985 are
based on an assumed rate of growth of GNP of 4 percent per
year in 1977-80 and a little more than 3 percent per year in
1981-85. See the baseline case in table 2, page 17.
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specified. The above-plan cadres usually have
been skimmed from the farm labor pool. Since
agriculture cannot spare many of the more
mobile young people that it now has, the
authorities are now likely to turn to the service
sector. By restraining the growth of services,
where labor productivity is relatively low, the
manpower authorities can reallocate labor in a
way that will raise average productivity in the
economy as a whole. Such a policy, however,
soon would conflict with the influential body
of opinion that argues for greater worker
incentives to raise productivity. Provision of
more services is a major part of the program to
enhance the quality of life in the Soviet Union.
As the manpower situation worsens, the
authorities will have time to review and perhaps
adopt policies to boost the rate of growth of
manhours. Older workers could be retained by
raising pension ages and lifting penalties for
working after retirement.l0 More young
workers would be brought into the labor force
by changing education policies to restrict the
number of full-time students. A reduction in
the size of the armed forces would also make
workers available. Inasmuch as the Soviets view
military conscription as serving political, ideo-
logical, and educational purposes as well as
military needs, such a cutback would probably
take the form of a shortening of the term of
service rather than a lowering of the partici-
pation rates. All of these measures taken col-
lectively could postpone the impending drop-
off in the rate of growth of the Soviet labor
force. Still, nothing that the planners can do
will prevent a long and pronounced decline in
the annual additions to the labor force-a slide
that would not bottom out until the mid-1990s
(figure 2, on page 5).
10 Statutory limitations on combined earnings of working pen-
sioners tend to discourage continued employment among the
relatively high-salaried professional and technical personnel. The
earnings ceiling currently is 300 rubles a month; average
monthly pay of engineering-technical personnel in industry is
over 200 rubles a month, with older and more experienced
personnel earning much more.
While reviewing ways of increasing the size of
the labor force, the authorities will press efforts
to use labor more efficiently. They should have
some success in this area. The major contrib-
uting factors to "over-full employment" in the
Soviet economy have been (a) a government
policy ensuring jobs for all who want them, (b)
a tendency on the part of managers to hoard
workers, and (c) an aversion on the part of
policymakers to the social and political conse-
quences of technological unemployment. In a
tight labor market, hoarding of labor will be-
come increasingly difficult and technological
unemployment less of a concern.
Possible Investment Strategy
Responding to productivity shortfalls by
pushing up the rate of growth of fixed capital
will not be easy in the short run. One straight-
forward approach would be to abandon the
scheduled rise in the rate at which old plant and
equipment is retired. The 1976-80 plan implies
an increase in annual retirement rates from an
average of 1.5 percent in 1971-75 to 2.4 per-
cent in 1976-80. Holding retirement rates at the
1971-75 level would raise the rate of growth of
fixed capital by a little less than I percentage
point, although the penalties on productivity in
terms of increased obsolescence would offset
some of the positive effect of having more
capital.
Alternatively, capital stock growth could be
stepped up by increasing imports of machinery.
We believe, however, that the USSR will have
trouble reaching the goals for foreign purchases
implied in the plan targets for growth in the
volume of foreign trade, and therefore in the
existing investment plan. In any event, because
of the long lead time required between the
placing of orders and the delivery and instal-
lation of new foreign machinery, accelerating
the growth of the stock of plant and equipment
by stepping up machinery purchases is not a
viable near-term alternative.
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A harder policy decision would be to reorient
domestic capacity for producing machinery. As
production of consumer durables is a small
though increasing share of total machinery out-
put, a large cut in production of passenger cars,
refrigerators, electrical appliances, and the like
would be required to have much impact on the
production of machinery for investment. It is
highly unlikely that such large-and politically
costly-cuts in the output of consumer durables
would be made.
A shift of defense industrial capacity to pro-
duction of investment goods also would be un-
attractive to the leadership and difficult to
effect within a time span of a few years. The
Soviets consider defense industrial capacity at
least as important as military forces in the
field-indeed, more important in the long term.
And they know that the Soviet economy is less
effective than that of the US in marshalling
technological resources in an emergency. More-
over, because of their specialized nature, such
resources could not be transferred easily to
civilian purposes on short notice. For these
reasons, we believe it unlikely that the Soviets
would divert weapons development resources or
defense production capacity or abandon devel-
opment or deployment programs currently
tinder way. They may, however, be willing to
stretch out research and development programs
and production schedules and slow the rate of
expansion of defense-oriented industrial capac-
ity, thus releasing some material inputs and
other resources that can be used for civilian
production. Passing into the 1980s, the pros-
pect of a long period of resource constraint
could incline the leadership to take a harder
look at defense. Arms limitation agreements
that save more than marginal amounts of re-
sources might then be given greater weight in
Soviet policy than they appear to have at
present. If such agreements were reached,
savings convertible into investment could rise to
a substantial level by 1990. (The consequences
of an agreement leading to fairly deep cuts are
explored further in this paper.)
Economic Reform
A thoroughgoing reform of the economic
system could boost appreciably the efficiency
and quality of production over a period of
years. But the Politburo correctly perceives that
reform threatens its political control. The most
radical reform conceivably acceptable would be
some kind of market socialism, which might
also include a larger role for private enterprise
in agriculture and services. The obstacles to
reforms of this kind are thorny. Introduction of
markets and expansion of private activity would
entail compromises with ideology, and markets,
if effective, would replace bureaucrats and
hence incur resistance. Economic reforms
would threaten the entrenched positions of
both state and party bureaucracies and weaken
the Party's grip on the economy. Moreover, the
transition to markets could cause unemploy-
ment and severe disruption in the short run.
Therefore, unless a serious breakdown in the
economy occurs, changes in planning and organ-
ization are unlikely to be a factor in stimulating
economic development through the 1980s.
Outlook for Economic Growth-
Some Policy-Conditioned Projections
Since the development of the Soviet econ-
omy will depend increasingly on how the
leadership responds to the emerging energy and
manpower problems, single-value forecasts will
not do. Therefore, we will present three pro-
jections of the growth of GNP-each tied to a
particular set of economic policies that the
leadership might embrace.'' The first is a base--
line case. It assumes that the USSR succeeds in
avoiding economic dislocations attributable to
shortages of fuel and other raw materials but
does nothing to accelerate the rate of growth of
See appendix for a description of the methodology used in
projecting growth of GNP_
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investment or to increase participation in the
civilian labor force. The second case is a busi-
ness-as-usual case in which the leadership fails
to act decisively enough to prevent fuel short-
ages and other supply bottlenecks from dis-
rupting production and does not adopt
measures to spur investment or to offset the
effects of demographic trends on the labor
force. For a third, best-case scenario we assume
both a timely reponse to energy and raw
material problems and energetic policies to di-
vert resources from consumption and defense to
investment and pull more workers into the
labor force.' 2
Base-Line Case
Should the USSR manage to prevent fuel and
raw material shortages from interfering with
production-while holding to present invest-
12 These cases do not of course exhaust the range of possible
policy combinations. We would argue, however, that the busi-
ness-as-usual and best cases represent about the worst and best
that the Soviets could do in influencing economic growth
through 1985.
ment policies and accepting the impending de-
cline in the rate of increase of the labor force-
GNP growth will inevitably trend downward,
following the resource curve in figure 4. Produc-
tivity gains probably would be about 1/2 per-
cent per year, resulting in a rate of growth of
GNP of approximately 4 percent per year in
1977-80 and 3-1/4 percent per year in 1981-85
(table 2). A higher rate of growth of GNP than
the range shown in table 2 would demand a
rebound in productivity growth that seems
highly unlikely, given recent experience and the
assumption of no fundamental change in eco-
nomic policies. On the other hand, if supply
bottlenecks do not appear, productivity should
at least increase, even though slowly.
The base-line case underscores a key aspect
of the USSR's economic future. Growth will
almost certainly taper off even if the leadership
finds a solution to the predicted decline in oil
production. The rate of growth of GNP of 3
percent to 3-1/2 percent projected for 1981-85 is
unprecedented in postwar Soviet history, and a
Factor
Inputs Productivity
Base-line case
(successful response 3% 1/4 to '/
to fuel raw material
problems)
Business-as-usual case
(fuel and raw
material shortages)
Best case
(successful response 31/2 M. to %
to fuel and raw mate-
rial problems and
vigorous manpower
and investment policies)
Factor
GNP Inputs Productivity GNP
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continuing fall in the rate of increase of inputs
to the economy suggests that normal GNP
growth could be less than 3 percent per year in
the later part of the 1980s.
Business-as-Usual Case
If the USSR fails to limit the damage implicit
in a downturn in oil production, GNP growth
could fall off abruptly (table 2). The projection
puts the transition in the 1981-85 period al-
though oil production may drop in the next few
years. In the business-as-usual projection, the
effects of fuel shortages (perhaps reinforced by
shortages of other raw materials) are repre-
sented by a decline in the level of the produc-
tivity of factor inputs. Factor productivity has
decreased in certain years because of bad crops,
but the pervasive and continuing effects of
shortfalls in fuel supplies could easily shut
down some of the USSR's productive capacity.
Indeed, over the course of a year or two, before
adjustments can be made, the effect on produc-
tivity might well be larger than we have pro-
jected.' 3
Realistically, business-as-usual could not last
beyond the first fuel crises. The urgent conser-
vation, reallocation, and substitution measures
that would surely be enforced would ultimately
bring relief. Nonetheless, if the first dislocations
.were felt in the middle of the 1.981-85 period,
GNP growth probably would not rise above
2-1 /2 percent per year during the remainder of
the 1980s.14 The recovery in productivity
would partly offset the steady decline in the
rate of increase of inputs to the economy.
13In the projection for 1981-85, factor inputs increase by 2-3/4
percent per year. If the "normal" rate of growth of productivity
were 1/2 percent per year, output would increase by 3-1/4
percent per year. The fraction of total capacity made idle by
fuel shortages would have to increase by only I percent per year
to bring GNP growth down to 2-1 /4 percent per year-the rate
shown in the projection.
14The lower end of the range of GNP growth in the business--
as-usual case shown in table 2 (2 percent) would also he asso-
ciated with the lower end of our projected range of energy
output.
Because Soviet growth potential falls steadily
from now through the early 1980s, the leader-
ship will come under increasing pressure to de-
vise new policy initiatives. The leadership's
choice of policies and the success of these
policies can only be guessed. We believe, how-
ever, that assuring an adequate supply of energy
is by far the most desirable path. that the USSR
can follow. As in the base case, we assume that
energy is not a constraint. Next, the USSR will
very likely search hard for more investment and
labor resources if its hopes for productivity are
disappointed. To test the possibilities in this
direction, we have specified two combinations
of policies that the Politburo might adopt in the
next few years, to take effect in the 1980s:
(a) The first set of measures focuses on in-
vestment. By freezing the level of military in-
vestment (acquisition of hardware and new con-
struction) at the projected 1980 level, sums
ranging from I billion rubles in 1981 to 10.5
billion rubles in 1990 could be added to new
fixed investment. At the same time, the authori-
ties would probably try to take something from
the consumers as well. Consumer durable pro-
duction, for example, could be cut back from
present levels by amounts increasing from 1.0
billion rubles in 1980 to 2.8 billion rubles in
1990. The effect of these policies on inputs to
the economy is shown in figure 5. Through
1985, the growth of capital stock and total
inputs rises only marginally. Even in 1990 the
increase in combined inputs as a result of the
higher investment is only 0.2 percentage points
higher than in the base case.
(b) As a second option, we assume that the
leadership supplements the investment program
described above with a strenuous attempt to
increase the labor force in 1981-85. Beginning
in 1981, the armed forces are pared back grad-
ually, from 4.5 million men in 1980 to 3.5
million men in 1985, about the level of the
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Figure 5
Annual Rate of Growth of Inputs
^ to the Economy Under Different
^ Investment Assumptions
Ca
italS
ock
-Mift"
W
th fn
estm
nt r
gra
ithou
7-
Inv
tmen
ro
ram
Tot
I Inp
s
vent
ent
r
~
~
er
r
Wi
out
....
Inv
stme
it Pri
ram
nhou
s
Land
mid-1960s. To raise civilian participation in the
labor force, the USSR could push more 16 to
19 year-olds into the economy by reducing
admission quotas for secondary, vocational, and
higher schools. By 1985 the implied partici-
pation rate for this age cohort rises to 65.3
percent, still somewhat lower than that pre-
vailing in the late 1950s and early 1960s before
the advent of universal secondary education.
To induce higher employment in the older age
groups, the leadership would have to raise the
retirement age or induce retirees to return to
work. The result of this double option-
depicted in figure 6-is an average boost to the
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rate of input growth of about one-half of one Employment, however, continues at a
percentage point during 1981-85. Nonetheless, substantially higher level than in the base case.
about 6 million more people would be working
in 1985 under this option than in the base case. The economy's response to such measures
After 1985 the employment growth rate drops (table 2) might seem paltry to the planners. The
back to about the same level as the base case. two options combined boost GNP growth by
Annual Rate of Growth of Inputs
to the Economy Under Different
Investment and Manpower
Assumptions
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about 1/4 percent per year in 1981-85 com-
pared with the base case_15 Before 1980, the
investment and manpower policies have not
taken hold, so the projected growth is the same
as in the base case. After the mid-1980s the
effect of the manpower policies on growth has
been spent, while the impact of raising invest-
ment allocations is too small to make much
difference to the growth of inputs. The trend in
productivity therefore determines the course of
the economy in the late 1980s, leading to GNP
growth of perhaps 2-1/2 to 3 percent per year-
again, as in the base case. Projections, by no
means precise, depend on assumptions regarding
productivity. We believe the Soviets will be
lucky to achieve productivity gains averaging
one-half of one percent per year and that draw-
ing in younger, untrained workers and retirees
would lower the rate of increase of
productivity, compared with the base case.
General Assessment
These illustrative projections of Soviet eco-
nomic growth do not exhibit much of a range,
aside from the case in which the leadership fails
to react quickly enough to forestall serious
shortages of energy and basic materials. For
example, as indicated above, such shortages
could occur, from the demand side, if there is
little or no energy conservation or, from the
supply side, if the output of energy falls to the
lower end of the expected production range.
Under these conditions growth in GNP might be
limited to as little as 2 percent per year in
1981-85.
Somewhat surprisingly, a comparison of the
alternative policy packages suggests that the
leadership cannot have much influence on the
rate of growth of consumption either. Con-
sumption is the residual claimant in the distri-
15 Production of energy at the high end of our projected range
combined with strenuous conservation programs could support
a growth in GNP 00-3/4 Percent per year, the upper end of our
range in the best case scenario.
bution of GNP in the different scenarios and by
far the largest claimant. Since none of the three
choices-leaving investment and defense un-
touched, boosting investment, or increasing in-
vestment and the labor force-alters GNP
growth much, the growth of consumption varies
between the base and best cases by not more
than 1 /4 to 1/2 percent per year throughout
the 1980s. Thus, it is doubtful that the Polit-
buro would be interested in this sort of
defense-investment-manpower trade off.
On the other hand, the slower growth of
GNP associated with persistent shortages of
energy, and possibly other basic materials,
would permit a growth in per capita consump-
tion of only about 1/2 percent per year in
1981-85 and an absolute decline for the balance
of the 1980s, compared with an increase in per
capita consumption of about 2-1/2 percent a
year in 1981-85 and 1 to 1-1/2 percent there-
after under a successful energy policy.
Under these conditions, the inevitable rise in
wages over the next 10 years combined with the
slower growth in the availability of consumer
goods will result in inflationary pressures and
increasing frustration for the consumer. The
Soviet consumer is relatively content as long as
some improvements are made. However, if he is
forced to experience an extended standstill in
living levels, this could affect substantially in-
centives and productivity and cause public
unrest. As a result, it is clear that to maintain an
economy healthy enough to preserve domestic
stability, the leadership must avoid a raw
materials crunch.
Implications for Foreign Trade
The USSR's growing economic problems will
hit imports from the West especially hard. Al-
though such imports are small in relation to
Soviet GNP (1.6 percent in 1976), they have
been increasing rapidly. Imports of machinery
and steel have been especially important to the
Soviet economy, and, with increased stress on
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raising productivity the need for Western goods
will become even greater. The problem is that
the USSR will not have the foreign exchange to
meet these increased demands. The expected
fall in crude oil production threatens to squeeze
severely Moscow's capacity to import Western
manufactured goods.
Under any but optimistic scenarios for oil
production, and in the absence of a high pri-
ority campaign to save oil domestically, the
USSR will shift from earning to spending hard
currency in its oil trade. The difference between
selling 1 million b/d (as in 1976) and buying
2.7 million b/dl6 (the projection for 1985 that
assumes no unusual conservation efforts) is $17
billion in 1977 prices, more than the USSR's
total 1976 hard-currency imports. A substantial
rise in real oil prices, I? which is likely to occur
at the very time when the USSR is becoming a
net oil importer, would further increase the
16 Comprising 1.6 million b/d for reexport to Eastern Europe
and 1.1 million b/d for domestic consumption (the difference
between projected consumption of 10.1 million b/d and pro-
jected production of 9 million b/d). An earlier CIA study, "The
International Energy Situation: Outlook to 1985" (April 1977),
estimates combined Soviet and Eastern Europe oil imports in
1985 at 3.5 to 4.5 million b/d. This range is consistent with the
base line forecast made in this paper on the assumption that the
Soviet Union makes no special new effort to save oil. There is a
difference in coverage, however. The earlier estimates include
Romania and Yugoslavia while those in the current study do
not because these two countries, unlike the others in Eastern
Europe, are not considered Soviet clients for this purpose; that
is, the USSR would not be expected to make up their energy
deficits. There have also been some changes in the forecasts
about oil demand in the USSR and Eastern Europe but these
largely cancel out. If Romania and Yugoslavia are included, the
current base line forecast is 3.9 million b/d or close to the
midpoint of the range in the earlier paper.
Unlike the earlier estimate, the present forecast considers
the possible impact of additional energy savings due to new
Soviet policies. With additional energy savings of 2.5 percent, all
in the form of oil, the USSR and Eastern Europe would need to
import 2.5 million b/d in 1985, or 2.9 million b/d including
Romania and Yugoslavia.
17That is, the price of oil rises relative to prices of exports and
other imports.
hard-currency drain. To offset such a shift, non-
oil Soviet exports would have to more than
quadruple in real terms in eight years-an im-
possible task.
Thus, Moscow will take steps, if necessary,
drastic ones, to protect its ability to continue
importing high quality manufactures and high
priority foods from the West. Such steps would
include all-out attempts to push nonoil exports,
and reductions of oil exports to Eastern
Europe.
Potential for Increasing Exports
The USSR will probably find it impossible to
offset the hard-currency shift in oil trade by
expanding hard-currency earnings from other
sources. If exports behave as they have in the
past, Soviet nonoil exports should increase at an
average annual real growth rate of about 5 per-
cent.' 8 Exports of wood and wood products
(the second largest hard-currency earner, at
$700 million in 1975) are expected to grow 5
to 10 percent annually in real terms. Soviet
timber harvesting problems will inhibit larger
increases. Diamond exports, valued at $500 mil-
lion in 1975, should maintain their strong up-
ward trend. Coal and coke exports ($400 mil-
lion in 1975) probably will not grow substan-
tially until the 1980s when new Siberian mines
are opened. Exports of platinum-group metals,
which have fluctuated annually by as much as
$200 million, were valued at over $200 million
in 1975;, they should increase over the long
term in part because of their use in pollution
control devices. Prospects for manufactured
goods, valued at over $600 million in 1975, are
bearish; the Soviets themselves admit that
export prospects are poor.
1sExport projections refer only to nonoil merchandise exports.
Gold and arms are treated separately below, The projections are
based on (a) historical relationships between Soviet exports and
Western industrial production and (b), likely trends in Western
industrial production.
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New export earnings from compensation
agreements already signed will boost annual ex-
port growth by several more percentage points
from present levels. Natural gas exports to
Western Europe will rise from $200 million in
1975 to more than $2 billion (1976 prices) by
1985. Exports of chemicals-especially am-
monia-wood and wood products, coal, and
metals will add another billion dollars to Soviet
exports by 1985. Another new source of hard
currency is uranium enrichment services, which
should add $200 million to $300 million
annually to hard-currency earnings beginning in
the early 1980s.
In light of the above, an average annual
growth rate of 7.5 percent seems appropriate
for nonoil exports paid for in hard currency. An
all-out Soviet effort to expand such exports
(again excluding gold and arms), combined with
more favorable economic conditions in the
West, could boost annual export growth to
roughly 10 percent.
Earnings from gold sales should increase
steadily, but rapid expansion will probably be
limited by market conditions in the West. In-
vestment decisions already made indicate a con-
tinued Soviet commitment to increase gold pro-
duction, which is expected to rise from about
350 tons in 1976 to 420 tons by 1980. Even if
the USSR should market most of its gold
production, we estimate that annual earnings in
real terms would increase only about 5 percent
in 1977-85. In 1976, Soviet gold sales were
approximately $1.4 billion. The USSR also
could boost production and/or sell off a portion
of its estimated 1,870 ton gold reserve in an
effort to boost earnings. Soviet willingness to
markedly expand sales will be tempered, how-
ever, by the adverse effect heavy Soviet sales
would have on the market price for gold.
Hard-currency earnings from arms sales are
substantial (an estimated $1.5 billion in 1976),
and have potential for growth. With a continua-
tion of the recent trend towards higher prices
for more sophisticated equipment and a rising
share of sales for cash, real earnings might in-
crease as much as 10 percent annually in
1977-85.
Although Moscow will wish to continue
financing a major share of machinery and equip-
ment imports through medium- and long-term
credits, it will find it increasingly difficult to do
so after 1980. Nevertheless, existing commit-
ments and relatively easy credit conditions in
the West suggest that the USSR should be able
to increase drawings on export credits by up to
5 percent (in real terms) annually in 1977-80.
By 1980 at the latest, the expected decline in
Soviet oil exports will cause increased apprehen-
sion in the West about Moscow's ability to
increase its foreign exchange earnings and
manage its debt. Substantial new credits are
likely to depend upon Soviet willingness to
undertake large compensation deals, particu-
larly in the energy sectors, that provide assur-
ances of future export capacity. In any case,
growing debt service will virtually eliminate any
favorable impact that more credits could have
on import capacity.' 9 By 1980 repayments on
past debt will exceed new drawings.
Soviet oil consumption policies will have a
far greater impact than the availability of new
credits on Soviet import capacity in the 1980s.
An oil conservation program that by 1985
results in a 2.5 percent reduction in overall
energy use and some substitution of other fuels
19Import capacity is defined as Soviet ability to finance im-
ports of commodities other than oil or grain from the West.
Soviet need for grain from the West is assumed to have first
claim on available hard currency for imports, depending on
harvests. In these projections grain imports are assumed to vary
between $1.5 billion and $2.5 billion annually.
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for oil seems plausible. Together such programs
would result in the savings of 700,000 b/d of oil
by 1985, roughly $3 billion in 1977 prices.
More important will be Soviet policy deci-
sions regarding exports of oil that do not earn
hard currency. In 1976 such foreign sales came
to 2 million b/d, two-thirds of which went to
Eastern Europe. Declining oil production will
probably cause Moscow to terminate oil exports
to such customers outside of Eastern Europe.
More importantly, it will force Moscow to
weigh carefully the tradeoffs between con-
tinued economic support to Eastern Europe and
trade with the West. Soviet oil exports to
Eastern Europe are scheduled to rise to 1.6
million b/d by 1980, a diversion of over $7
billion (in 1977 prices) from hard currency oil
markets.
We expect that Eastern Europe will be forced
to share the burden of the Soviet oil shortfall. If
the Soviets cut deliveries during 1981-85 so that
by 1985 deliveries were only one-half the 1980
level, the East Europeans would have to turn to
the West to make up the shortfall. The East
Europeans are.already buying 200,000 b/d from
hard-currency countries valued at about $900
million annually (roughly 5 percent of total
hard-currency imports); by 1985, assuming that
the East European countries take no additional
conservation measures, their hard-currency oil
imports could rise to 1.5 million b/d. That
would cost the East Europeans $7 billion an-
nually at 1977 prices, and more if the price of
oil increases-as we expect. An oil import bill of
this magnitude (about one-fourth of estimated
hard-currency imports) would cut into Eastern
Europe's ability to obtain critically needed in-
dustrial materials and equipment-a gloomy
prospect in view of Eastern Europe's depen-
dence on such imports to sustain growth.
The East Europeans will take steps to ease
the oil crunch but these will have limited effect.
A boost in exports to the West and massive
conservation programs would help but, in turn,
would require more imports from the West.2 0
In the final analysis, the East Europeans would
be forced to cut economic growth. A decline in
growth from our projected 1981-85 rate of 3.5
percent to 2.5 percent would reduce oil demand
by 400,000 b/d and the oil import bill by al-
most $2 billion. The reduction in economic
growth would force the East Europeans, and
ultimately Soviet, leaderships to engage in a
delicate balancing act between maintaining ex-
port levels and satisfying consumer expecta-
tions.
Soviet Hard-Currency Import Capacity
The range of uncertainty regarding future oil
production and consumption and the extreme
sensitivity of import capacity to alternative esti-
mates make it difficult to pinpoint future im-
port capacity. The interrelated nature of the
assumptions, however, narrows the range of
forecasts. For example, if Soviet oil production
falls quickly and early and if the world oil
prices rise rapidly, Moscow would probably
stress conservation efforts and be under pres-
sure to make substantial cuts in exports to
Eastern Europe. Conversely, a slower decline in
oil production coupled with a slower rise in
world oil prices would reduce the need for such
measures.
Our projections of future import capacity
were derived by combining several assumptions.
? Moscow pushes oil conservation beyond
20Both Eastern Europe and the USSR would have to rely
heavily on Western supplies for specialized machinery and
equipment for conserving energy.
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current plans, achieving a 2.5 percent savings
in overall energy use by 1985.
? Nonoil exports, excluding gold and arms,
increase between 7.5 percent and 10 percent
annually in 1977-85.
? Gold and arms sales will grow in real terms
by 5 percent and 10 percent per year, respec-
tively.
? Oil production falls to between 8.5 and 9.5
million b/d in 1985.
? The real price of oil remains at current
levels in 1977-80 and rises by up to 10
percent a year in 1981-85.
? Soviet oil exports to Eastern Europe in
1981-85 either remain at the scheduled 1980
level of 1.6 million b/d or are progressively
reduced to one-half the 1980 level.
Under these assumptions, Soviet import capa-
city in real terms will peak in 1980 at between
$16 billion and $19 billion and will fall by
1985 to between $3 billion and $11 billion
(see figure 7).21
The fall in import capacity will force the
Soviet leadership to make hard decisions regard-
ing trade with the West. We judge that:
? Imports related to energy conservation and
production will take precedence, as failure to
obtain such equipment and technology
would only exacerbate Soviet oil problems
and increase Soviet hard-currency expendi-
tures for oil over the longer run.
21 Under a likely set of assumptions with respect to oil produc-
tion and consumption, export growth, credit availability and
other factors, combined Soviet and East European hard-cur-
rency import capacity in the 1980s will decline-from an esti-
mated $36 billion in 1980 to $26 billion in 1985 (midpoints).
This is $1 billion less than the USSR and Eastern Europe
imported in 1976.. These figures assume an increase in the real
price of oil of 10 percent annually in 1981-85.
? Imports of consumer goods and nonessen-
tial foodstuffs probably will be cut
drastically.
? Imports of plant and equipment designed
to increase future export capacity will have
priority second only to energy-related im-
ports, and Soviet reliance on compensation
deals guaranteeing future export earnings will
increase.
? In order to encourage Western participa-
tion in compensation agreements and to in-
sure that energy resources are exploited effi-
ciently and rapidly, the USSR may have to
acquiesce to Western demand for profit shar-
ing, equity ownership, and onsite manage-
ment control.
Political Implications
Soviet economic problems over the next 10
years or so will become highly complex and not
susceptible to quick and easy solutions. As
Soviet leaders obtain a better perception of the
resource problems ahead, choices among eco-
nomic policy options will become abrasive
issues in leadership politics. For example, a con-
spicuous lack of success in coping with the
energy problem could lead to a policy crisis. and
pressure for changes within the leadership.
Soviet responses to economic problems will
be severely complicated by the fact that sta-
bility in the political leadership, which has been
quite high over the 13 years since Khrushchev's
fall, is almost certain to weaken during the
coming period. Brezhnev's vigor and stamina are
recurrently in question; his senior colleagues are
his age or older. The controlling group has been
timid in its approach to economic reform, and
its timidity has grown with time; the 1965
reforms were only partially implemented, and
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0 Capacity to Import Hard Currency
Goods and Services Other Than
Oil and Grain 1
1 An oil price of $12.50/barrel for 1977-85 is used under the high scenario while for the low scenario
$12.50/barrel was used for 1977-80, with an annual increase of 10%, thereafter.
the new constitution's emphasis upon central-
ization and party control testifies to Brezhnev's
conservatism on these matters.
Cautious economic policies are likely to con-
tinue during a period of transition to a post-
Brezhnev leadership. After a new leadership has
finally established itself, it is more likely that
policy options, which were considered and re-
jected in the past as too contentious or lacking
in urgency, will be given a chance. For example,
new leaders might be persuaded that basic
organization and management reforms in in-
dustry and an expansion of the private sector in
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agriculture are necessary. They might also con-
sider other options-such as accelerating invest-
ment at the expense of defense or consumption,
or reducing the armed forces to enhance the
civilian labor force.
The leadership may be spurred to action by
the growing potential for consumer unrest as
this sector is squeezed by both defense and
investment in the competition for the nation's
resources. Consumer expectations for an im-
proved diet already have been disappointed be-
cause of the poor harvests of 1972 and 1975.
An unfavorable climate change combined with a
hard-currency shortage could require a degree
of belt-tightening unknown since the Khrush-
chev years. Having just experienced a decade of
relatively rapid growth in levels of living, and
expecting continued growth in the next decade,
Soviet consumers will be doubly disappointed.
They have, of course, learned to bear disap-
pointments before, and the key unknown factor
is whether another round will finally impact
adversely on incentives and labor productivity.
Economic pressures that might elicit a major
political reassessment will depend not only on
domestic factors but also upon external de-
velopments, especially Soviet perception of the
international "correlation of forces." Western
economic health, North-South and Atlantic re-
lations, OPEC and oil prices are among the most
important factors that will enter into the
equation.
The West's recent economic troubles enabled
the East to gain in the growth sweepstakes in
the early 1970s but, because of a lower-than-
normal demand for the East's exports, also in-
creased the Bloc's debt to the West. Despite
better Bloc export prospects arising from West-
ern recovery, most of the problems related to a
further expansion of economic relations with
the West, including the debt accumulated, will
remain.
In -the meantime, the' decline in Soviet hard-
currency import capacity-coupled with a con-
tinuing need for imports of Western grain, key
industrial materials, technology, and equip-
ment-will lead the USSR to look to new
sources of foreign help. As indicated above the
only viable option would be massive Western
government-backed, self-liquidating credits for
large joint ventures such as those proposed for
the Yakutsk and North. Star LNG (liquefied
natural gas) projects. West Germany, Japan, and
other Western industrial countries can provide
substantial amounts of capital, technology and
equipment, but US participation in such
projects would almost certainly be required
both because of unique technology and to
spread financial and political risk.
The Burden of Eastern Europe
In deciding how much of the burden of rising
costs and declining oil production Eastern
Europe should bear, the USSR will have to be
careful not to push its allies too hard to gain
economic relief for itself. Reducing its oil ex-
ports to Eastern Europe will force these coun-
tries to spend scarce foreign exchange to buy
more oil in the West at the expense of equip-
ment and industrial materials vital for economic
growth.
Moscow would see economic benefits from
an expansion of East European trade with the
West and to join potentially helpful inter-
national organizations such as the World Bank
and International Monetary Fund. Western
direct private investment may have to be ac-
cepted to help Eastern Europe deal with its
hard-currency problems.
Communist Oil Policy in the Middle East
One major modification of Soviet policy in
the Middle East which has already begun is
likely to become increasingly important as time
goes on. This is the degree of emphasis given by
the Soviet leadership to using arms sales, partic-
ularly in the Middle East, as a hard-currency
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earner, as distinguished from using them as a
loss leader for purely political purposes. As the
economic function of arms sales becomes more
and more vital to Soviet interests, the Soviets
are likely to become proportionately avid in
seeking customers possessing hard currency or
its oil equivalent. This new economic interest-
superimposed on the old political interest in
using arms sales to supplant Western influence-
is likely to reinforce Soviet disinclination to
enter into international agreements restricting
such sales.
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APPENDIX
Forecasting Soviet Economic Growth
The forecasts of Soviet economic growth rely
on a combination of econometric techniques
and analytical judgments based on previous
trends and patterns in Soviet economic perfor-
ance. Central to the analysis in this report is
the aggregate production function. A produc-
tion function is a relation between inputs-
usually capital, labor, and land-and the result-
ing output or production. Production functions
of one kind or another are often used for eco-
nomic forecasting. In forecasts for the USSR,
both the general form and the precise charac-
teristics of the relationship between output and
inputs have been assumed or specified by anal-
ogy with Western practice.
Although a variety of production functions
were investigated, the aggregate production
function used in this paper was the generally
accepted Cobb-Douglas form: Q=ALbKcD I -b-c
where: Q = GNP
L = labor in man-hours
K = capital stock
D = land
A = combined factor productivity
The coefficients b, c, and (1-b-c) represent the
distribution of labor costs (wages, other in-
come, and social insurance deductions), capital
costs (depreciation and a 20-percent charge on
fixed capital net of depreciation), and an
assumed land rent. The fact that these coeffi-
cients sum to one involves an assumption of
constant returns to scale, that is, proportional
increases in all inputs will yield proportional
increases in output. The distribution of these
factor costs in production was derived from the
1970 GNP accounts for the Soviet Union. The
share of labor was computed at 55.8 percent, of
capital at 41.2 percent, and of land at 3.0
percent.
The combined factor productivity term, A, is
in effect a residual factor. It includes all in-
creases or decreases in production which are not
explained by increases or decreases in the pri-
mary inputs of capital, labor, and land. This
term incorporates primarily new technology,
qualitative improvements in management, pro-
duction engineering, health and education of
workers, and organization, changes in output
mix or material inputs, good luck, and anything
else not accounted for by quantitative changes
in the primary inputs.
The quantitative changes in primary inputs
used in the production functions computed for
the study are graphically portrayed in figures 5
and 6.
For the period through 1980, the GNP fore-
cast utilizes planned increments to inputs and
the assumption that factor productivity will fol-
low past trends quite closely. The forecast
growth rate of 4 percent per year 1976-80 is
consistent with an aggregation of individual
forecasts for the various sectors of the economy
(for example, industry and agriculture), derived
from a variety of econometric and analytical
techniques.
For the period 1981-85 the forecast is based
on the assumptions about the growth of inputs
and combined factor productivity since no plan
is available for these years. Labor growth is
based on analysis of projected demographic
trends. Growth of capital stock is more difficult
to predict because of changing Soviet strategy
for capital formation. The growth rates of
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capital portrayed in figures 5 and 6 assume that unfinished construction. The growth rate of
investment continues to grow at the relatively land is held at the rate planned for 1976-80 and
low rate planned for 1976-80 and that some reflects the effect of Soviet land reclamation
success is achieved in reducing the growth of programs.
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