BRIEFING BY THE OFFICE OF SOVIET ANALYSIS TO THE SSCI ON 8 MAY 1987

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B00017R000300570003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: December 9, 2011
• Sequence Number: 3
• Publication Date: May 8, 1987
• Content Type: MISC

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8 May 1987
Briefing by the office of Soviet Analysis to the SSCI on 8 May 1987
I. Gorbachev's Industrial Modernization Program: Implications for Civil-
Military Resource Competition
A. Gorbachev's Challenge - As we testified a few weeks ago, the major
challenge facing the Soviet leadership is to transform a system in
which past progress has depended on brute force mobilization of
resources into one that can generate growth through technological
change and more efficient use of resources. This challenge has an
important military dimension.
1. A revitalized Soviet economy would in the long-run benefit
defense.
a. As some Soviet military leaders have argued, successful
long-term competition with the West demands the
development of high technology support industries,
including those in the civilian sector.
b. A better functioning civilian economy would also protect
defense production from the disruptions that have plagued
it in the past.
2. Nonetheless, Gorbachev's program may require temporary
sacrifices on the defense sector's part.
a. Reduced to its simplest form, Gorbachev's modernization
program is a master plan to retool Soviet industries with
new, more capable machinery and equipment.
o Such equipment must come from the machine-building
sector, which is also the primary source of military
hardware.
b. More specifically, Gorbachev has singled out advanced
technologies--microelectronics, advanced machine tools and
robots, computer-based design and production systems, and
telecommunications--as having a "revolutionary" role to
play in transforming the civilian economy.
o These technologies are also crucial for efficient
production of the new, more advanced weapon systems
that the Soviets plan for their military forces.
Cl By Signer
DECL UAUR
DRVD FM Mil b-82
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o As Figure 1 illustrates, however, the Soviets lag
badly in these technologies. Their system has proved
particularly ill-equipped to propel the USSR into the
information age.
c. Hence the potential for sharp competition between economic
and military modernization.
B. An Overview of Our Analysis - In the remainder of my remarks this
morning would like to explore Gorbachev's challenge in greater
detail, focusing on:
a. The specific goals he's set, his progress, and his prospects.
b. The degree to which military demands for resources will
intrude upon this program, and
c. The ways in which changes in domestic policy and the
international political climate could facilitate or complicate
Gorbachev's task.
II. Civililan Economic Goals, Progress and Prospects
A. Review of Gorbachev's Approach - As I noted last month, the new
General Secretary has put forward the most comprehensive program
for economic modernization since Khrushchev.
1. While initially taking the traditional Soviet approach to
increasing productivity--enforcing greater worker discipline,
strengthening Party control, and the like--the core of
Gorbachev's program involves a long-term effort to
"restructure" the entire economy through a combination of
organizational changes, reform initiatives, and modernization
of the production base.
2. The new General Secretary has been active on all these fronts,
but measures to upgrade the USSR's relatively antiquated
industrial base and improve its technology are, by his own
account and our analysis, the key to his entire program.
3. In this regard, Gorbachev's modernization program has
concentrated primarily on increasing the supply of more
technologically advanced equipment. For example:
a. Production of computer equipment is slated to grow by 18
percent annually through 1990. By that time, the Soviets
plan to produce 1.1 million personal computers per year,
compared with almost none until the mid-1980s.
b. And production of robots in the 1986-9U period is to
increase by 120 percent, numerically controlled machine
tools by 90 percent, and machining centers by 330 percent
compared with production in 1981-85.
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4. While the Soviets probably will not meet these targets, they
have already taken steps to provide more and better machinery
in each of these areas.
a. Most significantly, investment in the eleven civilian
machine building ministries is to increase by 80 percent
during the 1986-90 compared with the 1981-85 period and a
new system of quality control--known as State Acceptance
(Gospriyemka)--has been introduced to put teeth into
Gorbachev's plan to improve product quality.
b. Meanwhile, expenditures for "science"--a rough indicator
of the resources committed to R&D--is also to increase
sharply--by 35%--and the USSR has created interbranch
scientific and technical complexes to expedite development
and incorporation of new technologies into the machine-
building production base.
c. Finally, foreign support is to fill in the gaps that
cannot be met at home.
o Moscow probably plans to increase the imports of
capital equipment from both Eastern Europe and the
developed West.
o Large, cooperative R&D programs have also been
established with Eastern Europe in key manufacturing
technologies.
B. Economic Performance Under Gorbachev - The economy's performance
over the past 15 months highlights both the strengths and
weaknesses in Gorbachev's program.
1. 1986--the first full year of Gorbachev's rule--was a good year
for the Soviet economy. GNP grew at its fastest rate in a
decade (about 4 percent). Figure 2 compares performance in
1986 with that in preceding years.
a. Industrial growth was also the highest in nearly a decade
(about 3.5 percent growth) although industry's momentum
slowed as the year progressed.
b. And in 1986, agricultural production reached a new high
and the grain harvest (21U million tons) was the fourth
largest on record.
c. Gains were also made in key consumer areas.
o Supplies of many quality foods increased, and the
additions to the housing stock were the largest in two
decades.
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2. On the down side, however, economic performance in 1987 is not
living up to Gorbachev's hones.
a. Industrial production in first quarter 1987 was 1 percent
less than in first quarter 1986.
b. And machinery production--which is of crucial importance
to the modernization program--fell by an estimated 4.5
percent.
c. The shortfalls in machinery production and in some other
sectors appear to reflect in part the implementation of
the new system of quality control.
o The program is causing confusion and even chaos in
some facilities as state inspectors reject output that
does not meet quality standards.
d. Finally, we have continued to receive indications that
some of Gorbachev's policies are running into resistance.
o A plenum focusing on the economy is reportedly
scheduled to convene in early June. But to this point
the leadership seems to be divided over the role to be
given to Gosplan in an economic reform. The future of
the state supply system, and the final form of a new
law on the state enterprise are also undecided.
o This follows other reports that some Soviet planners
and factory managers are unhappy over the changes
introduced by Gorbachev, claiming that they have been
more harmful than helpful.
o While there is nothing to suggest that as a result of
these difficulties Gorbachev intends to back down from
his program--indeed, we think just the opposite is
true--these problems indicate just how difficult it
will be to overcome the inertia in the Soviet system.
C. Prospects Through 1990 - In short, based on what we have seen of
Gorbachev 's program and the problems that it has encountered so
far, we project growth of GNP at an annual average rate of 2
percent during the remainder of this decade. While growth could
be somewhat higher during this period if the Soviets have good
luck with the weather and agriculture, the downside risks are
probably as great.
III. Accommodating Military Demands
Let me now turn to the issue of the military demands that
Gorbachev will face during the next few years--a period that, as I've
just said, will probably be one of relatively slow economic growth.
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A. Difficulty of Maintaining Their Current Status - Under any
circumstances, the Soviets face formidable costs in maintaining
and modernizing the world's largest military establishment.
1. As Table 1 indicates, the Soviets maintain very large stocks
of military equipment in their standing forces.
a. These weapons and equipment wear out and must be
replaced--from every several years for trucks to every 30
years or so for major naval combatants.
b. Thus, simply to keep their forces at the current level
requires the Soviets to procure thousands of major weapons
every year.
B. Modernizing the Forces - The Soviets, moreover, have worked hard
to improve the quality of their weapons by initiating a great many
new development programs.
1. During both the 1960s and 1970s the Soviets fielded about 140
major new systems and 200 to 400 major upgraded systems, and
this total may be slightly higher in the 1980s.
2. As Figure 3 illustrates, the Soviets have supported this
effort with steadily growing military RDT&E expenditures that
have exceeded comparable US expenditures since the early
1970s.
3. Through these efforts the USSR has raised the average level of
its military technologies considerably in some areas,
narrowing the gap between them and the technologies found in
deployed US systems. However, as indicated in Figure 4, this
success has come at a price--markedly higher costs to procure
these weapons.
C. Defense Industrial Challenges - The military production base can
manufacture large quantities of weapons, as is shown in Table 2.
But Soviet defense industry has been challenged over the last
decade to assimilate production of increasingly complex modern
weapons.
1. Over the last 12 years, the USSR has turned out considerably
more weapons than has the United States.
o For the most part these weapons are less capable and
easier to manufacture than their US counterparts.
o Since the early 1970s, however, the Soviets have
modified their weapon acquisition strategy,
introducing a number of systems that required advanced
production technology.
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2. The manufacture of these advanced systems was frequently
constrained by an obsolescent industrial base. It often
relied on labor-intensive production processes using simple
machinery.
3. In the early 1970s, therefore, the USSR began a comprehensive
modernization of its defense industries, retooling major
plants with advanced machine tools and other automated
equipment. Military electronics production was also upgraded
substantially.
D. Emerging Weapons and Production Technologies - This defense-
industrial modernization helped the Soviets to master the
production of a number of very complex systems, like the MIG-29
fighter and T-80 tank. But it also set the stage for intensified
competition with civilian interests in Gorbachev's industrial
modernization program.
1. As Figure 5 suggests, Soviet weapons entering production over
the next decade will demand further improvement in design and
manufacturing technologies.
2. In sum, Gorbachev is under pressure to continue the large-
scale modernization of Soviet defense industry.
o As in the West, the Soviets will be forced to recycle
industrial capital every 9 to 12 years.
o Thus, defense industry will demand substantial
quantities of some of the best machinery and
equipment.
3. In fact, the civil-military competition is already severe for
a whole range of materials, products, and manpower. We have
tried in Figure 6 to highlight some of the areas where the
competition is keenest.
IV. Reconciling Competing Demands
This brings me to the last part of my remarks and the really
critical question as far as US interests are concerned. Faced with
the heavy military demands I've just described, how fast will
Gorbachev be able to push his overall modernization program, not
during just the rest of this FYP, but during the 199Us. While there
are too many variables to allow one to predict with any certainty how
the economy's going to be performing a decade from now, I will suggest
some of the things that could go right for Gorbachev's modernization
program, and some of the things that could go wrong. I will also
briefly look at how issues such as arms control and more drastic
economic reform fit into the equation.
A. Meeting Near-Term Military Needs--At least through 1990, we see no
let-up in the very high levels of weapons procurement that have
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been the hallmark of the Soviet defense effort over the last two
decades. The overhaul of the defense incustries carried out
during the late 1970s and early 190s should allow the Soviets to
manufacture most of the weapons we expect to be delivered to the
Soviet forces through 1990.
1. Nonetheless, competition for basic materials, intermediate
goods, and skilled labor will probably cause the pace of
production of some of these new systems to be somewhat slower
and thL date of introduction somewhat later than the Soviet
military would prefer.
2. But, on balance, we expect that Soviet defense spending will
continue to increase, as represented in Figure 7 in your
package. We think total procurement spending during 1986-9U
will be approximately 1U percent higher than in the preceding
five years and slightly above the record level of 1976-80.
B. Longer-Term Requirements--Although procurement will probably rise
at a relatively slow pace, this does not mean that we expect civil-
military competition to ease. On the contrary, if the economy's
strong showing in 1986 proves to be transitory, as we believe likely,
then extremely difficult resource allocation decisions will have to be
made between competing civilian and defense interests, as well as
among competing interests within the civilian and defense sectors
themselves. Over the next few years, the toughest decisions are
likely to be in the investment arena.
1. Despite the high targets for investment in those branches of
industry key to the modernization program, we believe
achieving the production targets in critical areas like the
machine-building and the energy sectors will require more
investment than is currently planned for 1987-9U. Investment
is already being given priority, however, and finding
additional resources will not be easy.
2. Moreover, a major part of Gorbachev's short-term economic
strategy depends on increasing workers' incentives. The
leadership has already deemed it necessary to boost investment
in consume r-related areas in 1987, and further growth will
probably be needed if momentum is to be maintained.
3. And, as I have already said, Soviet defense industries also
will require large investment over the next few years.
a. Our evidence shows that new programs are in progress to
update or replace older systems with improved models in
every mission area, with many likely to begin series
production in the mid-199Us.
b. The Soviets begin to prepare for weapons production during
the 10 years prior to initiation of series production.
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The largest expenditures, including those to put in place
most of the machinery and equipment, occur in the last
half of this 10-year period.
o This suggests that they will be allocating
considerable investment in the late 1980s and early
1990s to prepare for systems entering production
during the last half of the 199Us.
C. Arms Control Issues--We do not know how Gorbachev will respond to
these pressures. But in putting together the 1991-95 Five-Year
Plan --which must begin in earnest over the next year or so--the
state of the economy, Moscow's perceptions of the military threat,
and Gorbachev's domestic political standing would all come into
play.
1. Gorbachev has based much of his political future and long
range plans for sustaining the USSR's superpower status on his
economic agenda, and we believe that, if at all possible, he
intends to give the civilian economy the investment resources
it needs. To do this, he will have to constrain the growth of
military demands for these same investment resources.
2. His preferred way of accomplishing this would be to reach an
arms control accord that would give him some confidence that
the pace of US weapons programs would also be constrained.
a. In effect, he must manage the US strategic competition or
he will have to deal with it in ways that could subvert
his agenda.
3. This is one of the main reasons we think he is so interested,
for example, in an INF agreement.
a. Although the resource implications of an INF agreement by
itself are at best marginal, the larger process of arms
control is seen by Gorbachev as his principal means of
constraining both external and internal pressures to spend
more on defense--at least until he can reap the
productivity gains he hopes to obtain from his industrial
modernization program.
b. And he probably believes that a successful conclusion of a
major agreement with the present US administration will
provide momentum to the process and create pressure for
subsequent movement toward agreements on strategic
offensive and defensive forces as the United States moves
into an election year.
D. Changing Relations With the International Economic Community--
While we believe an arms control agreement holds the greatest
promise of easing military pressures, the USSR could also reduce
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the strains on the domestic economy by expanding its commercial
ties with other countries.
1. The Soviets have taken a number of initiatives in the
international economic arena over the past year or two.
a. A reorganization of the foreign trade sector now allows
over 2U ministries and 7U enterprises and production
associations to deal directly with foreign businesses.
b. Joint ventures with Western partners may now be
established on Soviet territory, with the foreign company
allowed up to 49 percent equity and some expatriation of
profits.
c. Moscow has approached a number of international economic
organizations, including a request to participate in the
GATT, the pur,uit of closer EC-CEMA ties, and the issuance
of its own international economic agenda in various UN
meetings.
2. Although such measures are not radical, they are likely to
yield some dividends. But taken individually or collectively,
they are not likely to help Gorbachev's resource allocation
problem anytime soon.
a. Most Soviet imports and exports still remain directly
under the control of central planners.
b. Progress on joint ventures--the current buzzword among
Soviet traders--is likely to be slow as a myriad of
important questions remain unanswered. Both Soviets and
Westerners alike are approaching the issue very
cautiously.
3. Moscow also does not appear ready to raise its hard currency
debt substantially in order to finance large imports from the
West.
a. Despite significant borrowing during the past two years--
as well as large gold sales--Moscow has been content to
let hard currency imports drop by more than $4 billion
since 1984.
b. With net debt now nearly $24 billion--more than double the
level of two years earlier--we doubt that Moscow will keep
up its recent level of borrowing for more than a year or
two.
4. The USSR's approach toward trade with Eastern Europe appears
in many ways to mirror its approach to trade with the West.
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a. Trade with Eastern Europe, in particular, was quite
sluggish last year and shows few signs of picking up.
b. Eastern Europe's contributions in science and technology,
however, figure prominently in Gorbachev's plans to build
up Soviet high technology industries.
o Although Soviet-East European cooperation in
devEJoping new technologies will ease the financial
burden on the USSR, the East Europeans are not likely
to provide as much support as Moscow would like.
o In each of the high-tech areas singled out for special
emphasis, we estimate that Eastern Europe is at least
five to 10 years behind the West.
o Furthermore, their sluggish economies, high f oreiyn
debts, and their desire to maintain control over their
own S&T are likely to limit what the East Europeans
are willing to do.
E. Prospects for Economic Reform--Ultimately, under the pressure of
hard decisions on resource allocation and insufficient foreign
support for his modernization program, Gorbachev may decide to put
more teeth into his calls for "radical reform."
1. Adopting some of the bolder proposals that have been put
forward --such as a major decentralization of price setting or
real competition among state enterprises--would be aimed at
stimulating production and innovation, and would certainly be
consistent with the direction in which Gorbachev is already
heading.
2. Still, he would have to overcome some very stubborn political
and bureaucratic opposition.
o A broad spectrum of the party and government would
probably oppose moving too far in the direction of
more drastic reform on the grounds that economic
decentralization would threaten a loss of political
control.
o A major decentralization would also threaten the jobs,
status, power, and privileges of thousands of
officials now running the economy.
o The specter of unemployment, inflation, and widening
class divisions within society would undermine what
most Soviet citizens and leaders consider to be one of
the principal advantages of socialism.
3. Even if Gorbachev were able to overcome such opposition,
however, the outcome of such changes probably would not be an
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unqualified success in the short run. Substantial
dislocations would be likely as the economy adjusted to new
conditions.
4. Nevertheless, implementation of bolder reform measures could
ultimately have a substantial posi:.ive impact on economic
performance, especially if the measures forced producers to
respond to customer demand and allowed prices and wages to
reflect both demand and resource costs.
Changing Relations with the International Economic Community
F. Final Thoughts--In closing, let me say that even though I've been
taking about things that Gorbachev could do to ease the resource
allocation pressures he's under--arms control, finding additional
foreign economic support, real economic reform--even if he had to
increase the military budget substantially, the USSR would not be
a basket case.
1. Spending much more on defense would certainly undermine
Gorbachev's program for industrial modernization and possibly
forstall any appreciable gains in living standards, and leave
the economy on a very slow growth path throughout the 1990s,
perhaps less than two percent per year.
2. This outcome would be unlikely to lead to economic collapse or
social upheaval, however. It is worth remembering that the
Soviet economy is now so large that even at "zero" growth,
more than 2 trillion dollars worth of goods and services can
be produced each year. Some of the economy's basic strengths
are set out in Table 3.
3. Assuming the share of GNP devoted to defense remained at
today's level, about $275 billion would be available for
military programs.
4. But the technological gap would almost certainly widen,
leaving the USSR to continue playing "catch up", not only in
civil technology but also in some critical military
technologies.
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