THE SOVIET ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85B00263R000200150029-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: January 4, 2017
• Document Release Date: April 29, 2008
• Sequence Number: 29
• Publication Date: September 14, 1983
• Content Type: REPORT

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the Joint Economic Committee, Congress of th United Sta
International Trade, Finance, and Sec it Economics o
DDI Testimony Before the Submmi e on
The Soviet Economy
1. Mr. Chairman, in inviting us to testify on the Soviet
economy, you asked that we focus on economic policy
changes under the new leadership and the significance of
those charges, c cromic nFrformance in 1982 and thus far
in 1983, and the outlook over the next few years. You
also requested that we discuss trends in the Soviet
Union's allocation of resources to defense. F--]
A. Let me start with economic developments in the past
two years. Last year and the year before, growth in
Soviet gross national product (GNP) averaged about 2
percent per year, somewhat above the level attained
during 1979-80 but well below both the rate achieved
during the 1970s and the rate implied by the 1981-85
Plan (figure 1).
especially worrisome.
B. The slowdown in the growth of industrial output was
1. In 1981-82, average annual growth was less than
2 1/2 percent, about half the rate called for in
the 1981-85 Plan.
DIA review completed.
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Figure 1
USSR: Average Annual Percentage
Growth of GNP
/r
1966-70 1971-75 1976-80 1~e~ae2 1981=85
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2. Two developments during this period were
particularly noteworthy: the slowdown was
evident in practically every industrial branch,
and the productivity of labor and capital
employed in industry was down dramatically. F
C. Within industry the growth of energy production in
the USSR has decelerated significantly.
1. -bile gas output grew rapidly in 1981 and 1982,
raw coal output increased in 1982 for the first
time since 1978.
2. After three decades of growth, oil production in
the USSR has begun to level off, although the
prospects for the future are considerably better
than we once believed.
D. Based on some extensive research over the past two
years, we now estimate that the combined output of
oil, natural gas, and coal will increase by 10 to 12
percent in 1981-85 compared with the 22 percent
achieved in 1976-80. In the latter half of the
decade energy production will be about 6 percent
greater than in 1981-85.
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1. Oil production probably will plateau by the
middle of this decade and then subside slowly
through 1990.
2. All things considered, the energy picture
implies much less of a constraint on growth of
the domestic economy than we thought last
Sumer .
E. Shortfalls in the general availability of raw
materials were a major reason for the marked
slowdown in industrial production in 1981-82
(figure 3). F1
1. Declining growth in production of coal and its
deteriorating quality, for example, hurt
electric power and ferrous metallurgy.
Shortages of electric power, in turn, impaired
the performance of industrial power customers,
and an insufficient supply of steel products
contributed to lower growth in machinery
production.
2. The low rate of growth of machinery output--only
3.2 percent annually during 1981-82--is about
half the rate planned for 1981-85 and by far the
lowest since World War II.
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Figure 3
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USSR PRODUCTION OF ENERGY, 1970-82
..........................................................................N....?..........................1
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T
174
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Figure 3 (cont.)
USSR: PRODUCTION OF INDUSTRIAL MATERIALS, 1970-82
rr _ 'We NO ga
................... .' .-
~~.ww . .....~~.....................
M72 144 476 1674 MAO
L"Ww
CRUDE SttE1
aw-NUM .=
CC PPCR..~..
SUM MC AC O-.--
MINERAL FERTILIZO
CAUSTIC S~NOO*_
PLASTICS
LEE T~
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3. Machinebuilding is a pivotal sector, producing
military hardware as well as consumer durables
and machinery for investment. The hard choices
on resource allocation facing Andropov are most
evident in the sector. F-I
F. The value of agricultural output, almost the same in
;r, 19Rn. increased by somewhat more than 3
percent in 1982.
1. We estimate grain production at 165 million tons
last year--an increase of 7 million tons over
1981 but some 70 million tons short of plan.
2. Even with the 1982 rebound, farm output was still
nearly 7 percent below the 1978 peak-year level.
G. A substantial share of the responsibility for the
falloff in industrial growth must be assigned to
bottlenecks in the transportation of both raw
materials and finished products.
1. Total freight turnover, which had increased at an
annual rate of 3.5 percent during 1976-80,
actually fell slightly last year.
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2. The principal culprit has been the railroads,
which shoulder the major part of the
transportation burden in the USSR.
H. As Andropov noted in his early speeches, much remained
to be done in the in the area of consumer welfare when
he took office.
1. According to our estimates, total per capita
consumption increased in 1981 by about one
percent--but then declined in 1982 by almost one
percent.
2. Meanwhile, the availability of quality foods
declined generally. Per capita meat consumption,
for instance, was down slightly in 1982 from its
peak 1979 level.
1. In another area, the Soviets had more success. The
USSR substantially improved its hard currency payments
position in 1982.
1. By strongly pushing oil exports and holding down
imports, the USSR slashed its hard currency trade
deficit to $1.3 billion, or one-third of the
deficit incurred in 1981.
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.. I I
2. By the end of the year, gross hard currency debt
had fallen by an estimated $800 million and
totaled $20.1 billion. Assets in Western banks
were a record-high $10 billion at the end of last
A. As we noted in our submission to your subcommittee,
our latest estimate indicates that Soviet outlays in
constant prices have leveled off since 1976 in at
least one major area, procurement of military hardware
(figure 4). El
1. Costs in all other categories of Soviet defense
continued to grow at historic rates over the
entire 1972-81 period. Operations and maintenance
costs, for example, grew by 3-4 percent annually;
personnel costs increased by slightly less than 2
year.
II. Mr. Chairman, I have just reviewed the general performance
r,!' ..h,P Sativ ? et economy during the last two years. Let me
now turn to the particular issue of the costs of Soviet
military programs.
percent a year.
2. Our new estimate, however, shows that like overall
economic growth the rise in the total cost of
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Figure 4
USSR: Estimated Defense
Expenditures, 1965-818
USSR: Military Procurement
Expenditures, 1965-911
I . . t . I . . 1 . I 1 1 1 I 1 I . I -A 1 I . . a . I . . . . I
0 1963 70 75 10 al 0 1965 70 7S a0 ai
?The shaded area represents the confidence interval for each years
estimate of total defense expenditures. The width of the interval changes
over time as the weight of the component estimates that make up the total
and our confidence in them vary. We believe there is less than a 10-percent
chance that the true figure for any given year lies outside this interval.
Is It should be noted that our estimates for 1910 and 1991 are heavily
influenced by lead costs associated with weapons expected to be completed
in the succeeding two to three years. As we collect additional information
on activities in those years. changes could result.
Me shaded area represents the confidence interval for each pear's
estimate of procurement expenditures The width of the interval changes
over time as the weight of the component estimates that make up the total
and our confidence in them vary. We believe there is less than a 10?perceat
chance that the true figure for any given year lies outside this interval.
bit should be noted that our estimates for 1910 and 1911 are heavily
influenced by lead costs associated with weapons expected to be completed
in the succeeding two to three years. As we collect additional information
on activities in those years. changes could result.
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defense since 1976 has been slower--about 2
percent a year..
3. As General Bissell indicated in his June
testimony, DIA estimates of weapons production
also show flat or declining trends for major
categories since the midseventies. But their
estimate of Soviet defense spending--which
includes inflation--shows substantial growth in
total defense and procurement costs, though at a
somewhat slower rate since 1976.
R. The continued slow growth since 197G seems related to
a combination of complex factors including
technological problems, industrial bottlenecks, and
policy decisions:
a. We know that a number o major Soviet weapons
ran into technical delays that pushed their
serial production back at least a few years.
b. Raw material, energy, and transportation
bottlenecks appear to have disrupted military
production just an they did civilian
Production during this period.
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c. The leadership, either anticipating these
problems or in response to them, may have
taken steps to stretch out military
procurement.
procurement in certain areas.
u. Decisions to comply with SALT I and the
unratified SALT iI treaty also may have slowed
e. I should note, however, that the costs of
current Soviet military activities is very
large--about 45% greater than US procurement
costs for 1981. Despite the proeurem'.:rt
plateau observed, the Soviet forces have
received some 2,000 ICBM and SLBMVi missiles,
,G00 tactical combat and interceptor
aircraft, 65 SSBN and attack.submarines, and
31. major surface combatants since 1975. Thus,
even with reduced growth, they could still
introduce many new systems and continue to
improve their forces throughout this decade
.
e,:D x0 25X1
s
elc~'
I i' . 'As\the f i rs\ two yea.\s of the 1.98\-85 Plan cared
letion, i\t nLt :st have become cllar to Sovi~t leaders
that heir eeon,mie st rategy was no working.
Nonethe\les5, an `the basi'\, of informakion publi~'hed on the
1983 plarl~..and has ha'pened since, we conel\tde that.
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III. As the first two years of the 1981-85 Plan neared
completion, it must have become clear to Soviet leaders
that their economic strategy was not working.
Nonetheless, on the basis of information published on the
1983 plan and what has happened since, we conclude that
Andropov is still basically holding to the course set by
Brezhnev.
A. In particular, the little evidence that is available
indicates Andropov has not accelerated Soviet military
spending.
B. There also are no indications of significant change in
agricultural policy since Andropov took power.
1. The priority the leadership has given the Food
Program mirrors an apparent high-level
preoccupation with living standards.
2. Aside from its agricultural policies, the new
regime has shown concern for the welfare of the
population by a flurry of decrees published this
year which call for more attention to consumer-
related programs.
3. Nevertheless, the regime has little room for
maneuver on consumer issues until the Food Program
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pays some return and until more investment can be
spared for the production of soft goods and
consumer durables.
C. The major new element of economic policy this year is
the discipline campaign.
1. Andropov does not believe that greater discipline
alone will cure the economy's ills, but he sees it
as a necessary beginning.
2. Although the campaign is designed to tighten
discipline all around, the campaign so far appears
to be directed primarily against blue-collar
workers.
D. In the more sensitive area of reforming planning and
management, the new regime has introduced only some
very limited measures designed to decentralize
decisionmaking in both industry and agriculture.
These are described in some detail in our
submission.
IV. Turning now to the outlook for 1983, we believe that some
of the economic pressures on the Andropov leadership
should ease slightly this year.
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A. Based on statistics available for the first seven
months of 1983, we estimate that GN'P will rise by 3.5
to 4 percent--well above the approximately 2-percent
rate of growth achieved in both 1981 and 1982.
1. All major sectors of the economy are doing better
this year. F_~ 25X1
2. The rebound in industry reflects a comparison with
an exceedingly poor first half 1982. It also owes
much to the better than normal winter and spring
weather conditions, which eased transportation
blockages and permitted some rebuilding of stocks
of fuels and other inputs less in demand when the
weather is mild. F -1
3. We estimate that industrial production will grow
about 3 percent this year, somewhat more than the
2 1/2 percent annual rate in 1981-82. [7
-B. Following four consecutive years of poor agricultural
performance a substantial recovery is in the cards in
1983.
1. We expect total farm output to increase by about
7-8 percent, compared with slightly more than 3
percent in 1982 and almost no growth in 1981.
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2. Barring a major deterioration in weather
conditions, a grain harvest of 210 million tons is__
likely, the best crop since the 1978 record'of 237
million tons. The outlook for other major crops
is also good.
C. On the other hand, the new regime, which apparently
came to power with the support of the military, may
well be under pressure to speed up defense spending.tCo
counter a resurgent Western military effort
1. Opening the spigot wider would be costly. Any
sharp acceleration of the level of military
procurement will make it much more difficult for
Moscow to solve its general economic problems.
2. Andropov must soon decide how to approach the
defense spending and resource allocation issue
because the planning cycle for the 1986-90 Plan is
already under way.
V. A stronger economic showing this year would help Andropov
politically, but it would not--in our view--foreshadow a
higher growth rate over the longer term. As we say in the
submission you have received, the problems that have
constrained growth since the late 1970s have not gone
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away; some of them, in fact, are just now reaching peak
severity. F1
A. Most important, because of the slower growth of labor
and capital expected in the remainder of the 1980s,
long term growth would have to be sustained by
increases in the combined productivity of labor and
cap'tsI. A turnaround in productivity trends is not
likely, however, without fundamental change in the
economic system and until worker incentives are
improved.
B. But the regime's present strategy for spurring
efficiency seems unequal to the task.
1. For example, long cultural conditioning in the
work force and the difficulty of reversing trends
entrenched for the last 20 years will present
substantial obstacles to broad use of increased
wage differentials to stimulate productivity.
2. Serious obstacles also stand in the way of
continued implementation of the discipline
campaign. Public tolerance of a tough discipline
drive 30 years after Stalin is likely to be
tenuous and transitory. In the current labor
market, moreover, management will be reluctant to
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crack down on workers, who can easily quit and
find jobs elsewhere, often at higher pay. F-
C. The regime could improve the performance of the
economy in a number of ways.
1. The current investment plan, for instance, is
lopsided and lacks balance; it stresses
development of energy and agriculture at the
expense of other sectors also vital to economic
growth. F-1
2. A greater return could probably be achieved by
shifting more investment to such sectors as
machinebuilding, transportation, and ferrous
metals. In this connection, holding down growth
in defense spending would free up resources that
could be used to bolster the civilian economy.
3. Some gains could be achieved also by identifying
those areas in the economy where mismanagement and
administrative efficiency are worst and replacing
the managers responsible at all levels with more
competent people.
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D. The greatest potential for reviving economic growth,
however, lies in more "radical" measures that would
alter Soviet economic mechanisms.
1. The major constraint, however, in changing the
Soviet economic system is that Andropov and the
rest of the leadership--for compelling cultural,
economic, and political reasons--will not
dismantle the command economy and replace it with
some form of market socialism.
2. Given Andropov's emphasis thus far on study and
small-scale experiments, we think that reforms of
organization and management will have little
impact on the economy during the next several
years. Indeed, the improved performance in 1983
may even reduce the pressure for economic change
in the short run. k
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The Chinese Economy
Now, Mr. Chairman, I would like to conclude my summary
remarks with a review of recent developments in the Chinese
economy.
1. The Chinese economy today is in much better shape than
it was just a few years ago. F1
A. Progress can be seen in the substantial improvements
in personal incomes and consumption, in the
remarkable growth in agriculture, and in the
expansion of foreign trade.
B. There is now a sense of direction and purpose to
economic policies.
1. The new Sixth Five-Year Plan (1981-85), approved
last December, provides a reasonably well-
defined policy framework, something that had not
existed since the 1950s.
2. During the Cultural Revolution (1966-76) China's
planning apparatus was dismantled and plans
reportedly consisted of little more than targets
for a few important commodities.
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II. In several respects, however, economic progress has
proved elusive. 71
A. The appalling waste and inefficiency that
characterized the Chinese economy in the 1970s
remains equally serious today.
B. Paradoxically, management reforms designed to reduce
waste--by strengthening the profit motive and
decentralizing financial decision making--have also
made it more difficult to complete urgently needed
projects in bottleneck sectors such as energy and
transportation.
1. Last year, the investment plan called for only a
nominal increase in capital construction; by the
end of the year, actual spending was up by over
25 percent. Almost half of the increase came
from unplanned spending by enterprises, financed
from retained profits permitted under new
government rules.
2. This surge in investment, as in 1980, stretched
existing supplies of scarce building materials
and made it more difficult to quarantee cement,
steel, glass, and the like to priority
projects.
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C. This failure to meet completion targets for critical
energy and transport projects is at the center of
current policy discussions in Beijing. Only
slightly less important is how to ensure further
improvements in living standards and consumption in
the face of large investment requirements.
III. 1982 was fairly typical of recent years.
A. Overall, economic growth was at least moderate-to-
good.
1. GNP and industrial production each rose by over
7 percent.
2. Energy production rose by 5.7 percent, easing
what still is the major constraint on growth,
while agricultural output, benefitting from
favorable weather and a continuation of liberal
policies, grew by a remarkable 11 percent.
3. Despite the fact that increases in personal
incomes were slightly smaller than in 1981,
Beijing still had problems providing adequate
supplies of consumer goods. F1
4. Chinese consumers, not finding what they want in
the stores, continued to deposit large sums of
2
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money in savings accounts; and inventories of
rejected merchandise continued to pile up.
5. The population was also faced with a rise in
urban unemployment, which perhaps reached 10
percent, and an inflation rate of between 5 and
10 percent.
B. At the end of 1982, China was in its strongest
international financial position ever. Foreign
exchange reserves stood at over $11 billion, more
than double the year-earlier total.
1. Most of the increase in reserves, however, came
as a result of cuts in imports, which fell by 10
percent. With exports growing by over 3
percent, the trade surplus reached $6.3
billion. F7 4
2. Import cuts also had an impact on Sino-US
trade. China continued to run a deficit,
although that deficit shrank in 1982.
a. A 21-percent increase in Chinese exports
combined with a 19-percent decline in their
imports reduced China's trade deficit with
the US from $1.7 billion in 1981 to $0.6
billion last year.
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b. Chinese sales of textiles to the US were up
34 percent, and their purchases of US grain
were up 5 percent on a volume basis. F7
c. A 60-percent decline in imports of textile
fibers seems to have been unrelated to the
Sino-US textile dispute. It appears instead
to have been a matter of the Chinese having
excessive inventories of fiber.
IV. The first half of 1983 has seen a continuation of some
of the more unwelcome developments of 1982.1 25X1
A. Investment spending has continued to grow at a
20-percent pace, prodding the regime to review the
construction program and to halt or drop lower-
priority projects. F
B. Too-rapid growth in heavy industry continues to
squeeze consumer goods production.
1. During the first six months of this year, heavy
industrial output rose by 12.2 percent over the
year-earlier period. The annual target is 3.9
percent.
2. Light industry grew by only 5.4 percent.
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V. Earlier, I mentioned management reforms.
A. Since the late 1970s, China has experimented with
management reforms in practically every sector of
the economy.
1. The basic thrust has been to decentralize
decisionmaking in an attempt to boost production
and efficiency.
2. The reforms in agriculture have shown the most
striking success.
a. Essentially, these reforms have entailed a
reduction of the government's role in
production and marketing decisions. Now, in
most places, most of these decisions
apparently are made by farm households or
even individual farmers.
b. We believe these changes have been very
important in agricultural growth since the
late 1970s. But--and this is a major
complication--Beijing has also raised prices
for agricultural products. This by itself
probably has been a considerable stimulus.
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3. In industry, the reforms have involved
strengthening the profit motive and allowing
enterprises to retain a portion of their
profits. F1
a. Intuitively, this type of reform is
appealing, but because of major
irrationalities in China's price system, the
changes have not produced the desired
effects.
b. The reforms, moreover, have also provided
the funds for enterprises to carry out
additional investment, re.sult.ing in the
overextended construction program mentioned
earlier.
4. In another interesting reform, Beijing now
permits individuals to open their own
businesses, in some cases extending loans and
allowing them to hire workers, usually only
three or four who are designated
"apprentices."
a. This more liberal stance on individual
enterprises has been a very practical one
for two reasons: large unemployment and the
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extreme scarcity of personal service
personnel--such as barbers and appliance
repairmen, among others.
b. On the whole, individual enterprises still
are not terribly significant for the Chinese
economy. But they have grown rapidly. In
1978, there were only 150,000 individual
laborers in the urban areas; by the end of
1982, there were 1.5 million--rapid growth
by any standards.
5. Other reforms include: increased use of
domestic bank loans for investment funds;
raising interest rates to allocate investment
more rationally; encouraging direct contact
between producer and consumer; allowing some
product sales at prices that differ from state-
set prices; and promoting "free markets" to
allow peasants to sell their produce in urban
and rural areas.
B. The examples I have cited perhaps give you an idea
of the type of reforms the Chinese are interested
in. At this stage, judging their net impact on
economic performance is very difficult.
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1. Currently, Beijing has adopted a more cautious
approach to economic reform.
2. But because there are so many day-to-day
problems that demand attention, and because they
want to give more thought to the reform program,
the Chinese leadership has postponed further
major changes in the system until sometime after
1985, the end of the current five-year plan.
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