THE CURRENT STATE OF THE SOVIET ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000602000002-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: March 13, 2012
• Sequence Number: 2
• Publication Date: April 28, 1972
• Content Type: REPORT

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--eonf idential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Current State of the Soviet Economy
Confidential
28 April 1972
ER IM 72-65
IE
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
28 April 1972
The Current State of the Soviet Economy
1. The Soviet economy, the second largest in
the world, is a mixture of strengths and weaknesses.
On balance, the leadership feels no economic prob-
lem is so serious as to require substantial reforms
either in the allocation of resources or in the way
the economy is managed. In other words, the regime
seems confident that an acceptable rate of economic
growth can be maintained, permitting rising levels
of consumption for the people as well as providing
for a growing military-space establishment and meet-
ing the requirements of modernization.
2. The basis of the USSR's economic strength
lies in its great natural wealth, which ensures
self-sufficiency in nearly all important raw ma-
terials and a trained labor force that is about
Average Annual Rate of Growth of GNP, Selected Countries
Japan West USSR Italy France US UK
Germany
Japan France USSR Italy West
Germany
1961-70
Note: This memorandum was prepared by the Office
of Economic Research and coordinated with the Of-
fice of Current Intelligence and the Office of
Strategic Research.
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half again as large as the US labor force. As a
result of its emphasis on investment and industrial-
ization, the USSR has maintained rates of growth
of GNP that are high, although not exceptional, by
international standards. In 1971 the GNP of the
USSR reached $549 billion, about 55 percent of the
US level. While building an impressive industrial
base, the USSR has been able to achieve near-
parity with the US in military strength and to pro-
vide substantial increases in consumption levels.
3. To reach the present stage of Soviet eco-
nomic development, the Soviet leadership has re-
lied on a single-minded strategy--forcing growth
by heavy doses of investment. As a result, out-
lays for investment have taken an increasing share
of GNP at the expense of the shares for consumption
and military expenditures.
Distribution of Soviet GNP by End Use (Percent)
1950
1960
1971
Consumption 68
63
59
New fixed investment 12
22
26
Defense (including
military
programs)
space
13
8
6
Other
7
7
9
The large annual additions of new plant and equip-
ment have kept production increasing fast enough,
however, so that neither consumption nor defense
has suffered. Per capita consumption increased by
almost 4 percent per year in both the 1950s and
the 1960s. Outlays for defense dropped from the
equivalent of $61 billion in 1950 to $53 billion
in 1960 and then climbed to $72 billion in 1971.
4. Despite these strengths and successes, the
Soviet leadership continues to be concerned about
three basic economic problems:
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? Declining growth rates. The Soviet
economy grew more slowly in t e 1960s than in
the 1950s, and the rate of growth is likely to
decline further in the 1970s. The goal of over-
taking the US economically is as distant as it
was a decade ago--the dollar gap between the na-
tional products of the two countries increased
in the 1960s. Meanwhile, already behind many
Western European countries in per capita pro-
duction, the USSR has now been surpassed in
this respect by Japan as well.
The productivity and technological gap.
The fact that the USSR produces about half as
much as the US with a labor force 50 percent
greater suggests the magnitude of the Soviet
problem in this area. The reasons for the
relatively low productivity in the Soviet Union
are primarily organizational and political:
inefficient management practices, a cumbersome
planning system, and the overriding priority
given to increasing the quantity of production
as quickly as possible to the detriment of ef-
ficiency and quality. Introduction of new
technology and the replacement of old methods
of production have been slow, and as a con-
sequence, the technological level in many sec-
tors is substantially below Western levels.
Product quality also is a serious problem.
Most Soviet manufactured goods, particularly
machinery, cannot compete successfully in West-
ern markets.
. Consumer living standards. Although
the Soviet population is far better off than
it was in the years just after the war, per
capita consumption in the USSR is still only
one third that in the US, substantially
less than in Western Europe, and less than in
most East European countries. Soviet con-
sumers are increasingly aware of where they
stand in relation to consumers in other coun-
tries and are particularly interested in im-
proving the quality of their diet and in ac-
quiring more housing. Perhaps with the 1970
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Polish riots in mind, and realizing the im-
portance of consumption levels for work in-
centives, the leadership has committed itself
to major programs in the consumption area.
The most striking evidence of the new policy
is the plan to make more meat and consumer
durables, particularly passenger cars, avail-
able to the people.
Recent Economic Developments
5. Because of fluctuations in agricultural
production, the year-to-year growth in Soviet GNP
has varied considerably in the past six years--
from a low of 2.5 percent in 1969 to a high of
8 percent in 1970. In 1971, GNP increased by only
about 3.5 percent, as farm output declined slightly
from the record 1970 level and the pace of indus-
trial growth weakened. Per capita consumption also
rose at a slower pace than in the preceding five
years--4 percent compared with 4.5 percent per
year in 1966-70. The results for 1971 reflected
a slower growth in the supply of food and consumer
durables.
The Industrial Scene
6. Industrial output in 1971 did not measure
up to expectations, particularly with respect to
consumer goods. Over-all industrial production
increased by about 5.5 percent--well below the
planned increase for 1971 and the average annual
growth of 7 percent achieved during the 1960s.
Most of the published production targets were met
or surpassed, but substantial declines occurred in
some categories of processed foods and consumer
durables--notably fish, sugar, television sets,
and washing machines. Production of fabrics and
shoes also fell short of plan. Moreover, the
year was marked by a definite slowdown after mid-
year in the rates of growth of all major branches
producing industrial materials and consumer goods.
7. The slowdown in industrial growth in 1971
reflects continuing difficulties in achieving sat-
isfactory increases in productivity. Soviet
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industry is plagued by imbalances that are caused
by its uneven development and by the relatively
low productivity of many of its sectors. Much of
the disappointing performance, in turn, stems
from inferior and outdated technology. The USSR,
for example, produced more steel in 1971 than any
other country, but not enough cold-rolled steel
for cars or other consumer durables, nor enough
large-diameter pipe for the development of its
remote oil and gas resources. It turns out more
machine tools than any other country, but few of
these are of an advanced type, and it must rely
on Western firms to equip its new passenger car
and truck plants.
8. Because the Soviet management system is
so laggard in mastering new technology, the
planning authorities tend to adopt "campaign"
tactics--to attack technical backwardness in
relatively narrow areas. Recently, these have
taken the form of enormous investments in the
chemical industry (especially fertilizers) and
then in passenger car production (the Fiat plant)
and truck production (the Kama complex). In
priority areas such as these, the USSR has turned
increasingly to the West for machinery and com-
plete plants to help close the technological gap
between its industry and standard Western prac-
tice. Other candidates for Western technical
help are the production of numerically controlled
machine tools and third-generation computers,
where the inferiority of Soviet electronic con-
trols and the lack of know-how in the series pro-
duction of such equipment has been an obstacle.
Another example is the development of the new
Siberian natural oil and gas fields, where meet-
ing future goals depends on overcoming problems
associated with drilling wells and constructing
pipelines in permafrost. In a recent article,
Soviet geologists hinted that the development
of the gas deposits will not take place as quickly
as planned. Any postponement of West Siberian de-
velopment would result in an under-fulfillment of
future plans for exploiting natural gas and could
affect domestic supply as well as export commit-
ments to East and West Europe.
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The Agricultural Situation
9. Agriculture is the weakest and least pro-
ductive sector of the Soviet economy. The system of
giant collective and state farms has proved to be
the worst managed and least efficient organizational
form in the country. Nearly a third of the labor
force is still employed on the farm, and the cost of
producing grain and meat is far above world market
prices. Large increases in farm gate prices and
peasant incomes over the last decade have slowed the
flight of labor from the farm, but have also raised
costs without stimulating efficiency. In spite of
the world's largest inputs of labor and investment,
the USSR is periodically forced into Western markets
for food to provide promised improvements in the
diet for the population.
10. Net agricultural production in 1971 de-
clined 1.5 percent as a 5 percent increase in the
output of animal products failed to offset a 2.5
percent drop in crop production and a slower growth
of livestock herds. Meat production increased 7
percent on the heels of a 5 percent gain in 1970.
Net production of grain--estimated at 148 million
metric tons--was slightly off the 1970 level, while
potato, sugar beet, and vegetable crops all dropped
by 5 to 8 percent.
11. Even though farm production in 1971 was
near the record 1970 level, the Soviet Union spent
roughly $700 million in hard currency to purchase
large quantities of grain, sugar, and meat in 1971
and early 1972. The growing imports of agricultural
commodities during two years of abundant harvests
indicate the determination of the leadership to up-
grade the Russian diet. Per capita consumption of
meat and other quality foods in the Soviet Union is
still markedly less than in other industrialized
countries. As disposable incomes increase on an al-
ready determined schedule, consumer demand for meat
rises about proportionately. Production of meat
and other livestock products has not kept up with
this growing demand, and shortages are endemic. The
rapid increase in meat production in 1970-71 eased
the meat shortage somewhat, but also boosted the
requirement for feed grains by 11 million tons, or
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some 25 percent. These demands in turn could not
be met from current grain production, and large im-
ports and withdrawals from grain stocks were neces-
sary.
12. This winter the fragility of the USSR's
grain and livestock economy has been exposed once
again. Severe cold combined with sparse snow cover
may have destroyed up to one third of the winter
grain crop. While the winter damage can be repaired
by resowing and by increased attention to the sur-
viving winter crops and to spring crops, the weather
will be a critical factor from now on. Even with
average weather, the USSR will probably buy more
grain in 1972 in order to maintain the momentum of
its meat program and still meet its export commit-
ments to Eastern Europe and other dependent coun-
tries.* If the weather this spring and summer turns
out to be worse than normal, the possibility of
large additional Soviet imports of foreign grain
would of course be even greater. If the USSR is
forced to import large quantitites of wheat this
year because of a poor crop, a large share of the
imports would have to come from the US. Port facil-
ities in Canada, the major alternative supplier,
will be tied up handling existing contracts until
the end of 19 7 2 .
13. Over the longer term, the USSR probably
will be in the market for American feed grains and
possibly protein supplements. The feed requirements
of the Soviet livestock program will not be met by
the USSR's domestic production of grain over the
next several years.
'Since June 1971, the USSR has agreed to pur-
chase about 13 1/4 million tons of grain and has
taken an option for an additional 1 1/2 million
tons. Approximately 8 1/4 million tons are ex-
pected to be delivered before July 1972; the remain-
der of about 5 million tons is to be delivered
later. Not all deliveries will be made to the USSR,
however. About 350 thousand tons of wheat-equiva-
Zent, in the form of flour, will be shipped from
Canada to Cuba, and at least 1 million tons of
grain will be unloaded in Eastern Europe.
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The Impact of Military Programs on the Economy
14. As the rate of growth of GNP has out-
stripped the growth of military expenditures since
the mid-1950s, the share of Soviet resources devoted
to military programs has fallen steadily--from 13
percent in 1950 to 6 percent in 1971. Because the
economy has grown so rapidly, military programs now
require only about one tenth of industrial output
and one fifth of the production of the machinery
sector. In sum, the production capacity of the So-
viet Union is now so large that even moderate growth
of GNP can support continuing large absolute in-
creases in military spending without undue strain.
15. Thus the short-run economic benefits for
the USSR of a brake on the upward trend in military
spending are limited and are insufficient by them-
selves to force the Soviet Union into a SALT-type
agreement. The USSR has achieved parity with the
US in important military areas, and continued eco-
nomic growth will permit maintenance of this parity
without adding to the share of national resources
devoted to military programs. Moreover, the amount
of resources likely to be released under the kind
of agreement being discussed does not loom large
enough in relation to total investment to raise the
rate of economic growth appreciably.
16. Although the Soviet union can afford to
spend more on its military programs, this does not
mean that the occasional complaints of Soviet lead-
ers about the burden of military programs are mean-
ingless. The Soviet leaders surely would not wel-
come an escalation of expenditures which might well
leave unchanged the relative strength of the two
blocs. And in some areas where the civilian econ-
omy is backward--such as computers and some kinds
of electronics--a release of some of the talent
heretofore pre-empted by military research and pro-
duction would be of substantial help.
17. The main objectives of economic policy re-
main roughly the same as they have been since Khru-
shchev was sacked. Although the increases in GNP and
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industrial production implied by the 1971-75 plan
are larger than the actual increases posted in
1966-70, no major shifts are apparent in the allo-
cation of resources. Brezhnev, Kosygin, and the
economic planners recognize that past development
relied heavily on rapid growth in the labor force
and very high rates of growth of the stock of plant
and equipment. The USSR can no longer sustain "ex-
tensive" development of this kind; instead, the
leadership is now sounding the theme that future
growth will depend mainly on "intensive" develop-
ment--in other words, rapid productivity gains.
18. The 1971-75 plan for industrial growth of
8 percent a year depends heavily on such productiv-
ity gains. The technical progress required for
these gains, however, is not ensured by any new pro-
posals for achieving them. The USSR must do a bet-
ter job of using the technology and R&D resources al-
ready available to it. Although one impediment to
a speedier introduction of new technology in the
USSR is organizational, a more fundamental obstacle
is political. Party thinking opposes the radical
managerial reforms necessary to improve matters,
seeing them as a threat to the party's own right of
unlimited control. Experimentation with new mana-
gerial methods continues--for example, greater use
of computers in planning. However, the most strik-
ing trend is toward more detailed monitoring of en-
terprise operations and a greater reliance on party
intervention in industrial management. This policy
did not work before and is unlikely to be success-
ful now.
19. The alternative source of technical prog-
ress--imports of capital equipment from the West--
will be crucial for Soviet plans in certain key
sectors. Nevertheless, the contribution of foreign
technology to growth in 1971-75 will not be exten-
sive. The USSR's foreign exchange position and its
reluctance to go too deeply into debt prevent it
from importing sufficient plant and equipment to
make a major impact across the board.
20. While many of the 1975 goals will prob-
ably not be met, the over-all growth of Soviet GNP
in 1971-75 should be reasonably satisfactory to the
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leadership--about 5 percent per year. Annual incre-
ments in production of this magnitude would provide
a steady, visible rise in the population's living
standards, very large allocations to investment,
and generous support for military-space programs.
Neither the five-year plan nor more recent official
statements indicate that there will be an appreci-
able shift in national priorities in the next five
years.
21. Nevertheless, there are signs that consump-
tion and consumer-related sectors may now be on a
more equal footing with investment and defense. If
the economy fails to expand at expected rates in the
coming years, resulting in a shortage of resources
available for planned programs, growth-oriented sec-
tors, which formerly were protected from cutbacks,
may have to suffer along with consumer-oriented sec-
tors. At the completion of the plan, however, the
Soviet Union will still find that the consumption
levels of its population are much lower than those
in most other developed countries and that the lag
behind the West has not been appreciably reduced.
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