RESOURCE ALLOCATION TRENDS IN THE USSR 1955-1965

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• Publication Date: June 1, 1962
• Content Type: REPORT

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RESOURCE ALLOCATION TRENDS IN THE USSR
1955-65
1 June 1962
This material contains information affecting the
national defense of the United States within the
meaning of the espionage laws, Title 18, USC, Secs.
793 and 794, the transmission or revelation of
which in any manner to an unauthorized person is
prohibited by law.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
GROUP I
Excluded from automatic
downgrading and
declassiflcatio
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RESOURCE ALLOCATION TRENDS IN THE USSR*
1955-65
Summary
1. The general trends in Soviet allocations of resources during the years
following the Korean War have been as follows:
a. A rapid growth in investment and an increase in its share
of gross national product (GNP)
b. A decline in the defense share of GNP
c. A decline in the consumption share of GNP
2. These trends, which suggest a primary preoccupation with economic
growth, appear to have been interrupted in 1961. The growth of invest-
ment began to slow down in 1960. Defense expenditures show signs of
accelerating somewhat in 1962, and the decline in the defense share of
GNP may have been halted earlier.
3. Shares of GNP are too gross a measure to disclose difficult areas
of competition for resources. This competition centers around the re-
sources needed for the space and new weapons programs and particularly
the research and development phases of these programs, which have been
growing rapidly and are now large enough to be significant at the margin.
Moreover, the programs demand machinery of the highest quality, as well
as special materials and the highest caliber of scientific engineering
and technical and specialized manpower.
4. Many of these same resources also are needed for the programs of
modernization and technological improvement in industry and agriculture.
The Soviet leadership can be expected to move vigorously to overcome
specific bottlenecks that may have developed in 1961, but competition
* The estimates and conclusions in this memorandum represent the best
judgment of this Office as of 31 May 1962.
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for resources in the longer run will pose difficult choices. The problem
of the Soviet regime for the next few years is to ration these scarce
specialized resources among the competing demands of defense, space, and
economic growth. We judge that the total investment in defense, research
and development, and space must be kept within a constant share of GNP
at about the current level in order for the economy to: maintain an annual
rate of growth of 5 to 6 percent. We believe that Khrushchev does not
have the option that Stalin had of choosing one objective above all oth-
ers. Thus over the next few years defense expenditures are not likely
to vary widely either up or down from a constant share of GNP. Which of
the two, defense or economic growth, will be slightly favored over the
other we cannot judge at this time.
5. The estimates for 1961 and the projections for 1962 in this memo-
randum are preliminary. Research now underway in support of current
National Estimates may result in significant revisions.
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I. Trends in Gross National Product
GNP measures for the USSR are too aggregative to disclose the more
critical areas of competition for resources in the current period. They
provide a useful historical background, however, for a discussion of cur-
rent and future problems. The total GNP and end-use shares are shown in
Tables 1 and 2.*
1. Investment
Investment in the USSR has risen sharply since the end of the
Korean War. New fixed investment has the best data base, and our dis-
cussion is based chiefly on this component. During the period 1955-59,
new fixed investment rose from 18 to 24 percent of GNP, as measured in
rubles, with an average annual growth of 14 percent. These figures re-
flect the major investment programs in iron and steel, fuels and chemi-
cals, and dieselization of the railroads. These programs were inaugurated
following 1956, after the anguished discovery that the investment plans
of the Sixth Five Year Plan (1956-60) were inadequate.
The rapid rise of the investment share of GNP has not produced
any observable increase in the rate of growth. The rate of growth of
GNP (see Table 1) has fluctuated up and down with agricultural production
having been particularly aided by the bumper harvest of 1958. The series,
however, does not suggest any upward trend, and the average rate of growth
of 6 percent for 1956-61 is below the 6.8-percent rate of growth of the
preceding 5 years. The performance tends to support the hypothesis sug-
gested informally by Professor Abram Bergson that at least a 10-percent
growth in capital stock plus a 1-1/2 to 2 percent growth in the labor
force is required annually to maintain a 6-percent growth in GNP in the
USSR.
Since 1959 the growth of investment has progressively decelerated.
New fixed investment grew 7-1/2 percent in 1960 and 3 percent in 1961 and
is planned to grow 7 or 8 percent in 1962. We believe that these invest-
ment rates will not support a 6-percent growth in GNP for very long into
the future.
* Tables 1 and 2 follow on pp. 5 and 6, respectively, below.
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2. Defense
While investment in the USSR was rising as a share of GNP, defense
was declining. During the period from 1955 to mid-1961, the number of men
under arms was reduced, and expenditures on conventional weapons tended to
decline. Recent developments indicate that this relative decline in de-
fQnse may have come to an end. The precise timing and magnitude of the
change is a matter of considerable uncertainty, for the nature of data in
the defense area makes marginal shifts difficult to detect. Recent de-
velopments in new weapons and space, where background data are lacking,
make the measurement problem especially difficult.
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Table 2
Distribution of Soviet GNP (Adjusted Value-Added) by End Use
1955-62
Percent
1955
1956
1957
1958
1959
1960
.J 6l
1962 Plan
Consumption
63
63
63
62
61
61
61
Investment
(total)
22
23
25
27
28
28
28
New fixed
18
19
21
22
24+
211
24
24
Other
4
1+
4
1+
4
L.
4
Defense
14
13
11
10
10
10
9
10
Administration
2
2
2
1
1
1
1
1
Total /
3,00
100
100
100
100
100
100
100
a. Residual of independently estimated total GNP, investment, and de-
fense. Direct evidence on consumption does not strongly support a
growth of consumption at the same rate as those of the GNP (5 percent)
in 1961.
b. Because of the well-known difficulties in using Soviet prices and
uncertainties in defense prices in particular, the defense share of GNP
is not a reliable indicator of the resource burden of defense in com-
parison with other countries. Some effort has been made to adjust the
defense share to a factor cost basis so that the trends in shares are
meaningful, but defense probably is still too low in level.
c. Because of rounding, components may not add to 100 percent.
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I.I. Recent Developments and the Measurement Problem
Throughout the period since 1955 the USSR has maintained a rapidly
rising program of research and development in support of industrial de-
velopment, space activities, and, most especially, new weapons systems.
From a relatively small total in 1955, research and development (includ-
ing testing and evaluation) has become the tail that wags the defense
dog. In particular, the testing and evaluation part of research and
development has become in missile programs a much larger expense than
in previous weapons programs, including aircraft, and a much larger
consumer of hardware.
Our current estimates of military research and development are based
on general budgetary and employment data for scientific research insti-
tutes. The critical testing and evaluation part of the estimates on
research and development is therefore not based on primary data that
sensitively relates to that actual activity, and we do not have direct
data on costs in this area. On this account the estimates may well be
imprecise not only as to level but also as to trend. Most especially
they are insensitive to possibly significant annual changes. These un-
certainties apply with even greater force to defense expenditures broken
down by missions.
Information that has become available during the last year has pro-
vided us with new data on timing and scheduling and more detailed char-
acteristics of major new Soviet weapons. On the basis of these data,
we plan to calculate a breakdown of expenditures by program and mission
for the last few years that will include research and development by
program and mission.
These data uncertainties allow the possibility that the defense
trend may be more steeply upward than indicated in Table 1* and that
the decline of the defense share of GNP may have halted in 1961 or even
earlier.
With these caveats we turn to the estimates on current defense
expenditures.
P. 5, above.
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III. Estimated Defense Expenditures, 1955-62
Our current estimates of Soviet defense expenditures, by type and by
mission, are presented in Table 3 and Table 4.*
Soviet Defense Expenditures, by Type
1958-62
Billion 1957 Rubles Converted to New Rubles
1958
1959
1960
1961
1962
Personnel
3.4
3.3
3.3
3.0
3.2
Operation, maintenance,
and miscellaneous
3.8
3.7
3.7
3.6
3.9
Construction of facilities
0.4
0.4
0.3
0.3
0.3
Procurement of equipment
3.7
4.0
4.5
4.7
5.3
Land armaments
0.5
0.5
0.5
0.4
0.4
Naval vessels
0.3
0.3
0.3
O.-I-
0.4
Aircraft
0.9
0.6
o.6
0.7
0.7
Ground electronics
0.3
0.4
O.4
0.4
0.5
Missiles
002
0.7
0.8
0.8
1.0
Nuclear weapons
0.4
0.7
08
1.1
1.3
Research and development
2.2
2.4
2.6
2.8
3.0
Total
13.5
13.8
14.4
14.4
15.7
a. Not available at this time for years before 195 .
Table follows on p. 9.
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Table 4
Soviet Defense Expenditures, by Mission
1958-62
Billion 1957 Rubles Converted to New Rubles
1958 2-/
12L9
10
1961
1962
Ground mission
4.6
4.6
4.5
4.2
4.4
Naval mission
1.3
1.3
1.5
1.5
1.6
Strategic attack mission
1.5
1.6
1.7
1.8
2.2
Air defense mission
1.5
1.6
1.9
1.9
2.2
Command and support
0.9
0.9
0.9
0.9
1.0
Research and development
2.2
2.4
2.6
2.8
3.0
Residual
1.5
1.4
1.3
1.3
1.3
Total,
13-5
13.8
14.4
14.4
15.7
a. Not available at this time for the years before 1958. It should
be noted that research and development in this table is shown as a lump
sum and is not allocated by mission. To what extent the estimates of
research and development in 1961 and 1962 reflect the large expendi-
tures for the antiballistic missile program is quite uncertain.
These estimates of Soviet defense expenditures reflect certain basic
strategic trends,;-knowledge of which is well founded in spite of uncertain-
ties as to detail. First, the bulk of the growth within the total from
1958 to 1961 is concentrated in the areas of strategic attack and air de-
fense missions and the not unrelated area of research and development.
Second, it is clear that a decision was made by 1958 that missiles would
form the backbone of these missions, particularly in the case of the
strategic attack missions. Third, this decision was implemented some-
what earlier for the air defense mission than for the strategic attack
mission. Strategic attack missiles before 1961 were primarily inter-
mediate range. In 1961, emphasis began shifting to the ICBM program.
The estimates for 1961 include an allowance for the halting of demobi-
lization and the rise in the number of men in the second half of the year.
The estimates for facilities and procurement reflect our belief (previ-
ously stated) that there was no massive diversion of resources to defense
in 1961. The pricing of equipment and facilities involves a fair amount
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of broad estimation, so that there is a considerable range of uncertainty
in many of the components of defense. Nevertheless, we consider it very
unlikely that there was an increase in defense of the magnitude announced
by Khrushchev in mid-1961,.*
* There is persuasive evidence to indicate that the announced increase
of 3.4+ billion rubles in defense was principally an accounting shift of
funds from previously hidden accounts.
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IV. Competition for Resources
In 1961 the relatively good production performance of the Soviet
economy (except for agriculture) was marred by a pronounced slowdown
in the rate of growth of investment. Although these troubles do not
appear to be the result of a large-scale shift of resources to defense
in 1961, it is plausible that they do stem directly or indirectly from
a cumulative drain of resources by the military during a longer period,
say 1959-60.
Total construction slowed to a gain of about 1 percent in 1961, and
non-housing as well as housing construction decelerated. There were
substantial slowdowns and underfulfillments in the growth of investment
in nearly all key industries. Although the events of 1961 are still
clothed in confusion, some speculation from the known evidence is in
order. It is possible that the slowdown in investment is the culmi-
nation of trends that started as early as 1959. Table 1* indicates
that the slowdown in investment began in 1960. More significantly the
rate of growth in the equipment portion of investment declined from
17 percent in 1958 to 8 percent in 1959 to 7 percent in 1960 and 1961.
These rates of increase of equipment investment for the past 3 years
appear quite small in the light of the following:
1. The 19-percent and 15-percent increases in nonhousing
construction in 1959 and 1960.
2. The emphasis on modernization and replacement of old
equipment featured in the Seven Year Plan.
3. The increase in production of machinery and equipment,
which by our estimate grew some 10 percent annually at
a minimum (based on an announced sample). The Soviet
claim has been 15 or 16 percent annually.
4. A substantial increase of imported equipment from Western
Europe.
P. 5, above.
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These relationships suggest that a cumulative shortage in the supply
of machinery and equipment during a period of 3 years came to a head in
1960 and 1961 and was a major contributor to the substantial shortfall
in completion of investment projects in those years. Shortages of build-
ing materials also were reported,* as in 1959 and 1960, and undoubtedly
aggravated the investment situation. In any event, a large backlog of
uncompleted projects awaiting the right kind of machinery or special
building materials would make an expansion of nonhousing construction
activity at the 1960 rate rather dubious policy. Khrushchev last fall
suggested that a moratorium on new construction starts might be needed,
and stringent limits have been placed on the number of new starts author-
ized. The machinery and equipment supply problem was further highlighted
by Khrushchev's recent suggestion that existing machine building plants
must work more shifts.
The statistics suggest that investment has received a decreasing
share of the annual increments of output of machinery and equipment. The
most likely competitors for these resources are the growing parts of de-
fense expenditures -- that is, new weapons programs including research
and development, which consume. very much larger quantities of equipment
than do older conventional weapons systems. Space programs also are pre-
sumably a growing consumer of equipment. Consumer durables have not been
significantly increased.
The extent to which this is quantitatively true may be clarified by
further research. The competition for resources at the margin by a
rapidly expanding research and development program may be most signifi-
cant, however, in a qualitative sense. The demands of research and de-
velopment are particularly for advanced and precision equipment., for
special materials, and for the highest caliber of designers, engineers,
technicians, and project leaders. Civilian investment may have suffered
more from shortages of these specialized and highest quality resources
than from shortages of resources in the aggregate.
* Electrical cable has been a problem, as has been cement, perhaps be-
cause of quality and because of a considerable planned substitution of
cement for other materials.
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V. Problems for the Future
The Soviet leadership faces -- indeed it has been facing for the last
few years -- some difficult choices in allocation of resources both as to
objectives and as to means. Persuasive evidence of unsatisfied demands
by the leadership is apparent in nearly every major speech. We know how
compelling the priorities for economic (especially industrial) growth and
national security are in the minds of all the leaders. Khrushchev and
other leaders have a strong desire to increase the emphasis on housing,
agriculture, and consumer goods. Yet Khrushchev's openly stated wishes
on light industry and agriculture of 1961 and 1962 were matched by per-
suasive arguments on the other side. This is clear from the lack of any
substantial shift in resources, as yet, to Khrushchev's recently favored
sectors. In the background as an apparently persistent as well as high-
priority claimant for resources is the field of new weapons and space.
There is every indication that rising costs face the Soviet leader-
ship at nearly every turn. This is most :clear in military and space.
For example, an antiballistic missile (ABM) program, to provide a mod-
erately effective defense, would require estimated annual expenditures
of 2 billion to 3 billion rubles during the next few years. Simultane-
ously the economy needs a steadily growing investment program that in-
creasingly requires the high-grade specialized resources presently pre-
empted by the requirements of the defense and space programs. The in-
vestment program is particularly behind on machinery of advanced and
specialized design. The Seven Year Plan (1959-65) and longer term pro-
grams already announced depend on substantial increases in industrial
productivity. A general failure of the modernization component could
jeopardize these plans.
The problems of agriculture have come to the same impasse. The re-
gime has nearly run out of cheap ideas for increasing output. Rather
large quantities of machinery are needed* just for present acreage,
both to increase output and reduce labor requirements. But to have a
significant effect the machinery must consist of new and improved designs
of a wider range of specialized types. Second, the fertilizer needs
would be rather minimally met by the 1965 goal of 35 million metric tons.
* Doubling the park of tractors would not be excessive. Nor would it
be feasible in the near future. At present rates of growth in output of
tractors the park might be doubled by 1970.
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The present level of 15 million metric tons is far behind the schedule
required to meet the goal of the Seven Year Plan. Once again critical
resources for chemical plants are needed. The immediate solution that
has been adopted is the plan to plow and plant some 40 million hectares*
of grasslands and fallow lands during the next 3 years or so. This pro-
gram may bring an increase in output in the short run but also creates
an immediate demand for more machinery. In the not-too-long run, soil
nutrients that were formerly conserved by rotation and grass will have
to be replaced by artificial fertilizers.
The housing shortage Khrushchev has always with him. In this area
there are not only problems of ordinary building materials but also
cable, electrical equipment, and sanitary pipe and equipment both in
the housing and in the overhead utility costs. Temporarily, housing
construction has been allowed to decline a little. It should be remem-
bered, however, that the volume of housing construction is still respect-
ably large and that a slow but steady increase in housing space per
capita will be achieved at this volume of construction.
Approximately equal to the "new lands" program.
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VI. Postwar Patterns of Choice
One can safely conclude that the desires of the Soviet leadership
n
exceed their available resources. This, however, is a pay of life. In
have faced before, and with the USSR it is virtually and
Stalin's day, difficult choices were made with less arg fe. ument public private.
We can be reasonably sure that the Soviet leaders will move rather
quickly and effectively to eliminate any specific bottlenecks that may
have appeared in 1961. However, the continuation of 1961 allocation
patterns -- the restricted growth of allocations to investmentebothain
basic industry and in consumer sectors -- not only p
in danger but also industrial growth. The hardest decisions will be in
growth emandthes
industrtalspace
the competitive areas beu rementsefordefense
hand and investment req,
If the leadership should decide either to accept lower orither
unilaterally to cut back on some projected major military programs,
alternative would be unprecedented. The leaders have accustomed learned
the
live with growth rates that are lower than they were ed to public
early fifties. The process of adjusting was accompanied by great
pro-
Dods is
anguish, but once done, it was quicimYtto?Khrushchev,~butghe was
gram and agriculture are certainly important
able to survive the chagrin of abandoning the 1960-61 meat and milk goals
of overtaking the US output, which he so dramatically proclaimed in 1957.
The advent of "full communism" will simply be a little delayed. Past pat-
terns of choice indicate that the Communist Party is especially adept at
cutting losses and awaiting a more favorable day.
The admirable trait of patience applies even to military goals.
Soviet strategy has not in the postwar period aimed at matching US
strategic strength. It has been content to take a.ca~iated risk
rand in
depend on a deterrent, aimed principally at Europe. and This was apmarente-
the choice of medium-jet bombers over heavy
range missiles over the very expensive first generation ICBMs
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VII. A Reasonable Projection
1961-62
What exactly are the decisions which have been recently taken in the
Kremlin, in the aftermath of being caught out in a bluff on ICBM deploy-
ment, we do not know. The following conclusions are quite tentative* and
are based on the available evidence, plus the assumption that the Soviet
collective leadership has not sacrificed any one of its goals.
The defense estimates for 1962 in Tables 3 and k** are based on a
continuation of military manpower at the level of the end of 1961, a
buildup of ICBM's to moderate deterrant levels (because matching the US
in 1962 or 1963 is virtually a physical impossibility), and a continuing
growth of air defense missiles.
Two areas of uncertainty should be highlighted. A decision may well
be taken to resume demobilization and reduce spending on conventional
armaments much more than indicated in our projections. This would offset
a considerable part of the 1962 increase. The second uncertainty is in
research and development. This component may be higher in 1962 than we
estimate.
Beyond 1962
For the next few years, say to 1965, expenditures for research and
development, new weapons systems, and space pose a difficult problem for
the Kremlin. Nevertheless, we do not believe that Khrushchev has the
option that Stalin had of choosing one objective virtually to the exclu-
sion of others. He must choose between slightly favoring defense or
slightly favoring investment, and in this competition it seems most
likely that consumption will be least favored. However, it cannot be
forgotten in allocating annual increments of resources.
If the decision is to guarantee that economic growth does not suffer
substantial reduction, then it would appear that investment must receive
something close to a constant share of increments in-production of ma-
chinery and equipment, thus allowing an annual growth of investment of
* And advanced with hesitation, because National Estimates on Soviet
air defense and strategic attack are currently in preparation.
Pp. 8 and 9, above
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perhaps 12 percent. This would be consistent with continuing industrial
growth of 8 or 9 percent and growth of GNP at 5 or 6 percent, with modest
gains in food, housing, and consumer goods per capita. Defense, in this
allocation plan, would then be held within a constant share of GNP (say
10 percent), but the machinery and equipment portion would still be ris-
ing significantly faster than the total defense budget -- at about the
same annual rate as equipment for investment.
Alternatively, eve'.:-if the decision is to favor defense, the critical
resources involved place limitations on the increase of defense during
the next few years. As long as the emphasis is on research and develop-
ment and technical improvement of weapons rather than on a buildup of
forces based on existing weapons, we do not expect that defense would
rise much as a share of GNP, although the effect on the announced plan
for improving technology in the civilian economy would be more severe
and economic growth more retarded.
What new decisions will be taken with regard to these programs is
difficult to judge, but a major causal influence will almost inevitably
be the pace set by the US.
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Series Number
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Approved For Release 2000/04/19 : CIA-RDP79TO1049AO02400170001-6