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USSK: _
Economic Projections ThroughNov hook
CIA HISTORICAL REVIEW PROGRAM RELEASE AS9
ussr:
economic projections throughnew look
r mfiiii Mini
ol Soviei ueoniMiic development pronde un vwrtlial backdrop
Iji di.tuiM.uii ul Sueiei their iinrdk'jiian- fiu ibc Unikdhe annual rwcaicb paper, in ilikan dc^encd! lot an.iljw of Savkl economk. puUIk-tl. re founded io giveuuiUiMlive outlook for lhc Soviet economy ihatate* a> muchc tall tut abtMl ipevifk fKlurt in!luviK.'inf gioHtliarcn* of uiwuimv. Aof altcmstncenable* oi lo ditliiujaiili bctuceiiunccttaintie. thatloud our view of fnlurc growth (thai k. thoic in area* "here change willa inujor impact) and ihoic whine iMijVKt on growth i> likcl> to be *ui;itl
In ihk annual paper we link recentaual>>e> of particular Soviet economic iMuo. peblUhcu during ihi JVM. and event* effecting ihcoverall Soviet growth prrapoelf. fw Claim*::
In IH3 tkc Directorate ofajor nud> ufulwoTTor Soviei energy production through: itsimplication* are examined in ibi* projection* popvr.
The Directorate aliom oiimalc of Sovieteml. mf. The imrlicatiuio ol fuwre defi-ntt spending growth-cither ni raici of ihe recento* aftershifts indeferue *remlmggran-lit in general and for the Soviet vonMinwr inhk paper.
Leadciship changes duting (lieyear and ihc increndng foeuionihe needmprove economic performance could affect prcduclrviij:d ilic uuaolilalrve franscwork ofpaperound the impact thai productivity gain*bare on economic performance daring thb decade.
A bibliography lists rccenl Dl publications on mam- of the tupic.n ihcrupcr. Given in focus on an attempt ui quantify lhc iiujoi influence* on Soviet Biontlithii paper omits much of the informationoaliiaiivc nature lhal kdealt with in tnoK publication. Sucharticularly important to analyst*are considering Ihe likelihood of foture event, in order loingle best eilimaie of the Soviei economic future. Ihef lhc annual piojeei'toaieference picture of ibe future and to bound *omc of the iiiajoi uncertainties that affect it. i
Ill
ndfirs! iwo yean oflh Five-Year-
MmmOmia Soviei gross national product (GNP)erceni and
of IJMS
ercent per year, respectively.3 ilercent, according io our estimates. This improvement probably owes much co 1he effect or favorable weather on sectors such as agriculture and iransporla-lion and something lo live effect of gains from lhc regime's efforts to enforce labor discipline. Despite that improvement, however, ourIhe assumptions sei forthihit Sovietgrowih will averageerceni per year for ihe decade (
This paperet of conditional projections of thepros peels for lhc Soviet economyarge-scale econometric model, wctructural description of tbe economy wiihabout likely trends inoaseline projection or leferencc outlook. Wc then adopted otherthough perhaps less likely, developments in importani economicused these in lhc model to project lhc bounds within which future economic growth is likely to Tall. Taken together, the baseline aod alternative projectionsreliminary. Quantitative picture of ibe prospects for lhc economy through the rot of ihe decade,oint of departure forand further analyst!
On the basis of these projections, wc expect tbai;
The average annual GNP erowth rale will beercent in. (Itercent inerceni in
Industrial output, which accountsittle more than one-third of ihe national product, will grow at slightly moreerceni per year over Ihe decade.
Agriculture will be the most volatile sector of the economy, as always. Wc make projections based on known trends in agricultural production and an assumption of average weather conditions, but the changeability of specific weather from year to year will cause actual agikultural output lo vary raibcr widely around any projected trend.
Per capita consumption will remainow level during ihe decade, allowing at best only modest improvements in average living standards.
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Energy supplies will comif ain economic growih little thiouch the middle of the decade. In the Ulci years, they couldodest drag on growth if energy exports arc hcM dose to present levels and energy demand coniinues on the trend we expect.
Foreign trade will not help the Soviet economy ins il did in, when fast-rising prices for energy and gold and the rapid growth of arms sales enabled ihe Soviets lo increase teal hard currency importsapid rate. During the rest of this decade, real hard cutieney
poits are projected to growea
Thii general growth outlook could change wiih changes in various economic factors. The model's response to our alternative assumptions indicates that:
A sbifl in defense spending policy would havemall impact on overall growth during the decade, because the industrial plan! in the Soviei Union is very large relative to the amount of resources involved io shifts of thishift in defense spending policy, however, has considerable impact On both consumpiion and invcstmcnl in lhc near lerm. aad changes in investment could have importani implications for growth in lhc
- Only ooe of our alternative assumptions would open the possibility of significant improvement in growih prospects byreiuraore favorable productivity levels ofnd. The comprehensive organizational reforms needed to achieveramatic turnaround in the USSR are noi likdy io be in place soon.
Our results suggest lhai.undamental reform of the economic systemombination of very favorable circuinstances bringing backroductivity relationships, the Soviets probably can do littlelter lhc economic growth trend0 as il is indicated in our basdinc. They will, however, have some opportunity to change the distribution of output lo competinginvestment, defence, and the consumer- in pursuit of policy goals (
The chief obstacles lo substantial improvement in Soviei economicare problems built inio the economic system itself. Nevertheless. ILc period of continued low kvei of growth lhai we project0 should not be takena harbinger of economic collapse. Growth will be sufficient toide range of policy initiatives, especially in Ihe aieas of defense and invesiment. and nill keep tbe living alandard of the traditionally hard-pressed Soviet consumer from declining It would be mote accurate to inlerprel our projections asnd slressful periodrge and viable, if inefficient, economy
USSR:
Economic Projections ThroughNew Look
action
We continue loifficult lime (or Ibe Soviet economy throughcig) problems may pose lesst mi lo growth (his decade ihaa we iSccght earlier, bul demographic factor* ate ccniifl to holdo. force growth, ami partial depkiM of tbe raw maiciul bate ia ibe de-ekped European regions will increasingly foicc expensive new invest' menu in temoic area* of Siberia. Fanhcrmo>e, im-ptoif me-ili ia labor productivity will be hindered by ihe continued slow growlh of capital invesiment. and hard currency trade Is not likely toolution lo tbe industrial atalcriall and inveaiment probtemi lhat arc already emerging. Superimposed on these trends il the ibarpening competition for resources between the civilian and military sector* of the economy
Leadership chattel in ihe USSR have increased thein our economic loreeasis in teneral and ia obi forecasts of ibe distribution of national output aooeg major claimants in paiiscular. Decisions lo be*i will bee importantfor ibe pun an ot poucy foah tela led io defense, investment, ind consumption duringh Fne-Yearlimes pan ibairge part of the period of our forecasts. While overall growth inayitself be shifted much by choice* heie, ihe impacts on miliiarv nding ot on Ihe consumer coukl be tubtianiial
The projections shown in ibis paper were developedarge-scale ccianornclriche model enables us lo inlef rate individual assumptions and analytic (segments soonsisteai sei of general Quantitative trends can be deduced. Tbe assumptions and judgments that underlie lhc baseline projections
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an of two general lypes: where we have developed supporting analysei. (be tnpci represents our current view of likely developments in ihe Soviet economy dunng ihe rest of; and, where ihearticularly ambiguous, wc use an e'lrapotaiion of the leceni pastoint of departure, and then consider alternative wurnpliont {see inset] Tor ihe moil pan. oarrc based on historical data updated13 and on statistical parameters cslimalrderiodear or iwo before lhat
Tbe baseline protections. Iheiefore.oviei giowth acenario lhai differs from other scenario* only in (he -alues lhat are givenhe model We have developed some alternative scenarios by deliberately (hinging the inputs from ibeir baseline values to idled iliernaiive Soviei peJicws or ciicmal events andbo analytrd the projected nerds lhai result from these changes. The puipose ol Ihese projections is toeme of ibe range within which fulureSoviet growth is likely io fall and to assess some major factor* inflMoeing lhat range la Ihis sense, theoa Id be viewedcanl of departure and should not be consiruedormal "be"f ihe outlook for the Soviei economy.
The baseline assumptions and projections follow, in iwo carts one presents testraphicaland the other displays selected estimate* tabular form' Given tbe naiuie of the assumptions posulaled in ihi* paper, we hue much morein Ihe general (rends of ihe projections lhan in estimates for particular years. The annual figures, however, can be used lo illustrate where the economy mighl beiven year in (be absence ofchanges ia political and economic eoadil-wr /
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The growth teit of Sonet GNP dVi'jottom Une'ofihe tfanomH projectionsIn ihii pas*'. Tht projections of ihltare drvtloptdrotest in whichcalculates GNPhr toilsmany
kindi of daleariety of tourtrt The procen requiresalut for toch variable be put into the model for eoth year of the period over which the GNP projections O't to be made Whtnevtr previous analy-lii hoi ded estlmatet of likely t'tnds In tome of these input voriabltt. we hat adepitd thoitIn other tain, we hot drttoped Independent estimates; and in economic errai where tht future Is particulaily ambiguous, we hot limply examined eltrrnailt ol lump It ons
Thert art dt/fnlng degrees In tht it'talnly that ton be attachedhen Input data raluet. Our estimates <sf labor force growth art relatively firm, for example. Income all ihe people who trill start working during ihis decade can already be Identified In exist log population data and we hart good information on mortality tales. At the Other end of the tertointy Spectrum is the distribution of GNP among primaryInveiimtnt. and defense. Tkii distribution li subjecthe policy choices of Sovietnd the valuelfor the allocations lo defense spending and inveslmenl lhal we must develop end put Into Ihe model art analytic assumption! on our part, which may be subftet to lubstantial revision as erenti unfold, for example, we assume certain
gra-lh rotes for defente ripenditwes aad farhardware procurement ihrouth theon the baiiiur anolyiii of observeble current and historical irtndi. The actual rwri of thtie tor tablet in tht future, however, ran be influenced by decisions of the leadership In wayt that the lite of the labor force inarge extent otrrjdy determined by drmogiaphie fattori) ton noi
Moil Input data fell betwttn those ettremei. and ihe degree of teetainly frequently depends on the amount of reieorch that can tuccntfully bt applird lu the subject Confidence Incur energy production forecast is bultrenedajor irirnrth effort in that area, for example, and continuing reiea-ch indicates lub-Stanilal evidenceong-run decline in produetivily growth im Ihe Soviet economy. On the Other hand, no one would daim thai ihe future price of toldfactor In our calculation of the Soviet tradrbeforecasi with lonfidence
In general, we have more eenoiniy cbout input values that ere subject to Utile. If any. manipulat-on through
policy or are clearly refleetloni of loaf-teem letnds that ore not likely to bt reversed quickly. Certainty is less about the assumed values of Inpul variables that can bt strongly influenced bp iueh fatlorl as policy
decisions and market penes One reason for looking
al alternative GNP ptojeetionx is lo gauge how sensitive the mines geneeaied by the modelingart to some ofmporiant uncertainties in lhc Injrut variables
in the teat, appr opt Uie sections discusselical thills in out baseline anumptions about the fututc Sovieini ton me fit and folic) dcei-siorii and tbc impact ol these shifts on the baseline solution TViw ol* theac lomarioa deal with thelor airicnitxc itade. and> reflect jlteieatitc defied of Sovieto mectmi eneigy tejoitemcaU And two io-ofre alternative sen ofcflectier.menially diffc'caldecisions at to tbe priorities lo be accorded defense and consumer acidic. The dlmmIrani thatibcdiicuuione major aspects of the data in the appcndii
Baseline Assumptions
Tbe projeeiioni presented in this report ate basalumber of key assumptions about future trends in the Soviet economic environment. We have chosen ibcac lo represent (I) what we think will be likelyin thepresent or historical trends, where data are loo ambijoous to
CnalMtafiU
judgment about the most likely nuiiume. Our baseline aiiumpiieni include ihe following-
viieodtwivit* of ihe Sovkl tspiul sleek, which hii tilleo lubsitei'uilly19IS, wig coo
liftuet'lmn Irani" ofnt
maller growih increment lhan in the past
The Ubor force "ill grow more ihx-ly Inhan it did in theat in average annual rateerceni. down from IJ percent.
Tbeocation ol initSlnK.nl and labor lince| enosectorsreflect the trends evident in lhc Sorkl Five Year* tares going io ihe ervtigy sectors will increaseihe expense of some consumer sectors) The lhares accorded to heavy industry will remain relatively constant
- Oil productionbarrels per day) wilt nearly reach lhc plan target of1 ihcna slow decline ioW* On ihe Crthu hand, gn prodoeiioncontinue lo increate mp>dly. more thin ofTsttling lhc tliop in oil Output
energy efficiency of newly installed plant and equipment will eoniinwe ioiur (vowcuoos of capvitl sroek. wc can estoralnergyw erne ma
continued growth of domesnc energy require-iMMS. ihe Soviets willonfliei bctv.cn maintaining oil eiporti and mectinf domestic needs
The Soviets cionoi count on foreign trade toay oui of their difficulties The oil and gas markets ate likely to be soft for most of lhc decade, arms sales will face increased competition front oiher suppliers, production problems and growing domestic demand will hold back increases in exports of meal nonfoel minerals, and low duality and poor marketing techniques will continue to reiard in-creases in capons of machinery and othergoods.'
Fundamental economic reform will noi be part of the Politburo agenda. We assume lhai there will be no shift in political or economic policyignificant impact on economic performance (
The issue of future Soviet defense spending deserves special attention. Our latest estimate of recent defense spending concluded that real growth in toial Outlais for theveragedercent annually, rather lhanerceni ii had avengeduring ihe same pciiod. thereliiile real growth in procure iif military haidwari
cannot siale confidently ii( will rebound quickly| retard the inc npendiivres fc so-nr time
of Soviet prowili
tkcausc ihe causes of the slowdown ut military piocmcmcnt growth are not fully undeistocd.
icthc' the jro-iti trend eil>ei theise in overall defense
baselineiv* hs'e assumed
ei|tndiiiiies ighthu. iiement rrnwih will rise
3
il'chiIr and research, development, letting, and(RDTAE) gro-lh will fall slightlyince the issue of fulure defense growth involves considerable uncertainly at ibis point, we examineater section the impact on Soviet growth pi os pee is of alternative defense spending assumptions
Aspects of Soviet Economic Growth Under Baseline Assumption*
Sourer* of CNP
Our baseline projection ofcrcenl average annual GNP growth inndicaies that Soviet eiijiiorr.il growth will remain at recent low Irvcli for ihe balance of ibe decide. Soviet GNP grew atrateercent per year1 aadercent2 The monger economic showing) (which relumed GNP growth to ano SJ perceni Tor thai yeai) was due primarily lo favorable weather and does notigher rale of growih Through the rest of' Low average growthpersist through. in spite of the improved oui loot (or oil production and the reduced growth ia cipcodiiurca for military procurement that we lutmc in this year's forecast.'
half thai ofnduilry faces the econ-omywidc problems of slower growth of plant and equipment, labor, nnd other mputi. Ihc industrial hcailland of European Russia altoapid depletion of raw rnatetials production capacity. More and more investment resources that might otherwise contribute additional industrial ouipul are being uied kinisly lo maintain (listing production levels, at new raw material and energy deposits are developed in the remote and high-cost area* of Siberia Evenhare of annual inveslmenl in ihe oil sector were io double between nowecline in en)over lhc lias half of Ihc decade cannot be prevented.*^
Form production is highly dependent on weather conditions. We estimate future crop yields oo tbe basis of Ihe historical Irrnds. incorpofaling changing weatherhe return lo trend-line agricultural growth afier lhc bad harvest years01 results in eslimate* of short-term agriculluial growih thai are deceptively high, the return lo normal having the appearance nfevertheless, ignoring year-to-year flucluilions, Soviei agricultural ouipul is likely to grow at tbe trend rale over the rest of Ihe
changes in our assumptions improve growth Only marginally, because tbc additional resource* released for productive use representmall percentage gain for the economyhole. The S'-rragc GNP growth rale ofeicent Ihat we project forontrastserceni inercent inOs
Imluii'iol ouipul. which constitutes aboutercent of the nationalikely to grow during tbc rest of tins decadeittle above Jrate about die third that of thend less lhan
er ctUmtird ONp irvwiS in
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Uses of CNP
The projections of aggregate "nd sectoral economic growth are influenced by many interrelated factors. The projected distribution ol GNP among end uses (figures particularly semiltve to ihe assumptions we have made aboui annual investment allocation snare* and the nenri in defense expenditures over tbe decade After calculating GNP as the ouiput of the producing sector* in ihe economy, wc est mateas theinta at oa GNP after investment and detente leeiuirenieau bate been met. Tho netseful heca use tt reflects the historical order of priorities ii tht Soviet command economy: ban ia means that our protection of eontt.ri.pt ion win be directly affectederrnri in our dr'ente and investmentiona
The declining growth in production over ihc IViOs noted above in the roctioo on soutces ol GNP means
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figure 1
Sources ol GNP
expansion In ihe availability of goods and service*e divided among ihe competingfor future growthhe consumer, and defense. Our rxojectioirindicate that for tbc teat of lhc decade Soviet economic planners will continue to face the dilemma of how beit lo distribute very imaH increments to national output At the endowever, tome of out CNP distribution assumption! differedfrom thoseo brief, we no* assume that the Soviets will giveoniinuing raiherising priority;eflected in theof CNP we project as being allocated to defense, ne difference between our findings23 isin the section on GNP distribution (page it)
Figure
Key Rcsouiees
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OuWi*
wum mnmuiiHi. in*<
i j.
projections indicate tbil new fixed inveitrocni inill irietease at less than bait ibe rale of, prims rily because of slower growth ioproduction and new const action starts. However, our current estimate of the growth rate of new fixed invesuneoi for,ercent annually, is greater than last year's projection. This is mainly because we assume lhai the total value of durable roods going to the defense sectorincrease during ihe period up'
Tbe Impact or Ihe generally reduced eipansion ol investment inoo OKPgto-ih will be compounded In particular by ibe increasing demand for investment goods per unit of Output in ibe energy sectors. Just toow rale of growth in energy output, the Soviets win have lo givereatly increasing share of uvesuncnL This will depress 'he expansion of investment in (he noncneigy sector
Ct-aMntM
Figure 4
Ubor Productivity
lhc drxadc,at results.tignifi. cant energy tkficil could develop in ibe dartouc eranoeny. We assume ihai adjustments in ilia silua-"ice -ovJd .Delude retirement ol ibe mow iiM^iekni eneity-iaint eouipment ind somewhat lower rale* of capital ute
Labor Productivity
The ley to Soviet labor productivity improvement in the {vast hai bnen inc-eese* in capiul pet worker. Now.nless Soviei punnet achieve more success in rcaliang lechncJogiealm-piovemcntt in organization, and other lourcesof produciiviiyny additional incresjes in capital per wnrlxi will have leu and lew effect on produciiviiy
Since Ihe. Ibe returns on additional capital have been dimin.ih.ng moreihan in earlierhe rcssons lor this include (I) raw materialuler emit associated with thebe locauoni of ra- materialrom lhc depkt-cd nreas wesi of, so Siberia. <J> pr-JsabJ, transportation bv.lcnccki.ossibly worsening worker morale
In spite of Ihe publicily givennd abroad io Andropov's ubor discipline campaign, we have as yet imufricjeavl data io measure an intcrrnrdtalc io long-term positive effect on produciiviiy.cu possible thai the influence of those factors lhat ledecline io the effect of eilll capiul on output in lhcay intensify in the future' If lhat is the ease, our low labor productivity giowih estimates shown here uie conservative, and Ihe actual growth will be even smaller
The pallern of produciiviiy growth inroyeeiions is only marginally different from thosebe differences arc not significant in terms of trend. They are due lo tome ihifuJ In our assumptions about Soviei investmeni allocations and to improved prospects few "reduction in someectors, panicularly or'
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filial andt the relationship
between lliH Deed fo* (MID and iht irOiBI Klulii
available lo' consumption lhai affects projectedIhe closet iht amount ot energy availablecomet lo meeticj requirements,is GNP growih loceiial defined byond capital iicch uendt In out modeling,available for domestic consumption iiij- iwill not reach
ihu potential because tome capital nock, lacking energy. wiD be idle
We eslinutie lhai primary energy produclion will grow byerceni per year on average for ihe rot of the decade, downcrccei ia. Fjpectcd gains in gai produclion will be sontcwhal offsel by declining oil produclion andstagnalion of eoal oulpul. For lhc USSR loositive energybe plannrrt null hold domestic eoeify consumption growthiille belowritical exports io Eastern Europe and exports lo Ihe West lor hard currency aree me)
At ihe same lime, our projections Indicaic lhairequirements for primaryare largely determined by lhc siic age, and erarrtpoaiiioo of tbe capitaleooOavc loaa average ofercent annually .
Tbe implcalioQ of tbese trend, is thai thebe cccratntg under aa energy constrain!mercy reepiirorncnu greater lhan thefor eimiumpiax tbe enddecade approaehet. At Ihe muroeconomic leveluni.'r-n. the impact of an encigy constrain! itfell use of available capital Thb leadsoutput and has ilic effect of makingprojection of annual GNP growth almostpercentage point lower in Ihr tail half of Ibeil would bevr modeling,onlythe effectsossible
energy imbalance
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nuPmat ra
O
Moreover, we do noi yeiclear ladications of Soviet policy concerning energy investment,coosBmption. and irade duringThe Sonets' taccus in Ivewdtag energywillarge etteni be determined hy then abiliiy to implement an intricate combination of energypolicies, which arc likely* cosily ia terms of other economic objectives, and energy conservation policies, which will face icimui obstacles in the rigidily of Soviet economic management
Adding lo the complexity of ihis issue, ihe mix of energy oulpul will alto shift during the decade, as shown iu figuref the economy is to adapt to ihe new mix of energy produced, energy-consumingwilt have to make sigruficani adyssintents. For example:
The chief area oflor -oil substitutioneirie powc generation Yet ihe Soviet refining industry, which currently produces ml quantities of fuel oil. is not equipped lo process inio lighter products the' large amounts of cioess fuel oil lhat would be made available through gas substitution.
- Gas-for-oil substitution also icquirca substantial construction of feeder pipelines and. in seme eases, adaptation of capiul equipmeni The SoricU have made scenein these arras, bui lhc cettlook is unclear.
Of tbe (wo problems, tbe inadequateaj rail is ihe more serious. Although the Soviets have long been aware of lhc need to shift the refinery oulpul mix to cmphaiile lighter products, they have yetntroduce sufficient cracking uniu. For example, ihey planned io build nine cracking units ineriod, but by3 they bad repotted only two under ccnsi ruction. Any rapid development of this sector would probably require Wealcrn issisiartci
Energy exports arc expectedecline slightly,0 energy exportsercent below7 level. Tbe relative importance ot oil and gas exports wiU shift, with ibe capectcd decline in oil expons. Inacased gaieipotu will take up tome, bul not ill, of
ron'jjT.inl
slick. Despite Iheie changes, energy will ilill remain the dominant Soviet hard currency earner, (c,
Oil Pioduitio* limit. The SovielV Cuifcnl olof4ccounu foi roughlyerceni of Iheir loial primary energy produciion. Three-fourth* of ihissed dorocsikilly and one-fourth eipocled Roughly half of the cipex led dl goes to lhc Council for Mutual Economic Assistance (CEMA) countries, and about ooe-lhiid goes to ihe West for hud currency.
We estimate that Sovkl oil ptoduciion will begin to decline after the. This it based on the increasingfor drilling and fluid lift and on the lagging Infrastructure development in Weil Siberia. The aeverity of the decline will depend on Sovietlo increase iavesteneni rapidly. Weorking assumption thai production wiH use shghllyJS. and then decline
0
Gai Piodmiion ft mil. Current gas produclion ofillion barrels per day oil equivalentoc) account! for nearlyercent of totalenergy production. Aboutercent ol the gasported We estimate ihat gli output -ill rise Substantially in ibis decade. Tbc annual growth rate wilt averageercenind nearlyercent of ihe increase will be used io meel ming domestic eneiry reucirtrw-iii Lagging gas-for-
could slow ibe increase ia gashence production could be lower thanWe estimate Uui0 gas will(or abouierceni of total primary
Coal Piodatiion limit. Coal produclion, cuircnilyoc. represents abouterceni ol lotal Sonet primary energy output Net coal csports account (or leasercent of the coal mined We anticipate that coal raodaciioa and ciporti willnear twrrcni lech tllreiaghou* the decade, but rising output nill be leeornpanicdhe energy content of ibe ceo) i
Hard Cuiiaoey Trade
Foreign Irade is not opecied to boost the Soviet economy ins it did in. At thai
time, fast-riiing energy and gold prices and the rapid growth of arms sales enabled lhc SoiisU to increase real hard eoncoCy imports al an average raie of mora thmear. Through. cukes arc likely lo be far more stable and lhc volume of ciporis is likely lo rise mote slowly
The leal value of both fuel and nonfuel ciporis ii assumed to grow atear over theof theuels, therefore, will continue to account for aboui two-ihirds of eapoct earnings, wuh ihc real price of energy assumed to remain roughly constant. The earningsowever, is cipccicd to change, with:
Farnirtgi from oil sales decliningercent
in constantarnings from gas sale* risingercent in real terms, making gas 'he most important Soviet hard currency eipon. We ealimile Ihat real ciporis of other commodities will grow very little and lhal earnings from gold and arms sales will remain stagnant in real terms
Real import growth will depend on lhc need to boy grain and other firm products and On policies and opportunities regarding the purchase of foreignhigh-technology mii<nmeot. si tel. and either invcilmcnl goods. Assuming riling domestic grain Production, unchanged meal production policies,ontinuation of low real grain prices in ihe world market, we project ihat ihc real value of annual grain imports will remain well belowevel for Ihe real of Ihe decade, although grain imports may reachillionearhe Soviets will probably need to import more investment goods, however, because of their growing desire lo raiseproductivity,though machinery im pott* from Ihe West can ha*e, at ben.eltsi impact on overall growth /
Because real hard currency earnings are likely to grow slowly, if at all, during the rest of lhc decade leal greiwib of imports wtmld lequirc inciused use of foreign creditsro-ing bird currency debt II
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tisti.uss/ii Ht-iCWfiM>toattni i
may well be difficult for Soviei leaden lo accept these coodi lions. Hence, import growth in real terms over Ihe next seven yearsprobably be well below the average rate of.odal goalear real growtb for all hard currencyfigure we used ia oui baselinecause the trade deficit to grewercent in constant dollarseal credit drawings couW remain fairly constant orer Ibe next several years but would escalate quickly toward the end of Ihe decade to nearly twice tbeir current level. Over Ibe same time period, the real hard currency debt would increase by one-third. The debt service ratio, however. would remain roughly tbe same for mosi of the dccaflVwould still be only aboutercent(
This situation could be strongly affected by Soviet grain output and by the world energytring of poor harvests, neccssitaiing larger grain imports lhan we here envisage, could add billions ofear to Soviet hard currency needs or force the redirection of imports from other commodities io
grain. Any increase in imports would have to be met through additional borrowing (causing foreign debt to rise even more) or at tbe expense of critical investment good imports (retarding even more the sluggish growth of Ihe Sovieto the other hand, an upturn in energy prices andbecause of an expansion of the Middle Eastdjjstically increase revenues from fuel eaports. This could eliminate the need for most of the projected bard currency credit drawings, thus causing foreign debt to dectine sharplyr the Soviets could use Ihe increased revenues to raise imports of needed investroer"thus fostering industrial and energy growth |
Varia rioos on the Baseline Growth Case Energy
Overall Soviet economic growth may have suffered from ibe slower growth in energy production ibal
began in thirequent reportsold of power outages and fuel shortages.esult. Output of cement, chemicals, food, and other commodities has been impeded Energy quotas Ksve been eiieetively imposed oa industrial ministries and faciorieicope with electric poweroreover,souices indicaic lhai power short-tgcx in lhcoil an averageillion rubles annually in damaged equipment and disrupted processes. We expect ihia problem io worsen inod beyond )
To mini mite their shortages, lhc USSR will give priority to energy investment, ll hai grown fatter lhanii Soriei investmentnd ihis trend will continue through the decade. Ineriod, the Soviets pun to increate energy investment by M> percent, boosting itt share of all new industrial investment to more iha* one third. (Overallis slated to grow by roughlyet cent
The Soviets arc facing increasingly difficultchorees. Tbe rising cost of this investment will sunn the economy by "crowding out" investment in Other hey sectors The energy industryerceni of Soviei pipe pi eduction, moreerceni of machinery oulpul. and substantial shares ol other sector production. As energycosts increase, ibe investment burden of rising energy production -ill grow over base One Soviet energy cipcrt rninrutlcs-rerccnugc pOimio energy's shale of investment could lover overall economic growthand the consuming sector's shareo OA percentage point. On ihe other hand, il will be difficult to slow ihe pace of energy investment, given the growth of energy demand by other productive lecion
("men the impact of rising eneigy costs innd the potential tripici of energy shortfalls, the Soviels may cmphatirc conservation and energyespecially later in the decade If effectively
olicy CouMshortfalls Results tonld be achieved mote quclly if Iheigh prtoriiy io eneigy conservation and
1h fifti.
Ih' n)
consequently were willing io sacrifice other eeonomie ohieciivet Wc estimate that progress in energywill be slow The Soviets know the potcniisl benefits of using more energy-efficienttructures, bul they have ircvSf; reabiing thisl Fnergy efficiency is only one (and by no means the most importani) ol Ihe many coals lei for Soviet machinery producers and builders. Managersdesign improvements slowly, so as not to riik failure IO meet peoduci-jn largeltj
Morcotr. eouipment continues io be used as long ai il can be repaired. The average annual retirement rait of Soviei capital stock has beenerceni. less lhan half thai of normal Western practice, and, in contrast to Western experience, no mayor Soriei industry hat nsodcraricd its caiitc esaaUHhrncni wish new.nergy-elf the guvein-tnenl were willing to poshore rapid retirement Of Outmoded equipmeniduceent of slower economic growth in the short -to-iniermcd>ilc icrm f
Weiamined two iddnioul scenarios (figure 'l which differ from the baseline case in cnir foricatis for oil. gas, and coal production and our estimates ofimcitmrnt necessary to achiev: those output levels. For this study, wc set produclion andfor ihe oil. gas. and cool sectors at other "reasonable""and above Our baseline esiinnatcs For example, weeC thai Oil pruduc lion0 would ben the Vnw cneig) ii.rn.afio andn the high-cneigy scenario, instead of ihesed in our baseline case. Based on out assessment of Soviet energy dcmied io. both scenarios asiume ihai ami of thenergy a- iiiibnn nude ia the capon sexciefore. the im.iact o* 'he domestic economyaiber small in either case
otal GNPl-oo rubles (orercent) higher ia the high energy case than in lhc lo* energy Case, sndusirul tewcaliucaiercent higher, and lhc industrial growth tiic is I ilfcseiccntage point higher Asene, most of the impact will be felt in the etport sector, where the
additional energy capon* (principally oil) associated wiih the high-energy scenario would boost capon earnings0 by tnoee than ii billion mi the
earnings in theccaaiio(lbat is, front SS.)
biluon to JO.JbdUou)
If the Soviets could improve enctgy efficiencyto remove lb* energy comuaint. then growth prospects would improve. The GNP growth rale, for eiampfc. woold beercent ineriod, upercent in the baseline cat j
We assume that Soviet economic planners will squccic the consumption sector hard in order to allocate tufficicnt investment to energy.. even in tbc low-energy scenario, the annual growth rate of per capiia consumption) is reduced to Itsercent, down from aa averageeicent in. Given lhc slowdown in economic growth. Ihe Soviett will be hardto maintainthare of GNI
Other1 . i. Growth
Coodilions and actions taken in Ihc agricultural sector siiongly affect year-to-year growth figure* for the Soviet economy In recentad weather in the main gram-growing areascaused ouipul to run well below trendur baseline or ejection of Soviei agricultureeiurn to moat normal weather enodiljons for the real of ibe decade Continuing unfavorable conditions could keep grain output below these trend circctations, while favorable weather duringofouk) cause rt to outrun ibetn |
The implications of these possibilities were caplored in two scenarios (figurene auuincs g'*in output io be ID percent below trend levels for ihe real of lac
TW uudla-mIM)
IHt> "mil vw"
Agrieullur*ffect of Low and High Asiumpiioni Aboul Giiin Production
iiirw Aamnl Gnat*
ould be ihe case in lhc event ofweather) and the otherercentcould result from more favorable weather)ihese scenarios are plausibleercent below trend7 and Id percent above fromHistorically, each percentage pointof grain output from ueod levelshange in lotal Soviet agriculture oulpulpercentage point in the same direction.shows tbalimpact is passed
along to Soviet cenisoroctr
In tbe soon run. rites of growth of agricultural output and consumption, as well as labor aad capital produc-inities in the agricultural and ceauunes goodscan be greatly affected by shifts ia weather conditions In tbe km; run. Ihese rales arcleeted by other factors underlying agricultural proasVnicaJ change, and irnlitalional development
If ihe weaiher were favorable, tbe grain output0 would be XI million tons gicaier than lhc trend level for lhat year. Thii would be enough to meet alrnoai all Soviet needs (unless Soviet planners chose to espand the nations gramnder these circumstances, grain Import requirements would be well below the level* indicated by our baseline condi irons. Actual imports, however, could still be high, because of long-term grain agreements, foisting agreements obligate the USSR to purchase alillion,ear until the second half of tbe decade.
If ihe weather were urdaveeable. Soviet grain output would be more thanillion tons below the trend levelhb would rccwoe subsuaiial imports bul Ihe increase would be coast rained by lhc gr nn handling caruhthjes of So-net ecru and by policy cons id era Irons. Additional grain imports could in-
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batd currency ciedil drawings, itcdciiiirig ihe growih of deb* io Westernbe Soviels eoold decide, however. Io olTsel some ol ibe cosi of grain imporu by reducing imporu of otherunder similar condition*hey chose io
reducefrom baid currency
count ri
Trade Hunfavorable giain-growing coodhioosa long-lasting reduction of bard currency imports, could that reduction harm Soviet industrial investment and accelerate the decline in Sovietand economic growih? Two scenarios ea> ptore thii questionn the first, ihe real value of bard currency machinery imports is assumed io return to tbe1 level and remain there for the rest of tbe decade. In the second, the real value of total hard currency import* ft; auumed to grow at a
raleerceni faster than in the baselinehe additional imports being ao umoled foe by purchases of machinery. We assume in both scenarios that the shift in machinery imports is not offset by changes in (be levels of other types of imports and thus rmwoaffect hard currency credit drawings and del
Out model suggesu that these shifts would havemall impact on total invesiment, contoroplicin. and economic growth This is because, in aggregate terms, bard currcocy machinery imports arc relatively small. In ihehey were only one-third of the level of machinery imports fromercent of Ihe total oulpul ofict
maebinC'building and mctalworkiog tcctoc. and onlyercent of (be Ice] of total investmentne thould tieep in mind, however, tbal hard euneoey machinery imooni dopcctal value foe 'he Senv ihey are willing to use theie scarcene ivy and increase their baid currency debt to obtain tbtiti Tbcse import* may be critical in a
f key aieai. inch as energy production.
where ibtir effcci on theeconomy well be
gieatei thin our mudel result* indicate *
Our anatyib suggest* that change* in hard currency machinery import* couldignificani impact on the Soviet bard currency payment* position. In the scenario with lower import growth,0 iride deficit iiercent below (he deficit in our baseline
" TSu nluiiN ntiBinaey liopnrU Ucomrannittmiilii fine* Dudoes not eliiiinruiihmn una) wlvn laidrmt.imJn |ib*.mI
tZeSJt mil ulrniin iV xlai ti lard Ounw)kSovtHJ. Nnntdn. "wSf* Owl i'M mntvriiVnM ikaarprojection, debt servior paytneiin and the debt service rate arc more than SO perceni lower, irvj net bortow. ing is iwo-lhird* lower. The grot* debt it one-third lower. In Ibc tcenario with greater import* of hard currency rnichinciy. tbc trade dcfial it more lltsnercent big her. debt service paywwnu oneand net borrowing two-third* more than in the batelinc caie.0 the great debt it more than WO billion and the debt se/vtce ratio itercent- Soviet' leaders probably wouldihn tecond sccnano unlets ihey were driven i* titical need (or ipccifk key import item
Pttni.aiiiif. Pan Sonet effort! to boon output fo tutcd on increasing input* of capilal and labor.umfhe dtffievhy of cowl inkingpproach bat grown ivbttantiallp Emphitit now appear* lo be focuied on:
Imprewing the prcducttvtiy of labor, initially through greater discacjiac of the work (oree and eventually ihrough better naming
Increasing ihe efficiency ol capiul investments, wild special attention lo the coenplerion of projects already under way aad beiier niuiieaiacc ofisting capiul flock.
This emphasis creates illproblems. Even if il can
be made to wont, would il have an appreciable impact
on ihe growth of the Soviet economy'
Putlinf aside Ihe question ofcoal involved, ihe implications foe other sectors, or ibe speed with which it couldn mined the implicationi of improved productivity by assuming the Soviei etonomy lo opernle ini ll didJ (Etwionielric analysts of tbe vaiioci sectors of ibe industrial ecorscenj icvcab thai tha Impact of additional ieiettmcot on labor pecductrvily drecexdeturn loroductivity giowth trends would help tbe Soviet economy grow faster by incicatinf the gain in labor prtaduciivily derived from increases in the stock ol machinery and equipment
If ihe Soviei industrial economy were openiing as it didndustrial output would be flowing at almost twice its actual rale. This growth would slow down considerably in the last balf of the decade but would still remain well above the growth we now project for thai period.0 machinery output would beoercent higher, total invest-mem alirsoatercent greater, and consumptionercent mote thin is now projected The economy's lotal slock of capiul would grow faster under these conditions than in tbe baseline case, although our resulu luggcsl thai an energy shortfall could retardf capital stock actually used in production
To approach the growth rales of our improvedscenario within the neit five lo seven years. Ihe Sovieu would almost certainly have to make very ambitious and incisive reformside spectrum of policyincluding invest jsent, tabor, irade, and economica scale lhai weunlikely for tbe Soviei buieatxrac;
I) ist. Ib-iioo of CNP
Compulses13 Pie.|et lions Theercent average annual growth of CNP overn3 projcciiorts is not significantly different from ihe giowth rue ihai we projectedlthough il reflects new defense assumptions and our current judgments lhai oil production -ill not begin to decline until5 and will fall lest farhe dilference in GNP distribution is rr.we noticeable Ourereeni average an-nual growth In defense capcadituiciercent last year) and slower growih in miliUry hardware procure meet has ihe effect of releasing resources for Olhcr uses. InvciUncal and consumpiion inh Fine Year Plan period both benefit, and per capita consumption no longer tliotvt the absolute decline reflected in7 projections
The impact of the decreased drag on irivcsimcnl hatradual positive effect oo output growth in. Nevertheless, production capacily is increased somewhat because growth in tbe nock of plinl and equipment will eventually foSow growih ia lhc flow of investment goods Increases ia in'tstmcnt andcapacily iaould pout mo the economy better for improved growih in. Tbe implications of leas stringency for tbe consumer, in Ibe form of continuing (though modest) improve-menu ia average bvingouldoon for the Sonet leadership Gains couldositive effect on labor productivity, ai more goodso be available in eichange lor wages rarocr*
Tbe growth rate for defease capeaditares thai we currently assume is approijrnatcly the same as out protected growth late (or the economyhole Therefore, in our cuitenl baseline scenario ibe de-lensc burden remains al aboul I* percent throughout lhc decade instead of increasing (at it did ia1 calcuutiowt loercent5 andcreen in
Figure II
Comparison2i Baseline0
veetge Annul Growth
CKf
Fa.eieing the Coeainur orMilitary Tbe eslimate of Soviet eeonomie rtfospects presented in our baseline depends in panumber of key judgments about tbe future Soviet economicand policy decision. We have also examined tsvo casesn whichssume Soviet leaders decide lo distribute Ihe economy's growth incrementanner different from ihat assumed in our baseline ease. In one weonsumer welfare, io (heilitary, orientation. Nciiher policy option alters our baseline forecast nf GNP grovrth by as much as one-fourthercentage point per year during the decade, but the outcomes for the clsimanis on national output are significantly different. The results are in accord wiih ourthat, leaving aside consideration of fundamental economic reform, Soviei policy choices are more likely to affect the distribution of nationalthan, to affect Its growth during thb deead-
Con rumtr Welfarec assume that the aimelfare-oriented policy in Ihe USSR would be to move the economyigher growih path by providing the material incentives needed to spurOur assumptions for thb case includeshares of investmentusinc. lightandthat produce goods for whichuch uetsatbficdfor energy. For this scenario, we assume thai defense spending remains flat, to allow for increased total investment, and Ihat the volume of food and Otheroods imported from thencreased.
esult. GNPlightly tower than in the baseline case during the but half of the decade, because of the shift of resources away from the sectors
Figure 11
AUemilivc Allocation0 EITcci of Increasing lhc Priority or the MiliUry or of Consumer Welfare
WW
Cil"1b
CUT
n Ci|lt* CtaivnplWii
product invcstracniand con-Smiction. There are sutwiantial gains for thehowever. Per capita oansumplion growih iaatevel through the middle of the decade and ii twice as great0 as tbe growth in our baseline csss
Miliiary OriemaiioiL If the Soviet leaders tell that the challenge by the West to tbe nation's security interest!tronger response, they might accelerate the buildup of their miliiary forces and choose economic eoliciesilitary orientation. To increase military production in tbe long term, they would step up investment in energy, industrialand tbc investment goods sectors. For this scenario, we assume defense spending would growercent perrate slightly higher than the historical rate oferiod. More repressive dorocslic measures would be likely, and weandatory returnonger wwtoreck, whichtbc labor input to the eeortotny. Wc also assumeefense spending growth rate ofercent per year above ihe historical level would not acutely alarm Western nations. Tttciefore, tbe Soviets could increase tbeii machinery intporis from the West lo meet the greater need for inveslmenl goods and
their talcs of oil to the West for ibe hard currency necessary to pay for the rnachinery. Oil sales to Eastern Europe would be reducex
An accelerated arms buildup would be costly. GNP giowth would increase slightly over that in theease, primarilyesult of lhc extra investment (and subsequent production) io toe energy aod defense industries. But tbc defense burden would escalate, forcing down lhc per capita consumption growth rate by nearlyercentageear oo ibe average during the laiter half of ibc decade.oosewbat higher overall rate of investment, itnpom.nl civilian sectors (eapescially comucoptioo goods and services) would suffer, as an irscreasing share of new plant and equipment went to defense industries. Fur-llwiiitoce, tbe combination of higher lake-home pay (which we postulate as resultingongerand fewer consumer goods could increase the repressed ialUlion in the USSR and lead to popular discontent. Under ibis scenario. Ibe share of GNP going to defense would reach IS percentigure about one-third higher than the averageduring the Soviet military buildup
c 3
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Somen of CNP (Ftcfor Coal)
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Original document.
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