Robert W. Campbell
THOSE WHO would understand the Soviet economy have always had to keep in balance two startlingly contradictory aspects of its perform-ance. It is an economy perpetually in crisis, wasteful and inefficient in the use of resources, bureaucratically musclebound in efforts to innovate technologically and institutionally, and scandalously callous and inept in meeting the Soviet population’s consumption wants. Despite all this, its growth performance has been impressive. Lurching though its progress seems, it overcomes crises rather than allowing them to accumulate to the point of collapse, and year after year significant output increments become available, expanding the leadership’s ability to achieve its goals. By devoting a significant share of the economy’s output to investment, the leaders have continually expanded the nation’s production capacity, and the Soviet Union today has achieved an aggregate output that makes it a major economic power and a military superpower. In the years after Stalin’s death, consumption also began to share these output increments for growth.
The 1980s promise to bring a significant shift in the interplay between these two contradictory aspects of Soviet economic performance. The mobilizational approach that permitted growth in spite of waste has lost its efficacy. Unless the Soviet leaders can resolve the systemic weaknesses that inhibit effective use of its resources, economic stringencies will create serious pressures on foreign and domestic policy in the 1980s. Some see in this change significant constraints on the leadership’s room for maneuver in the 1980s, serious tensions, vulnerability, and heightened responsiveness to initiatives on the part of the United States. One can address these issues only in the context of the volume as a whole, but this chapter can set the stage for such an assessment by explaining the ways in which economic prospects represent a change from the past and by describing the economic choices and constraints facing the Soviet leaders as they confront these problems.
Growth Slowdown and Economic Constraintsin the Eighties
Soviet leaders face unprecedented conditions of resource strin-gency in the 1980s, as growth of the economy slackens and as resource expectations and demands of the various claimants on the nation’s output expand. A number of adverse trends will combine to bring the rate of economic growth well below recent experience. Soviet GNP growth has generally been decelerating in the years since the Second World War: it was 6 to 7 percent per year in the 1950s, and 5 percent in the 1960s, declining to 4 and then 3 percent in the 1970s.1 In the 1980s, output is unlikely to grow at more than 2 percent per year.
The growth of labor supply will decelerate sharply. The civilian work force grew at a rate of about 2.3 percent per year in the 1960s and 1.4 percent per year in the 1970s, but during the 1980s will fall to probably about 0.4 percent. The Soviet economy was able to add 8.2 million persons to the work force in the Tenth Five-Year Plan (197680) and 17.3 million persons over the decade of the 1970s as a whole.2During the Eleventh Five-Year Plan period the Soviets forecast growth of the population in the working ages as only 3.3 million and for the whole decade of the 1980s as no more than 5.8 million.3 There seems little prospect for increasing labor supply by increasing the participation rate: very few people in the working ages are not already working.
In the past, growth has depended on rapid expansion of the capital stock. However, as the rate of growth of total output slows, amounts available for investment also grow at a slower rate. With this reduced dynamism in increments to the capital stock, the growth of the latter will also decelerate. The Eleventh Five-Year Plan (1981-85) squeezes allocations of investment to maintain growth of military and consumption allocations, and this choice magnifies the effect of this reduction. The growing burden of attrition of the capital stock will also slow growth in productive capacity. In the early stages of growth, depreciation of the capital stock is relatively small compared to new additions. As the stock ages and becomes obsolete, depreciation increases as a share of increments, and net increments are squeezed further.
Growth in output takes place not only by increases in the flow of resource inputs, but also from gains in productivity. Here, too, the prospect is not encouraging. Since the Second World War the growth of GNP per unit of resource input has fallen consistently and by the end of the 1970s was apparently zero or negative. Professor Abram Bergson figured that in 1950—1958 GNP per unit of combined capital and labor grew at 1.7 percent per year, but at only 0.7 percent per year in 1958—67.4 The CIA’s calculations of combined factor productivity are methodologically close to Bergson’s, though they count land inputs as well as capital and labor, and are consistent with Bergson’s in showing 0.7 percent per year productivity growth in the early 1960s. The CIA figures show that productivity growth then improved somewhat in the early 1970s, but that after 1973 it was negative, declining at an average annual rate of 0.8 percent per year.5
The leadership indicates that it expects some kind of revolution in productivity in the 1980s and relies on acceleration of productivity growth to compensate for the slowdown in the growth of resource inputs. But a significant turnaround is unlikely. One explanation for slow growth in productivity is that the Soviet economy has reached a level of capitalization where substitution of capital for labor is difficult. If so, slow labor force growth in the 1980s cannot easily be offset by capital growth. Additions to capital too often take the form of new job slots that cannot be filled rather than labor-saving deepening of capital. Other explanations for low productivity growth include organizational slack, foot-dragging by management at lower levels, and failure to innovate. It is difficult to make a case that the Soviets can overcome these phenomena, which are deeply embedded in the system. In the 1980s, branch and regional shifts that require increases in the average amount of capital required per unit of output are also likely to reduce the effect of additional capital investment. The rail transport system has in recent years absorbed increasing loads by intensifying utilization of its capital stock but may be reaching a point where it needs large, new additions. Similarly, the energy sector operated in the 1960s and early 1970s with falling costs and low incremental capital-output ratios, as it developed new resources cheap to find, develop, produce, and transport. The Soviets must now expand output in locations where the opposite is true and shift to alternative sources for which capital costs per unit of delivered output are higher than in the previous mix. Gas with high transport costs and nuclear power with high investment costs per kilowatt of generating capacity are illustrations. Regional shifts in economic activity involve massive diversion of investment into infrastructural projects with high capital intensity and little immediate output. Examples are the Baikal-Amur railway (referred to as BAM for Baikal-Amurskaia magistral’.) in Siberia, and housing, transport, and urban support facilities in the regions crucial to plans for producing energy and raw materials.
The impact of external economic relations on growth in the 1980s is unlikely to remain as favorable as it was in the 1970s. By opening their economy to more interaction with the rest of the world in the late 1960s, the Soviet leaders achieved a significant contribution to growth through importing Western technology. They also enjoyed a significant terms-of-trade bonus as prices of Soviet exports rose in relation to import prices, most spectacularly in the case of oil, for which the price revolution of 1973 generated an estimated Soviet windfall of as much as $10 billion per year in the later seventies. Foreign loans also produced a net addition to real investment resources. The USSR was able to borrow at subsidized interest rates and pressed the East Europeans for contributions to joint investment projects.
Most aspects of economic relations with the rest of the world are likely to be less favorable in the 1980s. Soviet exports face sluggish demand, price trends are unlikely to remain as favorable as in the past, and high interest rates and Western caution may limit Soviet borrowing. The USSR could face a net drain of hard currency earnings if it decides to help East European countries meet their debt service obligations.
The agricultural sector remains a critical problem. Since the mid- 1960s it has consistently absorbed over a quarter of all resources allocated for investment, with relatively weak response in terms of output growth. Three consecutive years, 1979, 1980, and 1981, brought poor harvests, and 1982 was not much better. This may seem an unusual run of bad luck, but some research suggests that a trend in Soviet weather conditions makes this kind of calamity likely to recur in the coming decade. To sustain its efforts to improve the Soviet diet, the regime has had to continue massive imports of agricultural goods.
Some strong feedback mechanisms in this prospect create dilem-mas for the Soviet leaders. The slower growth is, the less they have to divide among increasing consumption, defense, and investment. They might hope to stimulate growth by allocating more to either consumption (which might raise morale and incentives) or investment (to increase productive capacity), but allocating a higher share of the total output to either undercuts growth of the other.
Forecasts of the rate of growth for the 1980s depend heavily on the assumptions one makes, especially regarding the growth of pro-ductivity. Western analysts of the Soviet economy have reached a fairly well defined consensus, with few projections of GNP growth in the 1980s falling outside the range of 2 to 2.5 percent per year. The CIA has stated that the most likely rate of growth for the coming decade is not more than 2 percent per year. The most elaborate approach to forecasting Soviet growth is the model developed by Wharton Econometric Forecasting Associates, which indicates a rate of 2.3 percent per year.6
Pressure for Priority Choices
With supply increases thus constrained, the Soviet leaders will face hard choices as they pursue their traditional objectives: investment for economic growth, strengthening military power, and improving the lot of the consumer. When GNP was growing rapidly, each of these end uses could grow rapidly, and each of these claims generated strong demands or expectations for continued growth at customary rates. As the increment shrinks for responding to these competing demands, conflicts over allocation, always an important issue in Soviet politics, are likely to become unprecedentedly severe. Let us consider recent experience and expectations regarding each major end use.
Consumption has traditionally been the stepchild of Soviet eco-nomic priorities. During the first half century of Soviet growth, con-sumption grew during most of the period at a rate well below that for GNP as a whole and trailed investment and defense. In 1970, consumption accounted for 57 percent of GNP, a smaller share than that characteristic for the industrially advanced countries. If anyone wonders how consumption can still account for 57 percent of total output when it has grown so much more slowly than the other components for half a century, the answer lies in changes in relative prices. The costs and prices of consumer goods have risen in relation to those for the investment and defense goods to which the regime has devoted its primary attention. Thus, when one measures the various components of the nation’s output in 1970 costs, consumption goods bulk larger than if one valued all components in prices of some earlier period.
Even in the 1970s, when the regime declared its intention to raise its priority, consumption usually lost out to other claimants. Soviet terminology for accounting for the nation’s output and its allocation among alternative uses is not especially helpful for analyzing such issues, but we can use it in this case to make the point. Within the industrial sector, Soviet statisticians distinguish Industry A, which produces the means of production, from Industry B, which produces the means of consumption. In the Ninth Five-Year Plan (1971-75), the output of Industry B was to expand faster than Industry A, but in fulfillment, Industry A grew at the planned 46 percent rate, and Industry B grew by only 36 percent, compared to the planned 49. For all material output, the statisticians make a division into the consumption fund (fond potrebleniia) and the accumulation fund (fond nakopleniia). The plan also projected a faster growth of the consumption fund than the accumulation fund, calling for it to rise from 74 percent of national income in 1970 to 75 percent in 1975. In fact it fell to 73 percent.7 In the Tenth Five-Year Plan, the priority given consumption reflected in these indicators reverted to its customary low status, both in plans and in actual performance.
It is becoming increasingly difficult to postpone radical im-provement in consumption levels, for both morale and incentive reasons. Indeed, it is no exaggeration to say that the stability and legitimacy of the regime depend on significant improvements. The party has traditionally justified its monopoly of political power and its right to allocate national output on the grounds that only a visionary elite could enforce the discipline needed to ensure the country’s security and to divert output into accumulating capital to ensure growth and a better tomorrow. It has accomplished those purposes. The Soviet Union today supports a larger investment program and a larger expenditure of resources for each year on defense than does the United States, which has a GNP at least half again as large as Soviet GNP. Though Soviet leaders are careful not to claim military superiority over the United States, they openly assure their people that Soviet military power equals that of the capitalist world and dem-onstrate that change in status by increasingly bold military actions. They can make no such claim regarding the consumption component of the Soviet Union’s GNP, however, because it is between a third and a half the corresponding United States aggregate.8 Given a Soviet population of 265 million, compared to 223 million in the United States in 1980, the USSR’s relative standing in per capita terms is still lower.
To an outsider, the traditional rationale for the lopsided alloca-tion priorities of the past has lost its plausibility, and the regime’s legitimacy now depends on successful efforts to raise consumption levels. In my view, this is apparent to Soviet citizens as well. Moreover, the leadership itself is coming to accept the proposition, as two recent quotations indicate. In a 1981 discussion at the Institute of Economics of the USSR Academy of Sciences, one Soviet economist asserted that the Guidelines for the Eleventh Five-Year Plan (1981—85) should acknowledge explicitly that consumption growth is a prerequisite for growth in general:
It is necessary to underline more precisely the role of the consumption sphere…. Growth cannot now be adequately guaranteed if we apply the assumptions which were widespread 15 to 20 years ago when we treated consumption as a deduction from the national income…. In the period of developed socialism the consumption sphere plays an active role in the process of growth, and we must take account of that circumstance.9
Brezhnev in his speech to the Twenty-sixth Party Congress in 1981 noted clearly the political significance of improving consump-tion:
As you know, comrades, the draft of the guidelines for the next five years embodies a certain acceleration of the rate of growth of Group B, to exceed the rate of growth of Group A. That is good. The problem is to create a really modern sector producing consumer goods and services for the population, which meet their demands. In concluding this point, I would like to consider it as more than a purely economic problem, and pose the question in broader terms. The things we are speaking of— food, consumer goods, services—are issues in the daily life of millions and millions of people. The store, the cafeteria, the laundry, the dry cleaners are places people visit every day. What can they buy? How are they treated? How are they spoken to? How much time do they spend on all kinds of daily cares? The people will judge our work in large measure by how these questions are solved. They will judge strictly, exactingly. And that, comrades, we must remember.10
Consumer needs go beyond food and other material consumer goods. Many Soviet experts believe that the regime must improve many other aspects of life as well, if only because this is crucial for improving the quality and quantity of effort the population contributes. Thus, one reads numerous expressions of worry about deteriorating health conditions, as in one author’s warning that “in some regions of the country, infant mortality has risen, cardiovascular and other diseases are becoming ‘younger,’ the gap in life expectancy of men and women is not lessening, drunkenness among the population is not declining.”11
One commentator on the guidelines for the Eleventh Five-Year Plan considered its goals too modest with respect to improving the populations’s health. He called for amendments to commit the gov-ernment to “eliminate finally the employment of women in heavy work and work dangerous for them; … to develop widely a network of prophylactic stations in enterprises, introduce complete provision of dispensary services for men 40 years and older and for all workers employed in heavy and dangerous lines of production; to satisfy fully the need of the population for medicines; to improve the equipping of all medical institutions with the most modern treatment and diagnostic equipment; to extend widely the struggle against alcoholism, using all means of mass information and gradually reducing the pro-duction of vodka.”12
Many assert that the Soviet people will accept passively whatever low standard of living the regime permits and consider it a boon even to have enough to eat. But numerous observers of contemporary Soviet society suggest that the mood of the population has changed, especially that of the young, and that the people expect the regime to provide continuous improvements and a higher standard of living. Which of these views is more nearly right is impossible to settle, but the regime’s actions demonstrate that it inclines toward the latter view.
The present Soviet leaders have demonstrated in the last fifteen years a strong commitment to increasing Soviet military strength, and they have supported a buildup of military forces at a consistently high rate of growth. As Coit D. Blacker explains in another chapter, Nikita Khrushchev sought to reduce the costs of the Soviet military establish-ment by developing a new strategic doctrine and by modernization. The resulting conflict with important parts of the military establishment and the humiliation of the Cuban missile crisis, when the USSR had to retreat in the face of superior United States power, no doubt played an important role in his downfall.
The present leadership came into power determined not to yield in such a confrontation and has concentrated on building Soviet military strength. According to thorough and elaborate estimates by the CIA, which are accepted by most specialists, allocations of resources to military purposes have grown in real terms since 1965 at a rate of 4—5 percent per year, and by 1980 constituted between 12 and 14 percent of the Soviet GNP. Both the growth rate and the share of GNP are figured in 1970 factor cost. CIA analysts believe that the relative costs of military goods may have risen faster in the 1970s than the costs of other elements of GNP, so that in current prices the share might be somewhat higher.
We have little information on which to base an estimate of Soviet ruble expenditures for defense, and for a large portion of the total, the CIA converts its dollar estimates to rubles, using ruble-dollar purchasing power parities. Some critics consider the resulting ruble figures too small, largely because of the way the dollar figures are converted to rubles. Others see them as too large and criticize the way the original dollar figures are generated and the way they are converted to rubles. Less controversy has emerged regarding the growth rate of these expenditures, though one critic of the CIA methodology considers 4 to 5 percent much too low, and estimates 8 percent per year growth since 1970 and an even higher figure for the fifteen years since 1965.13 I find the CIA figures generally plausible, but one should always retain a certain skepticism regarding such a complex issue on which we possess far from full and clear information.
The experts generally agree that the resource allocation to de-fense in the USSR is well insulated from competing claims. On the production side a great deal of inertia protects the process by which R and D programs develop new weapons systems, which then grow into procurement and production commitments. Production facilities for military production are somewhat walled off from the civilian economy, and the sector is to a considerable degree self-sufficient. However, a significant portion of the output of the plants in industries producing military goods is for civilian use, suggesting more flexibility in reallocating resources from military to civilian production in the short run than has sometimes been claimed. Within Gosplan (the State Planning Commission, which develops both the annual and five- year plans) planning the output of military goods proceeds on its own in a separate military section rather than in direct competition with other allocations. In the very highly centralized Soviet political process, a still more restricted circle of actors makes decisions about commitments to defense. Most analysts believe that the Defense Council decides the pace and scale of weapons procurement programs, without debate in the Politburo as a whole or in the Central Committee. As Grey Hodnett says, “because of its composition and its access to highly restricted information the Defense Council probably can expect to have its decisions routinely approved by the Politburo.”14
This separation of military-economic from general economic af-fairs cuts across all top-level planning and administrative bodies, with responsibility for the military sector segregated in special organs within each major central policy body: the Military Industrial Commission in the state economic structure, the Defense Council in the legislative structure, and a Military Industrial Department in the Party Secretariat. According to one expert on Soviet military affairs, “The internal environment in which major Soviet military policy decisions are made can best be described as a closed system of defense decision making within a slightly larger but also closed system of political decision making.”15 The allocation of resources to the military thus has a highly inertial character and is so insulated from the regular sources of decision making in the USSR that proponents of other interests find it difficult to advance their claims.
Soviet leaders have always considered investment the key to growth and given it a high priority. The long-run growth record shows that capital stock has grown much faster than the labor force, which is characteristic of modern economic development in general, but it has also grown faster than output, which distinguishes the experience of Soviet-type economies from other rapidly growing economies. In justifying the allocations implicit in the plans, the regime has always emphasized that building the “material-technical basis of communism” was one of the first tasks. Ideologues have generally favored a doctrinal proposition that output of the means of production (not exactly the same thing as investment goods but closely correlated) must grow faster than output of the means of consumption. This is part of the well-recognized “extensive growth pattern” of Soviet-type economies.
Against this background, it is difficult for Soviet leaders to suppress the traditional high priority for investment. In the early 1970s Abram Bergson published an article suggesting that Soviet decision makers could achieve a much higher growth of consumption over the proximate decade by accepting a lower than customary growth rate for capital stock.16 This would reduce GNP growth somewhat but, by reducing the growth of investment, would promote faster growth. This is an intriguing application of the idea that less can be more. When one reviews what happened in the 1970s, however, one finds that the possibility did not attract Soviet planners, who persisted in seeking a rapid growth of the capital stock.
In addition to this inherent belief of decision makers in the im-portance of investment as the route to growth, the system in general generates excessive demands for investment. From plant managers at the bottom of the hierarchy, decision makers feel an instinctive pressure to add new facilities and capacities to improve their ability to deal with pressure from the top for increased output. In the absence of significant interest charges and market-based prices, this costless way to obtain more resources provides little motivation for project makers to economize when they design plants and when they specify and order equipment. One careful reader of Soviet discussions on this problem, Nancy Nimitz, has concluded that “goldplating” equipment and production facilities has become endemic in the Soviet investment process. An intriguing theme in current Soviet economics literature deals with an effort to introduce “passports” for machines and production facilities indicating their output capacity. Soviet managers show little enthusiasm for this campaign, and planners commonly fail to impose output assignments fully utilizing the indicated capacities even when passports are developed. Another aspect of this noneconomizing behavior is that decision makers tend to prefer ex-pensive additions of new plants rather than modernization of old plants by replacement of obsolete equipment.
In short, out of established strategic habits of thought in pursu-ing growth and as a consequence of the incentive structure, the Soviet economic system has a bias toward relying on investment as the key to growth: the two have been almost synonymous in Soviet eyes.
Research and Development
Another end-use of GNP analogous to investment in its relation to growth is research and development. In recent years R and D has been given a high priority and has absorbed about 4 percent of GNP. Until recently it rose faster than GNP because of its expected contribution to growth and because of the leaders’ great faith in the “scientific-technical revolution” as a way to transform Soviet society. The need for technical progress has certainly not disappeared; but a growth differential favoring R and D growth cannot continue indefinitely, and apparently the time has come to curtail its growth. Although the Eleventh Five-Year Plan does not make plans for R and D spending explicit, Minister of Finance V. F. Garbuzov subsequently cited figures indicating that R and D expenditures are to slow sharply. A decree in late 1981 provides corroboration of this by calling for reductions in 1981—85 in the number of R and D personnel from the 1980 level and for some pruning of the network of R and D establishments. Brezhnev remarked at the Twenty-sixth Party Congress earlier that year that the State Committee for Science and Technology and the USSR Academy of Sciences should arrange a “regrouping of scientific forces” and that defense industry R and D organizations should provide more help to the civilian economy. There may have been some decision to slow what must recently have been a runaway expansion of military R and D.17
Alternatives or Trade-offs
Obviously what is done for one claimant affects what can be done for others. A simple calculation will help assess these trade-offs. Table 2.1 presents a projection of Soviet GNP based on our knowledge of the likely growth of the labor force, the growth of capital stock under two alternative investment policies, and some assumptions about productivity growth. This calculation is less a forecast than a quantitative framework for showing the impact of the growth-decelerating forces described earlier and the implications of the trade-offs we want to consider.
The first half of the table recapitulates the kind of exercise Berg-son completed for the 1970s. The projection assumes that the Soviet leaders try to maintain the growth of the capital stock at near the rate of the preceding decade, by calculating the resulting GNP growth expected for alternative productivity projections and determining the levels of investment required to achieve the postulated growth of the capital stock. Subtracting the allocation to defense on the assumption it continues its inertial growth at 4 percent per year leaves consumption in 1985 and 1990 as a residual and enables us to determine its growth rate over the period.
This strategy is quite unattractive in its implications for consumption, for consumption growth is well below GNP growth. On a per capita basis, the low productivity projection falls to about 1 percent per year. If productivity growth should fall below half a percent per year, consumption per capita would stagnate, with consequences explosive for Soviet society and for the regime. The second half of the table represents the same approach, except that it assumes that the flow of resources to investment remains constant at a level slightly above that of 1980, as is planned for 1981-85, while the allocation to defense grows as before at 4 percent per year. In this scenario, growth will indeed slow, though the rate will again depend significantly on what productivity gains the system is able to stimulate. Holding the line on investment will remove some pressure on the guns-or-butter choice and permit consumption to continue to grow at reasonable rates, even if military expenditures continue to grow at the current rate of about 4 percent per year. If productivity could be raised to 1 percent, consumption could enjoy a very respectable growth, i.e., almost 4 percent. The more likely forecast of a rise in productivity at half a percent per year brings consumption growth down by almost a percentage point. If no productivity growth at all occurs, the prospects for both GNP and consumption are much more bleak.
Competition among the three major end uses also occurs at a more disaggregated level, the most important example being the common burden which investment and military procurement put on the output of the machine-building sector. As GNP growth slows, industry and its subsectors, including the sector that produces machinery, are also likely to grow slowly. One can formulate a balance sheet for this category of output in which the-supply consists of the final output of the domestic machinery sector, plus imports, with demand divided primarily into producer durables for domestic investment and for export, consumer durables such as refrigerators and autos for household consumption, and military hardware for the defense establishment. The work completed on this problem suggests that rapid growth of military spending will eat into the machinery output available for investment in the 1980s.
The impact of that competition will depend heavily upon Soviet international economic relations. Exports and imports are sufficiently large in the machinery balance that changes in the amounts of machinery imported and exported can significantly ease or exacerbate the competition between military procurement and investment. Machinery imports depend in turn on agricultural imports. In 1980 the Soviets spent a third of their hard currency earnings to import agricultural commodities, and in 1981 the share was about 45 percent. The $9 to 12 billion those imports cost would buy enough machinery and equipment to make an important contribution to easing invest ment bottlenecks. Soviet hard currency earnings are likely to grow little in the 1980s, which will mean little or no growth in imports of machinery unless the Soviet Union can escape the large burden of agricultural imports it has sustained in the last decade.
To sum up, the Soviet economy is confronted with a choice like the guns-butter dilemma, but with an added dimension. It is really a guns-butter-growth choice, complicated by a feedback link between the butter and growth elements. A choice about the level and division of imports that reacts on overall growth further complicates the planners’ choices. Switching imports between machinery and consumer goods, mostly agricultural commodities, will influence the consump-tion-investment outcome.
Major Problem Areas
We have looked at the overall perspective in a very aggregative and schematic way. Before discussing implications for Soviet external policy in the 1980s, we should examine some of the major elements conditioning this perspective, consider what possibilities may exist for easing these constraints, and ponder policies the regime might adopt for that purpose. Let us consider in turn labor supply, investment, energy, agriculture, international economic relations, and possibilities for economic reform.
Some general figures on the expected growth of the labor force were cited above, but I shall now explain the developments that will affect the labor force growth, examine some other dimensions of the labor problem, and consider what improvements are possible.
The starting point for labor force projections and the basis for the earlier assertion about a labor shortage is the expected additions and losses to population in the working ages over the decade. In the USSR, the working ages are considered 16 through 59 for males and 16 through 54 for females. This is based on a somewhat conventional notion of the school-leaving age and the retirement ages customary in state employment. Everyone who will move into the working ages in the 1980s is already born, and the main uncertainties concern attrition of the various cohorts over the period.
Table 2.2 shows U.S. Bureau of the Census projections of the number of people in the working ages at mid-decade and in 1990 as follows for the USSR as a whole and for the peripheral Moslem areas (millions as of January 1): The startling feature of this projection is that the entire increment between 1980 and 1985 will occur in the Moslem areas and that between 1985 and 1990 the working-age population in the non-Moslem areas will actually decline. These pro-jections have apparently been generated on the assumption of no migration, and migration could change the numbers projected for the peripheral areas. However, students of Soviet population trends conclude that there is little reason to expect migration on any significant scale, since the ethnic groups of Central Asia are reluctant even to leave the countryside where most of the increase will occur, not to mention moving from their ancestral homelands.
The number of people in the working ages is only the starting point in labor force projections. Many people outside these age groups work, and some in the relevant ages, such as students, nonworking wives, and some 5 million people in the armed forces, do not participate in the civilian labor force.18 How many people not now in the labor force could the government mobilize to add to the labor input? Are there labor policy and labor market reforms that might improve utilization of those already in the labor force? How could the government draw the new entrants in the working ages into the work force, since they are mostly non-Russians located in Central Asia, far from the places where new jobs are being created, such as Siberia and the industrialized centers?
Soviet statements suggest that there is virtually no possibility of adding to labor supplies by mobilizing nonworking members of the population. One authority says explicitly that 100 percent of the growth in the labor force must come from the growth in the number of people in the working ages in the Eleventh Five-Year Plan, with no contribution from drawing nonparticipants into the labor force.19 Trying to reconcile population figures with the labor force figures provided in Soviet statistical sources leads more to frustration than to enlightenment, especially because of the Soviet government’s reluctance to publish the results of the 1979 census. Still, some calculations with these data, too tedious to describe here, make it clear that two of the traditional sources for additions to the state labor force, nonworking women in urban areas and the overaged, juveniles, and women in rural areas engaged primarily in private plot agriculture, have so shrunk that they can provide no more recruits.
Probably the best possibility lies in persuading more pensioners to work, and the government is making significant efforts to attract people eligible for pensions into the labor force. A decree of September 11, 1979, authorized increases in pension amounts for those who postponed retirement and permitted pensioners to work and still receive all or most of their pension. I doubt that can make much difference: a decree along the same lines was issued in 1969, and the new decree only extends the provisions to some additional categories of workers.20 Considering those who qualify for pensions on the basis of age rather than disability or other service, the fraction who work is already 30.4 percent.21 It is difficult to suppose that share could be much increased. The most positive feature is that the cohorts most likely to continue work, men in the 60 to 65 age group and women in the 55 to 60 age group, will increase significantly in the eighties. The U.S. Census Bureau has estimated that about 30 million persons in those cohorts would reach retirement age during the 1980s. Though mortality will reduce that number appreciably over the period, the cohort it will replace in retirement contains only about 18 million persons. A Soviet source estimates that the number of working pensioners could rise by 2 to 2.5 million persons in the Eleventh Five- Year Plan.22
The labor problem will be greatly exacerbated by the regional and ethnic characteristics of the new entrants, almost exclusively Moslems in Central Asia and in the Transcaucasus. Unfortunately, these increments are geographically separated from the new jobs, many of which will be in Siberia, with most of the rest in the established industrial areas. Moreover, these nationality groups do not constitute good material for the work force, since they tend not to know Russian and to be relatively low in modern industrial skills. As one Soviet authority says, as a result of historically formed traditions the native inhabitants of these republics have lower social mobility (readiness to improve their skills, to change occupations, to move from the countryside to the city, and so on) than the population of other regions.23
In the report of a conference held in Dushanbe in 1981 all local spokesmen asserted that these people will not move and that it is important to create jobs locally, while the Moscow representatives essentially ignored the issue whether jobs should be created locally or migration could solve the problem.24 I conclude that the drafters of the Eleventh Five-Year Plan have not reconciled forecasts they have made for additional labor supply with the ethnic and regional composition of those additions.
Another geographic imbalance occurs because many new jobs are being created in big cities, where official policy seeks to slow population growth. Studies of Moscow, Leningrad, and other cities show that the number of new jobs created far exceeds the addition to the work force expected, a corollary of failure to make the investment plan consistent with labor supply. Apparently enterprise and ministerial officials often use the official campaign favoring modernization and reequipment of old factories to circumvent prohibitions on creating new capacity and jobs in existing centers.
A traditional source for expanding labor supply has been shifting people from low productivity employment in agriculture to nonag-ricultural employment. The group working on collective farms in collective and private plot production has released about 5 million people to the rest of the economy in the last decade. As it still numbers about 14 million people, it may contain some slack. But most investigators conclude that the age and sex composition of the group precludes its providing much help.
Another possibility might be to reduce the size of the armed forces. A reduction of a million persons would be significant in relation to the less than 3 million increment in civilian employment the current five-year plan envisages or even in relation to the 5 million increment for the decade as a whole, but it would represent a great sacrifice for the military. In any case the current leaders have demonstrated the high priority they assign to raw manpower for the armed forces by a decision in December 1980 to eliminate most higher education deferments for cohorts reaching conscription age.
Better utilization of the existing labor force through enhanced mobility is an alternative to adding more bodies. The labor market is one of the freer markets in the Soviet economy but still suffers from administrative interference. Although employers have some room for maneuver in the wages they offer by juggling job classifications and piece rate systems, the centrally imposed wage pattern probably offers too little differentiation to move and motivate workers. Employers face excessive restrictions in trying to fire workers. Moreover, many features of the incentive system, such as salary and bonus formulas that relate managers’ rewards to the size of a unit’s labor force and the knowledge that managers are expected to supply labor to help with harvest campaigns, motivate them to keep more workers on the payroll than they need. A great potential exists for reforms that would create a freer market allowing labor to move where needed and giving employers the freedom to bid for it. Some Soviet labor policy measures in recent years move in that direction, e.g., by removing barriers that inhibit part-time work by women and pensioners.25For the most part, however, recent labor legislation has introduced more administrative controls on the labor market, such as ceilings for each enterprise and ministry, organized placement of graduates from vocational-technical education, and increased penalties for workers who quit. Soviet planners have an instinctive fear of labor mobility and assert that excessive turnover (20 million people change jobs each year) leads to large losses, since the average time lost in a job change is one month. But losses from keeping workers in the wrong jobs far outweigh the time lost in job changes. One of the major recent changes in planning, a shift to value-added measures of output, as it lessens the incentive to overemphasize material-intensive outputs, may induce a bias toward labor-intensive production mixes that enterprise labor ceilings only loosely control.
In short, the Soviet economy must cope with an unprecedented labor problem in the Eleventh Five-Year Plan. A consistent feature of past plans has been failure to achieve targets for growth of labor productivity, compensated by above-plan increases in labor force growth. That solution will not be possible during the approaching period. In fact, a number of comments in Soviet discussions of the plan have suggested that the plan may presume a larger growth of the labor force than is possible, considering the geographic and ethnic problems just described. One author notes that the plan does not explain how labor productivity growth can account for only 90 percent of the increment, since he sees no growth in the labor supply. N. K. Baibakov, chairman of Gosplan, in one of his formulations suggests that the labor force will grow at a much lower rate than even that suggested above.26
Growing Investment Needs
The character and growth of the economy during the 1980s will depend very much on how the Soviet planners allocate investment among the major sectors, shown in Table 2.3 for 1980. This distribution is for the broadest Soviet concept of investment, which includes cooperative investment and private investment in housing as well as state investment. This breakdown shows investment in housing on collective farms as investment not in agriculture, but in housing. The reader should be alerted that Soviet planners and statisticians frequently mention an agricultural investment figure “for the whole complex” accounting for 27 percent of all investment. In addition to agriculture proper, this includes agricultural research, some agricultural processing, firms in the agricultural sector engaged in construction and the production of construction materials, and others. A still broader concept referring to investment in the “agro-industrial complex” includes investment in industrial blanches supplying inputs to agriculture and processing agricultural produce. Brezhnev’s 1982 description of the food program and other references cite this concept. That aggregate is to account for about one-third of all investment in the Eleventh Five-Year Plan.
Quantitatively the most important sector absorbing investment resources is industry. Apart from the traditional reliance on investment as a growth factor, a number of trends underway in this sector will raise the amount of capital above the amount needed in the past. It seems impossible that the Kremlin can meet the needs for energy investment, development of territorial production complexes, investment to replace labor-, fuel-, and material-wasting equipment, more workplaces in Central Asia, and so on without increasing the dominance of industry as a claimant on the investment pool. Indeed, in the Eleventh Five-Year Plan, the share of industry is expected to rise by 4 percentage points over the share in 1976—80.27
Within the industrial sector, energy investment will be especially demanding. The amount of capital tied up per unit of productive capacity is rising dramatically across the whole range of energy producing, transforming, and transport activities. Nuclear and hydro power, which will be the fastest growing components in the electric power sector, have much higher investment costs per kilowatt of capacity than other types of power generation. The investment re quired to transport a given output of gas to the consumer will increase sharply because of the rapid rise in the average distance it must be transported. The best summary indicator of the significance of these trends is that the energy sector’s share in all investment was only about 16 percent in the late 1970s but rises to 21 percent in the Eleventh Five-Year Plan. This trend will undoubtedly continue during the second half of the decade in the Twelfth Five-Year Plan (1986-90).
The transportation sector has long-delayed needs for new capacities. Transport is inherently a sector characterized by investment lumpiness: once capacity is built, intensifying utilization of the plant can increase the amount of transport work done. But eventually the capacity of a given link or network is reached. Then the network requires large new additions of capital to accommodate more traffic. One of the central elements in current strategy is to develop territorial production complexes in Siberia in areas which have virtually no infrastructure. Expensive investments in transport, housing, and power must therefore accompany creation of new production capacity.
A distinctive feature of Soviet investment distribution is the high share of agricultural investment. In the United States this amounts to 7 to 8 percent of all investment, compared to the 20 percent for the USSR shown above or the 27 percent figure cited “for the whole complex” which has been constant for a number of years. The annual Central Statistical Administration reports invariably cite this share, suggesting that the leaders adhere to this commitment to agriculture. Although this share is planned at 27 percent for the Eleventh Five- Year Plan and the food program envisages a further rise in 1986—90, that decision will surely be a subject of intense discussion during political succession.
As the table shows, housing has been a significant drain on investment resources as the leaders have tried to relieve the crowded condi-tions of Soviet cities and to cope with the large increase in the urban population accompanying economic growth. They have managed a notable improvement, raising the urban housing stock from an average of 10 square meters per person in 1965 to about 13 square meters in 1980 (this refers to the total space in dwellings and exceeds by one- half the “living space” for which the Soviet planners have proclaimed a long-standing norm of 9 square meters, still not attained). The USSR has a large backlog of housing needs for people who share apartments with others and would like housing of their own. It is difficult to estimate the magnitude of that backlog, since the Central Statistical Administration does not publish information on the stock of housing units which we could compare with the number of house-holds. But figures on new family formation, together with information on the number of new dwelling units made available in the last five years, suggest that they may be falling behind, rather than catching up: 13.8 million marriages have taken place in the last five years, while the system created only 10.3 million new dwelling units. This is an imprecise comparison, since deaths diminish the total number of households, and the destruction of existing units reduces the net growth of dwelling units. Divorces create even more complications by adding to the demand for housing units and offsetting somewhat the demand from new marriages. But imprecise as the comparison may be, reasonable allowance for these factors suggests that the backlog of unmet need is rising. The demographic changes described earlier in which the cohorts entering the labor force will be unprecedentedly small should reduce somewhat the rate of family formation and ease the pressure. Since Soviet economic literature provides virtually no systematic data on rural housing, the situation in the countryside is less easy to document, but it is certainly much worse than in the urban areas.
The demand for housing has a high income elasticity. That is, as incomes rise Soviet citizens want this element to increase more than their consumption in general. Moreover, some policies discussed earlier involve locational shifts that will expand the need for housing. Housing is one of the major infrastructural requirements for the development of Siberia. As efforts continue to develop the agroindustrial complex, many new jobs will be in rural areas, and the government must provide housing to attract people. Other elements of the agricultural program, such as the effort to reclaim and improve the low fertility soils of the nonblack earth regions, also require significant housing construction. Apparently one reason that program has achieved so little is that too few have moved in to work the newly reclaimed areas. In connection with the food program the party has stipulated in the Eleventh Five-Year Plan that 176 million square meters of housing be built at collective and state farms and other agricultural enterprises.28 Total housing construction in rural areas, which is a much broader category than state and collective farms and other agricultural enterprises, was only 149.1 million square meters in 1976—80. This significantly higher amount within a total housing target that has not been increased over the Tenth Five- Year Plan (1976—80) suggests that urban dwellers are not going to note any improvement.
The Soviet government could encourage more private construc-tion, aided by government credit and more cooperative construction. This was a feature of housing policy for a number of years, but apparently nonstate forms of housing construction have been cut back, especially in rural areas. The share of private housing fell from 25.2 percent of all housing construction in the Ninth Five-Year Plan to 21.4 percent in the Tenth. The same retreat took place in cooperative housing. Discussion of housing policies for the Eleventh Five- Year Plan indicates no shift toward private and cooperative housing. This is a puzzle, since nonstate forms of housing construction would seem an attractive method of absorbing excess cash held by the population and help to correct the erosion of incentives this overhang causes. Thus, both in terms of production objectives and as part of any effort to provide incentive-enhancing consumption increases to the population, investment in housing remains vital.
The same argument applies to the final category of distribution, investment in health facilities and in municipal, commercial, and other services. Though in Soviet parlance these are “nonproductive” investments, they are important for achieving production increases and for providing facilities essential for improvement in consumption levels and variety. Important among the things Soviet citizens want as their incomes increase are better services, more amenities, and better health care, but apparently the government will sacrifice these services along with housing in the current investment crunch. Gosplan Chairman Baibakov says that the share of nonproductive investment will fall by 4 percentage points in the Eleventh Five-Year Plan, i.e., just offsetting the rise in the share of industrial investment. In about the only direct reference to the kind of investments sacrificed, Baibakov says: “We must have a certain reduction of the construction in cities of theaters, places of culture, swimming pools, and stadiums.”29
There seems to be a contradiction here. On the one hand, the planners would like to restrain investment spending somewhat to permit greater growth of consumption, but to some extent they can make growth in consumption possible only by first investing in the capital facilities to produce consumption goods and services. The emerging investment priorities sacrifice investment in the nonproductive sectors producing housing and other services to cover the growth in the share of industry. Moreover, it seems that the reallocation taking place within industry is away from the sectors producing consumer goods and toward the fuel and energy sectors. As execution of the investment plan begins, hints are emerging that it is too tight. As the informal priority system works to accommodate this, further shifts are taking place toward the high priority sectors of industry and away from those a consumption-oriented policy would need to emphasize. For example, Brezhnev in his speech to the May 1982 plenum of the Party’s Central Committee on the food program said that investment targets for the nonagricultural components of the food program are not being met satisfactorily.30
Are there any possibilities for ameliorating this investment crunch? The Soviet leaders do have a strategy. First, they consider it possible to get more for less by reducing the stock of unfinished investment. Investment in the USSR has a long gestation period, with dispersion of resources over a large list of projects, some of which progress almost imperceptibly. This stock of unfinished construction and uninstalled equipment at project sites seems to grow inexorably. The Soviet planners, eternal optimists, expect they can reverse that pattern in the Eleventh Five-Year Plan, with new commissionings planned to exceed investment by about g billion rubles.31 I consider this impossible and see in this another factor working against fulfillment of Soviet growth plans in the Eleventh Five-Year Plan period. A second argument says much investment requested by producers is not really needed and cannot be absorbed, so that starving investment may force some salutary improvements in the use of investment funds.
Some argue that investment too often creates jobs that cannot be filled. A number of articles in the economic press have suggested this is one reason additional capital investment pays off so poorly in extra output. The directives for the Eleventh Five-Year Plan noted that it is necessary “to adopt measures to achieve balance between existing and incremental jobs and labor resources,” but a number of interesting commentaries on what is happening are much more informative on the seriousness of the problem than on measures taken to deal with it. The “shift coefficient” in industry, which measures the intensity of multishift working, is falling because it is impossible to staff the intended second and third shifts. The Soviet shift coefficient is now below that of any industrial developed country. At the level of equipment design rather than factory design, one Soviet economist has asserted that it is impossible to train enough operators for the scheduled output of machine tools, given their type and number.32
Another long-standing bias in Soviet investment decisions favors new investment over replacement and a corresponding emphasis on structures over equipment. Some U.S. specialists on Soviet agriculture believe this is one reason large investments in agriculture have been so unsuccessful in raising output. The Soviets are now making efforts to discourage new construction and to encourage replacement of obsolete equipment: in the Eleventh Five-Year Plan the share of investment for reequipment and reconstruction is supposed to rise to 32.5 percent, compared to 29.2 percent in the last quinquennium, and the share of equipment in the total (as contrasted with construction) is to rise by several percentage points.33 Undoubtedly large wastes do oc-cur in investment, and it is not difficult to identify ways to save. But it is not clear whether stinting the supply will overcome long-standing habits and biases and force project planners and designers to make savings.
Developments in the energy sector in the 1980s will have a very important influence on the economy as a whole, especially because of its investment requirements and because of the crucial role energy exports play in Soviet ability to earn hard currency. During the sixties and seventies, the energy sector has had a favorable impact on Soviet and East European economic growth. The investment cost per unit of incremental fuel output has fallen until recently, and the average production cost per BTU of energy produced has behaved similarly. The ease with which supply could be increased has been such that the Soviet Union could not only meet its own growing needs for energy at low cost, but also export oil to meet the needs of Eastern Europe and of the market economies. The latter made it possible to finance large increments in modern capital goods and grain imports.
The major causes of this favorable situation have been intensive exploitation of rich oil reserves and the sharp rise in oil prices after 1973. Oil output rose from 3 million barrels per day at the beginning of the 1960s to over 12 million barrels per day in 1980. More recently, availability of cheap and easily producible oil resources has declined, and natural gas has begun to take the place of oil in the expansion of energy production. During the past two decades, growth of oil and gas output covered 85 percent of the total increment in Soviet primary energy production, and oil accounted for about 60 percent of the growth in hard currency earnings from the industrialized market economies. More recently, between 1975 and 1980, oil accounted for only 44 percent of the increment in energy output and gas for 47 percent. On the trade side, in the same period, oil accounted for 66 percent of the increment in hard currency earnings and gas for 14 percent.
One of the most striking indicators of the favorable impact of energy on development is that while the energy sector took about 37 percent of all industrial investment in the Fourth and Fifth Five-Year Plans, that share fell to only about 28 percent after 1965.
In the eighties, the energy situation will be much less favorable. The Soviet Union will be able to expand output to meet its energy needs, but investment requirements will rise very sharply, both per unit of energy output and as a share of all industrial investment. During the Tenth Five-Year Plan, investment in the energy sector was 88 billion rubles, which amounted to 16 percent of all state investment, or about 40 percent of all state investment in industry. In the Eleventh Five-Year Plan period, the share in all state investment will rise to 21 percent and the share of the energy sector in all state investment in industry will approach one-half, 47.5 percent to be exact.34I see no reason to expect that the increased burden of energy investment will ease in the second half of the decade. With the costs of producing, transforming, and utilizing energy resources rising to a much higher level, the total gains from exporting energy will appreciably decline.
Table 2.4 sets out a framework for quantitative evaluation of alternative scenarios for the supply of primary energy and its disposition among alternative uses in the 1980s. Aggregate domestic energy consumption is likely to grow about as fast as GNP in the USSR. The GNP elasticity of energy demand in the USSR has had a value of 1 or higher. That is, each percent increase in GNP has required more than a one percent increase in energy consumption. Although Soviet planners will give much attention to promoting conservation, I am skeptical these efforts will be effective. GNP growth at 2 to 2.5 percent per year, with energy demand elasticity at 1 would imply an increase in domestic consumption by 1990 of 375 to 480 million tons of standard fuel. How can these requirements be covered?
A great deal of controversy has taken place over Soviet petroleum prospects, too complicated to evaluate in detail here. My position is pessimistic about the growth of oil output, which I believe must fall from 603 million tons in 1980 to perhaps 500 million tons (i.e., 10 million barrels/day) by 1990.
Even if oil output drops significantly, the Soviet Union will be able to meet nonsubstitutable domestic demands for oil. The USSR produces more petroleum than any other country in the world. With total output of crude petroleum and condensate of 603 million tons in 1980, domestic consumption was only about 388 million tons. Of that, approximately 175 million tons was fuel oil burned in boilers and furnaces, where other kinds of primary energy can replace oil. At the end of the 1970s, the requirements of the Soviet economy for such nonsubstitutable uses of petroleum as motor fuel and petrochemicals were only about 200 million tons, compared to United States consumption of over 700 million tons. The Soviet Union should be able to resolve a tightening oil supply situation by improving the way it uses oil, i.e., by deeper refining to produce more motor fuel and petrochemical feedstocks. There are alternative energy sources whose output can grow to substitute for the lost residual fuel oil.
Nuclear power, a new and growing source, can probably make a significant contribution. In the Tenth Five-Year Plan capacity increases averaged about 2 gigawatts per year, but the new Atommash plant at Volgodonsk, when fully in operation, is supposed to produce one of the two types of reactors which the USSR has developed, the pressurized, water-cooled and moderated VVER, at a level of 8 gigawatts per year. Other plants will produce the second major type of reactor, the graphite moderated, boiling water RBMK. Plans will surely be underfulfilled, but if we assume that it is possible to add five to six 1 gigawatt reactors per year for the 1981-90 decade, capacity could grow at 13 5—15 7 percent per year and the fuel equivalent of additional nuclear power output (assuming utilization of 5,000 hours per year and a heat rate of 330 grams of standard fuel per kilowatt hour) would be 82.5-99 million tons of standard fuel by 1990. Nuclear power can probably contribute 90 million tons of standard fuel by 1990, an increment of 67 million tons of standard fuel.
The hydropower resources of the USSR are still far from full development. If we assume that the rate of growth can continue at the 1970-80 rates, an incremental contribution of about 25 million tons of standard fuel by 1990 could occur.
Coal output stagnated in the Tenth Five-Year Plan, actually fall-
ing in 1979 and 1980, but may grow appreciably in the 1980s. Quality will deteriorate, so that even large increments in physical quantities will be unimpressive in terms of energy content. An additional 100 million tons of standard fuel may be possible by 1990. Minor sources (firewood, oil shale, and peat) are unlikely to grow and could actually shrink. I show them at 65 million tons of standard fuel in both 1985 and 1990.
Gas is the energy source least constrained by production prob-lems, and its output can expand significantly. Reserves exist to support output levels double or more current levels. The significant bottleneck will be putting transmission and distribution capacity into operation. Gas will play the role of gap filler in the Soviet energy balance, and the most useful approach is not to forecast an output, but to ask how much the Soviet gas industry must increase output to be consistent with various possible scenarios. If the question is whether it can produce the output necessary to maintain aggregate energy exports in standard fuel at the 1980 level, the increase in gas output necessary to cover the gap is 281—369 billion cubic meters by 1990. The gas increments would have to come completely from Western Siberia. Indeed, West Siberian output will have to increase by more than the increment in total consumption to make up for declines in the European areas. This creates a tremendous transport problem. To ship an additional 350 billion cubic meters of gas from Western Siberia to the center in 1520 mm lines operating at 75 atmospheres pressure would require 12 additional lines.35 Apart from transport feasibility, two additional questions are relevant, i.e., whether that much gas can be absorbed domestically in replacing oil, and whether it is a feasible substitute for oil exports. The answer to both is probably yes. The energy balance surely ought to be able to cope with a drop in oil output of 100 million tons, by substituting gas for 60—70 million tons of oil to maintain hard currency earnings and by replacing 100 million tons of residual fuel oil now being burned in boilers and furnaces. Substitutions of those magnitudes would cover the decline in crude oil output and provide an increment in the output of light products.
The balance could end up a little tighter than this forecast. It is possible that GNP could grow at 2.5 percent per year rather than 2. It is quite possible that oil output will drop to less than 500 million tons, and the forecasts in Table 2.4 for nuclear and hydro power are probably at the outer limits of feasibility. The investment requirements to build the necessary pipelines, especially for pipe and compressor capacity, will severely strain the economy, whether inputs are produced domestically or are purchased abroad for hard currency. Indeed, the importation from Western Europe of large diameter pipe and of high-quality compressors was and remains critical for the Soviet Un-ion. Overall, I believe that the USSR will probably have to reduce energy exports in the 1980s.
The Soviet planners’ forecast for the first five years of the decade is now available in the targets of the Eleventh Five-Year Plan. Column (2) of Table 2.4, which summarizes this forecast, is basically consistent with our longer range forecast for the decade as a whole. The production targets imply a total primary energy output of 2,375 million tons of standard fuel in 1985. If exports remain constant at 300 million tons of standard fuel, the implied amount available for domestic consumption in 1985 would be 2,076 million tons of standard fuel, for an annual average rate of growth of energy consumption of 3.9 percent. That is well above the GNP growth even if the energy plan is seriously underfulfilled, as I believe will be the case. It seems doubtful that oil output can grow appreciably: the target figure of 630 million tons is probably more a political pronouncement than a realistic target. The industry will be fortunate even to keep output constant, and this change alone would drop the growth in domestic availability to 3.5 percent per year, assuming constant exports. The nuclear power target is demanding, and the coal target represents a very sharp turnaround in performance compared to the Tenth Five-Year Plan. The gas target is no doubt attainable in terms of the availability of reserves, but whether gas can fill the gap is again a question of putting the transport capacity in place fast enough.
Despite these uncertainties, it seems most unlikely that the situa-tion could become so tight either in the first five years of the 1980s or over the decade as a whole that the Soviet Union would need to import energy. However, energy exports will probably fall below the present level, which would have important implications for external economic policy. The Soviets need growth in hard currency imports proportioned to growth in GNP, and it is also in their interest to expand exports to Eastern Europe. That region cannot pay for energy imports from hard currency sources to keep growing.
All these judgments about growth of energy supply, both for the immediate five-year period and for the longer perspective, assume large Soviet imports of technology and energy-related equipment from the developed market economies. It has been possible to achieve the current levels of oil output only by extensive import of several kinds of oil production equipment, especially submersible pumps and gas lift equipment. The USSR was able to expand gas output at the achieved rate only by importing very large amounts of wide diameter pipe and compressor equipment. Meeting the oil targets for the Eleventh Five-Year Plan and beyond will require a continuation of these imports, as well as considerable expansion of technology transfer in exploration, offshore work, drilling, and for the first time, refining. Pipe imports are indispensable for meeting the gas output plans, and there will still be a great need for compressor equipment. The gas industry will obtain most of the compressors needed from domestic production of several new, large capacity models of turbine- powered units, and there are also hints that much more use will be made of electric powered units. But reasonable estimates of how much compressor capacity will be needed so far exceed past performance in developing and producing large compressor units that one can only conclude large imports will be necessary.36 This situation explains why purchases of gas line pipe, compressors, and rotors from the West is such a critical matter for the Soviet Union.
Agriculture: The Problem Sector
It may be misleading to consider the problem of trade-offs purely at the level of such end-use aggregates as consumption, investment, and defense. In order to improve the consumer’s lot the Soviet economy will have first to expand particular kinds of output, and second to master tasks that have always been poorly done, such as servicing consumers. These changes may encounter institutional obstacles or very high marginal costs. One of the major consumer demands is an improved diet, especially increased availability of most vegetables and fruit. The increment of GNP involved may constitute an imperfect measure of the institutional and resource costs. It is therefore worth reviewing closely the problems of agriculture, the sector that plays the major role in fulfilling the goals of the “food program.”
The dominant feature of the agricultural problem is that Soviet agriculture is a very high cost activity. During its fifteen-year tenure the Brezhnev regime succeeded in expanding agricultural output at a rate of about 2 percent per year, which compares favorably with overall growth of GNP.37 However, it attained this result at very high incremental cost, reflected in the high share of agriculture in all in-vestment, in the very high costs of animal products output, in a huge subsidy bill, and in the need to import large quantities of animal feed from hard currency areas.
As indicated earlier, agriculture proper takes 20 percent of all Soviet investment, compared to approximately 7 or 8 percent in the United States. Much of this investment goes into equipment, land improvements, and facilities for animal husbandry: in the Eleventh Five-Year Plan (1981-85) almost 80 percent of the “productive” investment will be for these three purposes.38 The investment in equip-ment produces discouragingly low results because the equipment tends to have short service lives. The unavailability of repair parts and poor repair practices keep much of it unavailable to help increase output.
Why the other kinds of investment are so unproductive is not clear, though it is partly because the investment in land improvement is offset each year by large attrition. In the last ten years new land has been prepared for irrigation amounting to 8.346 million hectares, but the total reported in use has risen by only about 6 million, with the rest probably abandoned because it has become salinized or was unsuitable in the first place. An even greater gap exists between the amounts of land with drainage facilities added over this fifteen-year period, 11.9 million hectares, and the growth in the amount of such land reported in use, only 3.7 million hectares. I conclude that much of the investment in melioration, canals, and other facilities for draining land is very poorly managed. Many of these projects were probably never completed or involved land never put into production because no one wanted it or because there was no population. A recent Soviet statement says explicitly that much work was poorly done and that extensive reconstruction will have to be carried out in the Eleventh Five-Year Plan.39
A major reason for high costs in agriculture is low productivity, a high ratio of input to output at each stage of production. In crop production, seeding rates are much higher than in the United States: for wheat the Soviet seeding rate is 240 kilograms per hectare compared to 85 kilograms in the United States. In combination with relatively low yields, this means that an unusually high share of the output goes back to seed. Animal production makes inefficient use of feed, in part because rations are not balanced nutritionally. A very large share of output is wasted along the way from field to user because of poor storage facilities and unreliable transportation. One Soviet author declared that as much as one-fourth of the output of vegetables and fruits spoil on the way to the consumer. Another wrote: “We are the largest producers of potatoes in the world, with an output 6.5 times larger than the United States. But can it be said that in the consumption of potatoes we are on the same level? I think not, since the mass of marketed potatoes is no more than half the output and the volume of retail sales is below the American level. The use of potatoes for seed, the amount fed to livestock (a completely uneconomical use), and especially the losses at all stages of the post-harvest cycle from transport to the kitchen table are excessively high.”40
The payoff of expensive outlays on fertilizer is smaller than it should be because of losses in transport and storage. In addition, fertilizer is not produced in the most advantageous mixes and forms and is wastefully applied. The state heavily subsidizes fertilizer and other industrial inputs into agriculture, weakening incentives for their careful use. Much Soviet territory has too little moisture to make fully effective use of fertilizer.
The high marginal cost of coaxing more output from the agriculturai sector, together with unchanging retail prices for the major food items, has led to a large and rapidly growing subsidy bill. In 1980 the state procurement and trade organs paid agricultural producers 81 billion rubles for the commodities they bought. These goods were then sold to final consumers at a price level such that procurement agencies and processors incurred large losses, over 30 billion rubles in 1980, which the state reimbursed. The state also subsidizes agriculture by preferential prices for some production inputs it purchases, such as machinery, fuel, and fertilizer. In a number of cases collective farms also have the privilege of buying back processed agricultural products from procurement organizations at lower-than-standard prices, depending on the amount of raw products delivered. Together, these elements of the subsidy bill reached an estimated 37 billion rubles (more than $50 billion) by 1980, so that the price covered less than half the cost of agricultural produce sold to the population.41 The proper formulation is not that “agriculture is heavily subsidized,” but that “the level of prices of agricultural output the consumer is charged is set well below costs.” This distorts decision making (it is cheaper to feed bread to animals than to feed grain), creates disequilibrium in many consumer goods markets leading to lines, black markets, and general dissatisfaction, and requires that the state budget raise large funds from other activities to cover the difference. These costs are the more difficult to justify because the subsidy program has been only moderately successful in inducing agricultural producers to expand output and improve productivity.
In short, Soviet agriculture remains a most critical problem for the Soviet system and its leaders. Supplying ample amounts of satisfying food is among the most elementary requirements any system faces: the Soviet Union has not been successful in meeting this rising challenge as it grows in seriousness and conflicts with economic growth, and this inability has become ever more visible and restrictive. Massive, expensive imports of grain, which violate the highly valued goal of economic independence and to which the Soviet Union has had to devote increasing billions of dollars annually, reflect the clear failure of Soviet agriculture even to approach meeting the food requirements of its population. This dependency weakens the bases of Soviet foreign policy by making the country turn to the United States and other Western states for a Soviet necessity and demolishes the myth that the Soviet system can serve as a model for other rapidly developing countries.
Solutions to this problem and reduced reliance upon imports to meet consumer expectations are quite unlikely as long as the Soviet leaders remain committed to the collective farm system and to centralized decisions, aimed at detailed control of agriculture. The changes that the Brezhnev era introduced, from huge investments to price and wage policies favoring the peasant, have been and will re-main ineffective. This problem is probably not one which money can solve, but it is probably reasonable to expect that impressive results could be obtained by abandoning bureaucratic control of agricultural operations and guiding agriculture mostly by price signals. This would be a wrenching break with all traditions, but without some change of this nature, agriculture will remain a constant drain upon financial and human resources, especially hard currency, and will restrain Soviet foreign policy by reducing Soviet independence.
International Economic Relations:
Importing Western Technology
Trade involves one of the closest links between Soviet domestic economic development and external behavior. The purpose of this section is to ask how international economic relations will interact with Soviet growth prospects in the eighties. How critical is the Soviet need for Western grain and technology? Can trade policy offer significant amelioration of otherwise dismal growth prospects? What effect will trade policy have upon foreign policy?
In spite of Soviet respect and even reverence for science since Lenin, its possession of perhaps 40 percent more scientists than the United States, and the emphasis given to expansion of scientific research and development over the past two decades, the Soviet Union has been unable to narrow the gap between its technological level and that of the West. In fact, the gap is widening as the West moves dramatically ahead and comes to terms with the implications of the information revolution, which may have consequences as significant in transforming societies and international politics as the steam engine or the telephone have had. The Soviet Union is hardly on the brink of this great change and is in danger of falling very far behind in the next decade or two.
The causes of Soviet weakness in scientific creativity and innova-tion include overly centralized planning and control, which tend to stifle initiative; the limits bureaucracy places upon creativity; the separation of research and development from the production processes; the insulation of producers from the suppliers and consumers who might push them to innovate; a price and incentive system which discourages innovation. The apparent separation of most of the industries producing for the armed forces from the less well equipped and staffed concerns working for other sectors of the economy inhibits diffusion of the innovations made. Above all, Soviet concentration on control rather than opportunity and the restrictions imposed upon information from abroad and upon the free flow of information within the Soviet Union greatly hamper activity.
The principal consequence of these shortcomings is that as the Soviet Union seeks to absorb each new wave of progress made abroad, it is once again left behind and continues to trail the West in many if not most fields of research and technology. The massive Soviet purchases of energy equipment are one illustration of this shortcoming. The Soviets lack adequate domestic equipment and techniques for exploration and exploitation of oil fields, for offshore operations, deep drilling, and construction of efficient pipelines to move Urengoi gas westward. The turn to the West and the shift in Soviet trading patterns in the past twenty years paradoxically may have delayed a Soviet effort to close the gap by inhibiting reforms that would release the entrepreneurial spirit and creativity within the Soviet Union itself.
The Soviet Union has not demonstrated the capability to absorb new technologies and then to innovate independently that has propelled the Japanese into the forefront of scientific, technical, and industrial progress. Soviet productivity suffers as a consequence, and the Soviet Union is likely to continue to need technology imported from the West. This need is likely to grow and will affect Soviet conduct.
During the 1960s and even more in the 1970s, the Soviet Union moved away from its traditional autarkic stance in international economic policy to a more open one toward the nonsocialist world. After the Second World War, the USSR’s international trade expanded faster than GNP, so that trade became ever more important in relation to total economic activity. The disparity was especially great in the first half of the 1970s, when trade grew in real terms at 7.8 percent per year and GNP at 3.7 percent. In the early years most Soviet trade was with Eastern Europe, and much was not helpful for economic growth. Most observers would say that the flows involved had little relation to comparative advantage and did little to boost growth of any of the partners by technology transfer. Beginning in the mid-1960s, however, Soviet policy makers redirected more of the USSR’s trade toward the industrialized market economies. This trend was especially strong between the mid-1960s and the mid-1970s, when the share of the industrialized market economies in Soviet trade turnover rose from 19 percent to 31 percent. The share has since drifted up a bit and now seems stabilized at about one-third.
This shift to Western trading partners concentrated on imports of equipment embodying a higher level of technology than that achieved in the Soviet economy. Imports of machinery and equipment from industrialized market economies (as represented by the OECD) rose from $462 million in 1965 to about $4,576 million in 1975 at a rate of about 25 percent per year. For comparison, Soviet statistics show that the machinery and equipment element in capital investment (in 1973 prices) rose during the same period from 16.9 billion rubles to 37.1 billion rubles—a rate of 8.2 percent per year. As a result, imported equipment rose from a negligible element in all investment in machinery in 1965 (about 2.2 percent) to a palpable share of 6 percent or more in the mid-1970s. A recent investigation of how foreign machinery is priced when absorbed in the domestic economy concludes that earlier conversion rates for calculating the domestic value of Soviet machinery imports were mistaken and that the share is today actually 10 to 12 percent.42
Imports of Western equipment were part of a deliberate strategy to stimulate productivity growth, accelerate structural change, and break bottlenecks in domestic supply, as in production of fertilizers and automobiles. Most Western studies of the impact on the Soviet economy of Western machinery imports have concluded that they made a significant difference to economic expansion. British economist Philip Hanson asserts in his study Trade and Technology in Soviet- Western Relations that they may have raised industrial growth by as much as half a percentage point over what it would otherwise have been. The USSR, unlike most smaller East European countries, based its expansion of hard currency imports to only a small extent on borrowing and paid for them mostly by expanding its exports of primary products, especially oil, and by gold sales.
The question for the 1980s is what will happen to the current orientation of Soviet trade policy toward the nonsocialist world in response to the economic pressures described earlier. The Soviet leaders might push technology transfer even more vigorously than in the past in the hope that productivity gains from such an expansion would offset other growth-inhibiting trends. I believe this is unlikely to happen. The energy supply situation will make expanding hard currency export earnings difficult. Indeed, hard currency earnings from oil exports are likely to fall, the drop depending on the trend in Soviet oil output and Soviet success in substituting gas for oil domestically and in pushing the East Europeans to make the same substitution. The major offset to declining oil exports will consist of exports of natural gas to Western Europe. The best guess is that the USSR can perhaps keep hard currency earnings constant at the level of the early 1980s.
The price of gold has fallen sharply, and the USSR has drawn down its stocks in the early 1980s to acquire foreign currency. Expansion of Soviet borrowing is a possible additional source for financing imports. At the beginning of the 1980s, the Soviet hard currency debt was quite small, less than $10 billion, and the debt service burden was much more manageable than in the case of the smaller East European countries. The hard-currency debt service ratio for the USSR in 1980, figured as interest and repayments in relation to hard currency earnings, was less than 10 percent, quite unlike Poland’s 100 percent. Nevertheless, both the traditional conservatism of the Soviet leaders regarding foreign indebtedness and the likelihood that Western lenders will become extremely cautious in lending to any Communist country make significant growth in Soviet indebtedness an unlikely source for financing technology imports.
The attitude of Soviet leaders may change regarding external economic relations. Extensive evidence suggests disenchantment with the technology import policy, in part because parochial calculations by Soviet officials often lead to requests for imported equipment that could be met equally satisfactorily from internal R and D efforts, without burdening the balance of payments. Brezhnev probably articulated a fairly widely held view in his report to the Twenty-sixth Party Congress in March 1981 when he said, “We must look into the reasons why we sometimes overlook our leading position in technology and spend large amounts of money to buy abroad such equipment and processes as we are fully able to produce ourselves, and moreover often of higher quality.”43
A second reason is that some foreign equipment imports have been poorly utilized and some projects based on foreign technology unsuccessful. Further analysis of the crisis in Poland can only strengthen the position of those making that argument. Moreover, Western disenchantment with lending to the socialist countries and United States efforts to reduce the flow of trade with the USSR will narrow the possibilities for continuation of the recent policy of technology transfer. On the other hand, scientific and technical progress will continue apace in the West, especially in fields important in military and political competition. In short, the Soviet leaders face a critical problem when determining their technology import policies and finding the hard currency necessary for payment.
The triangular relationship among the USSR, the East European members of the Council for Mutual Economic Assistance (CMEA) (Poland, Czechoslovakia, East Germany, Romania, Hungary, and Bulgaria), and the industrialized market economies also raises questions concerning technology import policies and hard currency for payments. The six East European states face very difficult times in the coming decade, of a kind which the Polish debacle illustrates in the most extreme form. All these countries (some, like Czechoslovakia, much less than others) have followed a policy of borrowing, but, because the Eastern Europeans often invested these borrowed resources in inefficient projects or spent them to support higher consumption levels, and because the hoped-for export expansion has foundered in the face of world economic recession, opportunities for obtaining additional capital are drying up. Aggregate net hard cur rency debt of these six countries reached about $60 billion by 1980. For some, the debt accumulated is already beyond their capacity to service. While Western governments and banks will accept some postponement of interest and repayments of principal, they are unlikely to extend new credit. With heavy debt service obligations and with the cessation of new net inflows, the East European six accordingly face a period of austerity in which they must adjust consumption and investment levels downward to live within their means.
Fundamentally, the only way the USSR could help the East Euro-peans solve the hard currency problem is to earn a surplus in its own hard currency trade and transfer it in the form of a loan or in exchange for goods for use in servicing the latter’s debt. The Soviet Union could help in a more general way by running export surpluses with the East European partners: the extra supplies acquired from the USSR might contribute to reducing Eastern Europe’s hard currency import needs. The Western countries can do little to persuade the Soviet Union to follow such a course by putting pressure either on the USSR or on the East European countries themselves. The harder the West makes it for the Soviets to earn or borrow hard currency the less likely they are to help Eastern Europe with its hard currency problem. On the other hand, extending Western credit to the USSR to lend to East European countries to pay their debts to Western creditors is neither likely nor wise. Our control over the situation is essentially limited to making sure Eastern Europe does not sink further into debt to the West.
Eastern Europe will have to adjust its investment and consump-tion downward and adjust the composition and direction of its trade. Poland is the prototypical case. It will have to reduce the imports it has been receiving from the industrialized countries, replace them insofar as possible with substitutes from within the bloc, and divert some exports away from the market economies to the bloc to pay for them. All the East European countries will need to adopt the same short-circuiting of the triangular trade, with the USSR and Eastern Europe sending to and getting from each other what they now exchange with the market economies, at least as far as increments are concerned. If Soviet trade is not going to increase with the market economies, growth requires directing any increments in trade mostly to Eastern Europe. Unfortunately, such short-circuiting of either existing flows or possible increments is difficult because of the structure of the respective trade flows.
As Table 2.5 shows, the East European countries as a group and the USSR each carry on about the same volume of trade with the market economies. The arrows in Table 2.5 show the direction of the indicated flows. For example, the USSR in 1980 exported to the OECD countries $258 million worth of food and other agricultural products and imported $5,169 million worth of food from them. Considering that a similar imbalance occurred in trade with the six East European countries, the net export surplus of food and other agricultural products from the OECD to both areas together was $6,564 million, shown with a plus sign in the OECD column. Examination of individual categories, even at this high level of aggregation, suggests it would be impossible for the USSR and Eastern Europe to trade with each other what they now buy and sell in the industrially developed market economies. Taken together, they have a huge deficit in machinery, food, manufactured goods, and chemicals. Eastern Europe cannot supply to the USSR, or the USSR to Eastern Europe, what the other needs in any of those categories. The socialist world pays for the goods it must have from the industrialized market economies with raw materials and fuels, only part of which it could absorb within its own markets. At a more disaggregated level, this analysis would reveal some possible switches. Eastern Europe could no doubt use more energy, raw materials, and semifabricates, which the USSR would find difficult to supply. The USSR probably has little to gain by shifting its imports of investment goods from the market economies to Eastern Europe but could probably use agricultural products, which would reduce its external vulnerability, and manufactured consumer goods from East Europe could probably make an important contribution to Soviet efforts to improve consumption, especially in providing variety, modernity, and quality in consumer goods. East European countries, in varying degrees, could supply manufactured consumer goods, especially as their own consumption levels stagnate, except that little of their capacity for expansion in the recent growth phase has been in those branches.
I believe that the total East-West flow of machinery will not grow and may even decline somewhat as the bloc-wide source for paying for it, Soviet and Polish energy exports, stagnates or declines. The impact on the Soviet economy will be to depress prospects for increasing productivity and growth.
Other Possible Strategies
Another possible strategy for the USSR would be to expand tech-nology imports, financing them by a reduction in food imports. This might be possible if the resources being poured into agriculture bear fruit soon. Such a policy would emphasize Western Europe over the United States as the source of hard currency imports. This policy might preserve for the USSR the economic gains from technology transfer and at the same time split the Western alliance by exacerbating the conflict between an American administration pressing Western Europe to curtail trade and the West European view of such trade as greatly in its interest.
Room also exists for shifting trade somewhat in the direction of the less developed countries. As the example of Argentine wheat shows, these countries can probably supply some food and agricultural goods the USSR needs. So far the USSR has found it difficult to align itself with these countries in opposition to the industrialized market economies in the North-South argument over trade issues. It has been suggested, however, that the USSR could move to expand its trade with them, and by implication, its influence by a kind of bifurcated trade policy. Even as it seeks to maintain an exchange of raw materials and fuel for modern equipment with the Western market economies, the Soviet Union could expand an exchange of arms and less sophisticated machinery for food and selected raw materials with the developing countries. Such a policy might avoid the heavy development costs for domestic production of particular kinds of raw materials, reduce dependence on its greatest adversaries for food, and exploit one of its major comparative advantages. Success would depend to an important degree on ability to expand arms exports, which today account for about half of Soviet exports to the developing countries and are paid for largely in hard currency. The Soviet leaders could probably increase that trade if they were willing to accept payment in goods. Though the share of developing countries in Soviet foreign trade turnover remained essentially constant in the 1970s, dramatic increases occurred in 1981 to 15 percent, compared to 12.8 percent in 1980. Since Argentina accounted for only a fourth of the increase, something more general than the reaction to the grain embargo may be at work here.
A recovery or acceleration in productivity growth could con-siderably ameliorate the bleak forecast for growth. As Table 2.1 showed, even under a constant investment strategy, productivity growth at 1 percent rather than one-half percent per year would raise GNP growth from 2.5 to 3.1 percent per year. Alternatively, one could consider the tremendous resource wastes that occur in the Soviet economy as “reserves” that could be turned into additional output. Indeed, Soviet planners often describe them in this way. How likely is it that the pressure of the resource crunch will induce Soviet leaders to institute reforms that will significantly improve economic efficiency and hence productivity growth? This is probably the most uncertain aspect of any forecast of changes that could affect economic growth.
Stagnating productivity seems to characterize most major indus-trialized nations at the present juncture, but the causes in the Soviet economy are different from those in other countries. We think stagnant productivity in the industrialized market economies may be a temporary phenomenon associated with cyclical problems, diversion of resources into environmental protection efforts, and substitutions required by the revolution in energy prices.
In the USSR the slowdown in productivity improvement seems the result of exacerbation of a number of fundamental weaknesses that become more serious as the economy matures. Many explana-tions have been offered for low productivity in the Soviet economy: misallocation of resources, uneconomic choices concerning technology, perverse incentives, a general disinclination to act in an economizing way, refusal to exercise initiative, unwillingness to accept the challenge of innovative or risky behavior, and little sense of dedication on the part of the worker. In my view it is helpful to divide these sources of inefficiency into two broad types.
One source of inefficiency is the waste from bad decisions about allocation. On the basis of faulty data or wrong criteria, planners locate a plant in the wrong place, choose its size unwisely, or give it a technology less then optimal. The Gosplan may fail to achieve equilibrium in the supply and demand of some commodity, so that production in related sectors is disrupted, or may misallocate some resource so that its contribution to output or cost reduction is unequal at the margin in different uses. Enterprises may find that the prices and bonus systems destroy their interest in producing the products assigned or in meeting quality standards specified in their plans. These mistakes often flow from ideological constraints imposed by Marxist dogma, clumsy payoff formulas, misleading information fed to decision makers, or simple irrationality in allocation. Most of these defects could be ameliorated by better prices, by refining bonus formulae, and by improved capacity to transmit and process data into sensible decisions as computers become more widespread. The Soviet Union in the last decade has made a great deal of progress along these lines.
In my view, a second kind of waste flowing from the hierarchical character of the system itself is more serious and more intractable. In the Soviet planned economy, a system of vertical links between enterprises and superiors rather than interactions between enterprises themselves define communication, influence, power, and attention. Enterprises are not responsive to the needs of their consumers and have little power to influence their suppliers. One may argue at one level that this should not present any fundamental problem: with the growth in the capacity to communicate and process information, with more sophisticated and economically rational models for processing information into decisions, the gap between what the center induces a plant to do and what its consumers might want it to do will disappear, so that the vertical channels of influence and communication will generate outcomes as good as a market system. But that view overlooks a more fundamental difficulty with the administrative approach.
The greatest wastes in the Soviet system take the form of gener-ally unresponsive and even noncompliant behavior on the part of management at lower levels, which flows from a defect in the bargaining relationship between superiors and inferiors in the hierarchically organized administrative structure of the economy. In this system the top levels try to direct the behavior of lower level decision makers by the classic administrative paradigm of assigning responsibilities, basically in the form of assigning an annual plan, checking on performance, and offering rewards for good performance. As this periodic process moves from one cycle to the next, the terms of the relationship are frequently renegotiated unilaterally from above. An enterprise that responds to the bait of rewards for improving performance beyond the plan is likely to encounter the famous “ratchet effect,” the tendency for superior organs to renegotiate the terms of the bargain against it. In this situation the manager quickly learns that it is important to manipulate the upward flow of information, to conceal reserves, to understate real potential, and to seek an easy plan, pleading weakness and demonstrating it by as poor a performance as is manageable. Managers shun initiative, avoid risks, and hoard reserves to protect themselves against extraordinary demands. They do not fight to correct the mistakes of higher level planners: their goal is to survive rather than to make improvements. They are likely to use the little room for initiative they have defensively against their superiors rather than aggressively to expand output, to best their competitors, or to win new customers. A Soviet economist has summed up the situation by saying that “the existing system of incentives has a number of powerful defects. It puts in an advantageous position those collectives which set a plan low in output and high in inputs. That is, it does not create conditions for developing ambitious plans, gives no advantage to the best enterprises, validates the worst, and leads to egalitarianism.”44
In my view the regime must make a determined effort to reform this system and improve productivity by changing the relationship between the center and the managerial class. The experience of the last decade in the Soviet Union and in Eastern Europe suggests that reform efforts will have no significant effect in improving performance unless the problem is attacked in these fundamental terms. Tinkering with details will not suffice; it is necessary to “constitutionalize” or “propertify” the position of the managerial class. Enterprise management needs more responsibility for its success or failure, and at the same time more security and independence in exercising that responsibility. The system needs a clear statement of the terms on which the central administrative bodies will do business with the managers and a retreat by the regime from its present arbitrariness in changing the rules, from its day-to-day oversight of managerial behavior, and from its willingness to rescue poor management and to impose added burdens on the successful. The rulers must convince managers and the enterprises they control that they must perform or perish under clearly stated conditions.
This can happen only if the terms on which they will succeed or fail are made more stable and immune from arbitrary manipulation by the superior organ, whether in the form of arbitrary hardening or of relaxation in response to pleas of special conditions and weaknesses. Only this kind of change will shift managerial attention from trying to manipulate their superiors toward trying to elicit cooperative behavior from their suppliers and to satisfy their customers. Most Western experts who have specialized in studying the Soviet-type economy share this view, as do many Soviet economists. A recent round-table discussion of the reasons Soviet machine tools trail those in other countries in quality and why producers pay so little attention to the users’ needs described the situation accurately. One discussant said, without demur from others, that the system forces the director to decide whether to sacrifice plan fulfillment or the reputation of his plant. Few managers are quixotic enough to sacrifice the plan to satisfy their customers’ interests.45
The problem is not that the Soviet leaders have not tried to “reform” the system. They have launched an unending set of experiments, rule changes, and institutional realignments, in what Gertrude Schroeder has perceptively called a veritable “treadmill of reforms.”46The difficulty is that the long history of “reform” in the Soviet Union has never produced a direct attack on the central problem. The present regime has an acute sense of defects in performance but a very limited comprehension of what it must do to solve the problem and has shunned radical economic reform. It has not hesitated to change many traditional features of the system: there has been significant price reform; full-cycle planning and financing of R and D programs has been introduced; normative net value has replaced gross output as the measure of output. The leaders have changed the formula for rewarding output increases in agriculture from overfulfillment of planned deliveries to increases above annua) average deliveries of the preceding period as the basis for premia. They have amalgamated enterprises to combine related activities under one boss. Among the many changes and experiments carried out in the Brezhnev period, some have helped to make the enterprise more independent, stabilize expectations, and enhance the power of lateral interactions as a disciplining force to supplement control from above.
Nancy Nimitz has suggested that a number of changes one might describe under the heading of “self-financing” may help shift the enterprise focus from manipulating its superiors to influencing the enterprises with which it interacts.47 These changes force ministries to finance investment out of their own profits rather than from state grants and so motivate them to control cost and to demand cost-cutting improvements from suppliers of capital goods so they can live within investment budgets. The literature on reform in the small East European economies has a constant theme that tightened budget con-straints such as would come with self-financing could greatly strengthen economizing behavior on the part of enterprises. The Soviet economy is a seller’s market. Buyers have little power to act in a discriminating way, effectively articulating demands for quality, product improvements, and timeliness in performance, because excess demand gives sellers the upper hand. From the other side they do not need to, because everyone works under loose financial constraints. Financial penalties to deter bad performance are weak; buyers wink at defects that raise their costs because cost and profit are not crucial issues for them; directors of investment projects accept cost overruns, poor design, and obsolete equipment because they can avoid the budget limit for investment projects.
Some specialists on Soviet economic affairs find corroboration of the “self-financing” idea in the way the military sector operates. The Ministry of Defense is a demanding customer because it must meet the test of foreign competition and because, as a single buyer in relation to many suppliers, it has the upper hand in deciding whether or not to accept a product. The same principle appears in the civilian economy in one case where the buyer has a stronger than usual position vis-à-vis its suppliers, i.e., the Ministry of Power and Electrification in buying equipment for power stations. This is one reason this ministry has a better than average record of innovation and technical change.48
The central issue for all who have pondered the question of “economic reform” in the Soviet-style planning system is whether piecemeal changes can help significantly, whether numerous small changes can ever constitute a revision of the fundamental character of the system, and if so how much is enough to achieve a transition from quantitative to qualitative change. There is no consensus on these matters. Nevertheless, I believe that no significant improvement in the behavior of managerial decision makers will occur until some bold regime is willing to cross the threshold of abandoning the physical allocation system, specification of output plans, and monthly, quarterly, and annual evaluation of plan fulfillment.
The discussion so far has concerned the behavior of management personnel in their relations with superior organs and with the firms which they serve and on whom they depend. An analogous problem exists at a lower level, i.e., eliciting dedicated and intelligent effort from workers. The worker’s behavior is determined not so much by the administrative or planning system as by his employment relation to the firm, i.e., job security, conditions of pay, and so on, and his ability to convert money earnings into real income by exchanging them easily for goods and services that are strongly desired, such as housing, travel, consumer durables, and various amenities that enhance the quality of life.
The Soviet system makes heavy use of pay incentives to encourage worker effort. In practice, however, over-full employment and the inability of workers to turn monetary returns from effort into an improvement in real consumption seriously weaken the motivating power of the wage system. To deal with this problem, the Soviet Union requires more than a quantitative increase in the resources allocated to consumption. Improvements in quality and variety of goods, better pricing to equate supply and demand, and institutional changes that make the sector producing consumer goods more responsive to the desires of consumers are also crucial. The incentive effect of the resources the regime allocates to consumption is seriously diluted by the fact that purchases require huge investments of time as well as money, that the quality and mix of goods are poor, and that durables break down and cannot be repaired. This is partly a systemic problem in that the dominance of vertical over horizontal ties reduces producers’ motivation to please consumers, but in part it is a policy problem. Soviet planning has always been biased toward overfull employment planning. Plans are overambitious, and informal priorities and adjustment mechanisms in their execution lead to imbalance in consumer goods markets and repressed inflation. Weak financial controls and pressure to fulfill plans lead enterprises to pay out more money to households than planned. At the same time, overoptimistic goals for output are not met, especially output of consumer goods, leaving the population with excess cash. In the Tenth Five- Year Plan this phenomenon apparently grew completely out of control.
Deposits of the population in savings banks rose from 91.2 billion to 156.7 billion rubles during the Tenth Five-Year Plan. Since there is little advantage and probably some disadvantages in keeping one’s savings in the bank, given the low interest rates, significant accumulations in the form of cash held by households probably also occurred. Gregory Grossman has made calculations indicating that cash holdings of households may have increased by about as much as their savings in savings banks.49 Some savings are desired to accumulate funds for such expenditures as consumer durables, but most must be unwanted. This overhang erodes incentives and facilitates the growth of the “second economy” of illegal and semilegal production and speculation outside government control. Evidence is accumulating that this economy is significant in size, and a powerful influence for corruption and diversion of resources from the regular economy.
Inept pricing in individual markets compounds the problem. Some goods are particularly underpriced; meat, housing, and durables are notorious cases. The current Soviet regime is unwilling to meet this problem by adjusting the general price level and the prices of goods most in demand. Soviet politicians seem to believe that the social contract requires that prices for consumer goods not change, but Soviet economists certainly understand the deleterious effects of this policy and criticized it strongly in the discussion of the Eleventh Five-Year Plan draft. As S. S. Shatalin said, “guaranteeing balance in the consumption sector of our economy is the most important condition for steady growth of the people’s welfare, for the creation of an effective system of material incentives, and for a transition to a primarily intensive, balanced, development of the national economy as a whole.”50 But the leadership does not accept this argument. An official of the State Committee on Prices expressed their position:
Continuation of the strategic course of the CPSU to hold retail prices stable once more affirms the inadequacy of the views of those economists who think that in our economy it is necessary actively to use the price mechanism for equating supply and demand for certain consumer goods. Raising the prices on products of mass consumption, demand for which is still not fully satisfied, cannot in my opinion be considered a cardinal solution of the problem of balance and is fraught with negative social consequences. The solution of the problem is in the increase by all possible measures of the output of consumer goods, especially those that are today in short supply.51
Official spokesmen say that the Eleventh Five-Year Plan corrects the macro-imbalance of the Tenth and that goods supply will match the money incomes of the population. But one can rightly be suspicious that they are as overoptimistic on this occasion as they have been in the past.
Prospects for Change
The greatly increased pressure to seek improvements in per-formance and the possible shift from immobility to fluidity accompanying a leadership succession may open the way for significant institutional and policy changes. A new leadership which has grown up in different circumstances might be willing to try something bold and radical. Certainly many specialists—economists, planners, and managers—understand what is needed and support radical changes. On balance, however, I am skeptical of significant change in the sys-tem.
The increasingly radical tone of the analysis and policy prescrip-tions Soviet economists now offer is impressive. They do not hesitate to suggest substituting enterprise choice of supplier for central alloca-tion, raising housing rents to reflect costs, and taking lessons from the second economy to overcome the clumsiness of central allocation. Many recommended overhauling the whole complex of wage structure, consumer goods pricing, fiscal planning, and allocations to collective consumption in order to make rewards proportionate to effort. Some even apparently attack the burden of military expenditures in an Aesopian mode by describing the high cost of weapons systems in the United States. Abel Aganbegian and the economists associated with his Institute for Economics and Organization of Industrial Production in the Siberian Branch of the USSR Academy of Sciences are most outspoken; some Western observers interpret this as a reflection of their distance from Moscow geographically and in terms of influence. But equally venturesome ideas appear in many other places much closer to the center, such as the Scientific Research Center for Economics attached to Gosplan and the Research Institute for Systems Studies. Even in older and more traditional institutes, such as the Institute of Economics of the USSR Academy of Sciences, criticisms and advice seem more forthrightly novel than in the past.
Nor are these people on the fringes of the economics establish-ment. Two of the most critical economists were elected corresponding members of the USSR Academy of Sciences in the 1982 elections. When the new leadership turns to the economics fraternity for recommendations for “perfecting administration and the whole economic mechanism” and “accelerating the shift of the economy onto the path of intensive growth” (a meeting of the Central Committee in July 1982 did precisely this), they will probably hear a much narrower range of opinion with an overall tone more radical in recommendations than happened on previous occasions when they consulted the economists.52
Nonetheless, great obstacles to significant change still exist. First, any serious attack on the problem of managerial behavior described above would undermine the role of the party, which is bound to see any move to “propertify” or “constitutionalize” the status of the managerial group as a threat to its role. Second, institutional reform would threaten many vested interests in the economic system, especially for those who have a stake in continuing in a way that is familiar and for those groups whose livelihood is tied to continuation of misal- locations made in the past. It is difficult to imagine the kind of coalition that could push change through against all opposing interests. Policy reform aimed at realistic and balanced planning has not been attainable in the past: it inevitably suggests lowering aspirations, and many would attack those who would propose this on that ground. Ideologically, on the other hand, such a shift to less ambitious, more realistic plans is certainly conceivable. If Stalin held that “there are no fortresses Bolsheviks cannot storm,” Lenin had earlier sanctioned the idea of “less but better.”
Worker opposition would be a formidable obstacle to the policy and institutional changes most observers consider vital to enhance motivations, raise productivity, and unfreeze the labor market. Such fundamental changes must include some reduction in job security, sharper differentiation in the reward structure, price increases for goods of high income elasticity such as meat, quality clothing, housing, and durables for which market disequilibria are greatest, and an attack on the cash asset positions of households. The historical analogy that comes to mind is Stolypin’s “wager on the strong” as a policy to encourage initiative and productivity growth in tsarist agriculture and to win the loyalty of the strongest elements among the peasantry.
Our reading of the social contract as the Soviet working class understands it, the experience of Polish leaders in trying to impose such changes, and the history of Stolypin himself combine to convince us, and no doubt the Soviet leaders as well, of the riskiness of such a policy. My summary judgment is that only a very solidly entrenched leadership group or one desperate to the point of adventurism would contemplate undertaking so radical a course.
All this does not rule out innovation, but does suggest that change will require a sense of desperation among the leadership, combined with determination that it is difficult to believe any faction fighting to capture power could sustain long enough to achieve radical change. The Polish experience is relevant here in revealing how the leadership of a socialist society can adamantly refuse to adapt, even when the situation is desperate.
The dilemmas economic stringency forces on the Soviet leaders offer no easy escape. The Brezhnev regime clearly revealed its resolution of these conflicts in the Eleventh Five-Year Plan, which sacrifices investment in favor of the claims of the military establishment and of consumption. The plan is full of verbiage about improving planning and the economic mechanism and increasing discipline, but the leaders clearly have sidestepped significant efforts at economic change. They approach the centerpiece of the consumption effort, the food program and agricultural policy, primarily by an extraordinary commitment of resources rather than by significant reforms that would enhance the prospects of making this investment pay. When the price reform of January 1, 1982, raised prices on many important commodities, the government exempted agriculture from having to pay higher prices. A continued inflow of investment resources is backed up by a new increase in agricultural procurement prices. The incentive payments of the previous five-year period have been absorbed into a new higher guaranteed level of agricultural prices, topped with the promise of a new 50 percent price premium for deliveries exceeding the levels realized during the Tenth Five-Year Plan. The food program continues a policy of forgiving debts incurred by collective farms, converting those loans in retrospect to a free gift.
In confronting its agricultural sector the Soviet regime seems to feel the same impotence Western creditors feel toward Poland. The program promises higher incomes to collective farm management and offers concessionary terms to those collectives whose inefficiency and high cost put them at a disadvantage even under the new generous terms. An indigent imagination has limited institutional revisions to support this infusion of resources into agriculture to adding another new layer of bureaucrats in the form of regional production administrations, with only a slight offset in the form of some increased freedom for private plot agriculture.53 An American cannot help but recall our own disillusioning experiences with trying to solve complex problems by throwing money at them.
One cannot call current policy an imaginative response, but one can appreciate that it flows from the inherent conservatism of an aging leadership with a short planning horizon, a vivid memory of recent events in Poland, and values that make them susceptible to the argument they must not now let themselves fall behind after persistent efforts to catch up. Current strategy contains some internal contradictions, but overall its weakest feature is its unattractiveness as a long-run policy, since it mortgages future growth prospects to short-run exigencies.
One might argue that the consumption emphasis may stimulate growth by increasing incentives and productivity, but that argument is not persuasive. Food alone will not make the population content with their government and give them incentive to work harder: the government is doing too little to support the increased allocation of resources to consumption with appropriate institutional and policy changes. Without changes in pricing, without reform of the decision making system on the production side that produces wrong assortments, low quality, and bad distribution of consumer goods, without changes in the labor markets, the incentive and productivity effects of the resources devoted to producing consumer goods will be minor. One suspects that even within the constraints the planners have accepted, the plan for 1981—85 is still too ambitious and that investment bottlenecks will develop that undercut growth, including the intended growth in consumption if investment retains its low priority. I see nothing being done to reform agricultural decision making to make it possible to attain output increments that match the huge resources invested in agriculture.
If the agricultural program and some improvement in the weather enable the Soviet Union to avoid agricultural imports, the Kremlin can reserve hard currency earnings for financing technology imports which could help growth. On the whole, however, the current strategy does not seem to embody a clear line on international economic relations. Technology imports will certainly continue on a large scale, but current policy seems irresolute in adopting either of two policies needed to expand their contribution to growth, i.e., developing a supporting export program or revising arrangements for absorbing imported technology to maximize its growth enhancing properties.
It is true that gas development plans are specifically shaped to ensure an export surplus, according to Brezhnev, for many years to come. But this is primarily a replacement for oil rather than an incremental program, and a multitude of problems endangers its long-run prospects. On the absorption side, the planners seem neither to have identified strategic sectors where the Soviet Union might achieve critical breakthroughs, as was done with fertilizer, nor to have moved toward an economic reform that would create flexibility to direct imports toward highly productive, small-scale, bottleneck areas.
I am doubtful that the current economic strategy can survive the turmoil of succession. Certain parts of it, such as the food program, carry Brezhnev’s name. The current strategy undoubtedly represents a consensus within the Politburo, but some significant groups no doubt are less than wholehearted supporters, and even within the Politburo itself doubts may arise. The agricultural policy, in particular, must seem to many misguided and excessively costly. In my view, the measures the food program embodies must have stretched the tolerance of other groups to the breaking point. In his justification of the food program at the May 1982 Central Committee plenum, Brezhnev spoke of the commitments it implies beyond 1985, but his expectation of extracting such commitments sounds somewhat farfetched. In attempting to cope with what appears will be severe underfulfillment of the plan, the new leadership may be tempted to blame Brezhnev and retreat from some of his policies. The precedent of Khrushchev’s scrapping the Sixth Five-Year Plan (1956-60) in mid-course in favor of a new start under a Seven-Year Plan is perhaps apropos here.
What kind of changes might the new leadership make, in terms of possible resource reallocations and policy innovations to support them? One possible program would be a complex of shifts in a “progressive” direction. I suspect that the investment problem will emerge as a dominant concern. I have already noted the long-range implica-tions of slow investment growth, but investment shortages are likely also to cause serious short-run implications before 1985. Renovating the capital stock to adjust to the scarcity of labor and the high cost of materials and energy poses investment needs on a scale the planners’ calculations have probably not yet absorbed. Numerous bottlenecks are likely to emerge, both in individual sectors starved for capital and in the infrastructural investments supporting regional shifts. Pressure is likely to grow to reduce agricultural investment, perhaps even military procurement, and to expand the share of investment and redirect it more to producers goods industries. As the new leadership responds, it might formulate the question: “Given that we are still fully committed to the triple aims of growth, defense, and welfare, can’t we find a more effective set of policies for getting there?”—a question it could ask each of the major claimants.
National security will remain a paramount goal, but the external situation may change enough to justify reassessment of many aspects of military policy. The United States administration may suffer serious disappointments in its efforts to rearm, the Soviet leaders may absorb lessons from Poland, Afghanistan, and the Falklands. Cheap opportunities may emerge for making significant gains by political and diplomatic means. The new leadership could reopen the question of its resource commitment to defense, asking that the military rethink the national security task, including the force structure and appropriate rate of buildup. We do not understand the nature of the regime’s commitment to the military very well. We have tended to express it as a promise of continued growth in the allocation to the military at the current rate, basically because that is the historical record we see. It seems more logical to suppose that the military may formulate its expectations in terms of individual weapons programs, rate of buildup of the forces, and so on, and that the government may grant much that the military wants without committing itself to a fixed rate of growth in the allocation to defense. Even if the allocation to defense were frozen or reduced from the current rate, Soviet military capacities will still grow at an impressive rate.
The possibility of arms limitation or reduction agreements with the United States is obviously relevant to the leader’s position on the defense allocation. Force expansion matched by the opposition adds little to national security, and resource stringency should stimulate a rethinking of the goals the USSR might seek in arms agreements as a resource-saving and security-enhancing move. Issues of strategic doctrine and defense decision making are discussed in other chapters of this study, but the economic aspects of this issue merit mention here.
The important point is that the outlays on strategic arms are only one component of Soviet military expenditures. The CIA estimates that Soviet expenditure on strategic forces in 1980 accounted for about 17 percent of all military spending when all elements are valued in 1979 dollars.54 The share in rubles is likely to be higher, since strategic forces are rich in inputs with high ruble-dollar ratios. They are also especially demanding in some of the inputs that compete with investment. The CIA’s calculations show that construction and pro-curement of hardware for strategic forces cumulatively accounted for 37 percent of all military construction and procurement for 1971—80. Both these share calculations omit research and development from both halves of the ratio. Since strategic systems are probably R and D intensive, these ratios may understate their importance in the overall military burden on the economy. Despite all the uncertainties and possible errors in this kind of comparison, the point remains that limitations in strategic arms with the United States affect only part of the Soviet military burden.
Military expenditures could be reduced for programs other than strategic forces. Such reductions or limitations depend on many other considerations besides the general strategic relationship with the United States, i.e., the perception of the Chinese threat, possible diplomatic and political approaches as an alternative to military force in dealing with Western Europe, problems and opportunities in the Middle East, and so on. The possibility of constraining military outlays should not be linked solely with arms limitation agreements.
A final caution is that experts dispute how transferable resources now devoted to military production are to production of civilian goods. Some branches of military production are so specialized and the working conditions so special that the resources involved would contribute little to civilian lines of production. But many Soviet production lines are intentionally designed for dual use. I believe that resources used for producing military hardware could be transferred within the limits of conceivable reductions, especially when the shift would be to production of investment goods. And of course many components of military expenditure are for items such as manpower, fuel, and other inputs easily transferred into operations.
Such a renegotiation has already taken place regarding invest-ment. Brezhnev and his colleagues adopted toward producers somewhat the same line that Khrushchev took toward the “metaleaters,” asserting that the resources available were adequate to the tasks for which they were responsible, and that they had the responsibility to find ways to expand production capacity by utilizing the current level of investment allocations more effectively. It is true that such institutional change as has occurred seems inadequate to validate this message and policy, but the message and policy are unambiguous. The current strategy has identified correctly many of the tactical elements, such as replacement, user pressure for improved equipment quality, and so on, but has thus far done little to create the relevant instruments and incentives to alter decisions in this direction.
One might ask a similar question regarding consumption. Recent Soviet economic commentary indicates that a real change in Soviet priorities has occurred. The belief that the time has come to deal with consumption is widely shared in Soviet society, and the leadership has acknowledged and even roused popular expectations in this regard. Without calling into question the leadership’s priority for meeting consumer aspirations, the new regime could argue that the present complex of measures is ineffective. It could reconsider the degree of autarky sought in agriculture and in manufactured consumer goods and contemplate institutional and policy changes that would elicit more output from agriculture at a lower cost. A new approach to consumption would have to include some decentralization for the nonagricultural sector as well, especially in the form of giving managers incentives to economize on labor and more realistic pricing in relations with households. One United States student of agriculture argues that the Soviet citizen is not badly undersupplied with meat even today. At 52 kilograms per capita per year, Soviet consumers are well below the United States level of 108 kg, and appreciably behind rich, traditionally meat-eating societies such as France and Germany, with annual per capita consumption between 80 and 90 kg. But in relation to a number of other European countries, especially those at income levels more comparable to the USSR, such as Italy, Spain, and the United Kingdom, the gap is about 10 kg. and is only 9 kilograms compared to the Swedish level.55 Part of the problem concerning meat is that inflexibility of the distribution system and underpricing of meat create extraordinary frustrations and extract huge welfare losses from the population as they acquire and consume it.
In a very perceptive piece in a 1982 issue of the journal of the Institute for Economics and Organization of Industrial Production, S. S. Shatalin develops persuasively the idea that the regime has achieved a “dialectical unity of ends and means” in linking the growth of the welfare of the people with a shift of the economy to the path of intensive development.56 Whether that unity can be achieved in practice is the real issue.
The problem with any such “progressive” scenario is obvious. We are discussing the central authorities’ renegotiating their contract with major constituencies, the population in general, the military, the industrial workers, the state economic bureaucracy, and the managers. The leaders may see less possibility for maneuver in each of these areas than this discussion suggests. Precisely because the regime has never allowed popular participation in discussion of the priority given consumption, it is likely to receive a bloody-minded response to any suggestions of retreat from what are considered tacit agreements, such as the policy of keeping retail prices unchanged. The Polish case certainly supports such an interpretation.
An individual or clique aspiring to consolidate a power position in the succession might consider such a progressive approach too risky even to try. Anyone proposing it would be vulnerable to ideological criticism and would also alienate groups whose support a rival could mobilize in the struggle to capture the dominant role in the power structure. The succession could, however, be a kind of controlled shift toward a new consensus rather than a factional struggle for power. In view of the tension attendant on economic stringency, the leadership may unite behind an effort to carry out such a renegotiation.
If the new leadership is rebuffed in an effort to renegotiate these various implicit contracts, the alternative is likely to be a retrogressive set of policies, shifting resources back to investment, substituting discipline and repression for satisfaction and incentives through consumption increases, preserving the primacy of the military allocation, and so on.
I believe it foolhardy to predict which of these courses the USSR will follow. Much depends on one’s view of how the succession will evolve and on the nature of Soviet politics, especially the interplay between the “clientelistic” processes that make state policy a compromise between various power groups, and the “elitist” processes that permit the party core to use the instruments of state power to impose its will on groups within society.
The economic prospects for the USSR, examined in isolation, suggest both great pressure for systemic change and great potential for improvement through change, if the leaders are sufficiently radical in attacking the causes of the monumental waste, inflexibility, and nonenterprising character of the economic actors in the system. The causes of these defects are so intimately wrapped up with the political system that they probably preclude evolutionary change of the economy in the coming decade. In my view, discouraging as economic prospects are, they are unlikely to create such overwhelming pressure as to topple the system or threaten its rulers’ hold over society.
After all, we expect growth to continue, even if at reduced rates. If output grows at 2 to 2.5 percent each year for the decade, it creates an easier situation in which to maneuver than the United States has faced during the years 1978-82, when GNP grew only 2.5 percent over four years. It is true that many problems urgently demand attention, but the situation is not beyond repair, even if the leaders are not willing to turn in their creaky old model for a radically new economic system. It is possible to attack particular problems by introducing changes in policy, without undertaking radically to revise core institu-tions. Some problems are more serious than others, and a leadership freed of the Brezhnev presence can begin to work on them one at a time. It should be able to restore the motivating power of the ruble by changes in consumer goods prices and in wage policy without raising implacable opposition. Since agriculture is a more or less separate sector, it is feasible to reduce the degree of central administrative control in favor of more market direction without scrapping centralization for the rest of the economy. I believe this would result in a striking improvement in agricultural performance. For the doubters, a working example is at hand in Hungary. Policy changes in those two areas alone could result in enough savings in resources and enough extra output to make a significant difference.
I do not anticipate a radical reorientation of priorities, except for some reallocation to investment. If some relatively straightforward policy changes can indeed produce more satisfaction and effort from the resources already devoted to consumption, and if agriculture can be weaned of its investment habit, that will free some resources for increasing investment and reallocating it to crucial needs. It will no doubt be some time before we understand what Brezhnev told the military leaders in his speech shortly before his death, but it is not implausible to conclude that part of the message was that some restrictions must be placed on military requirements, justified in part by easing tensions with China.
This, after all, is what is meant by “muddling through”—little adjustments here, some trimming of aspirations there, palliative measures to defuse a few of the most threatening situations. What all this would mean for external conduct is risky to forecast. Considering the problem from the perspective of economic considerations alone, these tendencies would suggest a turning inward of the leaders’ attention, more concern and effort devoted to urgent domestic problems, and some temporary retrenchment in foreign efforts. This process is likely to last several years. I do not foresee complete withdrawal from international economic relations with the West, however, since the Soviets will still need grain imports, and they will rely on technology imports as the cheapest and fastest way to solve certain domestic tasks.
1. Stanley Cohn, Economic Development in the Soviet Union (Lexington, Mass.: D. C. Heath, 1970), p. 28; CIA, Net Foreign Assessment Center, Handbook of Economic Statistics 198o (Washington, D.C.: USGPO, 1980), p. 56.
2. The work force consists of state employment (described in Soviet sources as rabochie i sluzhashchie ), collective farm members engaged in socialized production, and the members of families of workers and employees and collective farmers working only in private plot agriculture. The Soviet statistical yearbook, Narodnoe khoziaistvo SSSR [National Economy of the USSR] (Moscow: Tsentral’noe statisticheskoe upravlenie), for the respective years, routinely reports these figures.
3. Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO [Economics and Organization of Industrial Production], 1982, no. 3, p. 138.
4. Abram Bergson, “Toward a New Growth Model,” Productivity and the Social System: The USSR and the West (Cambridge: Harvard University Press, 1978), p. 27.
5. CIA, Handbook of Economic Statistics 1980, p. 59.
6. Five-year forecast through 1986, released in April 1982.
7. N. K. Baibakov, Gosudarstvennyi piatiletnyi plan razvitiia narodnogo khoziaistva SSSR na 1971-75 gody [The State Five-Year Plan for the Development of the National Economy of the USSR in 1971—75] (Moscow, 1972), and Narodnoe khoziaistvo SSSR za 60 let [National Economy of the USSR for Sixty Years], p. 168.
8. U.S. Congress, Joint Economic Committee, Consumption in the USSR: An International Comparison (Washington, D.C.: USGPO, 1981), p. 6.
9. E. P. Gorbunov, in a round-table discussion of the Eleventh Five-Year Plan guidelines, in Voprosy ekonomiki [Problems of Economics], 1981, no. 1, p. 64.
10. Ekonomicheskaia gazeta [The Economic Newspaper], 1981, no. 9, pp. 10-11.
11. Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1981, no. 5, p. 15.
12. Voprosy ekonomiki, 1981, no. 1,p. 7.
13. An informative survey of the variety of opinion and the relevant arguments on this matter is available in CIA Estimates of Soviet Defense Spending, hearings before the Subcommittee on Oversight of the Permanent Select Committee on Intelligence, U.S. House of Representatives, September 3, 1980 (Washington, D.C.: USGPO, 1980).
14. Grey Hodnett, “The Pattern of Leadership Politics,” in Seweryn Bialer, ed., The Domestic Context of Soviet Foreign Policy (Boulder, Colo.: Westview Press, 1981), p. 103.
15. Thomas Wolfe, Military Power and Soviet Policy, Rand P-5388 (Santa Monica, Calif.: The Rand Corporation, 1975), p. 15.
16. Bergson, Productivity and the Social System, pp. 24—37.
17. The Garbuzov statement is in Finansy SSSR [Finances of the USSR], 1982, no. 1, p. 20; the decree on personnel reductions, in Izvestiia, November 24, 1981; and the Brezhnev statement, in Ekonomicheskaia gazeta, 1981, no. 9, p. 10.
18. According to U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers, 1970—79, (Washington, D.C.: USGPO, 1982), p. 76, the number of persons in the Soviet armed forces was 4.8 million in 1979. Other sources suggest somewhat higher figures. I use 5 million as an approximation.
19. Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1982, no. 3, p. 141.
20. The two decrees are available in Resheniia partii i pravitel’.stva po khoziaist- vennym voprosam [Party and Government Decisions on Economic Questions], vol. 7 (Moscow, 1970), pp. 677—79, and vol. (Moscow, 1981), pp. 136—45.
21. Sotsialisticheskii trud [Socialist Labor], 1981, no. 10, p. 4.
22. U.S. Bureau of the Census, Population Projections by Age and Sex for the Republics and Major Economic Regions of the USSR, 1970 to 2000, International Population Series, P-91, No. 26 (Washington, D.C.: USGPO, 1979), p. 91. The Soviet estimate is in Sotsialisticheskii trud, 1981, no. 3, p. 52.
23. Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1982, no. 3, p. 138.
24. Sotsialisticheskii trud, 1982, no. 3, pp. 64—71.
25. An excellent survey of recent changes may be found in Ann Goodman and Geoffrey Schleifer, “The Soviet Labor Market in the 1980s,” in U.S. Congress Joint Economic Committee, The Soviet Economy in the 1980s: Problems and Prospects, (Washington, D.C.: USGPO, 1982).
26. Planovoe khoziaistvo [Planned Economy], 1982, no. 1, p. 6.
27. Ibid., no. 3, p. 30.
28. For the decree on housing for agriculture, see Pravda, May 30, 1982, p. 1.
29. Planovoe khoziaistvo, 1982, no. 1,p. 11.
30. Ekonomicheskaia gazeta, 1982, no. 22, p. 5.
31. N. K. Baibakov in ibid., 1981, no. 4, p. 6 of insert.
32. Three interesting recent pieces on the excessive creation of work places are: V. Cherevan’, “Soglasovanie vosproizvodstva rabochikh mest s trudovymi resursami” [Coordination of Creation of Work Places with Labor Resources], Voprosy ekonomiki, 1982, no. 2, pp. 51-61; R. Tikhidzhiev, “Voprosy sbalan- sirovannosti vosproizvodstva osnovnykh fondov i trudovykh resursov” [Questions of Balanced Growth of Fixed Assets and Labor Resources], Planovoe khoziaistvo, 1981, no. 12, pp. 44-53; and N. Gorelov et al., “Organizatsiia ucheta rabochikh mest i obespechenie ikh sbalansirovannosti s trudovymi resursami” [Organizing the Accounting of Work Places and Guaranteeing Their Balance with Labor Resources], Planovoe khoziaistvo, 1982, no. 3, pp. 82—87. The discussion of machine tool design is by S. A. Kheinman in Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1982, no. 1, p. 49.
33. Planovoe khoziaistvo, 1982, no. 1,p. 11.
34. In his speech on the Five-Year Plan in Ekonomicheskaia gazeta, 1981, no. 4, p. 4 of insert, Gosplan Chairman N. K. Baibakov says that in 1981—85 about 132 billion rubles will be invested in the branches of the fuel and energy complex as compared to 88 billion rubles in 1976-80. He also provides a figure of 618.4 billion rubles for all state investment. Industrial investment of 277.9 billion rubles in 1981—85 is implied in a statement in Planovoe khoziaistvo, 1982, no. 3, p. 2, that its share in all investment will rise by 4.4 percentage points in the Eleventh compared to the Tenth Five-Year Plan. Baibakov’s figures for energy sector investment clearly refer to a broader concept than is used in the figures on the distribution of investment by branch in the Central Statistical Administration’s statistical yearbook, cited above, which show investment in the big four energy branches for 1976-80 as only 65.638 billion rubles. There are a number of other statements on the changing share of fuel and energy of investment shares but they are not mutually reconcilable, probably because of differences in concept.
35. Ekonomika gazovoi promyshlennosti [Economics of the Gas Industry], 1977, no. 9, p. 18, gives the capacity of such lines as 28-30 billion cubic meters per year.
36. For a discussion of the equipment import dependence of the Soviet gas industry and the prospect for meeting the Eleventh Five-Year Plan goals, see Robert Campbell, “Soviet Technology Imports: The Gas Pipeline Case,” California Seminar on International Security and Foreign Policy, Discussion paper no. 91 (Santa Monica, Calif.: 1981), and Edward Hewett, “Near-term Prospects for the Soviet Natural Gas Industry, and the Implications for East- West Trade,” in U.S. Congress, Soviet Economy in the 1980s.
37. David Schoonover, “Soviet Agricultural Policies,” in U.S. Congress, Joint Economic Committee, Soviet Economy in a Time of Change (Washington, D.C.: USGPO, 1979), vol. 2, p. 83.
38. Planovoe khoziaistvo, 1982, no. 4, pp. 100-105.
39. Data on land improved and prepared for irrigation are regularly re-ported in the statistical yearbooks. The statement on the need for reconstruc-tion is in Planovoe khoziaistvo, 1982, no. 4, p. 104.
40. Voprosy ekonomiki, 1981, no. 1, p. 89.
41. Vladimir G. Treml, “Subsidies in Soviet Agriculture: Record and Pros-pects,” in U.S. Congress, Soviet Economy in the 1980s.
42. Sources for this and the preceding paragraph are Eugene Zaleski and Helgard Weinert, Technology Transfer between East and West (Paris: OECD, 1980), p. 321; Philip Hanson, Trade and Technology in Soviet-Western Relations (New York: Columbia University Press, 1981), p. 129; Vladimir Treml and Barry Kostinsky, The Domestic Value of Soviet Foreign Trade: Exports and Imports in the 1972 Input-Output Table, Foreign Economic Report no. 20, U.S. Dept, of Commerce, Bureau of the Census (Washington, D.C.: USGPO, 1982).
43. Ekonomicheskaia gazeta, 1981, no. g, p. 10.
44. Planovoe khoziaistvo, 1982, no. 5, p. 73.
45. Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1982, no. 1, p. 66.
46. Gertrude Schroeder, “The Soviet Economy on a Treadmill of Re-forms,” in U.S. Congress, Soviet Economy in a Time of Change, vol. 1, pp. 312— 40.
47. Nancy Nimitz, The July 1979 Decree and Soviet Economic Reform, Rand Corporation Series, The Burden of Soviet Defense: A Political, Economic Essay (Santa Monica, Calif.: The Rand Corporation, 1981).
48. Robert W. Campbell, Soviet Energy Technologies: Planning, Policy, Research and Development (Bloomington: Indiana University Press, 1980), pp. 246-47.
49. Gregory Grossman, “A Note on Soviet Inflation,” in U.S. Congress, The Soviet Economy in the 1980s.
50. Voprosy ekonomiki, 1981, no. 1, p. 63.
51. Ibid., p. 102.
52. Ekonomicheskaia gazeta, 1981, no. 28, p. 3.
53. The description of the food program and Brezhnev’s explanation of it are available, among other places, in ibid., 1982, nos. 22 and 23.
54. CIA, Soviet and U.S. Defense Activities, 1971—80: A Dollar Cost Comparison (Washington, D.C.: USGPO, 1981), p. 48.
55. Kenneth Gray, “Soviet Livestock: Stymied Growth, Increased Cost and Search for Balance,” in U.S. Congress, Soviet Economy in the 1980s; Economic Commission for Europe, Review of the Agricultural Situation in Europe at the End of 1980 (New York: United Nations, 1981); U.S. Department of Agriculture, Agricultural Statistics, 1981 (Washington, D.C.: USGPO, 1982).
56. S. S. Shatalin, “Narodnoe blagosostoianie i sovershenstvovanie ras- predelitel’nykh otnoshenii” [National Welfare and Improvement of Distribution Relationships], Ekonomika i organizatsiia promyshlennogo proizvodstva-EKO, 1982, no. 1, p. 3.
I would like to express my appreciation to Morris Bornstein, John Hardt, D. Gale Johnson, and Thomas Wolf for the information and critical comments they provided.