• fntdhgcn c l I l Gorbachev's Economic Agenda Promises Potentials and Pitfalls An Intelligence Assessment I · • - ·• - ··· -' v ' ·t •- t - Ir • --- Uircccor Jle of lurclJigcnce Gorbachev's Economic Agenda Promises Potentials and Pitfalls • An Intelligence Assessment • • -'r f ·' Gorbachev 's Economic Agenda Promises Potentials and Pitfalls Key Judgments r fo mal on avatlabl a 1 Q 6 S pt mher 1985 • -'OS us d in 1h1s report Since coming lO power Mikhail Gorbachev has set in motion the most aggressive economic agenda since the Khrushchev era The key elements are • A reallocation of investment resources aimed at accelerating S T and modernizing the country's stock of plant and equipment • A revitalization of management and planning to rid the Soviet bureaucracy of incompetence and pelly tutelage and put more operational control of enterprises in the hands of managers on the scene • A renewal of Andropov's anticorruption and discipline campaigns coupled with a new temperance campaign lO increase and perhaps improve worker effort All of Gorbachev's initiatives are aimed at raising productivity and efficiency throughout the economy by matching more and heller equipment with a motivated work force and an enlightened managerial cadre He has put his finger on the very tasks that the economy has never done well and has become progressively less able to do as it has grown in size and complexity _ Although Soviet economic performance has improved in recent years from the low levels of 1979-82 Gorbachev still faces an economy that cannot simultaneously maintain rapid growth in defense spending satisfy demand for greater quantity and variety of consumer goods and services invest the amounts required for economic modernization and expansion and continue to support client-state economies Gorbachev in our view has a dear understanding of these limitations he is obviously extremely impatient that they be addressed now • Soviet officialdom probably was caught offguard by Gorbachev's sweeping condemnation of past economic policies particularly considering the rec nt economic rebound and was surprised that he apparently was ready to take action so early in his tenure Despite the urgency of his rhetoric he seems aware that implementing his programs too rapidly carries substantial economic and political risks • He has prepared the party and bureaucracy for substantial change by bluntly laying out the need for management reorganization and renewal but has yet to provide specific details on controversial issues that would provide a basis for organized resistance • He has moved aggressively to replace old-line economic managers but has yet to replace Council of Ministers Chairman Tikhonov regarded by most Soviets as a major political obstacle to economic change _ f ' 1t • ' - • - ' Ii · -· -14 · z '°' -· iii I·' -- • He has talked about the potential need for profound changes in the area of economic reform while strongly supporting the need to maintain central control Program specifics wi l be announced by next February along we judge with Tikhonov's replacement It is unlikely that they will contain any radical departures from what Gorbachev has already announced At present his game plan seems to be a realistic assessment of what can be done in the short run while planning and developing a consensus for more radical change over the long haul iC he deems that it is needed_ Success with the initial stages of Gorbachev's program could provide a relatively immediate growth dividend that could be used lo bolster worker morale and underwrite future growth How much economic improvement will occur and how long it can be sustained however is very much an open question Modernization is slow by nature in any economic system and in the Soviet case will run into the perennial conflict between neeting output goals and reequipping enterprises with new equipment and technology Streamlining the bureaucracy will be resisted by countless officials whose jobs and perquisites are threatened and a new set of incentives must be instituted to motl- 'ate a new type of Soviet manager Discipline campaigns can go only so far in energizing a cynical work force Gorbachev will be hard pressed lo find the resources necessary to underwrite his modernization goals The economic dividend from management reforms and the discipline campaign will not substantially relieve the basic scarcity of resources nor obviate the need for fundamental systemic change • Improving worker morale and management effectiveness will require an effective incentive system and a greater availability of high-quality consumer goods at a time when the investment sector will be oriented toward producer goods and new defense programs will be coming on line In fact Gorbachev's investment program implies a potential decline of some 60 percent in the investment increment going lo consumer-oriented sectors The regime's plan to hold cn rgy's share of investment constant comes at a time when demand for energy will grow and the cost of offse11ing ''- declining oil production will be rapidly risinll If the requisite investment is not forthcoming the current decline in oil production could become precipitous · iv • The increased managerial independence necessary to spur effective technological development and utilization is inconsistent with a centrally planned pricing and allocation system leading to the likelihood of management disillusionment and subsequent reversion lo the very methods that have led to waste fraud and mismanagement for years Gorbachev could employ various options to address these issues but all contain serious pitfalls East European countries could be ordered to shoulder a·larger part of the economic burden including increased ex pons of equipment to the USSR but their own deep economic problems increase the likelihood of confrontation between Moscow and its allies A drive to increase imports of Western technology would come at a time when the prospects for expanding hard currency exports particularly oil look dim A shift of resources from defense to ci itilian uses c ould ha ire consider ble 'IO itive impact over the loni run but even the suggestion of such a shift mil ht damage Gorbachev's relatioris with the military and risk deep 1ivisions within the Politburo Finally major economic reforms to promote managerial effectiveness would encounter strong resistance on political and ideological grounds particularly since they threaten the institutional prerogatives and thus the privileged position of the Soviet elite Indications that Gorbachev has decided on and gained consensus for mor radical changes could include • New drama lie initiatives to reach an accord at Geneva and concrete proposals for reduced tensions at the November meeting between the l President and the General Secretary which might signal a willingness and desire to reduce the Soviet resqurce commitment 10 defense _and create an atmosphere for expanded commerce with the West • Select legalization of private-sector activity particularly in regard I· consumer services which would indicate a willingness to confront p t economic orthodoxy in order to improve consumer welfare and ther economic performance • Breaking lhe monopoly of the foreign trade apparatus which wou signal an increased reliance on managerial independence at some centralized control V -- I to Continued reliance on marginal tinkering despite clear indications that the plan for economic revitalization is faltering would indicate that Gorbachev like Brezhnev before him has succumbed to a Politically expedient but economically ineffective approach • r •· 'f • - • • - 11 · f •• · -- ' - -· -·---- -- vi Contents Page iii Key Judgments Gorbachev's Economic Heritage The Gorbachev Aienda Accelerating S T Progress Restructuring Investment 5 5 Reor2anizing Management and Planning 6 Tightening Economic Discipline 6 An Integrated Approach 6 Favorable Short-Term Outlook 9 Long-Term Uncertainty 10 Problems Facing Industrial Modernization II Revitalizing Management 13 Dealing With Fir ite Resources 14 A Rocky Road Ahead 2 15 - -· · -- _ _ • ' ' -·· -·· vii •' ' Gorbachev's Economic Agenda Promises Potentials and Pitfalls Gorbache •s Economic Heritage In March I 985 Mikhail Gorbachev inherited a technologically backward economy th had experienced a decade of slowing growth punctuated by harvest failures industrial boulenecks labor and energy shortages low productivity and declining efficiency of investment sec figure I The simple growth formula that had propelled the USSR to a major world power in the postwar era-ever-increasing inputs of labor and capital resources-by the mid-l 970s was no longer effective • During the 1950s this growth formula resulled in rapid gains in output because of the very low level of GNP in the early postwar period and the relatively high efficiency of new fixed investment in reconstruction and repair of war damage As the USSR moved out of the reconstruction phase in the 1960s however highly effective investment projects became more difficult to identify and centralized planning and management of a burgeoning economy became more cumbersome and inefficient Unable to improve their ability to deal with an incrcasinely complex economy Soviet leaders had little hoice but to sustain the large commitment of resources to investment if economic growth was to continue apace In addition to maintaining larger annual Hows of investment Soviet planners have swelled the expansion or plant and equipment by • Holding retirement oi equipment to a minimum • Prolonging the service lives of technologically obsolete capital through repeated extensive repairs • Continually expanding new construction projects thus channeling the bulk of investment into buildings and structures rather than into new ment the principal carrier of new technology _ Sustaining a high level or increase in total capital assets by these methods enabled the Soviets to achieve high rates of growth and to support an enormous defense establishment but also impeded technological proercss and productivity eains Efforu to increase the quality and quantity of output and make better L· _ ·• I'- - I-·- ¢ - '•'·• l• use of available resources in the economy continued to be frustrated by a backward technological base inflexible production processes and perhaps most im- portant a umbersomc and inefficient system of planning and management _ _ These problems were well understood by Gorbachev·s predecessors Rhetorically at least Brezhnev recognized that in the future the economic system would have to operate differently if it was to meet the need •of the Soviet polity and society Various Central Committee and Council of Ministers· decrees were promulgated to address these problems but Brezhnev in his waning years lacked the energy and political will to follow through on his diagnosis As a result of this administrative lethargy and the endemic nature of many of the problems facing the Soviet econom ' Brezhnev's successors were saddled with • A technologically antiquated industrial base and a burdensome defense sector that has systematically siphoned off high-quality resources needed for eco- nomic revitaJization • An energy sector beset by stagnation and decline in production of its major fuel-oil-and a JO-year pattern of energy use that inhibits the rapid transition from oil to other fuels • _A level of technology that eenerally lags that of the West Even in military applications the Soviets have encountered technological problems in recent years that are sharply drivinl up costs and delaying new sophisticated weapon systems thus creating a further drain on available resources • An inefficient farm sector that despite large investments still employs one-fifth or the Soviet labor force is bereft or an adequate storage and transror• talion system and is unable to produce grain and meat in sufficient quantities to meet rising domestk demand ·• A hidebound bureaucracy whose rigidities contribute to irrational investment decisions retard scientific-technical innovation and e g e high costs and massive waste of resources _ Figure I USSR Key Economic Indicators A erage Annual Growth Rates ri m n Cumbincd rroJudi 11Y CNr ur Lwd U bur alld C 1pi1 al ' JO • fii 1 6 1111 _ lnd1nfri d Produclf lff lnveilmt nC 10 JO • • 1 -- - access While Andropov's ascension to power 2ave a glimmer of hope for change his tenure was too short and he had too little personal energy to reverse the decades of abuse and mismanaeement tolerated by his predeccs• sors Anticorruption and discipline campaigns stimulated some improvement in economic erowth but made only minor ripples across the surface of the deeply entrenched system of plannine and management Cherncnlco for his part ittle more than lipservice to these initiatives _ ' ·s - · ' r - • t J •- '' '- · ' ' o 10 8 8 6 6 The Gorbachet Agenda -I11 ·_____ II ____ O it966 70 71-15 76-W IU-8 • O Moreover by the end of the Brezhnev era a growing malaise had spread through much of the work force not only because gains in living standards had slowed but also because workers believed that the system was incapable of bringing any meaningful improvement This allitude-reflectcd in the rise of alcoholism and related health problems- xaccrbated the corruption and inefficiency that had permeated the Soviet economic bureaucracy from farmhand lo factory worker to the minis erial superstructure Workers and man• agers alike 'spent increasing amounts of time and effort trying to insulate themselves- ften through illegal means-from the effects ofshortages in both the home and factory This reduced prcductivity on the job and promoted greater shortages of goods and services throughout the economy especially for indi• viduals and enterprises with little or no special 1966-70 7J-15 76-80 81•84 When Gorbachev came to power many Soviet officials- xcept those of the old guard who felt threat• encd-had high expectations for a vigorous revival of Andropov's anticcrruption and discipline programs as well as a stepped-up pace of personnel change But with economic growth having recently accelerated from the unusually slow rates of 1979-82 many probably felt that he would avoid sharp changes in resource allocations - 2 Gorhachev'r I it list Gorbachev has made ii clear he intends to overcome entren hed resistance to his domestic programs by cleaning house • He has named eighl new economic ministers since coming ID power including those in charge of oil and steel producrion • He has replaced three Central Committee department chiefs who oversee the machine-building construcrion and trade and servic s sectors - take the job himself while others fodicate that he w give it 10 a close ally like RSFSR Premier Vorotnikov or partJ· secretary Ryzhkov • Several So11iets have strongf i • implietf that State P a11ning Commiuee Chairman Baybakov is 011 rhe hit list and Gorbachtv indirectly criticized him in June for undermi ring an economic experiment being impltmenud in major industrial secrors • Gorbachev may a ro want to go after the remaini rg dozen or so top economic officials who hal'e been • around since rhe beginning of the Brezhnev era In addition he has supervis d an extensive turnover among regional party firs secretaries-who play a critical role in implementing economic policies are spokesmen or local economic interests and act as facilitators in overcoming economic bottlenecks Already over 20 such officials have bun appointed nearly one 11 week since Gorbachev came ta power and mare changes are likely during the party elections that will precede next February's party congress • He has already shown his intention to reassert party control over the vasr economic bureaucracy which had grown accustomed 10 Brezhnev·s benign 11eglect The firings so far have probably sent an unmistakable message lo economic officials that 1hey mus loe the mark or face disgrace and forced retirement Gorbachev probably also has other high-level changes in mind • Reports persist that he intends to retire Premier Tik honov at the congress or perhaps even sooner Some Sovitt officials claim that Gorbachev might Gorbachev however has taken little solace in recent economic improvement by all indications he realizes that long-term gains will require solving endemic problems that for the last decade have prevented the economy from simultaneously sustaining • Continued rapid growth in defense spending that had proceeded unabated since the mid-l960s • Greater quantity and variety of consumer goods and services demanded by an increasingly discrimina1ini population • Rapid erowth in investment goods for economic modernization and expansion Increased support for client states whose own economies arc coming under incrcasini strain lJl III ln little more than five months Gorbachev has dem- onstrated that he is the most aggressive and activist virtue of his strong assertive personality and by aggressively inserting his own cadre into key positions Movini forcefully 10 place his personal stamp on CC nomic policy Gorbachev has repeatedly told managers that they must chani e the way they do business or i et out of the way • He has as sailed manai ers by name for lack of innovation laziness and poor manai emcnl and has strongly implied that they will be removed He has attacked the complacent attitude toward corruption within the party bureaucracy and called for promotion of younger and more competent officials at all levels While such rhetoric is not new in itself he has already underscored his intention lo back up his toueh rhetoric with dismissals sec inset Gorbachev·s Hit List Soviet leader since Khrushchev Heb laking power by _ ··' •· 3 ·- -·- • He has returned for revision the centerpiece or the planning system's raison d'etre the draft five-year plan demanding specific changes-so far unspecified-in the planned pattern of resource allocations for I 986-90 Gorbachev is determined to deal with the economy's underlying problems He has thrown down the gaunt· let on issues as controversial as the allocation of investment broad-gauge management reform and a complete purging of incompetent and corrupt officials from the system While the details of his economic game plan probably will await the new draft of the 12th Five-Year Plan 1986-90 to be_ announced at the 27th Party Congress in February I986 the broad features of his program arc already emerging All are aimed at raising productivity and efficiency throughout the economy-something the system has never done very well and has become progressively less able to do as it has grown in size and complcsity He has called for annual growth in national income of at least 4 percent Ir this plan were chieved growth in real GNP as measured in the West would also amount 10 an increase of about 4 percent per year-a healthy increase above the good performance of 1983-84 sec inset Measurini Soviet Economic Growth He plans to achieve this 2oal by pursuing an ambitious strategy for modernizing the economy's stock of plant and equipment and by raising the level of effort and sense or perso nsibilily of ·anagers and workers alike Gorbachev personally has provided a pointed e'3mple of how critical a substantial improvement in productivity and efficiency is to his entire program In his June speech to a special science and technol0gy S T conference the General Secretary indicated that an additional 8-10 million people iq the labor force and an average annual 1 rowth in investment of 5 5 to 7 percent durine every five-year period would be required 10 achieve his 2oal of 4-pcrcent annual irowth in national income in the absence of a substantial increase in the combined productivity of land labor and capital Both he and his audience probably were aware that less than 4 million people will be added to the labor force in 1986-90 and a 5 5- to 7-percent increase in he rate of growth of investment would put 1 ltasuring Soviet Economic Growth Tlte principal concep1ua difference bet -ee P and Soviet reported national incomt is the all · excfu sion af I most personal servicts as well rvices provided by the government for example 1 Ith educolion housing personal transporrau q nd com• munica1io11s recreation and personal ca Jvern ment administration credit and insurar ·tstarch and dtvelopmenr and military personn srs and 2 deprecia1ion on fixed capital Howe- r official Sovi t statistics on growth of national 1 m overs ate real growth because I hey do nor 1 1w properly for in lotion The CIA index of GNP J h au mpts 10 correct for thtse differe11ces has sh real graw1h to he about I percen age point lower h reporled statistics on national income More e Soviet plan da1a such as Gorbachev's 4-percen l vih large unlike officially reporled achiei•ed ore nor distorted by inllalion • severe strains on the other rcsour fensc and consumption They ah nized that productivity increaser growth in combined productMt capital has been consistently ne decade • To help address these issues G c ncv has appointed several economic advisers who 2 long advocated a major overhaul of the cconom stem substantial increases in investment in ma i building changes in the incentive structure a g r role for private activity and more devolution f uthority and personal responsibility to cntcrpris n nagers see inset Reform-Minded Economis visin Gorbachev The ascent of such reform-r r cd economic advisers to policy-level positions is a al of Gorbachev's commitment to finding wai t make the system work better At present these in J• accelerating S T progress restructuring im- f 1cnl implementing management rcrorms anC i 1tcning discipline c NF FS'· -A e-v r -· · --' s -· imants- le ably recog•ot be easy1d labor and ·or the last • depends critically on the success of other e lcmcnts uf Rdorm- 'rfinded Economirt Advising Gurhachev his strategy As he noin1cd out at the conference The prominenl and controversial economist Abel • In carrying ow the S T revolution the command- Aganbegyan has become an il lue11tial informal ad• ing key role belongs 10 machine building FirJt viser to General Secretary Gorbachev The longtime director of an economic instituie in Novosibirsk he reconstructed In 1he years 1986-90 capital recently moved to Moscow to head a committee al the Academy of Sciences Aganb gya11 has a history of tries should be inaeas d by 80 to 100 percent and foremost machine building itself must be investmt 1 for 1he civilian machine-building minis- involvemtnl in controversy with conservatives over • The acceleration al S T progress insistently demands a profound r organizalion of the system Qf planning and management Without this every-thing we are talkiJ g about today may remain but a fond hope • his criticism of the workings of the economic sys em Several changes he has proposed which include accelerating the modernization of industry through retooling and a streamlining of the Moscow-based bureaucracy have become major themes in Gorba• chev s recent speeches on the economy • Aganbegyan' r new status is another indication al Gorbachev' r intention to shake up the economic establishment At 52 Aganbegyan·s ties with Gorbachev date back to Moscow University days i11 the 1950s As an adviser to Gorbachev he is likely to rei1r orce the party chief's determination to look for new approaches to economic planning and managemtnt • There have also been indications that Tatyana Zas· avskaya a we I-known sociologist and dose colleague of Aganbegyan may now have a stronger voice in the academic community if not an advisory role in the governmtnt In a recenl interview in Izvcstiya she reiterated arguments originally made about the inappropriateness and in dTectiveness al the centralized economic system in a collfidential document that was leaked to the Western press in April 1 9 8 3 - Accelerating S T Progress Gorbachev views a modern efficient industrial base as crucial to the success of his economic program A special conferen was held in June lo develop a comprehensive strategy for accelerating technological progress In addressing the conference Gorbachev focused on the need for the rapid introduction of new production technology insisting that the Soviet Union must launch a revolutionary program to reequip its factories and farms with the most up-to-date machinery He recognizco that ac leration of S T progress Restructuring Investment Gorbachev recognizes that his call for accelerated technological progress is only pessible with a major alteration in investment priorities Currently 30 to 40 percent of all Soviet equipment has been in operation for more than I 5 to 20 years By 1990 Gorbachev dedared one-third of the fixed capital stock-including one-half of all machinery-must be new He urged that special priority be given to the ' development and introduction of fundamentally new systems of machines and technologies and called for a SOpercent increase in expenditures for retooling existing enterpris« 5 f i i n part by a cutback in new construction In his June address Gorbachev accused the State Planning Committee Gos plan of paying verbal tribute to the role of civilian machine building while continuinl to starve it of resources and suggested that his call for nearly doubling investments for this sector in the 1986-90 period could be achieved by the partial redistribution of capital investments from the industries that use the machines This su2gestion was presaged in a particularly forceful statement in a speech to an ideological conference last December where Gorbachev insisted that the longstanding practice of allocating economic branches the same proportions of new investment from one plan to another must be changed decisively - 5 ' In this context Gorbat hcv lunted that the need to supply additional resources to machine building might affect the priority status of two of the biggest claimants on investment re sources energy and the agroindustrial complex • He suggested that the share of investment in energy could be stabilized by giving greater allention to conscrva tion • He indicated that lhc present Jc 'el of investment in the agro-industrial complex is adequate and that it is the return on this investment that continues to be unsatisfactory He has not addressed how other major claimants on investment-such as defense-will fare Reorganizing Management and Planning Gorbachev has been particularly critical of intermediate management bodies that choke off initiative and has hinted that they should be streamlined or eliminated His aim is to rid the system of some of the massive bureaucratic apparatus whose petty tutelage in implementing Central Committee decisions defeats the purpose of the decisions • The level of specificity in his June speech in Dnepro· petrovsk suggested that plans for such a reorganization have now reached an advanced stage and will include the creation of supcrministerial bodies starl• ini with agro-industrial and machine-buildin2 sectors His speeches also suggest that these superministries will be restricted to strategic planning and leave operational control of enterprises in the hands of the Gorbachev J1as also endorsed Brezhnev's 1982 Food Program which as party secretary responsible for agriculture he helped formulate In this connection he has supported increasing the authority of the regional agricultural production associations RAPOs -an innovative form of administration that cuts across ministerial lines and concentrates author ity at the local level for coordinating the activities of farms agricultural service agencies and proccssi g enterprises in a given district • Tighlening Economic Discipline Gorbachev is banking on improved worker elfort to immediately bolster economic growth Because he needs the supper of both managers and workers he has appcaltd directly to them to buy into his program He has pledged to increase both the material rewards for good performance and the penalties for violations of economic discipline • Much of Gorbachev's campaign for improved worker effort however will rest on the more vigorous implementation of programs initiated before his tenure These include • Improving labor productivity by reviving the discipline campaii n which Andropcv initiated but which flagged somewhat under Chernenko Gorbachev has already initiated a vigorous antialcoholism cam• paign that is serving as a daily reminder of the new leadership's seriousness and intensity in attacking problems of both a social and economic nature manae crs on the sccnc --Gorbachev's first move to give greater operational independence to enterprise managers was to expand the economic experiment begun in January 1984 i iving enterprises greater control over investment and wage funds and ma kin fulfillment of contractual sales obligations the prime indicator for evaluating enterprise performance sec inset Managerial Initiatives He has also implemented a far-reach in experiment at the Tol'yatti Automotive Plant that increases the plant's authority for its own management and for making purchase and sales agreements with fo e 11n_firms without the direct partici f the m1mstr1es or foreign trade associations _ • Tying wo kers' earnings more closely to their output through greater differentiation of wages and expanded use of contract brigades-small groups of workers whose earnings depend on fulfillment of contractual obligations to management - An Integrated Approach On balance Gorbachev's game plan reflects an appreciation of what we and many Soviets believe to be many of the economy's fundamental problems Moreovcr he rccogni2cs that all clements of hJS program 6 I fanageria nitiarives The So11iets have announced a major expansion of 1he e perinrenr in industrial managemenl thar began on I January 1984 in ive a l-u11ion and republic-level minis1ries and was extended this year to 20 additional ministries The experiment will extend to all machine•building ministries and many consumtrrelated industri s in 1986 ond 10 al al industry in 1987 • The txpuimtnl S aim is to improve tht cenrral planning and managemenI systtm by reducing the number of success indicators used to evaluau enlerprise performance and by slightly increasing the enlerprist s limiled control over wage and investment funds The decree ta expand the experimenl presents measures to improve product quality and further increase enterprise control over plant operations • Enterprises of the machine-building sector producing products judged to be of highest quality will be • Emerprises will have foaeas d authority 10 spen i limiled amounrs of investment funds at their o ' '1 discre1ionfor industrial renovation and for consrrucrion of housing or orher cons1m1tr-rl ated urt- dertakings Th sta e planning and S JPply organs hai•e been instructed ro give such projects priorit r • Penalties for delays nondelivery or delivery al inferior goods will be increased and rewards for tim ly provision al satiefactory products will b implem nted • Moscow has a so on ounced a managerial reorgani zation program-described as a model for the rest of the economy-Jar the Ministry of Instrument ManuJauuring Minpribor Th program includes • Eliminating the management lev I that lies betk'ten the enttrprise and the ministry • Creating additional scientific production associa- tions to spur R D and protoiype productio11 • able to increase their earnings by raising pricts up 30 percent Enterprises producing lower quality goods will have to cut prices by up to 30 percent and then reimburse the state for lost revenue with money takenfram their worker and manager bonus funds 10 cannot be implemented immediately and simultaneously across the economy The centerpiece of his modernization strateu replacing the economy's stock of machinery and equipment and improvini management techniques will require years of effort Never• theless Gorbachev probably feels that unless he starts now in earnest and maintains constant pressure on his economic managers the future will continue to be hostage to indecision and inaction Gorbachev in essence is proposine an integrated approach for the resurgence of economic growth see figure 2 Anticorruption and discipline campaigns are 7 aimed at rcducini worker apathy which toeethcr with the attendant massive waste and theft of resources have held down growth in productivity throuehout the economy Some succcis here alone with some redirection of investment resources fewer layers of bureaucratic tutelaee and a more equitable system of rewarding productive workers and manacers is i earcd to provide a growth dividend that can be used both to bolster worker morale via more and be11er consumer eoods and services and to underwrite Figure 2 Gorbachcv's Grow1h S1ra1egy Announi cJ nmJIJVn or in1cn11uns Pl ttcnu 11 fulutc 1mh 11ivc l n111 1Ftrup11on ll nlJk fJn1 c UH I J1 1J1hnc 1111p ugn R a1 i iJ proJuctivi1y Mori huu grc- u r effort inJ leis 1hcft S1tc 1mhnc Rcff mn 11 c- R 11u 1urc Tk R D n1o01 1 uon m 1n 1gcn1 n1 trut1u inJ 1nw ut1 n1 dUSoe r JnJ plannini U ' C$S trnll alur Id pmJuct1on lmpto --C R O PruJu llon J1v1t cnJ M ue ou1put of goods and sef'1 l ces Mure machinery Bcucr machinery Reward J l'dUC1ivc wort en R uM in lmtn1 growth Sucngthcnc defense and managen Higher XMSUmpltoo Im Te a n u mcn1 uf lncrr u ---- u J m u h1ncry fl'Kreo1SC morale ilnd pndc In wort _ _ ---· -lm_p_ro_ _q_•_•_i 0 ____ l • - - -- - - - - y_____ Mi Jcrnu c capiial siodr Stimula'C iOGOYltion Consc rces r _____ 1 lntNJuce new 1echn lk gy -r-------- 8 further growth Gorbachev appears to be counting There is also growing evidence that Gorbachev favors heavily on a synergistic effect among the several parts an expanded role for private initiative as a way of of his program lo provide even greater dividends in the years ahead returning the economy to an upward growth path and perhaps providing him with justification for future fundamental changes in the centralized control of the economy if needed • alleviating consumer problems without much additional investment or change in the way 1hc socialized sector is organized and managed In the pas1 Gorbachev has been a staunch supporter of expanding production on private agricultural plots and in his speech 10 the Central Commiucc plenum in April he Gorbachev's strategy is not without subs1an1ial ecotwice referred to the contribution harthc private nomic and political rislc particularly as he is seeking farming sector can make to improving the quality of 10 change an economy 1ha1 has recently been on the life In May he returned 10 this subject in a speech in upswing In public s1a1ements Gorbachev has so far Leningrad and expressed disa erccment with the Poli1focused on the general hemes of his economic proburo's recent handling of the issue He contrasted the gram rather 1han on specific measures that could Politburo decision to earmark land for an additional galvanize opposition He may well have decided 10 I million private market gardens with Soviet citizens• refrain from translating vague expressions of support requests for some 15 million new plots Mathematifor controversial measures into specific proposals until cally he noted with evident sarcasm o iai rroach 10 this problem is fundamentally weak he has more fully formulated his plans-in part by encouraging public dialogue and selectively 1es1ing some options-and consolidaled his political s1reng1h Gorbachcv's remarks in Leningrad also lend credibility to earlier reports hat he favors the more controHe has not openly challenged lhe legitimacy of centralized economic control including such fundamenversial policy of allowing a greater role for private initiative in the service sector He called for a more tal obstacles 10 the success of his program as the arbitrary nature of Soviet prices that prevents planrealistic evaluation of the major role moonliehters currently play in providing such services as home ners from making economically rational decisions or repairs and seemed to sugeest that the state should the lack of sufficient consumer input into production decisions not just tolerate such activity but should actively Gorbachcv's current approach ne of support it Materials used he said arc generally first adoptine noncontroversial economic measures stolen and come from the state anyway In this while simultaneously working on a long-range and context lzvestiya acknowledged in August Iha illegal more far-reaching program Gorbachev may be reprivate services arc too widespread to stamp out and fraining from more radical measures because he hopes called f r t lization under contract lo stale that the steps he has already proposed will be suffienterprises cient to remedy the economy's i l l s Whether he will be able to achieve his economic goals in the absence of additional bolder changes-moves toward market socialism for example-is problematical There have been hints in Gorbachev's past and recent speeches and in the statements of some knowledgeable Soviet officials that he may eventually be willine to make such changes In his Lenin Day address in April 1983 for example Gorbachev stressed the importance of greater reliance on prices as an economic lever He returned to this theme in his June 1985 address lo the S T conference calling for a more decisive shift from administrative to economic methods of rcgulatini the economy In the same address he also called for an end to the domination or the consumer by the producer - 9 • Fa orablc Short-Term Outlook Gorbachev needs some near-term success to sustain his early momentum for chane e particularly since he is scckine major changes in an economy whose performance has improved in recent years To this end he made it clear at a recent Central Commillcc mcctinc that the 1986-90 five-Year Plan mus ect olf to a fast start He should be able to capitalize on the aura of change and rejuvenation he has created in the early monlhs of his n gimc to elicit some ccnuinc increase in elforl by at least part of he work force Moreover Potential Gains From Increased Discipline According 10 Abel Aganbegyan writing in rhe Sower labor newspaper Trud in 981 one-half of the decline in growth of labor productivitJ' that occurred in 197680 compared with 971-75 was due to people's attitudes tok'ard their work ·· A idropov recovered some of 1he earlier momentum with 1he ini1ia1io11 of a rough discipline campaign in 982 labor productivitJ• rose by 3 2 percent in industry in 1983 as slackers -·ere forced to actually be on tl e job during tl e time they were counted as being there Gorbachev may be able to recoup even more a the momentum with his revival of the discipline campaign and his strong stand OJI temperance Indeed the reduction in absen1eeism due to drunkenn ss may have a potential for achieving a greater increqse in actual hours worked than was achieved under Andropov Moreover Gorbachev·s direct appeal to workers together with his other initiatives may elicit a more responsible effort-at least in the short run-from many who might otherwise merely put in their time • the discipline campaign which was evidently an important factor in the economic upswing during Andropov's tenure could again have a favorable impact on economic performance sec inset Potential Gains From Increased Discipline This together with a new set of Gorbachev appointees-who probably have the ener2y and determination 10 use the carrots and slicks available lo them with greater consistency thar their predecessors-could promote at least some short-run gains in economic performance Althou2h Gorbachev is gambling heavily on the impact of his early initiatives-a risky approach given that prcviou ancmpts 10 implement similar changes have b«n frustrated by entrenched bureaucratic interests-his prospects for near-term success should not be undercs timatcd • could help rais r wth in investmtnt en Gorbachev·s rr H nization program mo· over the curio for a substantial increase rn t 1vi- production an i stock products this year after a dismal pcrfor· 1 c by the farm sector in I 984 sec figure 3 A t t harvest this year would help hold down queues J iood provide workers fewer excuses to be away f r their jobs during working hours improve car J r morale and reduce hard currency outlays for r _ - Long-Terp t certainty How muc nomic improvement will occur and how long ii ca t sustained however is very much an open que ic Short-run gains alone will not ensure success J anger term aspects of the program to succeed 1 1y things must go right for Gorbachevsome he control others he cannot Moreover he synergi c appears to count on may not develop cspecia I the short run for example he hopes to pair ir ed worker initiative with a modernized indus iasc But this will require redirec1in2 invcstrr ·sources which in turn could lead 10 boll in industries whose investment allocations are d Any campaien-stylc modernization prograr i create imbalances in new capacity and enc lengthy delays in achieving results Mr tic in er if plants arc forced to shut down produc s to permit renovation short-run performance ors will be adversely affected This in turn ir provide ammunition for Gorbachev's oppoP t who could contrast I 983-84 industrial product n a ins with a poor output record of newly rcnovat · tcrpriscs as evidence of harebrained or i uided proerams In the Joni run each of Gorba• h ·s initiatives faces particularly challcn2in2 probe· s that will take more than strong rhetoric and N in hands to overcome • 1o scow al so sb-ouid enjoy the Gorbachcv's program also may gel a short-run boost from the upsurge in machinery produclion that OC· curred in 1983-84 and a particularly favorable harv this year Growth in production of machinery picke up sharply in I 983-84 rceistering annual increases belier than 5 percent after averaging about 3 5 percent per year in 1981-82 The added machinerJ - bcp cfits of a buyen ' market lbis the inlernationaf crafo tnide World supplies arc cxp«ted to otrnue to be abundant l a rtely bec tuse of a bumper crop in 1hc tr in ni1cd S141es and rcduCW Soviet dcm and for eram _ 10 Figure 3 USSR Agricullural Perfonnance Pcrunt gro h ---------------- decrepit that renovation-if possible at all-will bc c trcmcly costly and time consuming Modern cqurpment requires facilities that have a broad assortment of heating and ventilation features Most old buildings in the USSR cannot be easily converted to accommodate such equipment This is especially relevant 10 the thickly populated regions of the European USSR 1he Urals and the Donets and Dnepr Basins-the old industrial core of the Russian Empire which accounts for about 75 percent of total Soviet industrial produc- tion - ·• 1'112 85' -----ProbleDIS F•cin ' Industrial Modernization R novatio• Renovating existing enterprises rather than building new ones is a key clement of Gorbachcv's modernization strategy He is likely to find however that this approach is fraught with difficulty Plans to ccncentratc investment on renovation have been touted by Soviet leaders for more than IS years but have never been effectively implemented The strategy has been resisted by enterprise managers because the downtime required to replace old machinery as well as the uncertainly inherent in new production processes threatens their ability to achieve short-term performance goals Maintenance and support for new processes-particularly highly automated processes-arc csscmial but problematical in the Soviet economy ll has always been safer from a manager's perspective to build a new production plant or add to an existing plant than lo renovate an operating facility - Moreover the renovation approach is not effective for larec areas of the coontry Accordine to Soviet literature many of the existing industrial facilities are so · II In addition -the emphasis on renovation could exacerbate the ever-present tension in resource supply throughout the economy For example as production lines are shut down for renovation the lost production will have to be made up by other plants if supply bottlenecks arc to be avoided Too much simultaneous renovation could lead to shortages of key industrial materials Indeed many or these ma1erials are already stretched so thinly thal even small shortfalls are magnified as their impact ripples throughoul lhc system • Machin ry Production Gorbachev plans 10 underwrite industrial renovation by a rapid expansion in output of high-quality equipment To achieve his announced eoal of 50 percent new machinery by 1990 he must manage an acceleration in the annual output of producer durables to rates unmatched since the early 1970 s Additionally the machines must be tailored ta meet the unique needs of the wide variety of plants bein remodeled-a difficult task for an industry accustomed to manufacturing large lots or a small variety of equipment for use in plants being constructed under highly standardized designs Indeed the increased pressure on Soviet machine builders 10 boost output probably will reinforce 1he tendency to reproduce the same pattern of output that has prevailed for years only faster and-unless major ea ins are made i control-perhaps in a more slipshod manner _ Advan ed Tuh ro ogy In addition to rapid c panding machine-building capacity Gorbachev must turn around a system characterized by its relative failure to crcalc and use technically advanced equipment ments conclude that the quality of Soviet machinery is well below world standards ' The geographic and bureaucratic separation of research organizations from production enterprises impedes introduction of new technology into the production process Insufficient funding of research-most noticeably in the machine tool industries and in the ministries responsible for producing agricultural machinery-contributes to poor performance Finally the Soviet system of bonuses-with its inherent bias toward volume of production and apparent rather than real quality change-is a de facto barrier to the production of better capital equipment According to one highranking Soviet official only J 5 percent of wage and performance bonuses arc keyed to the introduction of new technology and equipment • Many Soviet officials probably view Gorbachev• modernization strategy with pessimism A Busincss Club ' roundtablc discussion that Pravda held recently for instance painted to major difficulties in implementing the ongoing renovation proeram in the Ukrainian Republic home for about 20 percent of Soviet industry The program-developed along the same lines as Gorbachev's strategy-is failing it was concluded because of • Perverse incentives that discoura2c construction ministries from undertaking reconstruction • Inadequate funding for installing equipment • Lack of qualified workers • The inability of the machinery industry lo keep pace with the increased demand for more efficient specialized equipment needed for renovation • 0 While Gorbachev may ultimately be able to overcome some managerial biases by changini success criteria which he has not yet done and appaintini new managers he cannot overcome the economic realities of outdated plants and limited investment resources In the final analysis no matter how hard Gorbachev pushes modernization will occur only slowly and must Reforms To Spur nnovarion Dack ire Cemra authorities are attempting to stimulate high- qualiry production by assigning higher prices Enrerprises producing a new product or one judged af the highest quality· art able to increase earnings by raising the price by up to 30 percent This is leading Jo actions that planners did not anticipate and innovation is tht loser - - For example the Nori sk M ral urgit al Combine responded 10 rhe leaderships call to innovate by manufacturing an improved copper cathode Once produced it had to be inspected by central authorities to be certified as being Qf tht highest quality The State Price Commillee then had to review a formal petition or a price adjustment When the higher price was approved central planners readjusted the combine•s sales targets to take into account the increased revenues the superior product should gentrau Production plans were formulated and sales targets finalized before industry's demand for an improved copper cathade was tesud Whenfinal y put on sale the high-quality cathode was rejected by most domestic customers in favor Qf the cheaper less advanced version that has been used for years If the price were reduced by having the copper cathode recertified at a lower quality level the combine would not be able to achieve its sales output target which was set on the basis Qftht higher price Thus for all its trouble to produce a technologically advanced product the combine now finds itself in a no-win situation-unable to sell the more expensive higher quality copper cathode but also unable to cut its price and still achieve performance targets Thus the in 1 xible and formalistic procedures characl ris• tic Qf cenrral y conrrolled prices and output targets continue to undermine even seemingly sensible mea· sures to encourage innovation • ' Evidence also suue su lha1 avcraze leadtlmcs for usine new tcchnoloiy are much loneer in the USSR tban in the West Data show that about 50 percent o US and We1i German inYcalions are implemented ia about one year compared with hrec years for Soviet invcntioos Al the cod a two years the US impl cmcnts aboot I West Gcmaay 64 aod Ille USSR 23 percent • 12 Ficur USSR bur a cra J • r n amok lJJ come from new construction as well as renovation Substantial results cannot be expected for several years Even now signs arc emerging that some aspects of Gorbachcv's early initiatives arc backfiring and inhibiting rather than stimulating high-quality production see inset Reforms To Spur Innovation Back• fire Part of the problem is the intricate layering of the managerial bureaucracy which Gorbachev is still a long way from purging Decades of bureaucratic development have created a labyrinth of buck-passing and indifference that will probably take years and thousands of key personnel changes to rectify • Revitalizing Management Streamlining the bureaucracy refurbishing its ranks with his allies and developing better management skills arc critical to the success of Gorbachev's plan to stimulate higher productivity The General Secretary has already manaiicd to firm up his base of supparl in lhe Politburo an he intends to replace inistcrial officials and -members of the Central Committee with his own aides between now and the party congress next February Nevertheless his plans lo streamline the 13 industrial ministries remove unnecessary bureaucrat• ic linkages between enterprises and ministries and increase the autonomy of enterprises will not be welcomed by many officials whose jobs and perqui• sites will be threatened In the meantime Gorbachev runs the risk of having his directives ignored misin• terpreted or even reversed see figure 4 ln addition to cleansing the bureaucracy of rcdundan• cy indifference and gross incompetence Gorbachev must also come to iirips with an incentive system that stifles initiative and fosters corruption Reducing the myriad of success indicators and tying wages closer to productivity as Gorbachev has called for will help But the real trick will be to develop a set of success in• dicators that are beneficial both to the individual and to the economy This however can only happen as a result of a major change in the Soviet economic system that will induce producers to respand to consumers and ailow pnccs and wages to renect ccnsum r prcfcrcnccs As long as 1 set of detailed national preferences reflected in five-year and annual plans is imPoscd on producers and prices and wages arc set and changed at the discretion of central planners the managerial initiative Gorbachev seeks to develop- lespitc some likely early success-will even• tually succumb to the waste and inefficiency engendered by confiicting interests of enterprise managers and central planners • Tying workers' waies more closely to productivity will have some beneficial effect in the short run Wage incentives however will only be effective in the long term if there is a substantial increase in high-quality consumer goods available for purchase Indeed Gar· bachev has personally identified himself with an expanded commitmem 10 consumer-goods production A 7-billion-ruble program to modernize and increase shoe production has already been announced According to one Soviet official action to bolster output of household durables and materials for housing construction soon will follow But much more investment is necessary lo substantially improve the provision of consumer goods and given the strain already being put on investment resources it seems unlikely that consumer-goods sectors will benefit from much additional investment durine the next few years In fact a high-ranking Soviet official recently acknowledged that problems will continue in the consumer sector and few additional resources will be made available to overcome thcm 11111111 Dealing With Finil Resources Gorbachev will be hard pressed lo find the resources necessary to underwrite his goal of developing a modernized industrial base The economic dividend from management reforms and the discipline campaign while Potentially substantial will not come 1 Consumer mc 1 ns any purchaier or iOOCll or sr l 't'iccs-individual or enicrpri u • Enterprise manaccn with increased autanomy CK eumple will place r1ew and perhaps cxe ssivc demands on toe al suppliers for raw ma1crials and itmifinishr d °'xh Suppliers on the other h 1nd w1II still functionin under the direct control of central authorities and may be unable lo cconcil-c the denunds or their customers wilh the directives and resource allocations or 1hcir masters As a close to meeting these resource needs Increased discipline Jess corruption greater temperance and new management will help to raise labor productivity but will do little to offset the declining trend in capital productivity Given enough time and investment resources the modernization program could eventually pay off While five years may be enough time to make a substantial dent in the stock of plant and equipment that needs to be modernized there is simply not enough investment lo go around - Althoueh the Soviets have not formally revealed their in•cstmenl plans or the 12th Five-Year Plan total investment will increase by about 4 percent annually ' At the same time Gorbachev has indicated that investment in civilian machine bui'-' ng will nearly double while agriculture and related industrial support will maintain a large share This will leave li11lc room for increases in other sectors The consumer may be especially hard hit in the nonfood areas Gorbachev also will have to deal with pressures to expand investment in other areas as • Oil and natural gas exploitation moves farther northward into the offshore areas of the Arctic and deeper into the Pricaspian Depression • Demand for roads railways and other infrastructure dovelopment-projects with heavy up-front costs and long lcadtimes-increases in more costly and inhospitable reeions • Analysis performed with the aid or our macroeconomic tnodd or the Sovicl -economy SOVSIM indicates that lo mei t an invest• ment cro-wth rate of -4 pucent per year in 1986-90 Soviet industry will have 10 increase the output or metals t 1he rate of abou1 S pc t« nt per year and machinery at about 6 percent per year if defense procurcmcnl is allowed to crow al rouchly 2 percent per year and per capita consumption i$ to incrcue moderately EY'Cn allowini for a boost in produciivity our model forecasts a 2· to2 5· pcrc en11ce•poin1 shortfall in the arowth or metals production under lhese conditions of investment procurement and per capita consumption 1rowtb Unless I bis shortfall is made up by increased imPQrU or mclals and or equipment or by rain5 in efficiency of me als use tht implied tarcet of about •H ercent crowth in GNP will probably not be achievable • resull both producers and u iCN mar become disilllllioatd and may ooo apin ruort lo lhc very methods that have led to w as1c fraud and mismanaeemcnl for years - 14 • Expensive new convemional and strategic weapons that have completed or arc about lo complete testing enter series production on a large scale lmplicarions of Srabifi ing Energy's Share of nvestm nl We es1ima1e lhat ta keep oil production from la ling below about I I million barrels per day b d by 1990 inves1men1 in 1he oil sector alone during 1986-90 would have to increase by aboul 45 billion rubles from lhe 198 -85 eve We estimate that this is more Gorbachcv's announcement ha energy's share of than twice the inYt Stmtnt incrtmtnl that would he investment should be stabilized durine 1986-90 carries special risks Oil production has already begun a located to lht tntire tnergy secJor in 986-90 if Gorbachev stabilizes t11trgy s share al 1010 invesrto fall and without substantial increases in investment the production decline could become precipitous mtnt Uthe needed investmenJ in oil is nor forthcom sec inset Implications of Stabilizing Energy's Share ing produc1ion could Jal to less than JO million b d by 990 Such a drop in production would be greattr of Investment Electric power too will need large increases in investment resources to meet the inth'an 101al hard currency exports al oil in 984 creased power requirements that will accompany the modernization effort Coal production-the USSR's best long-term source of energy-has been slighted in plants-which has raised considerably the total effiinvestment allocations for years and will need a major ciency of those power focilitics in comparison with increase to adequately exploit the large Siberian and power plants in the West Some Soviet basic steelKazakh basins Thus if the energy sector has to make making processes arc also relatively cnerey efficient do with the same share of investment it received in Additional major cncriy savings in industry therefore 1981-85 likely production shortfalls could knock must conic through massive capital investment for the Gorbachev's modernization program into a cocked production and or importation of more energyhatefficient equipment • The leadership seems to be counting heavily on its ability to increase energy efficiency enough to offset any production shortages that might arise Retoolin1t and installine more enern-ef icient equipment promises substantial savings but only in the long run and after considerable expense The share of energy consumed by Soviet residential commercial and transportation sectors which present relatively greater opportunities for immediate cutbacks is comparatively small Apartments and stores consume over onehalf of the fuel used residcnlially and most of hem burn low-grade coal or firewood Trains rather than trucks provide the dominant mode of Soviet commercial transport and arc already the most energy efficient in the industrial world Private automobile use will remain far below levels in the developed West through 1990 lndustry and electric power i cncration are the prind· pal energy consumers in the USSR The Soviets arc world leaders in coeenera lion-the production of steam for space heal at thermal eleclric power IS However the production of more efficient equipment is a difficult and time-consuming task Machine builders-having had linlc incentive to produce cner2y-efficicnt machinery in the past will have to start virtually from scratch Payback is uncertain and delayed until new equipment can be desi ncd produced and put into operation- ften a process of •t least six to ei2ht years As a consequence 2iven Gorbachev's announced growth eoals the mix of Soviet output over the next five years is likely to become more rather than less encr2y inlcnsivc • A Rocky Road Ahe2d Gorbachev probably believes that if he can kick-start the ponderous economic machinery hard enough and sustain the momentum long enough the early gains he achieves arc likely to stimulate lastine improvement Indeed because of the strong interdependence among his plans for energy saving Justrial modcrnizaLion managerial renew il h t · produc1ivi1y and an improvt d work e1hic a la ose of early success in some areas could prorr uccess in others The longer he can sustain the c ains the better the chances for long-term progr fhis same interdependence however increas risk of failure because so many things that h Jne wrong for so long must now 1 0 right the Iii lOd is high that some will continue 10 go wror r j thereby impede progress Reducing waste fraud and i 1anagcmcnt and di• t ir most productive recting available resources uses will contribute substar 1 to the moderni2a lion program But the economi• f dend from management reforms and the disc -I e campaign will not come close to meeting tne c 1omy's resource needs The key to success will r rbachev's ability to cope with some fundamental r 1oxcs and he will have to do so sooner rather tha r Ticiency and worker • Improving managem Ctivc incentive system morale will require of high-quality consumer and increased avaik goods at a time wh investment sector will be - 2oods and new defense oriented toward pn on line On the basis of pro2rams will be c Jr redirecting investment we Gorbachev's progr project that the ir cnt in consumer-oriented 6-90 couid be some 60 pcrinvestment durin1 ceni Jess than thr 198 J-85 • Energy's share c i estment is 10 be held constant at a time when• n nd for energy will grow and the cost of ofTsettir c dining oil production will be rapidly rising o implications of a redirection of investment a t ·om other sectors particularly consumer-orit 1 sectors may be equally ominous • The increase r anagerial independence necessary to spur cfTer v technological development and utilization i1 onsistenl with a centrally planned pricing anc 1I cation system leading to the likelihood of m ecnent disillusionment and subsequent rev si n to the very methods that have led lo waste fr d and mismanagement for years I Gorbachev's approach in resolving these issucs could have strong political and strategic implications failure to resolve them wilJ stymie his modernization effort He could and probably will seek some relief from the economic dilemma by demanding that East European counlries which have benefited from Soviet eCllnomic largess in the past shoulder a greater part of the burden Imports of equipment from Eastern Europe accounted for one-fourth of total Soviet machinery and equipment investment in 1983 and Gorbachev will probably push for an even higher flow in the future while reducing Soviet deliveries of costly raw materials East European leaders beset wi1h their own deep economic problems and popular expectations are likely to strongly resist such suggestions paving the way for growing confrontation between Moscow and its allied states _ _ Gorbachev may also increase imports of Wcstern lechnology to secure state-of-the-art equipment in key areas A marked rise in imports however would require a substantial increase in hard currency expenditures at a time when the USSR is facing a decline in the production of oil its major hard currency earner While Moscow has the capability to expand imports by markedly increasing its hard currency borrowing such an expansion would create a potential vulnerabilily to Western exporters lenders and their parent governments that pas Soviet regimes have sought to avoid • Gorbachev could attempt to reallocate resources away from defense to provide some relief to the civilian economy but he probably would encounter stiff opposition if he attempted major adjustments in defense allocations Currently about 30 percent of all machinery output probably goes to support defense production Moreover this share generally represenls the highest quality products and newest technoloiical processes in Soviet machine building The mili1ary sector also receives the most capable manage Some labor materials and components could be readily shifted to civilian uses but mos1 defense industrial 16 The Khrushchev Analogy Nikita Khrushchev during his I I years at the top 1951-64 launched is own ··revolution in Soviet politics Crude boislerous and aggressive by nature he bullied and cajoled his colleagues and rhe bureaus crocy to adopt his vision of the Communisrfuture He made catching up with the United States a major goal and enshrined ii in rhe utopian par1y program of 1961 He eliminattd rerroras an instrument of everyday politics brought Stalin's police apparatus under effective political control and publicized same of rhe crimes and abuses of power of his farmu mentor These revelalions were a tremendous shack 10 rhe Sovi r people and la Communi l sympathizers around the world He made dramatic changes in economic pa icy and management-abolishing the same central ministries that now so trouble Gorbachev reorganizing the party appararus that oversees neous remarks during their pr pared speeches as ·ell as in che public role or their wi ' s and families The similarities berwetn both ltad rs are particularly pronounced klhen compared to tht cautious stiff and highly formalized scyle of Brezhnev rhpt was rh norm or rhe past 20 years • At the same rime Gorbachtv--mor polished and educar d than Khrushchl Y-Qppears Io have learned from Khrushch v s miscakes and is using v ry differ n raclics in pressi11g his agenda for change When Khrushchev was removed his successors accused him -among ocher rhings of harebrained scheming immarure conclusions and hasty decisions and aclions divorced from realicy bragging and phrasemongering ·• These accusations stemmed from his efforts 10 hastily push through major reforms rhac were noc them and changing economic priorilies almost r y well thought out and his highly personalized sryle of fiat He dramatically increased Soviet involvement in leadership that was based more on coefrontalion rhan the Third World and vigorously stepped up Soviet constnsus competition with the United Sratesfor power and influence around the world His risky political course While Gorbachev appears equally determined to Ol'trboth at home and abroad-along with his nonconsen- haul cht yscem ht has gone about tht cask much sus style-ultimately led ra his auster by the vuy more deU rately and cautiously than Khrushchev people he brought into power • His signals to the bureaucracy art clearer and make it easier for lower level officials to ca cu are whar is The most striking similarity between Gorbachev and expecr d from chem and to r spond accordingly Khrushchev is their informal populist style a leader- Instead al presenring specific proposals for reform as ship Like Khrushchev Gorbachev has made an effort did Khrushchev Gorbachev has defined che general to show that he is accessible and interested in the direcrions of the changes he would like to accomplish views a normal citizens He hos made forays into the and encouraged further discussion a the optimal streets and visits to factories 10 engage in unreways 10 achieve them At the same time he is hearsed well-publicized exchanges with the assemsystematically building political support for his agenbled crowds The informal style of both leaders is da by installing loyal officials in key positions and also tvident in their willingness to make extempora- removing thou who might thwart his plans • plants would require extensive timc•consuming re · tooling before they could productively turn out much civilian production Nevertheless in the lon2 run many defense r- sources rould be applied productively in the civilian economy commilled 10 programs for modernizing their offensive and defensive stratceic forces as well as their C Jnvcntional wcaPQn pro rams In addition the US defense modernization and the long-term implicalions of he Strategic Defense Initiative SDI probably arc being cited by Soviet military leaders as justification Although military leaders recognize thal the long1crm s1renith of the Soviet military depends Ja1 cJy on the cc untry's economic hcallh lhe Soviets arc 17 '- f r • - ' · • - t •- 1• -for higher grow1h rates for defense spending The rate of growth of defense spending since the mid-1970s has been a relatively modest 2 percent and military leaders probably already feel that defense has accepted slow growth in rc sourccs for as long as it can given the extcnsh c requirements for upgrading weap0n systems • The institurion of major economic reforms such as private enterprise and market-determined prices and allocations could over time markedly improve economic efficiency consumer welfare and technological adaptation They would encounter strong resistance on political and ideological grounds but Gorbachev has already shown that he will aggressively tackle the problems he has inherited and like Khrushchev more than two decades ago use his considerable power to force the pace of change sec inset The Krushchev Analogy ' • Premier Tikhonov almost certainly will be replaced at or before the congress in February by Gorbachev himself or an ally The leadtime to the congress will also give Gorbachev the opportunity to more thoroughly clean out the deadwood from the party and governmental bureaucracies and bring in a management team more sympathetic lo his policies and belier equipped to carry them out Over the next year indications that he is moving ahead with his economic agenda could include • A clear delineation of winners and losers in the 1986-90 plan for investment allocations Besides machine quilding sectors such as ferrous metals and chemicals must receive a greater share of the investment pie for the moderni ation program to ha ¢ any r ha·- cc for succc 1s • The com c 1 c tcr n • The replacement of Gosp Jn Chairman BJybako• with an outsider possibly even Nikolay RyzhkovJ who would enhance the political stature of Gosplan and signal increased emphasis on Jong-term strategic planning rather than detailed annual planning • A reduction in reported resistance co lhc ongoing industrial management experiment coupled with measured gains in productivity · Moreover with his own people in place Gorbachev should be able to build a ccnsensus behind the more far-reaching proposals that he has only hinted at to date Indications that he has decided on and gained consensus for more radical changes could include • New dramatic initiatives to reach accord at Geneva and concrete proposals for reduced tensions ar the November meeting between the US President and the General Secretary which migh1 signal a willingness and desire to reduce the Sovicc resource commitment to defense and create an atmosphere for expanded commerce with the West • Select legalization of private-sector activity particularly in regard to consumer services which would indicate willin2ness to confront past economic or• thodoxy in order to improve consumer welfare and thereby economic performance • B rcakine the monopoly of the Foreign Trade apparatus which would signal an increased reliance on managerial independence at some cost to central- ized control Continued reliance on mar1rinal tinkering despite clear indications that the plan for economic revitalization is falterine would indicate that Gorbachev like Brezhnev before him has succumbed to a politically · superministries for example by tries in the agricultural area with a - n t but economically inelfective approach · •eduction in ministerial control of cn · ·ati'lns • Specific changes in managerial incentives for example lying bonuses to the share of new equipment installed to promote modernization of plant and equipment 18