September, 1985 CIA Intelligence Assessment, 'Gorbachev's Economic Agenda: Promises, Potentials, and Pitfalls'

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“CIA Intelligence Assessment, 'Gorbachev's Economic Agenda: Promises, Potentials, and Pitfalls',” September, 1985, History and Public Policy Program Digital Archive, FOIA request to CIA, National Security Archive. http://digitalarchive.wilsoncenter.org/document/121967

Summary:

An analysis of Gorbachev's new economic policies.

Original Language:

English

Contents:

Scan of Original Document lntclhgcncc

Gorbachev's Economic Agenda: Promises, Potentials, and Pitfalls

An Intelligence Assessment

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Gorbachev's Economic Agenda: Promises, Potentials, and Pitfalls

An Inrelligence Assessment

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Gorbachev 's Economic Agenda: Promises, Potentials, and Pitfalls.

Key Judgments Since coming 10 power, Mikhail Gorbachev has set in molion the most The key /fl/onnatron a�arlablt aggressive economic agenda since the Khrushchev era. elemems as Qf6 s�pttmbtr 1981 are: 'Vas uud in this repoT/. • A reallocation of investment resources aimed at accelerating S&T and modernizing the country's stock of plant and equipment.

• A re'litalization or management and planning to rid the Soviet bureau cracy of incompetence and petty tutelage and put more operational control of enterprises in the hands ofmanagers 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 better equip ment 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 si multaneously 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 economics. 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 reco::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, rcg:irc..led by most Soviets as a major political obstacle to economic cflange.

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• He has talked about the potential need for ··profound" changes in the area of economic reform, while strongly supporting the need to mainrnin 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 to bolster worker morale and underwrite future growth. How much economic improvement will occur and how Jong 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 .nceting output goals and reequipping enterprises with new equipment and technology. Streamlining the bureaucracy wiJI be resisted by countless officials whose jobs and perquisites are threatened, and a new set of incentives must be in stituted to motl"i'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 to find the resources necessary to underwrite his modernization goals. The economic dividend from manage ment 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 l• consumer goods al a time when the investment sector will be oriented to ward 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 to consumer-oriented sectors. r·: The regime's plan to hold en�rgy's share of investment constant comes at a time when demand for energy will grow and the cost of offae11ing 'L....Jdeclining oil production will berapidly risin�. If the rcquisile investment is not forthcoming, the current decline in oil production could become precipitous.

,.,� · - ···�""'..... · • 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 to the very methods that have led to waste. fraud. and mismanagement foryears . •• 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 exports 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 bard currency exports, particularly oil, look dim. A shift of resources from defen�e to cbtilian uses 1.;ould ha.tt considerllble {'l(\'>itive impact over the lonf;t run, but even the sug�estion of such a shift mi2ht damage Gorbachev·� 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 p0sition of the Soviet elite.-

Indications that Gorbachev has decided on and gained consensus for mori radical changes could include:

• New. drama lie initiatives to reach an accord at Geneva and concrete proposals for reduced tensions al the November meeting between the l ) President and the General Secretary, which might signal a wiJ!immess and desire to reduce the Soviet rcsQurce commitment to defense .and <;:reatc an atmosphere for expanded commerce with the West.

Select legalization of private-sector activity, particularly in regard t· consumer services, which would indicate a willingness to confront p. •I • • economic orthodoxy in order to improve consumer welfare and ther J economic performance.

• Breaking lhe monopoly of the foreign trade apparatus, which wou

signal an increased reliance on managerial independence at some 1 to centralized control.

y -- 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.•

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Page Key Judgments iii Gorbachev's Economic Heritage The Gorbachev Aaenda 2 Accelerating S&T Progress S Restructuring lnYestment 5 �--� Rcora:anizing Management and Planning 6 Tightening Economic Discipline 6 An Integrated Approach 6 Favorable Short-Term Outlook 9 Long-Term Uncertainty 10 Problems Facing lndus1riat Modernization 11 ReYitalizing Management 13 Dealing With Fir.itc Resources 14 A Rocky Road Ahead 15

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··_., Gorbachev's Economic Agend3: Promises, Potentials, and PirfaHsll

Gorbache�·s Economic Heritage use of available resources in the economy continued to be frustrated by a backward technological base, in In March 1985 Mikhail Gorbachev inherited a tech· fic.xiblc production processes. and, perhaps most im nologically backward economy th&l had experienced a portant, a cumbersome and inefficient sys1em of decade or slowing growth punctuated by harvest planning and managemenl. __ failures, industrial bottlenecks . labor and energy shortages, low productivity, declining efficiency These problems were well understood by Gorbachcv"s of investment (see figure I).and The simple growth formu predecessors. Rhetorically at least. Brezhnev recog la that had propelled the USSR to a major world nized that in the future the economic system would power in the postwar era-ever-increasing inputs of have to operate differently if it was to meet the necrls tabor and capital resources-by the mid-1970s was no ·or the Soviet polity and society. Various Central longer effective Committee and Council of Ministers' decrees were .• promulgated to address these problems, but Brezhnev During the 1950s, this growth formula resulted in in his waning years lacked the energy and political rapid gains in output because of !he very low level of will to follow through on his diagnosis. As a result of GNP in the early postwar period and the relatively this administrative lethargy and the endemic nature high efficiency of new fixed investment in reconstruc of many of the problems facing the Soviet cconom}·. tion and repair of war damage. As the USSR moved Brezhnev's successors were saddled with: out of the reconstruction phase in the 1960s, however, highly effective investment projects became more • A technologically antiquated industrial base and a difficult to identify, and centralized planning and burdensome defense sector that has systematically management of a burgeoning economy became more siphoned off high·quality resources needed for cc� cumbersome and inefficient. Unable to improve their nomic revitalization. ability to deal with an incrcasinl?IY complex economy,

Soviet leaders had little c;hoicc but to sustain the large • An energy sector beset by stagnation and decline: in commitment of resources to investment if economic production or its major fuel-oil-and a 30-year growth was to continue apace. In addition to main pattern of energy use that inhibits the rapid transi taining larger annual flows of investment, Soviet tion from oil to other ruels. planners have swelled the expansion of plant and equipment by: •.A level of technology that i:enerally Jags thal of the • Holding retirement of equipment lo a minimum. West. Even in military applications, the Soviets • Prolonging the service lives of technologically obso have encountcrc-d technological problems in recent lete capital through repeated extensive repairs. years that arc sharply driving up costs and dclayine • Continually expanding new construction projects, new sophisticated weapan systems, lhus crc:uing a thus channeling the bulk of investment into build· fur1her drain on available resources. ings and structures rather than into new�m ent, the principal carrier of new technology. _ • An inefficient farm sector that despite large invest ments slill employs one-fifth of the Soviet labor Sustaining a high level of increase in total capital force, is �reft of an adequate storage and tr;i nspor· assets by these methods enabled the Soviets to achieve tation system, and is unable to produce grain and high rates of growth and to support an enormous meat in sufficient quantities to meet rising domestic defense establishment, but also impeded technological demand. proeress and productivity eains. Efforu to increase the quality and quaniit y of output and make better

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• A hidc:bound bureaucracy whose rigidities contrib Figure 1 ulc: to irraiional investment decisions. retard scic:n USSR: Key Economic Indicators, tific-technical innovation. and ge high com Average Annual Growth Rates and massive waste of resources.en.au

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10 10 The Gorbache' Agenda

I 8 When Gorbachev came to power, many Soviet offi

6 6 cials�xcepl those of the old guard, who felt threat· ened-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, wilh economic growth having recently accelerated from the: unusually sluw rates of 1979-82. many O prob:i.bly fdt that he would avoid sharp changes in o. it946."70 71-?S 76-&0 111·8� 1966- 70 71- 15 76-80 81 ·84 resource allocations.-

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Gorhachevs !lit list

Gorbachev has made ii clear he intends To overcome rake the Job himself. while or hers it1dica1e that he entren.;hed resistance to Ms domestic programs by will give it ro a close ally like RSFSR Premier cleaning house: Vorolnikov or partJ• secretary Ryzhkov.

• He has named eigh1 new economic ministers since coming to power, including those in charge ofoil • Several Soviets have strong(�· imp/ietfthar State and steel production . Pla11ning Committee Chairman Baybakov is 011 the .. He has replaced three Cenlral Commirtee depart hit list. and Gorbachev indiuctly critici:ed him in ment chiefs who oversee tlu: machine-building. con June for undermi11ing an economic experiment be struclion, and trade and servicusectors .• ing implemented in major industrial sectors.

In addition. he has supervised an extensiveturnover • Gorbachev may a/.ro want to go after the remai11i11g among regional party firs/ ucretaries-who play a dozen or so top economic officials who hal•e been critical role in implementing economic policies. are •around since 1he beginning of the Brezhnev era. spokesmen for local economic interests, and acl as facilitators in overcoming economic bottlenecks. Al - ready over 20 such officials have bun appoinred, He has already shown his intention to reassert parry nearly one,p week since Gorbachev came to power, control over the vasr economic bureaucracy, which and more changes are likely during the party elec had grown accustomed to Brezhnevs benign 11eglect. tions thal will precede next February".rparty con The firings so far have probably sent an unmistak gress able message to economic officials that they must toe .• the mark or face disgrace and forced rtrirement. Gorbachev probably also has other high-level changes in mind: --

• Reports persist that he inlends to retire Premier Tikhonov at the congress or perhaps even sooner. Some Soviet officials claim that Gorbachev might

Gorbachev, however, has taken little solace in recent virtue of his sirong, assertive personality and by economic improvement: by all indications he realizes aggressively inscrling hisown cadre into key positions. that long-term gains will require solving endemic Moving forcefully 10 place his personal stamp on problems that for the last decade have prevented the economic policy, Gorbachev has repeatedly told man· economy from simuhancously sustaining: agers that they must chan£e the way they do business .. • Continued rapid growth in defense spending that or get out of the way": had proceeded unabated since !hemid-19�0s.

• Greater quantity and variety of consumer goods and • He has assailed managers by name for lack of services demanded by an increasingly discriminat innovation, laziness, and poor management and has ing population. strongly implied that they will be: removed. He has

• Rapid £rOwlh in invcstmcnl goods for economic attacked the complacent attitude toward corruption modernization and expansion. within !he party bureaucracy and called for promo· • Increased support for client states whose. own econo tion oi younger and more competent officials at all mies arc coming under increasing strain ... levels. While such rhetoric is not new in itself, he has already underscored his inienlion lo back up his In little more than five months, GorbachC\' has dcm· toue;h rhetoric with dismissals (see inset "Gor�· onstratcd that he is the most aggressiven a d activist chev's Hit List"). Soviet leader since Khrushchev. He;:; taking power by - 3 - • He has returned for revision the Centerpiece or the 1\feasuring Soviet Economic Growth planning system's raison d'et re, the draft five-year plan, demanding specific ch::inges-so far unspeci fied-in the planned panern of resource: Jllocations The principal conceptual difference betwt!e1 ; P and for 1986-90.- Soviet r1:porced national income is the Jail · excfu. sion of {I) most personal servius as we// c . rvices Gorbachev is dc:lcrmined to deal with the economy's provided by the government [/or example. 11 ./ch. underlying problems. He has thrown down lhc gaunt educa1ion. housing. personal rronsporrau tJ :nd com� let on issues as controversial as the: allocation of munica1io11s. recreation and personal ca . ;;verri· investment. broad-gauge management reform, and a menr administration. credil and insurar �. ·esearch complete purging of incompetent and corrupt officials and development. and mi/irarypersonn, ' •Sts) and from the system. While the details of his economic (2) depreciation on fixed capitol. Howe r officio/ game plan probably will await the new draft of the Soviet statistics on growth of na1ional 1. 1me over 12th Five-Year Plan {1986-90) to be announced at the s/ate real growth, because they do not 1/ JW properly 27th Party Congress in February 1986, the broad for in/1ation. The CIA index of GNP. •I :h auempcs features of his program are already emerging. All are to correct for rhese differences, has sh 1< real growth aimed at raising productivity and efficiency through to he about I percen/oge poi /II lower h l reported out the economy-something the system has never statistics on national income. More1 e Soviet plan done very well and has become progressively less able data. such as Gorbachev's 4-percen : r111h target. to do as it has grown in siie and complexity. He has unlike ollicia/ly reported achiei•ed . are not called for annual growth in national income of at least dis10rted by inflation.• 4 percent. If this plan were �chieved, growth in real GNP as measured in the West would also amount to an increase of about 4 percent per year-a healthy severe strains on the other resour imants-de increase above the good performance of 1983-84 (see fensc and consumption. They ah .ably recog inset .. Mcasurin1: S-Oviet Economic Growth). .. He nized thal productivity increase! •ot be casy plans to achieve this 2oal by pursuing an ambitious growth in combined producti'l it �d. labor. and strategy for modernizing the economy's stock of plant capital has been consistently n� ·or the last and equipment and by raising the level of effort and decade sense or perso�nsibililyof ·anagcrs and .• workers alike. - To help addr ess these issues, G c :nev has appointed several economic advisers who 2 : long advocated a

Gorbachev personally has provided a pointed example major overhaul of the econom � stem: substantial of how critical a substantial improvement in produc increases in investment in ma 1i : building, changes tivity and efficiency is to his entire program. In his in the incentive structure, a g :c :r role for private June spceeh to a special science and tcchnol0gy (SctT) activity. and more devolution r uthority and person conference, the General Secretary indicated that an al responsibility to enterprisr n nagc:rs (see inset additional 8-10 million people iQ the labor force and "Reform-Minded Economis� ,. visin2 Gorbachev"}. an average annual growth in investment of 5.5 to 7 The ascent of such reform·r r ed cC-Onomic advisers percent during every five-year period would be re� to policy-level positions is a 11 ial of Gorbachcv's quired 10 achieve his goal of 4-perccnt annual �rowth commitment to finding wa) t make the system work in nationaJ income in the absence of a substantial bencr. At present these in• J• ! accelerating S&T increase in the combined productivity of land, labor, progress, restructuring im ,1 1ent, implementing and capital. Both he and his audience probably were management rcrorms, an( j 1tcning discipline. (C NF) aware that less than 4 million people will be added to the labor force in 1986-90 and a S.S- 10 7-perccnt increase in !he rate of growth of investment would put

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depends crilically on lhc success of other c:lcmcntsof Reform-Minded Economist A.d11ising Gurhachev his strategy. As he pain1c:d out at lhc conference:

Th i! prominent a11d controversial economist Abr?I • In carrying ow tire S& T revolution. the commor.tf Aganbegyan has become an ilf/luential irrlormal ad ingkey role belongs 10 machine building.... First viser to General Secretary Gorbachev. The longtime and fo remost. machine building itselfmust be director ofan economic insrituu in Novosibirsk. he reconstructed.... In the years 1986-90. cap ital recenr/y moved ro Moscow to head a commiuee althe i1111estme.11 fo r the civilian machine-building minis Academy of Sciences. Aga11bt:>gya 11 has a history of tries sh ould be increased by 80 to 100 percent. involvement in comroversy with conservatives over his criticism afthe workings of the economic syslem. • Th e acceleration alS& T progress insislent/y d� Several changes he has proposed, which include mantis a profound reorganization ofthe sy srem Qf accelerating the modernization of industry tlzrotJgh planning and management .... Without this. every retoolingand a streamlining of the Mosco w-based thing we are ta/ki1!g about today may remain but a bureaucracy, have become major 1hemes in Gorba fo nd hope.• chev "s recent speeches on the economy .• Restructuring ln'l'estment Aganbegyan 's new status is another indication of Gorbachev recognizes that his call forac celerated Gorbachev"s intenlion to shake up the economic technological progress is only passible with a m.ajor establishment. At 52. Aganbegyan"s lies with Gorba alteration in investment priorities. Currently, 30 10 40 chev date back 10 Moscow University days in the percent of all Sovic:lequipment has been in operation 1950s. As an adviser to Gorbach ev. he is likely" to for more than I 5 to 20 years. By 1990, Gorbachev rei11force the party chief"sdeter mination ro look fo r declared, onc·lhird of the fixed capilal stock-includ new approaches to economic planning and manage in� one-half of all machinery-must he "new." H c ment .• urged that special priority be given to the develop ment and introduction of fundamentally new.. systems There have also been indications that Ta tyana Zas of machinesand technologies" and called fora 50- /avskaya, a well-known socio/ogis1 and close col perccnt increase in expenditures for retooling existing league alAganbegyan, may now have a stronger voice cntcrpri � fi=in pa rt, by a cutback in new in the academic community, ifno t an advisory role in construcuon.-_ the governrmnt. In a recenl inurview in lzvestiya. she reiterated arguments originally made about the inap ln his June address, Gorbachev accused the State propriateness and indlectiveness afthe centralized Planning Committee (Gosplan) of payin2 "verbal economic system in a collfidential document that was tribute" to the ro le of civilian machine buildin2 while leaked to the Wes tern prus in April 1983.- continuin2 to starve it of resources and suggested that his callfor nearly doubling inve:;tmcnts forthis sector in the 1986-90 period could be achieved by the partial redistribution of capital investments from the indus Accelerating S&T Progress tries that use the machines.This .. su1mcstion" was Gorbachev views a modern, efficient industrial base presaged in a pa rticularly forcefulstatement in a as crucial to the success of his economic program. A speech to an ideological conference last December. special conferencewas held in June to develop a where Gorbachev insisted that the longstandin2 prac comprehensive slrategy foracceler ating technological tice of allocatingec onomic branches the same propor progress. In addressing !he conference, Gorbachev tions of new investment from one plan to another must

foc used on lhe need for the rapid introduction of new be "changed decisively production lechnolou, insistini that the Soviet Union .... must launch a revolutionary program to reequipits factories and farmswith the most up-to-dale machin ery. He reco�n izcs that acceleration of S&T progrC"Ss - ..... 5 ' In this context. Gorb:i.:hcv hintc:d tha L the need to Gorbachev J1as also endorsed Brezhnev s 1982 Food supply additional resources to machine building might Program. which. as pa rty secreta ry responsible for affect th(:pr iority status of two of the biggest claim agriculture. he helped formulate. Jn this connection. ants on investment resources. c:nergyand the agro h� has supponed increasing the authority of the industtial complex: regional agricultural producrion associations

• He suggested that the share of investment in energy {RAPOs}-an innovative form of administration that could be "stabilized" by giving greater attention to cuts across ministerial lines and concentrales author· conserva lion. ity at the local level for coordinating the activitiesof

• He indicated that 1hc presen t Je\· el of investment in farms, agricultural service agencies, and proccssi�g the agro-industrial complex is adequate .and that it enterprises in a given district .• is the return on this investment that continues to be unsatisfactory. Tighlening Economic Disciplin� He has not addressed how other major cl aimants on Gorbachev is banking on improved worker effort to investment-such as defense-will fare .• immediately bolster economic growth. Because he needs the support of bothmana gers and workers. he Rcorg:i.ni:dng ManagemenC and Planning has appcaltd directly to them to buy into his program. Gorbachev has beenpartic ularly crit ical of intermedi He has pledged to increase both the material rewards ate management bodies that choke o(f initiative and for good performanceand the penalti es for violations has hinted that they should be streamlined or elimi of economic discipline.• nated. His aim is 10 rid the system of some of the massive bureaucratic apparalus whose petty lutclage Much of Gorbachev's campaign for improved worker in implementing Central Commiitce decisions defea ts effort, however, will rest on the more vigorous impte the purpose of the decisions mcntation of programs initiated before his tenure .• These include: . Thelevel of specificity in his June speech in Dnepro· petrovsk suggested that plans forsuch a reorganiza 111 Improving labor productivity by reviving lhe disci· tion have now reachedan advanced stage and will pline campaiin.which And ropovinitia ted but which include the creation of supcrministerial bodies, start flagged somewhat under Chernenko. Gorbachev has in2 with agro-industrial and rnachinc-buildin2 sectors. already initiateda vigorous antialcoholism cam· His speeches also suggest that these supcrministries paign that is servingas a daily reminder of the new will be restricted to "strategic" planning and leave leadership's seriousnessand inlensity in attacking operational control of enterprises in the hands of the problems of both a socialand economic nature. manaecrs on the scene.- • Tying wo1 kers· ear nings more closely to their out Gorbachcv's first move to give greater operational put, through grea ter differentiation of wages and independence to enterprise managers was lo expand expanded use of contract brigades-small groups of the economic experiment, begun in January 1984. workers whose earnings depend on {ulfillment of eiving enterprisesgrea ter control over investment and contractual obfigations to ma nagement.- wage funds and making fulfillment ofco ntractual salesob ligations the prime indica tor fo r evalua ting enterprise performance(sec inset "Manage.rial fnitia An Integra ted Approach . tivcs"). He has also implementeda far·reachini ex periment at the Tot'yaUi Automotive Plant lhat in On balance, Gorbachev's game plan reflects an apprc· we creases the plant's authority for its o wn management ciation of what and many Soviets believe to be and formaking purchase and sales agreements with many of the economy's fundamental problems. More fo�e!a-n.firms, wit�oul the direct pa.rtici�f the over, he rcc.:og ni:!.cs that all clements of his program m1mslries or foreign trade associations._

6 Managerial lnitiarives

Th e Soviets have announced a major e:cpansion ofthe • £111erprises will h.:Jve foaeas�d authority to spert..:1

e:(perimenrin indusirial managen1en1 rhar began on I limited amoums of in11estmen1 fu nds at their O'- '1 January 1984 in.five a/l-u11ion and republic-level discretion fo r industrial renovation and for con minis1ries a11d was extended this year to 20 addition s/ruction of housing or other consumer-related un al ministries. Th e experiment will ex1end to all dertakings. The sta!I! planning and s:ipp/y organs machine-building ministries and man;• consumer ha1•e been insuucted to give such projects priorit_r re/ated induslries in 1986 and 10 all alindusuy in 1987.• • Penaltfrsfo r delays. nondelivery. or delivery al in/friargoods will be increased. and rewards /OI" The txp uimenr ·s aim is to improve the ctnrra/ timely provision.• alsat iefactory producrs will be planning and management system by reducing the implemented number ofsuc cess indicators used to evaluatt enter prise performance and by slightly increasing the Mosco111 has also announced a managerial reorgani- , enterprise 's limiled control over wage and investment zation program-described as a model fo r the rest of fu nds. The decree to expand the experiment presents the economy-fo r the Ministry ofIn strument Manu measures to improve product qua/fly and fu rther fa ,·turing {Minpribor). Th e program includes: increase enterprise conlrol over plant operations: • Eliminating the management level that lies betM.oeen the enterprise and the ministry. • Enrerprises of the machine-building sector produc • Creat ing additional scientificproduct;on asso.•cia ing products judged to be ofhighest quality will be tions to sp ur R&.D and protoiype productiolf able ro increase their earnings by raising prices up 10 30 percent. Enterprises producing lower quality goods willhave 10 cut prices by up to 30 percent and then reimb urse the start fo r lost revenue with money taken/ram their worker and manager bonus fu nds.

cannotbe implemented immediately and simulta aimed at reducin& worker apathy, which, toðcr neouslya cross the economy.T he cenrcrpieceof his with the attendant massive waste and theft of re· modernization stratc&y, replacing the economy's stock sources, have held down growth in productivity or machinerya nd equipment and improvin2 manage· throughout the economy. Somi: success here, alone ment techniques, will require years of etforl. Never· with some redirection of investmentresou rces, fe wer lhc:lcss,Gorb achev probably feels that, unless he layers of bureaucratic tutclaee. and a more equitable starts now in earnest and maintains consiant pressure system of rewarding productive workers and manac:· on his economic managers, t he future will continue to crs, is �cared 10 provide a growth dividend that can be be hostage to indecision and i naction .• used bothto bolster worker morale (via more and bcucr consumer 2oods and services) and to underwrite Gorbachev, in essence, is proposingan integrated approach fo r the resurgence of ci::onomic growth (sec figure 2). Anticorruplion and discipline campaigns arc

7 :"igure 2 ;orbachcv's GrO\\'lh Srra tegy

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Reward ptodUClittworllcn l S1n:ng11h:n defense •nd managen H1ghc:r aMSumpllon

Jn""l'ca&x- n:u�rncm uf u!J m�•h1ncry llfCTrtUi ____,. lncrc�scmor;ali: �nd · pndc: Ill wort =_:;_ - Improve qual11y Ml)Jcrn1tccapital Nodt S1imula&e iollOYlllion • __.- _ _ _ _ Conscl".: �ro:i - ...;· ------·} ! 1--- r.____ . --- . J ;;� '"'"'M O«h-: - I

- 8 fu rther growth. Gorbachev appea rs to be coumlng There is also growing evidence lhat Gorbachev favllrs heavily on a synergistic elfcct among the several pa rts an expanded role forpri vate initiative as a way of of his program to provide even grea ter dh·idends in aJJe.. ·iating consumer problems wichout much addi 1he years ahead , returning the economy to an upward tional investment or change in the way the socialized growth path and, perhaps,pr oviding him with justifi sector is organized a nd managed. In the past.Gorba cation for future fundamental changes in the central chev has beena staunch supporterof expanding ized control of the economy, if needed production on private agricultural plots, and, in his .• speech to the Central Committeeplenu m in April, he Gorbachev's strategy is not without substantial eco twice refer red co the contribution thar the private nomic and political rislc. particularly as he is seeking farming sectorcan mak e to improving the quality or to change an economy that has recently been on the life. f n May he returned to this subject in a speech in upswing. Jn public statements, Gorbachev has so far Leningrad and cJtpressed disa �reement with the Polit foc used on the general themesof his economic pro buro's recent handling of the issue. He contrasted the gram rather than on specific measures that could Politburo decision to earmark land foran additional galvanize opposition. He may well have decided to 1 million private market gardens with Soviet citizens· refrain from translating vague expressions of support �requests forsom e 15 million new plots. "Mathemati for controversial measures into specificpropa sals until cally,'' he noted with evident sarcasm, ··�oach he has more fu lly formulated his plans-in part by to this problem is fundamentally wealc.''- encouraging public dialogue and se lectively testing some options-and consolidated his political strength. Gorbachev's remarks in Leningrad also lend credibil· He bas not openly challengc:d the legitimacy of cen ity to earlier reports that he favors the more contro tralized economic control. including such fundamen versial policy of allowing a greater role fo r private tal obs tacles to the success of his program as the initiative in the servicesector. He called fora .. more arbitrary nature of Soviet prices that prevents plan realistic evaluation" of the major role ••moonliehters" nersfrom making economically rational decisions, or currently play in providing such services as home the lack of sufficient consumer input into production re pairs and seemed to sug2est that the state should decisions not just tolerate such activity but should actively Gorbachcv's current approach ne of support it. Materials used. he said. are generally firsta doptinz noncontroversial economic measures stolen and ..come fromthe state anyway." In �his while simultaneously workingon a long-range and context. lzvestiya acknowledged in August that illegal more far-reaching program. Gorbachev may be re private services are too widespread to stamp out and r�r fraining from more radicalmeasur es because he hopes . called l�liz.ation under contract lo state that the steps he has already proposed will be suffi cnterpnsc:s- cient to remedy the economy's ills. -

Whether he will be able to achieve his economicgoals FaYorable Short·Ttrm Outlook in the absence of additional, bolder changes-moves toward market socialism. for example-is problemati Gorbachev needs some near-term success to sustain cal.There have been hints in Gorbachev's past and his earlymomen tum forch ange, particularly sincehe recent speeches and in the statements of some knowl is seekingmajor changes in an economywh osepcrf or· edgeable Soviet officials that he may eventually be mancehas improved in recent years. To this end, he willini to make such changes. [n his LeninDa y made it clearat a recent Central Commiuccmec tinc address in April 1983. forexample, Gorbachev that the 1986-90 five· YearPlan must eel offto a fast stressed the importanceof greater reliance on prices start. He should be able to capitalize on the aura of as an economic lever. He returned to this theme in his change and rejuvenation he has createdin the c.arly June 1985 address to the S&T conference, calling for months of his r�gime to elicit some ienuinc increase a mo re decisi\l'cshi ft from administrative to economic in effort by at least pa rt of the work force. Moreover, methods ofrc gulatini the economy. ln the same address. he also called fo r an end to "the domination of the consumer by the producer.''-

·- could help ra is• !r wth in investment cn1 Potential Gains From Increased Discipline Gorbachev's 1r. u nizat ion progra m mo· over, the outlo . , fora substantial increase m t.1 uy .-tccording 10 Abel Aganbegyan, writing in rhe SoV1et prod uction an .i esrockprod ucts this _year afrer a labor ne111spaper Trud in I 981. one-halfof the decline dismal perfor· i :e by the farmsc cior in 1984 (sec

in growth oflabor productivitJ' that �curred in 1976- figure J}. A t :- harvest this year would help hold 80 compared with J97 l-75 was due 10 "'people's down queues J iood, provide workers fe wer excuses

attitudes roi.!ard their work. ·· A1idropov recovered to be away I r rhcir jobs during working hours. some of the earlier momentum with rhe iniriatio11 of a improve car 1 1.1•:r morale, and reduce hard currency rough disciplinecampaign in 1982: labor productivit)' outlays for ; rose by 1.1 perunl in industry in 1983 as s/aclcers were fo rced 10 actually be on the job during rhe time they were counted as being there. Gorbachev may he Long�Tem t certainty able 10 recoup even more ofthe momentum with his revival of the dis6plinecampai gn and Ms strong How muc � inomicimp rovemenl will occur and how sra11d on temperance. Indeed, the reducrion in absen long it ca t sustained, however, is very much an teelsm due to drunkenness may have a potential fo r open que ic • Short-run gains alone will not ensure achie�·ing a greater increqse in actual hours worked success. .) anger lerm aspects or the program lo

than was achieved under Andropov. Moreover. Gor succeed. .1 1y things must go right forGor bachev bachev's direct appeal to workers, together with his some he < control, others he ca nno1. Moreover, the other initiatives. may elicit a more responsible ef synergi • e appears co count on may not develop, fo rt-at least in the short run-fr om many who cspccia 1 rhe short run. for example, he hopesto might otherwist merely put in rheir time pair ir cd worker initiative with a modernized .• indus: iasc. But this will require redirectingin- vest...- ·sources, which, in tum, could lead to bott! in industries whose investment allocations the discipline campaign, which was evidently an im· are . :d. Any campaien-slyle modernization pro- portant factor in the economic upswing during Andro grar � crca le imbalancesin new capacity and pov's tenure, could again have a favorable impact on enc lengthy delays in achieving results. economic performance (sec inset "Potential Gains - From Increased Discipline"). This, together with a Mr ' er, if planlSar e forced to shut down produc new set or Gorbachev appointees-who probably have tic ,· .:s to permit renovation. short·run performance the enera:y and determination to use the carrots and in .:: ors will be adversely atf ected.This, in turn, slicks available to them with greater consistency thar IT I- provide ammunition for Gorbachcv's oppo- their predeccssors-<:ould promote at least some rt ,t who could contrast 1983·84 industrial produc- short-run gains in economic performance. Althouih 1 n .a ins with a poor ou tputrecord of newly renovac Gorbachev is gambling heavilyon the impact of his . . ·· .terprises as evidence ofhar ebrained or early initiatives-a risky approach given lhal previou .i uided proerams. In the Jon£; run, each of Gorba· attempts to implement similar changes have been h 's initialivesfaces particularly challcn£;in� prob frustrated by entrenched bureaucra tic interests-his e· s that will take more than slrong rheloric and

prospects for nea r· term successshould not be underes 11 .ing hands 10 overcome timated .•. .• ' 1oscowa !so shouldenjoy 1hc bcl!oclitsof a buyUJ'market Ibis • u in thein1erna 1ionalirain lf'llde, Worldsupplies ar c c1pcc1ed10 Gorbachev's program also may get a short-run boost ntinuc to be ab11ndant,l.u&cly bcoiuscof a bumper. crop in1h c fromth e upsurge in machinery prixlucrion that oc· 11i1ed S14lc:sand rcdu� S.lYlct dcm.11nd for 1r11n .. curred in 1983-84 and a particularly favora ble harv� this year. G rowth in productionof machinery picke up sharply in 1983-84, rceisteringann ual increases betterthan 5 percent, after averaging about3.5 percent peryea r in 198 J-82. The added rnachincr)

- 10 decrepit that renovation-if possible at all-will � figure 3 exircmely co�lly and time consuming. Modern OiUrp USSR: Acricullur.d Perfonnance mcnt requires facilities that have a broad assortment of heatingan d ven1ila 1ion fea tures. Most old buildings in the USSR cannot be easily converted lo accommo dalc such cquipmc:nLThis is especially relevant to the thickly populated regions of the European USSR. the Urals. and rhe Doneis and Dnepr Basins-the old industrial coreof the Russian Empire, which accounts for about75 percent of total Soviet industrial produc tion.-

In addition.the emphasis on renovation could exacer bate the ever-present tension in resource supply throughout the economy. For example, as production linesar c shut down for renova tion. the lost production wiU have to be made up by other plants if supply bottlenecksarc to be avoided. Teo much simuhaneaus renovation could lead to shortages of key ind ustrial materials. Indeed, ma ny of these materials are al ready s1rc1chcdso rhinly that even small shortfalls are magnified as !heir impact ripples throughout the system .•

------Mad1inuy Productiorr. Gorbachev plans 10 under write industrial renovation by a rapid expansion in ProblemsFa cini Industrial Modernization output or high-quality equipment. To achieve his Rtnovatio•. Renovating existing enterprises rather announced 2oal of 50 percent .. new machinery" by than building new ones is a key clement of Gorba 1990, he must manage an acceleration in the annual chev's modernization stra tegy. He is likely to find, output of producerdur ablesto rates unmalched since however, that this approach is fraught with difficulty. the early 1970s. Additionally, the machines must be Plans to ccncentra te investmenton renovation have tailored to meet the unique needsof the wide variety

been toutedby Soviet leaders for more than l S years of plantsbeinz remode led-a difficult task foran but have never been effectively implemented. The industry accustomed 10 manufacturing large lots or a strategy has been resisted by enterprisema nagers small Variety o( tQUipmcnt forUSe in plants being because the downtime required to replace old machin construcred under highly standardized designs. In ery, as well as the uncertainly inherent in new deed,the increased pressure on Soviet machine build production processes. threatens their ability to achieve c� to boostou tput probably will reinforce the tenden short-termperf ormance goals. Maintenance and sup cy to reproducethe samepa ttern of output tha l has port fornew processcs-particularfy highly automat prevailedfor year ...s. only raster and-unless major ed processes-a re essential, but problematical in the ea insar e made in control-perhaps in a more Soviet economy. ft has always hcen safer from a slipshod manner. manager's perspective to build a new produclion plant or add to an ex.isling plan! than to renovate an Advanced Tu/urology. (n addition 10 rapidl_y c.�pa nd operating facility.- ing machine-building capacity, Gorbachev must lurn around a system cflaracterized by its relative fa ilure Moreover. the renovation approacn is not effec1ive for lo create and use technically advanced equipment. larec areas of the country. Accordine to Soviet lit era� ture, many of the cxisling industrial facilities are so

•• .J ·�:,...... ll assess- Reforms To Spur lnno11ation Backfire ments con- clude that the quality of Soviet machinery is well below world standards.J The geographic and bureau Cemra/ authorities are allempti11g to stimulatelii gh cratic separation of research organizations from pro quality production by assigning higher prices. Enter duction enterprises impedes introduction of new tech prises producing a new product or one judged efthe nology into the productionprocess. Insufficient ··highest quality .. are able to increase earnings by fundingof research-most noticeably in the machine raising the priu by up to 30 percent. This is leadi11g tool industries and in the ministriesrespons ible for to actions that planners did nor anticipate, and producingagricul tural machinery-contributes to innovation is the loser poor performance. Finally. the Sovietsystem of .• - bonuses-with itsinh erent bias toward volume of For e:cample. the Nori/ 'sk Metallurgical Combine production and apparent rather than real quality responded 10 the leadership's call ro innovau by change-is a de factobarrier to the productionof manufacturing an improved copper cathode. Once better capitalequ ipment. According to one hig h produced, it had to be inspected by central authoriries ranking Soviet official, only J 5 percent of wage and to be certifiedas being ofthe highest quality. The performance bonuses arc keyed to the introduction of Stare Price Commiuu then had 10 review a fo rmal new technology and equipment .• petition fo r a price adjustment. When thehi gher price was approved. cenira/ planners uadjusted tht: com Many Soviet officials probably view Gorbachcv·s bine's sales targets to take into account the increased modernization strategy with pessimism. A "Business revenues the superior product should generatt:. Pro Club" roundtable discussion that Pravda held recent duction plans were fo rm ulated and sales rargers ly, forinstance, pointed to major difficulties in imple finalized before industry'sdemand fo r an improved menting the ongoing rcnovalion pro2ram in the copper cathode was tested.- Ukrainian Republic (home forabo ut 20 percent of Soviet industry). The program--

• Perverse incentives that discourage construction fo r years. Uthe price were reduud by having the ministriesfrom undertaking reconstruction. copper cathode recertified at a lower quality level. the

• Inadequate funding forin stalling· equipment. combine would not be able to achieve itssales output

• Lack of qualified workers. target, which was set on the basis qfthe higher price.

• The inability of the machinery industry to keep pace Th us. for all ils trouble 10 producea ttchnologica/Jy with the increased demand for more efficient, spc advanced producr. the combine now finds itselfin a cial izcd equipment needed for renovation .• no-win situation-unable ro sell the more expensive higher quality copper cathode but also unable lo cut While Gorbachev may ultimately be able to overcome its price and still achieve performance targets. Th us, some managerial biases by changing success criteria the in/lexible and fo rmalistic procedurt:s characteris· (which he has not yet done) and appointing new tic efcentrall y controlled prices and ourput targt:ls managers. he cannot overcome the economic realities continue 10 underminl! even suming/y sensible nua of outdated plants and limited investment resources. sures to encourage innovation .... In the final analysis, no matter how hard Gorbachev pushes.mod ernizationwill occuronly slowly and must

' Evidcn� also suuesu lhat avcraic:lc:adtim cs (or usin& new tcchnolQiy •re mucti lon�Cf in the USSR than in lhc West. Da t� show that about 50 percentol US Gd WelltGenna11 inYc111ionsar e implemented ic about one year compared with chrec years fat Soviet inventions. At the eodo{ two years. the US implements about �t;Wat Genany, 64 � •nd Ille USSR. 23 percent.•

·,

12 Fil•"� '· USS R. bur�a11craq run amok (U/

come from new construction as well as renovation. industrial ministries, remove unnecessary burc:aucral· Substantial results cannot be expected forsev eral ic linkages betweenenterp rises and ministries, and yc:ars. Even now, signs arc cmcr2ini thatso me aspects increase the autonomy of enterprises will not be of Gorbachcv's early initiatives are backfiring and welcomed by many officials whose jobs, and perqui inhibiting rather than stimulating hi2h-quality pro. sites, will be threatened. In the meantime, Gorbachev duction (sec inset "ReformsTo Spur Innova tion Back. runs the risk of having his directives ignored, misin fire"). Part of the problem is the intricatelay ering of terpreted.or even reversed (sec figure 4).- the managerial bureaucracy, which Gorbachev is still a long way from purging. Decadesof bureaucratic In addition to cleansing the bureaucracy of red undan development have created a labyrinth of buck-passing cy, indifference, and gross incompetence, Gorbachev and indifference that will probably take yearsand must also come lo grips with an incentive system that thousands of key personnel changes to rectify .• stifles initiative and foslcrs corruption. Reducing the myriad of success indicators and tying wages closer to Revitalizfog Mana2ement productivity, as Gorbachev has called for, will help. Strcamlinin2 the bureaucracy, refurbishing its ranks But the real trick will be to develop a set of success in· with his allies,and developing better management dica tors that are beneficial both to the individual and skills are criticalto the success of Gorbachev's plan to to the economy. This, however, can only happen as a stimulate higher productivity. The General Secretary result or a major chance in the Soviet economic has already mana�cd lo firm up his baseof supparl in system that will induce producers to rcsPond to !he Politburo, an consumers and ailow prices and wages to reflect he intends to replace inisterial officials and -membersof theCe ntral Committeewith his own aides bclween now and the party congress next February. Nevertheless. hisplans to screamline the

13 -· -

consun11:r prcfcrcnccs.1.As long as .i sec of detailed clos:c 10 meeting lhese resource: needs. Increased national preferenceslr efk:ctcd in five-year and annual discipline, Jess corruption, greater tempera nce, and plans) is impcsed on producers, and prices and wages new management will help to raise laborpr oductivity arc set and changed at the discretion of central but will do tittle to offset the declining trend in capital planners. the managerial in itiative Gorbachev seeksto productivity. Given enough cimc:and invcslmem re develoi>-

that problems will continuein the consumer sector, • Demand (o r roads, railways, and other infrastruc and few additional resources wil/bc madicavai lable to ture dcvclopmcnl-projccts with heavy up-front overcome thcm.11111 costs and long leadtimcs-increascs in more costly and inhospitable rceions.

Dealing With Finite! Resources 1 Analyiispcrrormcd wilh the aid of our macroa:onomictnodcJ of the Sovicl«:anomy (SOVSIM) indicat es 1hat, to mei:t an invest ment 1row1hra te of 4 pcteenl peryear in 1986-90, Soviet industry Gorbachev will be hard pressed to find the resources will hue to increase the output or me1.al$ at 1he rate of abou1 .S necessary to underwrite his goal of developing a perunt pery.:.r aridmachinery 11 11bout 6 percentpc:r year if modernized industrial base. The economic dividend defense Pfoc; uremenl is allowed to crow al rouchl:r 2 percent per yc.ar and pet capita consumption is 10 incteue moderately. Everi fram management reforms and the discipline cam allowinc for a boost in productivity,our model fo reaistsa 2· 102.5· paign, while potentially substantial, will not com e pcrcen1.a1c-poin1 shri1ics ancalions of their masters. As a rcsull, both pcoducen111d 1upplien mar becorne disillll$ioned 1Qd mayonce apin raort 10 lhe\'Ci')' me1bods th11 hnc led to w:as1e, fraud, and mismanaeemcnl for years ..

t• .... -

• E�pr:nsive new conventional and strategic weapons /mplic111ions of Srabili:.ing Energy 's that have completed or arc about to complete testing Share of lnwcstnrenl enter seriesp roduction on a large scale.

We es1ima1e lhat. 10 keep oil production fr om fa/ling be/awabou1 11 million barrels per day (h/d} by 1990, investment in the oil seaor alone dllring 1986-90 would have to increase by about 45 billion rubles ' Gorbachcv's announcement that energy s share of fr om the 1981-85 level. We estimate 1ha1 this is more investmentshould be stabilized durin2 1986-90 than twice the investment increment that would be carriesspecia l risks. Oil production has already begun allocated to lhe entiu energysector in 1986-90 if to fall.an d, without substantial increases in invest Gorbachev stabilizes e11ergy 'sshare oftotal invest ment, the productionde cline could becomepre cipitous ment. Uthe nuded investment in oil is not fo rthcom (sec inset .. Implications of Stabilizing Energy's Share ing. production could fa ll to less than 10 million b/d of Investment'•). Electric power. 100. will need large by 1990. Such a drop in production would be greater increases in investment resources to meet the in th•an total hard currency exports Qfoil in 1984.• creased powerrequir ements 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 effi investment allocations foryc-a rs and will need a major ciency of those power facilities in comparison with increase to adequately exploit the large Siberian and power plants in the West. Some Soviet basic steel Kazakhbasins. Thus, if the energy sector has to make making processes arc also relatively enerey efficient. do with the same share of investment it received in Additional major cneriy savings in industry therefore 1981-85, likely production shortfalls could knock must conicthr ough massive capiral investment for the Gorbachev's modernization progra m into a cocked production and/or importation of more encrgy hat- cfficicnt equipment.- The leadership seems to be counting heavilyon its However, the productionof more efficient equipment ability to increaseen ergy efficiency enough to offset is a difficultand time-consuming task. Machine any production shortages.that might arise. Retooline builders-having had liule incentive to produce and installine more encr.-:y-efficicnl equipment prom cncr2y-efficicnt machineryin the past.will have 10 ises substantial savings, but only in the long run and slart virtuaUy fromscratc h. Payback is uncertain. and after ronsiderable expense. The share of energy con delayed until new equipment can be desi2ned,pro sumed by Soviet residential, c:ommcrcial, and trans duced,and put into operation-<1ftcn a process of at portationse ctors, which present relatively greater least sixto ci&ht years. As a consequence, 2ivcn opportunities forim mediate cutbacks,is comparative Gorbachcv's announced growth 2oals,the mix of ly small. Apartments and stores consumeov er onc Soviet output over the next fiveyea rs is likely to half of the fuel used residcncially. and most of them becomemore, rather than less, cnen?Y intensive .• bum low-grade coalor firewood. Trains rather than trucks provide the dominant modeof Soviet commer cial transport and are already the most energy effi A Rocky Road Ah�d cient in the industrial world. Private automobile use will remain farbe low levels in the developed West Gorbachev probably believes that, if he cankick- start through 1990. the ponderous economic machinery hard enough and - sustain the momentum long enough, lhe early gains Industry and electric power i:eneralion are the princi· he achieves ate likely to stimulate lastin2 improve pal energy consumers in lhe USSR. The Soviels are ment. Indeed, because of the strong interdependence world leaders in c:oecncra lion-the production of steam forspace heat at thermal electric power ; among his plans forener gy saving Justrial mod Gorbachev's approach in resolving these issu� could ernization, managerial rencw:il, h t - productivity. have strong politica l and stratc:gic implicat ions: fail· and an improv1:d work ethic, :l. la • .ose of ea rly urc to resolve t hem will stymie his modernization success in some areas could prorr ucccss in others. effort.- Tltelon ger he ca n sustain !he e: .ains, the belier the chances forlong -term progr ! fhis sa me inter He could, and probnbly will, seek some relief from the dependence. however. incre.:ise! .� ;isk of failure; economic dilemma by demanding that East European because so many things that h. c .:inc wrong for so countries. which have benefited from Soviet c�nomic long must now i:o right, the Iii 1 .lOd is high that largess in the past, shoulder a greater partor the some will continue to go wror c: j thereby impede burden. Imports or equipment from Eastern Europe accounted foron e-fourth of total Soviet machinery progress.� and equipment investment in 1983, and Gorbachev Reducing waste, fraud, and i! .1anagemcnl and di will probably push for an even higher flow in the recting available resources l :ir most productive future while reducing Soviet deliveriesof costly raw useswill contribute substar l 110 the modernil.ltion materials .• East European leaders, beset with their program. But the economi• f idcnd from manage own deep economic problems and popular expecta· ment reforms and the disc ·I c campaign will not lions, arc likely to strongly resist such suggeslions, come close to meeting tne .c 1omy's resource needs. paving the way forgr owing confrontation between The key to success will lr : rbachev's ability to cope Moscow and its allied states.• _ with some fu ndamental r 1oxcs,and he will have to do so soonerrather tha i r: Gorbachev may also increase importsof Western technology 10 secure state-of-the-art equipment in key

• Improving managem Ticiency and worker areas. A marked rise in imports, however, would morale will req uire: !Ctivc incentive system require a substantial increase in hard currencyeir:pe n and increased avail• of high-Quality consumer dit urcs at a time when the USSR is facinga decline in goods at a time wh• investment sector will be the production or oif, its major hard currency earner. oriented toward pri .- 2oods and new defense While Moscow hasthe capability to expand imports proerams will be c ; on line. On the basis of by markedlyin crcasin� its hard currency borrowing, Gorbachev's progr ir redirecting investment, we such an expansion would createa potential vulnerabil project that the ir • ent in consumer-oriented ity to Western exporters, lenders. and their parent investment durinf 6-90 couid be some 60 per- governments that past Soviet regimes have soueht to ceni less than thr: I 1981-85. avoid .•

• Energy's share c i estment is to be held constant Gorbachev couldat tempt to reallocateresources away at a time when • .n md forenergy will grow and the from defense to provide some relief to the civilian cost or ofTsettir c! clining oil production will be economy. but he probably would encounterstiff oppo rapidly rising. o implications of a rcdir�tion of sition if he attempted majorad justmentsin defense investmenta"' / ·om other sectors, particularly allocations. Currently, about 30 percent of all ma·

consumer-oric lt • sectors. may be equallyominous. chinery output probablygoes to supportdef ensepro duction. Moreover. this share generally represents t he

• The increase r ana2erial independencenec essary highest quality productsand newest rechnoloiical

to spur e!fer .v technologicaldevelo pment and processes in Soviet machine building. The military uti lization i i1 ;onsistent with a centrally planned sector also receives the most capable managers. Some pricing anc .il x:ation system. leading to the likeli· labor, materials, and comPoncnts could be readily hood ofm 11 ;emcnt d1sillusionmc:ntan d subse shiftedto civilian uses, but most defensein dustrial quent rev si n lo the very methods that have led lo waste, fr: .d and mismanagement for years.

I J6 The KhrushdtevAna/ogy

Nikita Khrushchev. during his I 1 ;•ears at the rnp neou.rremarks during their prepared speeches as ..·ell (1951-64), launched Ns own ..revolu tion .. in Soviet as in the public role fo r rheir wives and fa milies. Th� politics. Crude. boisterous. and aggressive by nature. similarities between both Jeadus are particularly he bullied and cajo led his colleagues and the bureau.: pronounced when compared to the ca utious. rnff. and cracy to adopt his vision of the Co mmunist fu ture. He highly fo rmalized style of Brezhnev thpt klQS the made catching up with the United States a major norm /or the pasc 20 years .• goal and enshrined it in the utopian party program of 1961. He eliminaud terror as an insrrumenl of Ar the same time. Gorbachev-more polished and evuyday politics, brough t Stalin"s polh:t! apparatus educated chan Khrushch�ppears to have learned under d/e ctive political control, and publicized same fr om Khrushchevs mistakes and is using very di/Jer of the crimes and abuses ofpower ofhis fo rmer ellt tactics in pressi11g his agenda/or change. Wh en mentor. (These revelations were a tremendous shock Khrushchev was removed. his successors accused him to the Soviet people and 10 Co mmunist sympathizers ·among other things of.. harebr ained scheming. imma around the world.) He made dramaticchang es in ture conclusions. a11dhast y decisions and actions economic policy and management-abolishing the divorced fr om rea/i1y, bragging, and plrraumongtr same central ministries that now so trouble Gorba ing. " These accusations stemmed fr om his efforts 10 ch ev. reorganizing 1he party appara111s thar oversees hastily push through major reforms that were noc them. and changing economic prioriries almost l:IY wellthou ght out and his highly personalizedslyle of fiat. He dramaticaJ/y increased Soviet invo/veml!nl in leadership that was based more on coefrontaliottlhan thl! Third Wo rld and vigorously supped up Sovil!t consensus.• competition with the Un ited States/or power and in/iuence around the world. His risky political course Wh ile Gorbachev appears equally determined to 01•er both at home and abroad-along with his nonconsen haul tht :ystem, ht has gone about the task much sus style-ultimately led to his ous1er by the very more deJ.t.,,rattly and cautiously than Khrushd1ev. people he brought into power His signals to the bureaucracy are dearer and make .• it easier fo r lower level officials to ca/culate what is Th e most striking similarity between Gorbachev and expected fr om them and to respond accordi11gly. Khrushchev is their informal. populist style afleader /nsuad ofpresenting specl/icproposals fo r re/orm. as ship. Like Khrushchell. Gorbachev has made an effort did Khrushchev. Gorbachevhas ddined the general to show that he is acussible and interested in the directions Qfthe changes he wouldlike to accomplish views alnormal citize/IS. He hos made fo rays into the and encouragedfu rther discussion ofthe optimal sueet.r and visits to fa ctories ro l!ngage in unre ways to achieve them. At the same time, he is hearsed. we/l-p ubliciud exchanges with tire assem systematically building political support fo r his age1r bled crowds. The informal style albo th leaders is da by installing loyal offi cials in key positions and also e11ident in their willingness to make extempora- removing those who might thwart his plans.-

plants would require exlcnsive, time-consuming rc- a>mmiltcd 10 progra ms for modernizing 1heir offen 100Jing before they could productively lurn out much sive anddefensive srratceic fo rces, as weir as their civilian production. N everchelcss, in the lon2 run Conventional weaPQnpro 2rams. In addition, the US many defense r..s ourccs could be applied productively defense modernization and the long-term implications in the civilian economy� of the Strategic Defense (nitiativc (SDI) probably arc beingci1cd by Soviet militaryleaders as jus1ifica1ion Although military leaders recognize thal the long term Slren�lh of the Soviet military depends lar&clY on the count ry's economic heaflh, the Sovil!tsar e

t7 - -

for higher growth rates for defensesp1:n ding. The rate • The replacement of Gospl:ln Chairm:in BJybako.,. or growth of defense spending since the mid- 19?0s has with an outsider fpossibly even Nikolay Ryzhkov) been a relatively modest 2 percent. and military who would enhance the polilical stature of Gosplan l�dcrs probably already feel that defense has :icccpl· and signal increased emphasis on long-lerm strate ed slow growth in resources for as long as it can.given gic planning rather than detailed annual planning. the cittensiYe requirements fo r upgrading wcap<>n systems • A reduction in reported resistance to the ongoing .• industrial management experiment coupled with measured gains in . The institution of major economic reformssuch as productivity.. private enterprise and market-determined prices and allocationsco uld, overtime. markedly improve eco Moreover, with his own people in place, Gorbachev nomic clficiency, consumer welfare,an d technological should be able to build a consensus behind themore adaptation. They wouldencoun ter strong resistance far-reachingproposa ls that he has only hinted at to on politicalan d ideological grounds, but Gorbachev date. Indications that he has decided on and gained has alreadysh own that he will aggressively tackle the consensus formore radical changes could include: problems he has inherilcd and, like Khrushchev more .· than two decades ago, use his considerable power to • New dramatic initiatives to reach accord at Geneva force the pace of change (see inset The Krushchev and concrele proposals for reduced tensions at the Analogy"). .. November meetingbetween lhe US President and - the General Secretary, which might signal a willing· Premier Tikhonov almost certainly will be replaced at ncss and desiret o reduce the Soviet resource com· or before the congress in February by Gorbachev mitment to defense and create an atmosphere for himself or an ally. The leadlime to the congress will expanded commerce with the West. also give Gorbachev the opportunity to more thor oughly clean out the deadwoodfrom the party and • Select legalization or private-sector activity, partic governmental bureaucracies and bring in a manage ularly in regard to consumer services. which would ment tea m more sympatheticto his policiesan d better indicate willin2ncss to confront past economicor equipped to carry them out. Over the next year, thodoxy in order to improve consumer welfare and indicationsthat he is movinz aheadwith his economic thereby economicperforma nce. agenda could include: • Breakini the monop01yof the Foreign Trade appa

• A clear delineationof winners and losers in the ratus, which would signal an increased reliance on 1986-90 plan for investment allocations. Besides managerial independence at some cost to central machine l:!uilding, sectors such as fe rrous metals ized control. and chemicals must receive a greatershar e or the investment pie ror the modernization program to Continued relianceon mariinal tinkering, despite r.a"¢any r.:ha:-lce fo r succc.�:;. clear indicalions that the plan for economic revitaliza· tion is falterin2, would indicate that Gorbachev, like

• The ,.. · superministrics(for example, by Brezhnev before him, has succumbed to a p0litically

c1Jm� · >tries in the agricultural area) with a but cco11omically ineffective approach.

co.':'C · •eduction in ministerial control of en· -�nt

lcr;n . · .:i·alil)ns.

• Specific changes in managerial incentives cror elt· ample, tying bonuses to the share or new equipment installed) to promote modernization or plant and equipment.