Sinking Deeper into a Quagmire

By Charles Alexander

For the new boss, a major challenge is to end the economy's stagnation

While the Soviet standard of living nearly doubled during Leonid Brezhnev's rule, he left behind an economy slipping into deep trouble. Factories are faltering. Farms cannot feed the people. Oil production is peaking and may soon fall. After decades of steady progress, growth has seriously slowed. Still harder times may lie ahead.

Says Columbia University Sovietologist Seweryn Bialer: "In the 1980s the Soviet Union may pass through the worst period since the death of Stalin. Growth rates will be the lowest ever, and the population can expect a stagnating or even declining standard of living. The very stability of the social system may be in question." Observes Marshall Goldman, associate director of Harvard University's Russian Research Center: "There are problems everywhere in the economy. The Russians have to be thinking about what they fought the revolution for. They must be asking themselves, 'Was it worth it?' "

Because of a third consecutive dismal harvest, the Soviets had to import 46 million tons of grain last year, or nearly 20% of their consumption, at a cost of $7 billion or more. At the same time, the sinking market price of oil, the chief Soviet export, cut earnings from energy sales. Result: a hard-currency deficit with the West of $4 billion. To help close that gap, the Soviets sold some 250 tons of gold in 1981 to raise about $3 billion.

The Soviet Union, of course, is in no danger of economic collapse. Its $8 billion debt to the West is minuscule in a $1.5 trillion economy, and the Russian people throughout history have shown a great ability to live with adversity. Moreover, economic problems have not diminished the Soviets' military power. The armed forces get first call on food, clothing, steel, oil, machinery and technology. But the priority given to the military has left the civilian economy sputtering.

Gone are the heady days of the '60s and early '70s, when the average annual growth rate of 4.5% allowed the Soviets simultaneously to augment their arsenal, invest in new factories and improve living standards. Says Economics Professor Holland Hunter of Haverford College: "A very stern experiment in industrialization has been under way in the Soviet Union during the past half-century, and it has worked successfully. But this era has played itself out."

The economy now churns out one-fifth of the world's industrial production, including more steel and oil than any other country. But its per capita output of goods and services ranks below Italy's and is only half that of the U.S. The Soviet Union's reliance on exports of raw materials and imports of machinery, technology and finished products makes it appear more like a Third World nation than an industrial giant. Weaponry, including tanks, fighter planes and assault rifles, is almost the only manufactured product that is of high enough quality to be sold on world markets.

Consumer goods are far more abundant now than during the days of Stalin's early industrialization drive. Nonetheless, investment in industrial equipment and military hardware still absorbs nearly half of Soviet production. Personal consumption per capita is less than a third of what it is in the U.S. Only 6% of the population own cars; automatic dishwashers are unknown. Long queues are the norm at groceries and department stores. Poor planning and distribution generate temporary shortages of even the most essential goods. Recent examples: in the Belorussian Republic, dairymaids went to their jobs wrapped in bed sheets because of a scarcity of work clothes; in Alma Ata and Tula, students could not do their term papers because the shops had run out of ballpoint pens.

Though the Soviet diet has improved, it is still long on bread and potatoes. Since 1970, per capita meat consumption has risen 20%, to 128 lbs. per year, but that is only 48% of the U.S. level. Even this progress is now threatened by the succession of poor harvests that have caused shortages of animal feed. U.S. Government experts estimate this year's grain harvest at 180 million tons, 24% below the target in the current Soviet Five-Year Plan. "Usually the Soviets can expect one good year, one bad one and three average ones in a five-year period," says Economics Professor James Millar of the University of Illinois, "but three bad ones in a row hit hard, and a fourth could be disastrous." The Soviets hope to cover the grain shortfall with imports and thus avoid wholesale slaughtering of cattle and pigs. Despite heavy use of imported feed, however, meat production so far this year is down .5% compared with the same period in 1981, and milk output has risen only 1%.

While Brezhnev sank an estimated $530 billion into agriculture during his reign, many collective farms are still short of essential machinery, including combines for harvesting grain. Production also lags because workers lack the incentives of private ownership and profits. Proof: the 1.4% of Soviet agricultural land that is privately farmed produces 30% of the country's meat and milk, 50% of its fruit and 30% of its vegetables. A large portion of the food grown never makes it to a dinner table because the Soviets have failed to develop an adequate network of farm-to-market roads. As wheat is transported in open trucks along bumpy lanes, so much blows away that many rural routes are virtually paved with grain. In addition, there is a shortage of refrigerated trucks and warehouse space for perishable items. More than half of the potato crop rots before it gets to market.

For a year, a special government commission worked to devise a program that would revive farm production. Its decision, announced by Brezhnev in May: to raise the amount of Soviet investment devoted to agriculture from 27% of the state's capital budget to 33%.

Shortages of clothing and other consumer goods, as well as food, have fueled the growth of black markets. Soviet citizens surreptitiously spend their rubles on a wide array of hard-to-get wares, including jeans, stereos and calculators, sometimes smuggled from the West. Production of moonshine vodka, called samogon, roughly equals the output of the state-licensed brands.

Corruption pervades state-run businesses. To meet production quotas, Soviet managers resort to the "shadow economy," a system of under-the-table dealing. If an industrial supervisor is running short of bolts or truck tires, he barters for them with another manager, buys them illegally from an underground entrepreneur or perhaps bribes officials at the state agency that supplies the materials. Most of the equipment for sale in the underground economy was stolen or secretly purchased from state businesses in the first place.

The problems with Soviet industry run much deeper than an inability to produce quality consumer goods in quantity. The malaise has spread to heavy manufacturing and mining, which provide the raw materials for industrial growth and have always been the root of Soviet economic strength. Iron ore production so far this year is down .2% from the same period in 1981. Cement output has fallen 3%. Though the Soviet Union remains the world's largest steel producer (149 million tons in 1981, vs. 108.8 million for the runner-up U.S.), output has fallen below its 1978 level. Plants are equipped with outmoded Bessemer furnaces, which consume inordinate amounts of energy.

Obsolete technology also hampers many other industries. In factory after factory, the Soviet Union is anywhere from five to 50 years behind the West. The Soviets began producing their first family of minicomputers, called the Sistema Malykh (small systems), only in 1977, twelve years after comparable machines were introduced in the U.S.

The Soviets recognize their technological woes and are prepared to buy, borrow or steal know-how. The West has sold them state-of-the-art machine tools and oil-drilling equipment, but has in general sought to bar them from buying sophisticated hardware that could be used both in weapons manufacturing and in civilian industry. In Soviet plots to get around such bans, charges Defense Secretary Caspar Weinberger, "businessmen, engineers, scientists and workers have been bribed. Innocent-looking corporations have been created to buy equipment later sent to the U.S.S.R."

While the Soviets have successfully used Western technology in their weapons systems, their industry has reaped far fewer benefits. Because managers are expected to meet rigid production quotas, they have been reluctant to take the risk of testing new technologies, lest their normal output be disrupted. Says Ronald Amann, a Sovietologist at the University of Birmingham in England: "Imported technology cannot readily be adapted to Soviet organizations. It does not fit into the production machine."

Economic problems are complicated by the financial crisis in Eastern Europe. The six East bloc countries owe Western banks and governments $60 billion, and the debt is straining their economies. As new credit from the West has dried up, the Soviets have slightly increased their aid to the satellites, which last year totaled $21 billion. That will not be enough, and Eastern Europe could be an increasingly severe drag on Moscow.

The Poles alone owe about $25 billion and recently deferred payment on 40% of the $9.5 billion they owe this year in principal and in interest on that debt. With their economy reeling from the impact of political turmoil and martial law, industrial production fell 19% last year. Since then, food prices have gone up 300% to 400%. In Warsaw, new men's suits are available only to those who can prove they are graduating from school or getting married.

Other East European economies are also sagging. Rumania is trying to reschedule payments on its $10 billion foreign debt. Several Rumanian cities are suffering power shutoffs of up to four hours a day; bread and sugar are being rationed.

Hungary has high trade deficits.

Moscow will find it increasingly difficult to be generous to its allies. In the past, the Soviets achieved their economic growth by marshaling vast human and physical resources. But, says Abraham Becker, a senior economist at the Rand Corporation, "Soviet sources of growth will remain stymied until at least the 1990s." That goes for people as well as raw materials.

In addition to a low birth rate that is leading to serious labor shortages, the Soviets are facing shortfalls in their most valuable resource: oil. Production has probably peaked at 12 million bbl. a day.

As a result, the Soviets have had to reduce exports of low-priced oil to Eastern Europe, worsening the financial problems of the satellites. Economist Edward Hewett of the Brookings Institution says exports to the West may taper off to nothing by the middle of the decade.

To make up for stagnating oil production, the Soviets are planning a big boost in electricity generation through hydroelectric dams and an all-out development of their huge natural gas reserves. The centerpiece is the 3,500-mile pipeline that will carry gas for export from Siberia to Western Europe. Nonetheless, Hewett calculates that even with the pipeline, the Soviets' annual hard-currency earnings from energy exports could fall from last year's $17 billion to $11 billion in 1985.

Says Soviet Energy Expert Leslie Dienes, of the University of Kansas: "It appears that the entire growth in investment volume in industry will have to go for energy.

That leaves nothing for computers, steel and the like. The squeeze is severe."

Wresting more production from the available resources may require fundamental changes in Soviet central planning, including the use of free markets to set prices, combined with profit and wage incentives to encourage harder work.

Such reforms have been tried over the past decade in Hungary, where managers are encouraged to shoot for profits rather than production quotas. Bulgaria is now copying the Hungarian experiment.

But Soviet leaders have proved to be much more ideologically rigid. Economics Professor Gertrude Schroeder of the University of Virginia estimates that the Soviets are now working on their 14th set of "reforms" since 1965. Says she: "These aren't reforms as much as endless changes in their planning procedures. The real trouble is rooted in the system. To correct their problems, they must decentralize the economy." Decentralizing the economy, though, would mean dispersing political power, and the Kremlin is hardly eager for that. In addition, the vast Soviet bureaucracy has a vested interest in resisting economic reforms.

As the Soviets and their satellites have sunk deeper into the quagmire, they have become tempting targets for commercial and financial sanctions, even though such measures have been ineffective in the past. After the Soviet invasion of Afghanistan in late 1979, President Carter declared a partial embargo on grain exports and shipments of many types of technology to Moscow. Sixteen months later, Reagan lifted the grain embargo, saying that it was hurting American farmers more than the Soviet Union. In response to last December's martial-law crackdown in Poland, Reagan strengthened the ban against technology exports to the Soviets but let the grain trade continue.

But efforts to coordinate a sanctions policy among the allies hit a serious snag.

Despite persistent U.S. protests, West Germany, France and other Western nations are committed to supplying financing and materials for the Soviet gas pipeline and have refused to retreat from this position. Why, ask the Europeans, should they forgo the profits from the $10 billion deal and deny themselves much needed Soviet gas when the U.S. refuses to revive a grain embargo that would hurt American farmers? Over the past five months, the U.S. has banned the sale of American energy technology to European companies that are supplying equipment for the pipeline. But that policy has caused an uproar in Europe, and the U.S. lifted those sanctions on Saturday. A new understanding on East-West trade announced by the President (see WORLD) will resolve some of these Europe-U.S. frictions, but the basic disagreement on the usefulness of sanctions will remain.

Most economists doubt the West can agree on sanctions that would truly hurt the Soviets. Says Richard Kaufman, a Soviet expert with the Congressional Joint Economic Committee: "The U.S. cannot build an economic wall around the Soviet Union." Moscow evaded the U.S. grain embargo by boosting imports from Argentina, Australia and Canada.

Though the White House has talked tough publicly, there has been an ongoing debate within the Administration over how much pressure the West can bring to bear on the Soviet Union. Hardliners, particularly those in the Pentagon, say that economic sanctions might force the Soviets to slow military spending and be more cautious in foreign policy adventures from Afghanistan to Africa.

Moderates, centered in the State and Commerce departments, have argued that it is difficult to use economic pressure to force a totalitarian soci ety to change its foreign policy. Such countries can drive down standards of living a long way before they cut military spending. Moreover, the Soviet Union could be less predictable and more dangerous when it is economically weak than when it is doing well.

For more than a half-century, Soviet officials have claimed that their economic system is superior to Western capitalism and, as Nikita Khrushchev once said, would some day "bury" it. Such boasts sound particularly hollow today. Perhaps the greatest challenge that the new Soviet leadership faces is finding a way to haul the Communist economies out of their stagnation.

-- By Charles Alexander.

Reported by Erik Amfitheatrof/ Moscow and Gisela Bolt/ Washington

With reporting by Erik Amfitheatrof, Gisela Bolte

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