perestroika and change in soviet weapons acquisition

8/7/2019 Perestroika and Change in Soviet Weapons Acquisition

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AD-A236 866C

Perestroika and Change inSoviet Weapons AcquisitionArthur J.Alexander

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The research described in this report was sponsored by the Under Secretary ofDefense for Policy. The research was conducted in the National DefenseResearch Institute, RAND's federally funded research and development centersponsored by the Office of the Secretary of Defense and the Joint Chiefs ofStaff, Contract No . MDA903-85-C-0030.

ISBN: 0-8330-1067-0

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The RAND Publication Series: The Report is the principalpublication documenting and transmitting RAND's majorresearch findings and final research results. The RAND Notereports other outputs of sponsored research for generaldistribution. Publications of The RAND Corporation do notnecessarily reflect the opinions or policies of the sponsors ofRAND research.

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Unclassified

REPORT OcM TATIO PAGE _____ _____________1. REDPOT N11MU11 O ACCTA01ON 10L COPIeISrl CATALOG HUNERR-3821-USDP

4. TITLE (an Sw.W S. TYPE OF REPORT a Pemo CovEsPerestroika and Change in Soviet Weapons interimAcquisition 6. PENPofINe OR61. REPORT 1UMs .

7. auTIODIIIe S,. ONTRACT Ol "NANT NUuSEgr,)A. J. Alexander MDA903-90-C-0004

6. P5R@omNe oRNAIZAVION INAMEANS * 5 O.AD.aNIM t.1 r .- ,T. TASKRAND1700 Main StreetSanta Monica, CA 90401

It.CONTROIUNO OP"CIS M AlO LORES 1I.REPORT OATEUnder Secretry of Defense for Policy June 1990Washington, D. C. 20301 IS. NIuDm8OP PANE,96

I4. IONITOUNN AGENCY NAME 6 AOORES11SuI dlhiNEm# mCORIamOU1Om.) IL.SrCURMTY CLASS (atm e )unclassifiedIii. OECLAUilI CATIONOOlNGROSNao

I*. MSTP4SUTION STATIMIN.T (of We *.55)Approved for Public Release; Distribution Unlimited

I7. DSRrITsON STATEMENT (fm .em M /* d I, 1A k me601No Restrictions

10. SuPPt. ENNTARY NOTES

IS. KE Y WORDS (Cowome en ewsw O aissd1 amous e1for bkm*a nm bwm)Military Forces (Foreign)USSREconomicsAcquisitionWeanons ,

01. AMTRACT (Cinmbeu e wera sis HIOsOUseemmig maip m woo"

See reverse side

Do ' 1 I 1473 aiOO I N 556, SEUnclassifie


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Unclassified29CUMTV CL.AMSICATIO OF ThIS PAF4(WD e md3

Focusing on two major issues--the"conversion" of defense industry resourcesto civilian uses and the influence ofcontemporary weapons technology andcomplexity on th e Soviet Union's ability tomeet military requirements--this reportidentifies and explains the major elementsof continuity and change in Soviet militaryorganization, concepts, and goals since theemergence of Mikhail Gorbachev and his "newpolitical thinking." Soviet militaryresearch and development and productionevolved from the 1930s to the 1980s in amanner that was consistent with thepolitical-military doctrine and economicbase that supported it. Now, with thedramatic changes in Soviet politicalchoices, doctrine, economics, andtechnology, the Soviet Union's defenseproduction complex is engaged in adaptingto a conversion to civilian production asit tries to meet military demands forhigher performance, increased reliability,lower costs, and the application of newtechnologies. Analysts must now ahift fromdealing with established and familiarelements to grappling with theuncertainties of evolving Soviet politicsand policies.

UnclassifiedN=mTVy CLAIPCATg oF TnM Pt., wI aDo@ n0


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NTS G3RA&jID!IC TkB

.:: ~~Justif te ,tion _

Distr4but.Iom/ _* Avalability Ccd.5

Arthur J. Alexander

June 1990Prepared for theUnder Secretary of Defense for Policy

91-02492IlllllmllI,.,j 9 1R6 11i D 0 8 1

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Vi-aor orden and Prodactien line. futher deepening the effectOf conversion.

* KhmcsrecW and self-financing in defense enterprises will raisethe visible cost of procurement to the military and futheremphasi thes goeAM burden atdefense.e The broadened converuion responsWbilitie Of the MiHItazInmulal Comalon (VPK) and the Party apparatus fordefens Industy reduc, the Party' ability to maintain andissplement priorities fo r diemae ptoduction.* All of tdm atitwa *W1 a ChwVP in POWia choke OWafrom e inWhetwy and Wwwd c*ilam WeVO.These policies will influence the military' ability to develOP andprdc the Wsyse it deeies. Defns Industys,abifty and wding-am to develop and produce tcnoialyadvanced and complex

equipment have depended on the availability of inputs especiy Ofnew typee. If supply becomes more uncertain, the defctivenses, ofdefense R&D will be consderabl impaired; and if the coordinatingrole of the VPK and Part apparatus is diminished~ the fulfillment ofcmle taskts will be delayed and rendered, les likely.An importat ecor in predicting thes continuity of the Policies andtheir taui hchans and the ~ 'V > of the former structure ofpreferenoes. Much will depend on the futur of the VPK and the Con-tral Committee apparatus, for it is in these tw o bodies that politicsfande It extensio into aton. The arly evidence is that the authorityof thes organton over deee indiutxy has been diluted through.the broadening of responsibilities. The future course of these orgranwill provide important clues to the process of conversion.Impemetatonof conversion follows classic Sovie hum*s largrusouarce transfe direted by a campaign approach to mobilizing esm-gle and managing detils.Tis campaign thougk has ha neither theadvantage of cenltraiueed plans and coordination nor the benefits ofGorbache early economic Ireforms wholeale* trade, price refora,pes Incentives, 1 rP ed cntralization of authority-none, of whichha ve gocedA asccording to plan. As they enter the civilian industrialworld, Soviet defns podctin manr have confronted, the usual0410I untatis weak ties btenpoduce and user, and poorbelow 100 pureI VPIC chairman Buloumo summarised these develop-na by mod"n that the defens complex' coDUrIuton to practclwsedes tanning sowr." Neverthless civilian outpu will benefit inthe shot rn frm the resource base and eyrince of defen


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M~and lower tehiasand erde,than Aon1@plat, but also smeinereaed and improved civilia output, perhap eve visible to theaverag consumer.FiAcalM budgets hove not bean a principal source of control overmiliar einpendlsuree but rather werea an after-the-fact accountingdevie that Molowed the planing ot physica program and materialbalances. 7%ie situation is being drastically altered by the politicalleadsrshlp' attention to the reduction of aggregate expendItures, bythe budget review proem of the Supreme Soviet defense committee, bythe transition.of defense industy to self-financing, and by the neowsity to Crate an actual financial budgetary base fo r the Delane Minis-try to purchas prodU from W&OWry The Soviet defense budet,which has lImply been an artiact of Western, anayss as now becom-.Ing aPrincipal tool in the control of the Soviet armed forces

The Sovie military has implemented its authority as a buyr ofdeflamsysteme throug militay rpenttesin deelgn, bueu andfactories, to mpreh-1-ensivo testing of new equipment, and sanctione for0opefomno However, the technical feasibility sad amnsrtmethods of buye authority have been compromised by the technologiesend complaxitie Of cotmoayWeapo systemsThe advance in elProis coinuteleation, information, andminltursatome the 1970. hae" left Soviet military industry in avulnerable, position. The speed of change, the complewies, of dsign,the integration of many difeent tolowgie and input from. diverssourcesi and the high precision and reliability needed in productionstrike at traditional weak points of the Soviet economy, whic an nowaffecting weapos acquisition.171e integratVe role of the chief designer and the VPK is beingundermined by the number of participants and the complexity of theintmfce of modemn weapon system FleibIlity and moctivated disci-pine are aee"d but both arn largly missing in Soviet ognstoeThe kind of focused, centraliud campaigns used in the pas to dwe"Okpnuclear weapons and lo-range rocketry cannot be mimicke today bycommanido to build a micecroIP nics, capability or a data bum. Sys-tems designers can no longer count on slowly evolving technologies anda stable set of suppliers but mutst confront sharp chan in the talentsof their own design bureaus and new capabilities in their supplierts.Rvidence Isnow surfacing of serious shorteomings in Soviet weaponsystem in both reliabilit and performance. Thee problems haebeen particularly severe in advanced electronics, sensors, communica-tions, and computers. As moe testng is needed to discover problemtsbeoefelding, pressures from, the military leaderhi ar e trying to


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stimulate shorter times to field new systems. Growing deficiencies inthe science and research sectors compound the technology problems;Soviet fundamental science has been described as "too weak to contrib-ute much to practical applications."Much of the Stalinist structure supporting Soviet weapon acquisi-tion is now beginning to crack. It has not crumbled, and it is even farfrom collapsing, but it is beset by forces that reduce its capabilities andplace a premium on those economic traits in which the Soviet Union isweakestThe effect of conversion and defense cutbacks is occurring at a timewhen the adequacy of defense R& D is being questioned. Soviet mili-tary leaders are calling for weapons of qualitatively new capabilities asthe military leadership wrestles with the simultaneous issues of theirown new doctrine of reasonable sufficiency and new technological chal-lenges from NATO.These developments on the military side point to military demandsthat place less emphasis on the mass-production base, but perhapseven more on the advanced industrial capabilities and R&D resourcesof defense industry. The demands for higher performance, increasedreliability, lower costs, new and nontraditional solutions to militarytasks, and greater speed of introduction of new technologies willrequire a reorientation of Soviet defense R& D away from its Stalinistheritag Such a reorientation will conflict with the demands on thesesame resources coming from the conversion to civilian production.From the 1930e to the 1980s, Soviet military production and R&Ddeveloped along one dominant path, evolving and refining its practicesand approaches into a clearly identifiable style and culture. This pathwas consistent with the requirements of political-military doctrine andwith the economic base supporting it. Participants and foreignanalysts alike grew comfortable with the operation and the understand-ing of this enterprise. Now, politics, doctrine, economics, and technol-ogy are changing. The Soviet defense production complex and themilitary are adapting to forces imposed by the leadership and by lifeitself The fog and confusions of war are matched by the uncertaintiesof evolving Soviet politics, policies, and accomplishments.


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ACKNOWLEDGMENTS

The author gratefully notes the critiques and suggestions on earlierdrafts made by Steven Popper of RAND and Professor David Hollowayof Stanford University. These reviewers unerringly picked out theweakest parts of the argument and the gaps in the factual analysis.Virtually al l of their recommendations have been adopted in this revi-sion.

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CONTENTSPREFCE F A CE.................. iiiSUMMARY ..................................... vACKNOWLEDGMENTS ............................ ixTABLES ........................................ xiiiSectionI. INTRODUCTION ............................ 1Main Themes: The Changing Context of SovietWeapon Acquisition ....................... 1

The Sources of Defense Industry Effectiveness:In Brief ............................... 1U. THE PLIGHT OF SOVIET CIVILIAN INDUSTRY .... 3Phases in Defense Industry Support of the Economy ... 3Sources of Soviet Civilian Industry Problems ........ 3Goal-Oriented Programs: Borrowing from Defense .... 8

m. THE FAVORED SITUATION OF SOVIETDEFENSE INDUSTRY ................... 10Effectiveness and Efficiency ................... 10Military Incentives .......................... 11Military Industry's Access to Supplies ............. 11The Political Sources of Effectiveness ............. 13Defense Industry Governance .................. 15

IV. OVERVIEW OF POLICY ON DEFENSEINDUSTRY CONVERSION ................ 20Seeking the Magic of the Defense Sector ........... 20A Conversion Chronology ..................... 20The Necessity of Conversion Plans ............... 26Quantifying Conversion ...................... 30Redrawing Organizational Boundaries andResponsibilities .......................... 33V. APPROACHES TO CONVERSION ................ 34Transfer of Plants to Defense Industry ............ 34Total Conversion of Former Defense Plants ......... 35Partial Conversion or "Reprofiling' .............. 36

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VI. IMPLEMENTING CONVERSION ................ 40The Special Advantages of Defense Industry ........ 40Defense Production Inefficiency ................. 41Defense Industry Prospects in Civilian Production .... 45

VII. CONSEQUENCES OF CONVERSION FO RCIVILIAN PRODUCTION ................. 56The Conversion Campaign .................... 56Conversion and the Economy ................... 56The Returns from Conversion .................. 58VIII. SOVIET DEFENSE BUDGETS .................. 60

The Recent Birth of the Defense Budget ........... 60The Financial Budget Process .................. 60Central Budget Review ....................... 63Weapon Prices, Budgets, and Khozraschet: AdditionalBudgetary Pressures ....................... 64

IX . THE IMPLICATIONS OF TECHNOLOGYAN D COMPLEXITY ..................... 67The Declining Effectiveness of the Buyer's Market .... 67The Age of the "Weapon System"................. 67Deficiencies in the Soviet Military R& D Approach .... 68Trouble for Soviet Weapons ................... 70

X. SOVIET WEAPONS ACQUISITION UNDERPOLITICAL REFORM AN D TECHNOLOGICALREVOLUTION ......................... 78Resource Allocation ......................... 78Implementation Priority ...................... 80Buyer's Market ............................ 81R& D Style ............................... 82Conclusions ............................... 83Appendix: THE COST OF SOVIET W EAPONS ............ 85


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TABLESA.1. Announced costs of Soviet weapons ................ 86A.2. Characteristics and prices of U.S. and Soviet tanks ...... 88A.3. Announced and estimated costs of Soviet tanks ........ 89A.4. Estimated ruble-dollar ratios for Soviet weapons basedon announced prices ........................... 96

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I. INTRODUCTION

MAIN THEMS.: THE CHANGING CONTEXT OF SOVIETWEAPON ACQUISITIONSoviet wipon daka, &dwshpmoo,and ptoduction have been effec-tive euterprises ance the 193b. Although often lacking the mostadvanced technologie ppesring n contmporaneou Westem systemsand sometimes exhibiting lower performance measures in direct com-parisons, the operational capabilities of Soviet weapons have been thebackbone of the Soviet Union's military competency. Not only havethese weapons provided the offensive and defensive capabilities of theSoviet military, they have also been delivered in great quantities toSoviet friends and allies, and have formed an important segment ofSoviet external trade-arms sales having consistently earned the SovietUnion a significant proportion of its foreign exchange.The effectiveness of defense industry stands in sharp contrast to thelargely inferior performance of Soviet civilian industry. These differ-ences in performance are no t independent of each other, they haveemanated in part from the set of policies that has favored the one sec-tor at the expense of the other. An ongoing process of change is nowunraveling many of the weapon acquisition policies, organizations, andmanagement approaches set into place in the early Stalinist period.Interwoven with that process is the current process of convertingdefense industrial capabilities to civilian use. The changing nature of

defense technology-in the context of the prevailing deficiencies of theSoviet economy-further undermines defense industry effectiveness.THE SOURCES OF DEFENSE INDUSTRYEFFECTIVENE88: IN BRIEF

Defense industry effectiveness arises from four principal sources. (1)the allocation of large quantities of resources to the defense effort; (2)the assurance that the allocational choices are actually implementedthrough priority over the supply of materials and other inputs andthrough close Communist Party and government oversight an d supervi-sion of weapon acquisition; (3) a buyer's market in which thecustomer-the Ministry of Defense-has been ganted the politicalprivilege of not accepting inferior products; an d (4) a design and R& Dphilosophy and management approach that has effectively dealt withi1


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the shortcomings of the Soviet economic systemL In short, these foursources of effectiveness may be designated allocation priority, imple-mentation priority, a buyer's market, and design philosophy.This report will describe how Soviet political choices since mid-1987have altered the structure of defense industry privileges with negativeconsequences for weapon acquisition effectiveness. Later sections willaddress the problems introduced by the widespread use of electronics,communications, and sensor technologies in weapon systems and thedifficulties encountered by the traditional design and product'un phi-losophy in coping with the complexities of the new technologies.


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II. THE PLIGHT OF SOVIET CIVILIANINDUSTRY

PHASES IN DEFENSE INDUSTRY SUPPORTOF THE ECONOMYSoviet defense industry is different from civilian industry. Believingthat such differences have been the major source of the relative successof defense production and that these differences are transferable fromthe defense to the civilian sector, for the past 25 years Soviet leadershave attempted to seize a small part of 4.M defense industry magic andbestow it on civilian industry through the transfer of defense managersand methods. Such attempts were accelerated in the early Gorbachevyears in what we can now recognize as a first phase of enlisting thedefense sector in the aid of the economy.1 However, an important newelement has been added to the earlier attempts at stimulating civilianinnovation and output. In addition to magic, the present Sovietleaders are now seizing things that have hitherto been closely guardeddefense industry resources and privileges. The second phase of theevolving policy is the conversion of defense industry capacity to civilianpurposes. A review of the causes for the different results in civilian

and defense innovation and technology, especially the plight of civilianindustry, will aid in understanding and evaluating the evolving policiesand behavior.

SOURCES OF SOVIET CIVILIAN INDUSTRY PROBLEMSTwo Kinds of Priority

Within the Soviet system of a planned economy, civilian industrysuffers on two counts: (1) the political authorities allocate a compara-tively large volume of resources, especially of more advanced materials1These periods, from 19M6 until mid-1987, and from then to the present, were almostcertainly not planned as a phased program by the Soviet leadership bu t rather grew outof uplor changes in perceptions and politics that, in retrospect, may be identiffie withdifferent phases. For an analysis of the "first phase," we Arthur J. Alexander, "SovietWeapons Acquisition in the AVe of Perestroika," in H. Rowen and C.Wolf, Jr., TheImpoverished Super :parPereatroiksand the Sovie Military Burden, Institute of Con-temporary Studin Pro, San Francisco, 1900. 'T I political struggle is analysd byHarry Gelman, 7Te Soviet Turn Toward Conventional Force Reduction: The InternalStrugg e and the Variable at Pa, R-3876-AF, The RAND Corporation, forthcoming.

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* and suppbie, to dubs., starving civilian podl and (2) unreliatically high output targuts (taut Plans) result in shortalls of plannedinputs these shortfll, which cMeate gret uncertainty in civilian pro-duction, alleviated in dnee industry through special access toauthority and to supplies.Ths two methods of transformiMg preferences into results can betermned -allocational prWoWt and proOtyfINAloca-4tional priority exists when a particular sctor or recipient is favored.for example, compared with another countrs sectoral Share or level ofresources, or the same country at a different time. One could say thatallocational priority is granted to Soviet defense, compared with thepattern of defense expenditures in most Western countries, or priorityis now shifting away from defense, compared with the situation in thepast fifty yeas of Soviet experience.Impismentation priori0t can arise whenever financial or other kindsof allocations are insufficient by themselves to accomplish desireddetailed objectives. For example, dealing with complex bureaucratic orregulatory processes in any country i often esend by access to sourcesof authority able to cut through red tape. in the bumamatic, planned,conservative processes of the Soviet Union, implementation priority isa customary method by which political preferences are realized.It is no t logically necessary that allocational and implementationalpriorities coexist. Indeed, many cases of enormous expenditures in theSoviet Union represent major commitment of allocational prioritywithout a concomitant flow of implementation priority. West Siberiangas development is one example.' Also, many examples of rhetoricalpriority have had neither the resources nor the implementation com-mitment to back up the rhetoric, as witnessed in the periodic comput-erization and agricultural development campaigns. Politburo memberLigachev, for example, complained that the State Planning Committeehad submitted a draft annual plan for the aproindustra complex con-taining lower commitments than envisioned in the Five Year Plan:'While lip service is paid to the priority of the food program, theresources ar actually being cut bacwk" Defense, though, is an exampleof the coming together of rhetorical allocationaL and implementationpriority in the Soviet Union-the alliance of word, ruble, and deed.The necessary complement to such pri i the low status of civilianindusty and its cameq now neglected materi base, low tachnologi-cal levels, insufficient o nd poor quality products.

sAbohm di , Soiv t Cmtd Dw knm&v and Zemic GwA R-34-AI,The PAND Conmm*. immy UKIS w 21-2L.IMAieblu t6 P=s VnSam md R. .in Soum , ?sdi Juy 21, anS(1D1-OV4-1-M, Ju, l,21 I, p. 62).


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Aflosaales to Chiells. IryCiviia idustry is defied a produiction for civilia use, regardlesof the source. No t all nondefense Production, however, goes to theimmediate benefit of individuals; a considerable portion of total outputin the Soviet Union is devoted to investment. Estimates of the defensshare of GNP fall in the range of 15-17 percent, and the shae allo-cated to gron fixed investment is close to one-third of the entireGNP.4 In the Western indsraie countries, in comparison, thedefense share is 1-4 percent and investment about 20 percent of GNP.Defies plus investmenit in the Soviet Union, therefore, absorbsroqohl 45 percent of the economic output of the counitry versus 20-25percent in the other developed industrial economies. The high Sovietshare of both of these end uses of economic output is a direct result ofthe political determination to become a world power in economic andmilitary terms. Arithmetic logic dictates that, given suich choices, con-sumiption must suffer. Private household consumption absorbs lessthan 50 percent of GNP (60-65 percent elsewhere), and total privateand public consumption (which inclKue public services suich as trans-portation and health) stands at 56 percent in the Soviet Union and65-70 percent in other countries.As large as the defese shar of GNP appears to be, it impose aneven larger burdien on specific sectors, especially machinery output andR&D. Th e lion's share of investment funds allocated to the machinerysector has gone to the defense industrial ministries. Several estimatesplace the defense sh~are of total machine-building output at the 40 per-cent leveL 5 For R&D, total Soviet expenditures grew very slowly from1976 to 1966, essentially flattening ou t in the latest five year period.Military R&D, however, continued to grow, an d ince 1976 most of thegrowth in military expeniditures has been due to the R&D account.These diffrential growth rates imply that defense R&D has beencrowding out civilian R&D in the decade before 1966& This starving ofcivilian R&D has been occurring at the very tim that Soviet leadershave been counting on technology, innovation, and produictivityincrease to move the economy to an intensive growth trajectory.

4GW Oh,. "ot EcSonmi Grw 1U5-1555 Journa Et Zuuom LdsrutW.V.1. XXV, Decobu 117, Tahbm 3, p. 17K5 In contfo, outsmil 0I~Ms LAndhvstwm WO . psiPont of GNP, and 2&.0 psut wben ammwrd in cusm Aab-OM firIw v I~sI b Politi asubsi Lieobs,. who netAd Ih 185 Mii--g ~ ~ *"3hbhgthePrys Famed=u &W d Robm in Sodey.0 Am*d 2LtIM.i(flUOV4S1,J* 22. 180, p.U).


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Since at least th e 1930., then, Soviet political-economic strategy hasemphasized defense and heavy industry growth in allocating thenation's available resources. But under the conditions of the Sovietplanned economy, priority of allocation is insufficient to guarantee thatplans will be met Additional step. are required to assure the desiredoutcomes. A method of implementation priorities is also necessary.Supply Uncertainties

Innovation always involves the uncertainty of the unknowable futurewhere affairs are, by design, intended to deviate from contemporary cir-cumstances. But for the Soviet civilian innovator, the economic systemproduces additional risks, the most important of which arise from thesupply of inputs. Weakness ofthe interenterprise supply system has beena shortcoming of the Soviet economy since the 1930s. Uncertainty oversupply is a major concern of managers, and fo r innovating managers theproblems are multiplied. A great deal of management effort is normallydevoted to developing reliable relations with suppliers, tracking down lateor missing supplies, sending dispatchers to problem enterprises, and deal-ing with local Party and government organs in attempts to obtain supportin these activities. Once a set of suppliers, components, and materials hasbeen identified and incorporated into an enterprise's plans and opera-tions, a manager is very reluctant to disrupt these arrangements; sinceinnovation generally involves disruption of familiar routines, managersnaturally shun innovation activities.Supply problems arise from faulty planning procedures, overcentral-ization of planning and allocation, an underdeveloped supply infrastruc-ture, and complexity of the economy with its tens of thousands of enter-prises and millions of commodities, but mainly it comes from the tautnessof the planning system." Tautness is another name fo r excess demand,which arises from the attempts of planners to motivate workers andmanagers by stimulating effort throughout the hierarchical managementsystem. When tautness is combined with an incentive system that pri-marily rewards the meeting of gross output targets, a permanent seller'smarket is produced, one of whoe outcomes is a state ofconstant shortage.Despite repeated attempts since the 1960, to replace gross output targetswith more complex indices of plan fulfllment 7-including profit-likemeasures--short-term output continues to dominate the reward structuresJouph S. Berlimr, The Innovamtion Deewaon in Sovit Indutry, MIT Prs Cam-bWddp Mm , 1976, pp. 70-717The Inru&xo of Profi-oriented sel-fnancin practime (khowuehe) ha. notimpovd matte. markedl. A hmd bookkper complained of -the immee numbr ofadditioal indicator and ystems of inentives Five yam ag o the Rqot on the Fu#M.


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fo r a simple and powerful reason: The outputs of one organization are the- inputs of others; in a planned economy of the Soviet type, the authorities .cannot tolerate schemes that could disrupt the vast number of bureau-cratically contrived connections among organizations without contem-plating a chaotic breakdown of the production system.As much as the risks to innovation are multiplied for the Sovietmanager, the rewards for successful implementation of technologicalchange are stunted, mainly for the reason just alluded to: a rewardstructure that continues, in the main, to be basd on gross output.Despite several attempts to juggle new-product prices to favor innova-tion and to ad d output indices based on the number or value of innova-tions, these modifications have been fairly minor and ineffective.Moreover, the very system of central planning that produced the nega-tive incentives in the first place insulates producers from pressures toinnovate that are generated by competition and the potential entry ofnew enterprises. Enterprises are assured of customers for their produc-tion. Consequently, they face only administrative pressures (ratherthan economic requirements) to innovate.Organizational Structure

In addition to the disincentives retarding productivity and techno-logical change, organizational structure also acts to discourage innova-tion. Soviet economic organizations are marked by large-sale bureau-cratization, complexity, hierarchical rigidity, and horizontal boundariesthat are often more difficult to bridge than international boundariesbetween less-than-friendly states. Where technology is fluid andchange is rapid, successful innovating organizations require flexiblestructures, lateral interactions, and organic, nonhierarchical schemes oforgnization. Soviet economic organizations tend to violate thesenorms in al l dimensions. As one example, Soviet enterprises are lum-beringly large. Twenty years ago, only 15 percent of Soviet enterprisesemployed fewer than 50 people, compared with 85 percent in theUnited States and 95 percent in Japan. At the other end of the distri-bution, 24 percent of Soviet establishments had more than 500 employ-e; in the United States, only 1.4 percent of the firms were as huge,and in Japan the figure was a tiny 0.3 percent. In the meantime,Soviet organizations have grown even larger with the merger of enter-prises and the creation of production associations and science-mint o/NorM omihtsd of 10 pM, and now it hm 240 peVL. V. L Sidorov, "rAmlim'as ookkspg evls," EKO, Oetob 196, p. 34.'tU point is put %ward by Ohr, 8oviet Bononmie Gzowt," p. IBM.'Beriner, M Innovation Dsim p. 8.


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pynduction assocatiots in which many enterprises are joined under asingle manamgentL Iroically, the amlsainof enterprises andresearh&institutes, into enormous complexes was intended to correctthem" aniza.,onalboundary problmDespite the lag scale of individual Soviet research an d productionoganizations, the Soviet indutrial structure ha been chacterized byfunctional to Production enterprises do little R&D;,researchinstitutse have little capacity fr prototyp constuction and testing or forpilot plant production. Design, and project organizations produce blue-prints for products and factories they will never have to produce ormanage. ven when a reearch institute is within the same ministry as aproduction plant, the different incentives acting on managers of the dif-ferent orgmnizatiom produce only weak forcee fo r the interactions andpersonal energies required to develop an innovation and transfer it suc-cessfully to a producing organization. Moreover, the forces of demand areso blmted that ther is often little incentive to produce even a suc-cessfidly implemented innovation.For many products and technologis, market economies can coordi-nate these different functions through arm's-length market transac-tions; but fo r the majority of products, the functions are integratedwithin single companies where intense personal communications andthe movement of people who embody technical knowledge and know-how are more possible than across company boundaries. Even withsuch integation, however, research-intensive companies in marketeconomies find that the management of the interfunctinal flows is acritically important, difficult, and consuming activity. Developingeffctiv links among researh, design, development, production, andmarketing is diffiult in the best of circmstacs under Soviet condi-tions it is grossly ineffective.GOAL-ORRNTED PROGRAMS: BORROWINGFROM DEFENSE

One policy development in the civil sphere deserves mention becauseof its links to military sector practices: the ume of program planningan d managment. The program approach emphasizes a set of goalsor technical achievements such s the development of a specific newproduct or the creation of some production capability. For such pro-ane, plans focus on the achievement of the goals, rather than on anOnJdm Caspe, quad1 h oIovatis in ois, Idm*awy,' in IL m mam dJ. Coopw (db.), IAufw Imaeo n d Sost Uim, Yak UWity Pnue, New

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og unit such as an entepris. Many of these programs inthe civil sector appear to be related to high-level Party or governmentobjectives and are managed outside the usual methods and organiza-tional frameworks. In some cams, time schedules, resouces, and par-ticipants are designated in the formal documents authorizing the pro-ject. For important interministry problems, a lead organization may beassigned authority over resources and over other participeting organi-zations. In the most important projects, high-level political backing isused to solve the always-present problems of bottlenecks, unreliablesupplies, uncooperative partners, and general disinterest in results.Such approaches have been used for major campaigns such as exploita-tion of Western Siberian oil and ga s reserves, or for more narrowlydefined goals such as a ship-building development programn, Programmanagement effectiveness depends on the ability to isolate a high-priority goal from the general economic structure. High priority andprivileged access to supplies and organizational talents, though, candisrupt the plans of others and impose an additional burden on thealready taxed capabilities of less privileged managers. As Berlinernotes, when the source of problems is systemic, the creation ofremedies by exceptions only adds complexity and arbitrariness toresource use and decisionmaking. 2 Therefore, to the extent that pro-gram planning is effective, it contributes an additional impediment toinnovation and effectiveness for the nonfavored residual claimants ofresurces.

11Jbid., p. 479.fttliHsw, Th InnomaionDecskion, p.78 .


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MILITARY INCENTIVESThe highly skilled and experienced military professionals of theSoviet General Staff formulate weapon acquisition requirements andpolicies in light of the always-changing nature of the technical leveland capabilities of the forces opposing them. Real, international com-petition generates a phenomenon that is rather rare in the SovietUnion: a buyer operating under incentives leading to choices, that-toan outside observer-appear to be rational. This rationality is com-bined with political authority, which transforms the defense industrialsector into a buyer's market dominated by consumers. Unlike mostother actors in Soviet economic affairs, the military and the defenseindustrial managers in general actually choose what they ought tochoose: They are astute buyers. This is not to deny that distortedprices and the loosened constraints brought about by long-term budget

growth have induced many deviations from strictly optimal behavior,but the military has been given something that others do not have:authority to cope with uncertainty and risk, and the ability to escapethe customary Soviet preoccupation with the narrowly defined effi-ciency of producers at the expense of the utility of users.

MILITARY INDUSTRY'S ACCESS TO SUPPLIESMilitary industry has customarily been given first priority in itsaccess to materials and the outputs of other enterprises. Beginningwith planning at the highest level, the military allocation (as deter-mined by the interplay of politics, economics, and military demands) issatisfied first, with the rest of the economy treated as a residual.3 Inproduction plans at enterprises, military orders must be completedbefore the demands for other customers. Capital equipment in shortsupply goes first to military plants, and then the remainder is allocatedto lower priority enterprises. Advanced, high productivity foreignequipment, both bought and stolen, flows to military producers. Notonly supplies and equipment, but also high-quality workers andmanagers have been channeled to the military-industrial sector, wherethey have been rewarded with high salaries, bonuses, and other per-quisites such as housing.To guarantee the quality of its inputs, the military itself manages anetwork of military representatives at production plants producingfinal goods or inputs for the military customer. These representatives3A . S. Becker, Soviet Central Deciionmakag and Economic Growth/ A Summin Up,R-3349-AF, The RAND Corporation, January 1986, pp. 9,19-21.


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have the responsibility and authority to reject output that does no tmeet the contractual specifications and to work out corrective pro-cedures with local managers.Even more than in civilian industry, the military industrial minis-tries and factories try to assure that as many of its supplies and inputsare produced under its control as possible. For example, the Ministryof Aviation Industry includes aluminum production capabilities andrubber plants for tire production.In short, military producers escape many of the effects of a seller'smarket. They insist on the meeting of agreed quantities, qualities, andschedules. And they have the advantage of planning priority, deliveryauthority, and independent on-the-scene inspection by authoritativeexperts to implement their demands.Party and government organs contribute to the reduction of supplyuncertainties to military industry. As part of their general function ofobtaining supplies for enterprises under their jurisdictions, local Partysecretaries pay special attention to military production. They candivert needed supplies from civilian plants to military plants, comb thelocal area for reserves, and call on their comrades in other areas to dothe same in exchange for commodity trades or future favors. LocalParty leadem can use political pressure on producers to speed up pro-duction to meet deadlines, find transport equipment to move availablegoods, and otherwise attempt to solve the thousands of bottleneckproblems that affict Soviet industry. Some analysts claim that thesefunctions legitimize the roles of local Party leaders, impeding reformsthat would eliminate these functions and therefore the local Party'sstatus and main raisond'Otre.When solutions to supply problems cannot be dealt with on the locallevel, oftials can ascend the Party hierarchy, seeking resolution athigher ivl. At the top, the Party Secretary overseeing the DefenseIndustry Department of the Central Committee can presumably call onthe entire national economy te solve a critical military industrial sup-ply problem, mobihg the planning and supply agencies, industralcapabilities, and stocks and reserves. The Party, therefore, both estab-hes the priority of the military sector and, in its deployed capacitytthe country, stands ready to help implement its own policy.The Party is aided in this task by the VPK, an agency that is nomi-nally attached to the Council of Ministers but is closely supervised bythe PMaY Secretary for Defensh Industry. The VPK is primarily anorganzation of militay-industrial policy rather than on ethat Originate policy. One of its primary jobs is to coordinate andpolice mltary priorities thougout the economy and to s that deci-sions are actually carried out. The VPK participates in planning of


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weapons R& D and procurement at the national level with Gosplan,'the Academy of Sciences, and the State Committee for Science andTechnology (GKNT). With a supraministerial role and commensurateauthority, its instructors have the knowledge, skill, and power toenforce compliance with contracts and program plans; apparently theyare not reluctant to use these powers, even if fulfilling militarydemands has adverse consequences for lower-priority users.

Two modifications to this rather bald description of priority arenecessary to bring it closer to reality. First, although the military haspriority, and this is recognized and acted upon throughout the system,the actors at all levels are not unaware of the harm done to other sec-tors of the society by slavish attention to military demands. Decision-makers and Party leaders will fight sharp changes in military require-ments if the changes drastically disrupt established plans and relations.From the top budget and planning agencies down to the low-level sup-ply organizations, there is evidence that 'reasonable" and "customary"military demands will be more or less automatically satisfied but thatunreasonable requests will be opposed or compromises sought. Overthe long run, however, military industry has been successful in obtain-ing what it needs, while being sensitive to what the economy canprovide-at least in the short run.

The second modification has to do with tle proliferation or "bliz-zard" of priorities. As with many other units of exchange that are notbacked by real resources, it is all too easy for the authorities to issuemore priority than the available production capacity can support, thusleading to inflation. There has been just such an inflation of priorityin military production. Enterprises overbooked with priority ordersend up by fulfilling those that are the easiest to produce. Orders ge tHighest Party-Government Priority, Council of Ministers Priority,Ministry of Defense Priority, VPK Priority, industrial ministry prior-ity, and so on down the list. As priorities proliferate, military industrybecomes more like the civil sector, with all of the attendant problemsof tautness and a seller's market.

THE POLITICAL SOURCES OF EFFECTIVENESSThe effectiveness of Soviet weapons acquisition has depended on thegranting of special rights and privileges to the defense establishment by'h chronicle of emuts in the Council of Ministers, for eample, noted a jointpresentation by Gosplan and the VPK on the draft plan of the defense complex for thecoming ymr. "Chronicle, In the Presum of the Council of Ministers of the USSR,'Provithateny VestA, No. 18 , September 1969, p. 3.


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the political leaders. Effectiveness largely flows from political decisionsand choices. The special rights granted to Soviet defense include:1. The privilege of the customer-the Ministry of Defense-to bea demanding buyer. It can expect contracts to be honored; itcan enforce performance; it can refuse to accept defectiveproducts.2. The privilege of defense industry to receive priority in the

planning and delivery of materials and supplies. It is assignedthe best managers; it has been able to attract top technicalspecialists; in a shortage economy, it is afforded first access tosupplies.3. The defense effort has been given the right to the largevolume of resources needed to meet military requirements.These three rights granted by the political leadership to the nation'sdefense have permitted defense managers to operate with greater flexi-bility and less uncertainty than managers in the civil sector. Althoughthe Soviet economic system and decisionmaking practices impose con-siderable caution and conservatism on defense industry managers anddesigners, they have sufficient assurances of material support to confi-dently develop and use new technology in military equipment. In thealmost 60 years of experience with this structure of resource allocation,defense industry leaders have developed a management style and orga-nizational approach that deals effectively with the system in whichthey operate. However, without the political backing for buyer domi-nance, supply priority, and a large share of resources, defense industrywould operate at close to the levels of effectiveness exhibited by civil-ian industry. Although there are some high points in the productdesign and cost situation in Soviet civilian branches, overall perfor-mance is generally less than the purely technical abilities of Sovietcivilian industry would lead a Western analyst to expect.Over the years, Western analysts have described several methods toincrease the effectiveness of the Soviet civilian economy, including- (1)reform of the economic system, bringing it more in line with Westerncapitalist economies to obtain greater output from available resources;(2) reallocation of resources from defense to civilian uses; and (3), inthe absence of economic reform, shift of implementation priority ofsupply in the tautly planned economy from defense to civilian produc-tion. Economic reform, so far, is largely a stillborn policy underGorbachev's pereetroika. The policy of conversion, as it has evolvedover the past two years, turns out to incorporate a good deal ofresource reallocation. Preliminary evidence indicates at least a partial


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shift in implementation priority, although the actual persistence andconsequences of such a shift will have to be carefully monitored toassess the longer term effects. Underscoring the shift in priorities,prime minister Ryzhkov told the Supreme Soviet that the main valueimpressed upon defense production ministers wa s the "exceptionalimportance of measures aimed at conversion of defense productionfacilities and their redesignation to the production of consumer goods,alongside the need to equip the USSR Armed Force."5 Thus, theSoviet leadership has firmly embarked on at least one and a half newpolicies. Conversion now reflects political changes that deviate fromthe Stalinist value system embedded in past practice and institutions.

DEFENSE INDUSTRY GOVERNANCEAn issue of great importance is the question of governance, for it isthrough political and administrative governance that priority has beenassigned and implemented. The chief instruments of governance arethe Military Industrial Commission and the ministerial structure underit, and the Party apparatus. The fact that the former VPK Chairmanwas appointed head of Gosplan at about the time of increased civilianresponsibilities for the defense complex may have been coincidental,but it also suggests that the political leaders wanted a knowledgeabledefense manager in the chief planning job.6 Meanwhile, the VPKapparently has been given responsibility for coordinating the activitiesof civilian production in the defense complex, for producing conversionplans, and perhaps for the broader planning and coordination of foodprocessing equipment production and the other tasks and plansassigned to the defense production complex. Some evidence suggeststhat a new directorate has been created in the VPK overseeing civilianoutput." Similarly, defense production ministries have added newdirectorates or deputy ministers since early 1988 with apparent respon-sibility for civilian goods." The VPK chairman has been a leading

5"Report by N. 1. Ryzhkov, Chairman of the USSR Council of Ministers," PWAJune 28, 1989, p. 2 (FBIS-SOV-89-123, June 28, 1989, p. 38).6Prime Minister Ryzhkov, responding to criticisms of Supreme Soviet delegates overconfirmation of Yu. D. Maalyukov as Goeplan chairman, remarked that as VPK chair-man he had to face broad economic and technological matters, as wel as complex orgni-zational problems. "Ryzhkov Addresses Joint Chambe," Moscow Television, June tO,1969 (FBIS-SOV-89-111-S, June 12, 1989, p. 77).'For example, V. Komarov, who has been identified as a VPK department chief, haswritten on defense industry conversion plans. "Action," PraviteatvennyVutnik No. 18,September 198 (FBIS-SOV-9-191, October 4, 1989, p. 108).fThe Ministry of General Machine Building for example, has a Department of Con-sumer Goods. "Defense on the Defensive," Sotuidbtichesmhyo Induebiya, September 21,198, p. 2 (FBIS-SOV-89-191, October 4, 1980, p. 104).


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public spokesman for the conversio to Civil=a output and Individualmiteshav taken personal responsibility for meeting planned out-puts in their on spberes of influence. At the very least, then, one canmy that civilian production has the attention of the top industrialkoaers And if this effort has captured the time, cocntaiosili-tie, and energies of management, then defense Production must havelss of these scarce, resources.As part of a general indutria restructuringr, the defense productioncomplex was partially reconfigured, with the now ministry apparatusintended to lay its main stress on strategic issues of technology andinvstmntrather than on economic management.1 0 Although theplan is not to create superminiatries that would strengthen theirmonopoly position and their departmental diktat, it is difficult, to wehow increased centralization will be avoided, especially since technol-ogy strategy and investment lie at the core of industrial control.so far, civilian production in defense industry has no t been grantedthe impeetto priority of defens, as defense production managershave been sadly reminded when they are forced to confront thevagaries of the civilian supply system But even though civili= outputdoes not carr the legal stamp of priority, it is often the high-levelattention to the problems and processes of production that matters. Inthat sense, there appears to be a transfer of priority to civilia matters.But how long will it last? Will it survive another season, anotheryear? Since it flows from political power and administrative methods,the political pressure must be maintained--and intiuioaizdTh e requirement for priority in the Soviet economy was formallyrecognied by the government late in 1969. In a speech to the Congress ofPeoples Deputies reporting on the state of economic reform, Prime Mini-ister Nikolay Ryzhkov statd, 'Mh granting of economic priorities isrequired for civilian production in the defense sector.""1 Thi declarativeOMh Odehose complaza now compies (a) six production minietriee, (b) two minis.tie inr "ii aviation end commnunicatione, end (c) the Stats Committee for ComputerTechnolog and Infonatics The sax production ministries are: aviation production,ebA &Mdigdefes production (oanmce and conventional weapons), sneral mabin.building (balistic misiles), rado production (electronics products), and electronics pro-duction (conupoment). The new, -ouneai ministry combines the old communica-timn tresuwhulo and equlpet production mainistries. Mw. former medhim mechbinebU~ftn ministry (maceer weapons) was Included in a new eneruministry in the *fuelend emno complez. See sGovernment of the Nain, PAmwidetwna VestnA No 16,Sq&eMbsr isep.2.I%ech by NIkolsy Ryuhkov to the USSR Supremes Soviet, MOSCOW Televiso Ser-vice, June 10, 1969 (1SI-SOV-8-111-S, June 12 , 1969, p. 75).iiNhmA Fobkv -Untivem Consolldetion, and Reform ane the Way to aHealty Leoomy, Isuy, Decem 14, 193, pp. 2-4 (FBJS-SOV-8O-229, Decmber


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policy mari a shap break from early formulation of converdonmethods; however, there is no evidence yet of implmentation of such apolicy.With the continued planned an d centralized orientation of the Sovieteconomy, the reduction of military implementation priority-were it tooccur-would require a rooting out of ducads of practice and habit,beginning at the top-most planning levels, reaching down through Partycadres and economic managers at the lowest levels. It would mean, forexample, that ifaluminum shet were in short supply, it would more prob-ably end up at a toaster factory than at a MiG air plant. Countlessthousands of daily decisions, made according to powerful institutionalincentives, reinforced by 50 years of habit and experience, would have tobe reshaped according to new priorities. All of the Soviet experience sug-gests that, to be effective, such a change in values and policies wouldrequire a massive mobilization campaign, wholesale removal of old cadresand apointment of replacements, and visible punishments and rewardsto emphasize that the desired performance, on which incentives arebased, had indeed changed.The most direct source of political pressure has been the DefenseIndustry Department of the Central Committee Secretariat, and thesecretary responsible for the department. It is notable that the centralcommittee departments with economic sector oversight were disbandedin late 1988, except for the agrarian and defense industry departments.Gorbachev stressed that the decision to retain these two departmentswas necessary at the current stage of reform but that they may easilybe dissolved in the future. 12 The other departments were replaced bycommissions with broad social and political mandates, but often withseemingly little power. For the moment, then, the Central Committeesecretary and department for defense industry still exist and continueto wield Party political sanctions over defense industry activities 1However, the Party secretary fo r defense industry also has been activein areas far removed from defense: pollution and environmental issues,to name just two additional responsibilities. Thus, the content of thisposition has been broadened, with presumably less attention beinggiven to defense-industrial matters.A new feature in Soviet politics that changes the balance of forcesaffecting the resource and implementation priority of defense is theprocess of democratization and the emergence of an independent public2Alexander Rahr,*Who h inCharp of the Paity Appatus?"Radio Lbmt, Rqomfon t USK, April 14, I9M, p.21.n aditiMon to the Ctral Commite dqiunmet, 42 depertwmes ad 10 fectwm"

hPe, ben p Smd tor dpa. im q io Party wummi Iuieeou TaKICP&, Januay 196, p. 90 .


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opinion as voiced through the press, elections, and the legislativeorgans of the Supreme Soviet and Congress of People's Deputies. Ini-tiated by Gorbachev's reforms, popular preferences now have a moreimportant role in establishing the leadership's policies. A stridentnewspaper article examining the response of the "competent authori-ties to shortages of consumer goods noted, "The opinion of the publichas been molded and cannot but affect (and has indeed affected!) thesubsequent actions of these authorities." 4 Indeed, the focus of defenseindustry on food-processing equipment and consumer goods directlyreflects such political attention to popular concerns. Therefore, thefate of conversion is closely linked with the fate of political reform.A standing committee on military affairs has been established in thene w Supreme Soviet, a move that several Party leaders, includingForeign Minister Shevardnadze, have been promoting for several years.The chairman of this committee, V. Lapygin, has declared that it willconsider the most important issues "starting from the strategy of arm-ing and providing for defense... to producing and manufacturin thisequipment."1" By 1989, the committee was focusing on budgetaryissues, having been advised of the importance of controlling the purseby members of the U.S. House Armed Services Committee. Sovietdefense committee members, however, complained of the lack of speci-ficity of budgetary formulations and stated that they had many ques-tions for the General Staff and Defense Ministry. 6 This approach isanother step in breaking down the monopoly over information andexpertise formerly held by the professional military and is a major stepin transferring stewardship of the defense complex to a broadly basedcivilian body.The creation of the Supreme Soviet defense committee and the addi-tional tasks of conversion placed on party cadres may have diffused thefocus that Party personnel were formerly able to bring to defense pro-duction affairs: Not only has another high-powered body takenresponsibility for what had been a central Party concern, but thoseconcerns themselves no longer hold undisputed top priority. These fac-tors evidently have begun to affect Party performance in the defenseindustry sphere. Politburo member and former Moscow party leaderL. N. Zaikov complained to a conference on defense conversion in thecapital region of "a decline in the attention devoted to the work of

141. Ilimenko, Defense on te Defensive," Sotiatharya Induasfiyo, September21, 19089 (FBIS-SOV-0-191, October 4, 1989, p. 102).0lSmarb by Vladimr Lipygi, Moscow Domustic Radio Service, Jun 28, IM(FBISOV-8-124, June 29, 198, p. 37).

Wshfseg Radio Domestic Servics, October 6, 1989 (FBJS-SOV-80-194, October 10 ,190, p. 56.)


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TV . OVERVIEW OF POLICY ON DEFENSEINDUSTRY CONVERtSION

SEEKING TH E MAGIC OF THE DEFENSE SECTORMikhail Gorbachiev has perpetuated his predecessors' penchant forus n defense industry methods and managers to stimulate civilian pro-duction. Gorbachev has transferred defense industry managers to thecivil production sector, imitated the coordinating and executive functionsof the VPK by establishing simila commissions for the machine-buildingand a-oidutrasctors, and tried to duplicate the clout of a buyer'smarket by establishing a civilian counterpart to the Ministry of Defense

in the State Acceptance Commission (Goepriemka).' Unfortuniately, noneof the magic that seemed to inhere in defense production has been cap-tured in thes hapless imitative ventures.Since the magic could not be transferred out of the defense produc-tion sphere, then perhaps, Soviet leaders seem to have concluded, civil-ian production within the defense complex would be touched by theelusive qualities. Since early 19M8 efforts to increase the civilia out-pu t of defense industry have accelerated. This new policy marks abreak with pest efforts to harness defense industry to civilia output:It encompasses the application of defense resources as well as its

A CONVERSION CERONOLOGYConversion of defense industry capacity to civilian purposes hasbeen the subject of at least four, possibly more, economic plans, andthe number appears to be pgrm 2 Soiet high-level economnicmanagers have discussed these plans and goals in a consistent mannerbut often merge them into the general category of 'conversion."'A lis of such tranma is &mv in Pul Cocks, aSo'uist Science and TeecooSktamp Damowing from the Defense Sector." in Joint Deonomic Committee, 100thCong. 1t Bsm., orbachev'. BeonkmicP.. Vol. 2, Novemsber 2M 1987 (S. Pit. 100-57.,VaL 2)."VP Chiamn Belmovm ha Woken of t trUbled amoa to which 411 -e1 induattya- Preewil be file (1)spicultual processing equipment, (2)liHt industry equp-ma,(8) iqlet ' Or tbad and ciedsg. (4) consumer pods, (5)electronics (6)come-pa s (7)as A! 1eqlpnt (a)com .miglm(9) civil aviation, and (10) an tra-mtad Ibdee. Rlemrk by lo , Delwe,, Agoeon Domestic Radio Service, June 28,193 (1'33-80V-5 June9, 1IM, p. 87).

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Plans for the use of defense capacity have been developed for (1)processing equipment for the gonurilcomplex, (2) equipmnt forlight industry, and (3) complex goods for cosmrs. Party SecretaryBaklanov, who is responsible for oversighit of defense industry, con-veniently mentioned these three plans in a single sentence "It isalready possibles to say that the defense complex's scientific, and pro-duction potential as starting to work soundly on increasing consumergoods production, as well as production of the latest equipment forlight industry, and on the processing sectors of the apo in-dustrial crn -plex." A plan for medical equipment may also have been formulatedsince deflense industry has been charged with increased production ofsuch good.. Additionally, the projete reduction in procurement ofdefense equipment has inspired, a more cmrhnveplan, this lastplan may attempt to consolidate the various accumulating demand. onthe defense production sector and match them with the capait thatwill be freed by declining military demand.To help clarify the evolution of the policies on conversion, the follow-ing chronology attempts to array events as they occurrd; however, sincesome of the timing attributed to this behavior became evidlent a year ormore after the event, some of the chronology is only approxiate.An October 1987 Central Committee conference on the foodpoesnsecto of the agroindustrial complexI led to the subsequent development ofa ~ copeesv ln-hc included defense industry, for icesnoutput in the 1988-96 period. Apparently as a consequencie of the deci-sions taken,at that time, the Ministry of Machine Buiding for Light andFood idustry and Household Appliances ( IMinishchmash) was disbande on March 1, 196, and 220 of its plants tansetrred to defenseindustry miistries,6 although the decision had apparently alred beenmade the previous November. Party Secretary V. Filimonvv of the dis-banded ministry realized that something was afoot as early as November1967. *When they telephoned me back in November and said that it wasnot expedien to hold a Party meeting on problems associated withrestructuring in our branch, I realized that some decision wee beingprepared. with respect to our ministr."G Th e deputy minister of the Min-istry of Defense Industry confirmed this chronolocr. 'The decision on

Musics Temvisi, OVrw#Wj - =6at Decmber M3 IM6 (S-BOV-WB25,Doosbel 21, 166W p. 42).4ftGeo fo thed Peopis Off thu Mhisy Prodacm UneW Soudebkaos Bm4aumFebruay 10, 19f68, I FBJBOV-06-Mg Februa 13,1969. p. 82).50AIming hr a flnaktimusko Seeata Recess, Febray S&, 196 p. 3 (FRIS80V4S.461, arch 2,19UK pp. 61-4). The disbanded ministry poeseeced 260 fateriss,but a* 220 howe Spied in the trannfar. The adii 40 may have omdn activiies.Gltpctap from Aholie N~niwty,* Pmus1% Maoch S, 1968 p. 1 (P318.80V44-047. Maoch 10, 1968 p. 57).


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22the transfer of civilian enterprises turning ou t agricultural products pro-cessing equipment was adopted late in 1987.... Resources were promptlyallocated from the ministry's [of Defense Industry] reserves."7 By mid-March, the Ministry of Radio Industry had established a ministerialreview body to coordinate the transfer of Minlegpishchmash plants andthe increased output of civilian goods.8In early February 1988, VPK Chairman and long-time defenseindustry manager Yu. D. Maslyukov had already been appointed tohead the state planning agency, Gosplan. This appointment was con-sistent with the trend of transferring defense managers to civilian jobs,but it also may have been influenced by the intention to increaseinvolvement of defense industry in broader economic affairs.The Council of Ministers published a package of resolutions dealingwith increased output of civilian goods in August 1988 One resolutionin particular instructed defense industry ministries to increase produc-tion of specified consumer products.9 This resolution was followed upin October 1988 with a decree on measures to raise the incentives toenterprises in defense industry and heavy industry to expand consumeroutput. 10

About a year after the Central Committee conference on the food-processing industry, the regional press mentioned in October 1988 andVPK chairman I. S. Belousov confirmed in January 1989 the existenceof a comprehensive targeted program for the agroindustrial processingindustry, including the participation of defense plants."1 These plansincluded a rigid schedule and assignments of product types andvolumes to specific ministries. 12Then, at the United Nations in December, Gorbachev announced a14.2 percent reduction in military expenditures, including a 19.5 per-cent cut in arms and military equipment procurement. Deputy DefenseMinister for Armaments General B. Shabanov noted in early Januarythat the announced cutbacks were already being implemented. ByFebruary 1989, Belousov referred to the elaboration of a plan to work

7V. Bykadorov, -On Paef Conveyors," Selsa ZhiM, August 15 , 1989, p. 2(FBIS-SOV-162, August 23, 198, p. 100).$IPU6inaton for the APK," Ehoomicheayo Gmta, No. 48, November 1966, p. 4(JPRS-UMA--0M, February 13, 1966, p. 89).sIn the USSR Council of Ministem," Povda, August 21, 1968, pp. 1-2 (FBIS-SOV.88-165, August 25, 19 p. 50)."OAn Addition of 15 Billion," lwettoa October 15, 1968, p. 2.

ll the analysis of Mink Witlock, "Krsnodar Confrence Discusses Scientific-Thnc fmle of Agiculture," Radio Libey Reswch Repo RL 7/8, Deember 5,US , p. 4.MA Pleaefu Vocation for Defense Industry Plants," Izti% January 3, 199, p. 2(FBlS-SOV-U.003, Janury , 190, p. 52).


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out the scale and detail of defense production conversion. The newplan was explicitly tied to the reduction of military output stemmingfrom the 19.5 percent announced defense production reduction.Belousov justified the reductions in terms of the lower demands arisingfrom the INF treaty, the ongoing negotiations on strategic arms thatforesaw 50 percent reductions, and the "significantly improving inter-national climate."18Defense industry support of light industry was mentioned by a Gos-plan deputy chairman in September 1988,14 with details filled in byBelousov in early February 1989.15 His figures and his formulation ofthe light industry plan were repeated by Secretary Baklanov a monthlater.16The defense production cutbacks announced earlier evidently beganto affect specific plants almost immediately. The Minister of DefenseIndustry, P. Finogenov, said that in his whole career in defense indus-try, "I can't recall such a major switch as that which started lastyear." 17 And a group of enterprise directors in a round-table discussionsaid that a "reduction of defense expenditures by five percent has pro-duced quite an effect in virtually all branches."16 When one directormentioned that he was notified of the cancellation of on e order onDecemb&. 2..), another responded: "That's not too bad. One of ou rorders was voided in March." These cancellations were sudden andunexpected, leaving the enterprises without a plan, without orders, andwithout inputs or financing, but with factories full of employees andmanagers expecting to be paid their regular salaries; this situation sentthe managers scurrying to find civilian work to fill up the releasedcapacity.Events now seemed to be moving faster than could be accommo-dated by the planning process; toward the end of March 1989, DeputyDefense Minister V. M. Arkhipov could only point to "a partialy1 "Goods for the People Off the Military Production Line," Sovetshqya Rosiya,

February 10, 1969, p. 1 (FBIS-SOV-89-028, February 13, 1989, p. 82).14L B. Vid, "1989 Plan: Reference Points for Growth." Ekonomkhedksy Gasrt%No.37, September 1988, p.4 (FBIS-SOV8-202, October 19, 1988, p. 81).1S'Goods for the People Off the Military Production Line," Sovetsho RossiFebruary 10 , 1989.1"th Far East's Potential at the Service of Restructuring," Pryd, March 12, 1989,pp. 2- 3 (FPIS-SOV-89-048, March 14,1989, p. 44).'71mtedof Missiles and Tanks," Pvld, March 14, 1989, p. 2 (FBIS-SOV-89-060,March 16, 1989, p. 29).b0How to Beat Swords into Ploughssaree," Mekovhwkya Prouda, March 21, 1989,pp. 1-2, (FBIS-8OV-08,April 12, 1989, p. 55.) The 5 percent reduction in defemseexpenditures mentioned in this discussion could be the first portion of the 19.5 percentfaiure sated by Gorbachev.


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in 1988 to 27-30 percent in 1988.28 In the formerly all-military Sukhoidesign bureau, four new civil designs are in progess. The goal is toexpand civil aircraft activities to 50 percent of the design bureau effortGeneral designer Mikhail Simonov has said that the shift ispromptedby substantial military spending cuts.2 In the Progress engine desgbureau (previously headed by general designers Ivchenko and Lotarev),the scaling back of military production has led to the recent decline inthe technical work force. 5 The exporting agency Aviaexport isattempting to push civil aviation sales and consumer goods produced inaviation plants to ameliorate the projected 20 percent reduction in pri-marily military aviation production in 1989.2 And in late 1989, G. I.Zaiganov, the head of the premier Central Aero-hydrodynamicResearch Institute (TsAGI) wa s actively seeking joint ventures in theUnited States, noting, -I have thousands of talented scientists,engineers, mathematicians, and programmers, and unique types ofequipment such as hypersonic wind tunnels, that can be put to com-mercial aviation use. We can offer cheap, experienced brain power to aworld market."*2This sequence of events indicates an accelerated pace of defenseindustry involvement in civilian output since early 1988. Events beganto move faster than plans and enunciated policy, cancellations ofdefense orders occurring in late 1988 and early 1989 seem to haveresulted from the defense expenditures reduction policy rather thanfrom the narrower INF treaty obligations, for which there was consid-erable planning lead time. Defense plants were being told of cancella-tions without the opportunity to plan or prepare for alternative out-puts. Oleg I. Malyga, a missile design bureau designer with 32 yearsexperience, three special state awards, and 56 inventions to his credittold about his dismay at the turn of events: "I was shaken by thenews-no one now needed what I had been doing all my life. I heardabout it at a very large meeting that I attended as an expert."28

UsMotormwlm Ts* Skills of Severa Factore to Produce Powerplants," AviationWMee &Space T*rA, June 5, 19B, p. 50.SbukboI De nuu19- a n Ciwil Aircraft Develpment Rfftaw,- AraonWeek &Specs Tehkwv June 5. 1I6, p.90.uMPrpem Enone DeaWn Bureu Reepmeib for W id Product ne." AvahoWeek &SPe Technokoy, June 5, 1969, p. 4&wAvksqmt Bmpoft Surp inForne Orders After Res of New Tramapqo"tAglmd Wek &Span Tehnkv, Jun 5, 196, p. AO'Pa cmmu November 1M.

MTheEcomis of Disarmamet," , u u IndusWAe April 13, 1960,p.2 OFBS4OVM0 Ap 27,1I, p. 10).


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THE NECESSITY OF CONVERSION PLANSWhile the rapid sequence of conversion activities has overtaken thesystem's capacity to produce clearly articulated plans, the main goals ofconversion have been stated repeatedly, and they amount to a substan-tial planned contribution by defense industry to civilian output in theyears to 1995. On e of the main reasons for the necessity of specificand detailed conversion plans is the lack of fungibility of budgets andmonetary resources. Simple reallocation of budgets is insufficient inthe Soviet economic system to assure the output of a new mix of prod-ucts. Such a redirection must be explicitly planned and commanded bythe central authorities. This requirement was graphically described bythe chief designer and director of a defense industry institute:

In the absence of the ruble as a yardstick ... and with arbitraryprices, it is impossible to simply take a ruble out of, say, tank pro-duction and increase (let us say) the pensions of retirees. The wagesthat used to be paid to the workers at a tank plant will still have tobe paid to them. The funds actually freed up from outlays for themetal of tanks consist of entirely different rubles, which do not turndirectly into wages.29

This point wa s reiterated by the chief designer of an aviation designbureau: "W e have thirty kinds of rubles-for wages, planned materials,foreign goods, manufactured goods, profits, investment-and not one ofthem can be substituted for another." m In the Ministry of InstrumentMaking (Minpribor), khozraschet has given the enterprises the oppor-tunity to earn money, but they cannot spend it at their ow n discretion.Enterprises have R500 million under the mattress.... They havetheir own economic "notes"-goals, indicators, normatives, incen-tives-governing the tunes they can play that lead production awayfrom the goals proclaimed in the decisions of high party and stateagencies ... and the products the country needs.31

Another barrier to defense industry enterprise autonomy in conver-sion activities is that organizations often do not possess all of thenecessary functions for independent behavior. Research institutes,design bureaus, and production facilities specialize in their own narrowrange of activities. Integrated firms possessing the combined capabili-ties of such a Western company as Boeing do not exist. In recognition29Statement of Ye. O.Adamov, general designer and director of the Power EquipmentInstitute, in "How to Beat Swords into Plowshares," Moskovekaya Prmvda, March 21,

1969, p. 1 (FBIS-SOV-89-069, April 12 , 1989, p. 64).PenronUW communication, November 1989.$1 &'jsa/jhfhh Industrya, April 25, 1969, p. 1 (FBIS-SOV-89-082, Ma y 1, 1989,p. 83).


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of this problem of fragmentation and dispersal of functions, PartySecretary Baklanov has announced the creation of large associationsand amalgamations of some defense enterprises in the Kuybyshevregion in preparation for the transition to khozrawchet 8s2 However,there is no additional evidence of how widespread this process is likelyto be.But it is not just production and R& D that is fragmented- Invest-ment is controlled by the ministry; supply has been organized by theVPK, the State Planning Committee (Gosplan), and the State Com-mittee for Supply (Goesnab); and demand is formulated by the arma-ments directorates of the armed services. Moreover, defense industryorganizations typically face monopoly suppliers of inputs and do no tpossess the finance, credit, or organizational freedom to create ne wsuppliers or to recombine their own activities with other potential col-laborators.In the Soviet economy, still dominated by central planning and min-isterial authority, defense industry managers see plans as essential; inan y event they have little experience in operating in the more fluid cir-cumstances of market-like conditions. As expressed by an economistattached to the Council of Ministers,

It must be said bluntly that most defense sector managers are notready for this yet (i.e., choosing a new configuration for their outputand position in the market for nonmilitary output). They havebecome accustomed to regular, generous clients, and are unable toanalyze and forecast the market situation.... Therefore, a precise,long-term program for the conversion of the military economy isneeded.isThis expert goes on to note that even though plans are needed, defenseenterprises will also have to engage in marketing and learn how to sub-mit to market demands.The planning process for conversion had been only partly carriedout by mid-1989, as Gosplan, the Ministry of Defense, the VPK,defense production ministries, and other organizations grappled withboth the theory and practical realization of large-scale and speedyconversion.All parties do not fully accept the necessity fo r top-down planning ofconversion, however. "Some Soviet specialists" believe that the appropri-ate approach is for each enterprise to develop its own transition plan.

12TASS, September 14, 1989 (FBIS-SOV-89-180, September 19, 1989, p. 80).33Yu Yakovets, "This was Discussed at the Congras: Inverting the Pyramid,"Sovetskaya Rosiya, June 23, 1989, p. 2, emphasis in original article (FBIS-SOV-89-127,July 5, 1989, p. 75).


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However, others (apparently the dominant school of thought) proposethat a national plan of conversion must be compiled first, taking intoaccount changs in dfense plans and doctrine, the resourcesthat wouldbe relsed, and the overall needs of the civilian economy. Only thenwould the lower-level organizations be able to plan their own operationsin a satisfactory manner. Of course, the benefits of a planned economyare expected to give the Soviet Union a special advantage in the creationof "geat national programs, as the national plan of conversion mustbe , "A third voice in this debate asserts that the very notion of planningconversion runs counter to Gorbachev's economic strategy.

Th e fact that at present, after the transition of virtually all enter-prim to complete economic accountability and self-financing, wehave to talk about a plnned conversion of defense industry enter-prise in itself testifies that the economic mechanisma are not work-ing yet. ... Administrative steps should not be necessary in anenvironment of efficiently operating state ordera.U

However, the move to economic accountability in the defense indus-trial sector appears to be moving slowly. Full transfer to khowuzchetby all orgnizations is not to be attained until the beginning of thenext five year plan; the full instructions for implementing khozrashethad not been issued by the end of 1989, and movement in this direc-tion is apparently uneven across the different defense production min-istries and hundreds ofenterprises.N6

There is clearly a split in the preferences of defense industry managersbetween autonomy and plans, with many individuals preferring indepen-dence under a reformed economic mechanism but choosing plans underthe existing system. A conference on conversion organized by the Minis-try of Defense pointed up these conflicts. Many defense enterpriseleaders and specialists judged that "it would be expedient if there were nocentralized imposition of the full range of output for civilian purposes.Labor collectives ought to be given greater powers to resolve these ques-tions."' However, many enterprises actually producing according to theirown decisions ran into serious problems. A science-production associa-tion in the Ministry of Radio Industry lost millions of rubles "due to thedemolition of the economic management system [presumably from the

S4V. Chmmyshev, "COnvsrmvo The First Stepa" Trd, bruary 14 , 19M, p. 3.SMsawkgy. Pnavda, March 21, 1980.XPenonl coumunicatio Novmber 1989.$7L Iveny k, "Dhms Convermion, Econom Acommtabillty," K5 manu Zun, Ju m

29, 190, p.2 (FMBJS-8OV-6-lo0, July 10, 190, p. 105).


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transition to khozrachet] and the lack of a clear-cut concept of coMMr-sion... Over a period of about 6 months, thousands of peopl foundthemselves out of a job." 6 This conference also identified difficultiesassociated with the monopoly position of suppliers, the absence of com-petition, and the dominance of the "cumbersome, cost-based military-economic mechanism" in relations between industry and the DefenseMinistry.With the stalled transition to wholesale trade called fo r in the ear-lier phases of economic perestroika, there is a natural desire to rely onthe traditional methods of planned supply. A department chief of theTatar Gosplan remarked, "It is necessary to take the production ofagricultural and processing equipment at defense complex enterprisesout of the decentralized order process. They should be granted stateorders, which provide material-technical resources." mFull-scale planning for conversion seems to be the preferred methodof attacking the problem, but there have been complaints that this pro-cme is taking too much time. The typical Soviet haste in stimulatinggreater output can be seen in the evaluation of the conversion process.Prime Minister Ryzhkov was already complaining of delays in October198&

The only thing we are not satisfied with is that things are movinghere very slowly. Igor Sergeyvich [Beloov], time has been lost-Time has been wasted on organizational iss. While you weredividing up the factories, while ministers were sizing them up, gettingused to them,... time wasnmhing on, it was marching on inexora-bly. Today we do not have time to spend years resolving these ques-tions."*

In fact, though, many of the conversions are unplanned as enterprisemanagers find themselves with cancelled military orders and unusedcapacity. But planning don continue and forms the backdrop for themain discussions on conversion. Indeed, one military expert in theMinistry of Defense goes so far as to call fo r the adoption of nationalconversion plans in all countries contemplating reduced defense expen-ditures. 'With the adoption by every interested party of a nationalplan for conversion, it will subsequently be possible to coordinate such

nD. Bkov, Bwo luto Powses How t. Def Dancus An Mskig theTramitam to Psassdz Pnrona,*&bAt Zhism Augus 1,196, p. 2 (FBISV4-IS1, Aupst 14. 1M, p. 116).ftsem UTmion Saezyhe October 21, 19s, om Coun l of Minirs M,sins,OctW 19,16 (FBIS-BOV..8-20, Octobw 25,1, p. 55).

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plans at an international level, and could make for the most effectiveorganization of this complex process."' 1

QUANTIFYING CONVERSIONPlans for defense industry call for the output of enterprises of the"defense complex- designated for "peaceful purposes- to rise from thepresent 40 percent to 50 percent by 1991 and to 60 percent by 1995.We can decompose this growth in the share into two sources: theannounced reduction of approximately 20 percent of defense outputthat will be transferred to civil purposes, and an additional growth incivilian production capacity in defense industry. Under these assump-tions, the plans would call for an absolute growth of civilian output of10.3 percent annually over the 1989-1995 period, or by roughly 7 per-cent annually over and above the gains flowing from conversion. 42If the announced 20 percent arms reduction were only the firstround of a series of cuts, the civilian production goals would no trequire the high rates of growth projected in the figures shown above.But it is unlikely that defense output can actually be converted rublefor ruble into civilian uses. Not only will additional investment beneeded, but the efficiency of conversion will probably be considerablybelow 100 percent. Meeting the civilian output goals, therefore, willrequire either greater cutbacks in defense or more rapid growth ofpurely civilian capabilities in defense industry; consideration of thepresent state of Soviet politics and the economy suggests that the

former is more likely than the latter, but also that the planned goalswill not be achieved.In line with the typical Soviet method of identifying output by thecounting of things, VPK chairman Belousov noted that the comprehen-sive plan for the processing industry identified 4500 categories of newagroindustrial equipment planned for development and production by1995, including 3000 by defense industry enterprises. When theseplans have been fulfilled, defense industry enterprises will be responsi-ble for R17.0 billion of processing equipment output, or almost half the"1Ye. Serov, "Coordinated Interstate Actions in the Sphere of Conversion ProessShould Have a Juridical Basis," Venyi Vestni, July 1989, No. 13 , pp. 11-12 (JPRS-UEA-8W-024-L, September 12, 1989, p. 9).42 f the present levels of output are indexed at 60 for defense and 40 for civilian, the

20 pereent reduction of defense output that in to be transferred to civilian usm wouldenerate an index level of 48 for defense and 52 for civilian output by 1995. An addi-tional gowth of the civilian portion of defenm industry of 20 index units to 72 by 1996,while df&n output remained constant at 48, would place eivilian output at the dsig-nated 60 pereent shmre of total output.


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is IAbill=o over the original plan figure--an increase apparentlyresulting from the new conversion initiatives.4What do these current changes and plans amount to in tam ofdafense industry capacity an d total resources? Defense industry hasalways produced some supplies and products for civilian industry andp jut n civilian industry has supplied the military withinputs from raw materials to finished products. Brehnev gaea boost to the dfense indiutry's involvement in helping to relieve civil-ian shortaega in the late 1960s and by 1971 could bout that 42 percentof "defese industry output was then serving civilian purposes. How-ever, it was never clear just what that 42 percent consisted oE Thebest gusm was that it included only production (and not services) ofthe Ministry of Defense Industry, just one of the nine defense produc-tion ministris.Recent estimates by Blaine McCants draw on the detailed investi-gations of Julian Cooper on the civilian production of defense indus-try.'0 McCants notes that no t all civilian output of the def&n sectoris in machinery output or in manufachured goods more pnealy. Con-struction and other services are also produced, as are non-machinerymanufactured goods such as furniture and china tableware. McCantsestimated sham of machinery types of output (producer durables andconsumer durables) for the period 1966 to 1986; for 19865, he alsoaccounted for the transfer of Minleishchmah and for the productionof nonmachimry goods. However, since many services and some con-sumer durables are not included in these estimates, they should be con-sidered as minimum lower bounds.

McCants' calculations reveal a doubling of the civilian share of outputfrom 1965 to 1965, with estimates of the 1966 share varying around 40percent, depending on output definition. In early 1989, Prime MinisterRyzhkov claimed that 40 percent of the products manufactured bydefense industry were also nonmilitary items; these same figures havenow been mentioned repeatedly. Consideration of the Soviet statementsalong with the McCant analysis sugg st.: the civilian machinery outputof defnse industry in 1988 was around 40 percent of defense industry'smachinery production; including consumer durables and other goo

perestroika and change in soviet weapons acquisition

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