Soviets' secret industrial might. Managers create slack in system so they can up production on demand

Although the Soviet economy is unquestionably in severe straits, its inherent potential is not well known, even to the Soviet government itself. Among Western analysts it is widely believed that the only practical way for the Soviet Union to reinvigorate the economy is by reducing military spending.

The economy's potential has been exhausted, they say, and the situation is so severe that the Soviet generals must accept a sharp drop in military spending during the current Soviet five-year plan (1986-90).

This, however, is not necessarily true. Soviet sources tend to overstate the achievements of their economy, but they underestimate its industrial potential. There is a case in which this has already been proved.

One of the greatest problems the Soviet economy faces is the country's shortage of steel. Production began to fall in 1979, and many industrial enterprises stood idle because they lacked the metal. But in 1983, steel production shot up.

The increase came about because of an explicit threat from then-Soviet leader Yuri Andropov to Ivan Kazanets, the minister of the Soviet steel industry: Increase steel production or expect the fate of a number of other ministers -- dismissal.

A group of workers signed an open letter published in the Communist Party daily Pravda a month after Andropov's rise to power, taking Mr. Kazanets to task: ``We have been unable to make shipments of products to critical start-up industrial and agricultural projects, the Western Siberia oil and gas complex, residential projects, and public services. It is incomprehensible to us, Ivan Pavlovich, why management in the steel industry has so little regard for the fulfillment of the state plan and delivery contracts.''

Similar letters were printed in Pravda during the Stalin purges in the 1930s. They were clear signals that the addressee was about to be arrested. Of course, the letter to Kazanets did not carry the macabre implications of the Stalin era. But it was a clear ultimatum, and presented the managers of the steel industry with a sudden crisis, not unlike the kind of challenge that would test an army's state of preparedness.

Fortunately for Kazanets, the steel industry passed the test with flying colors -- with an increase of 5.3 million tons, which brought steel production for 1983 to an unprecedented 152.5 million tons.

There is no way that Andropov's tightening of the screws could, by itself, have produced the surge in output. The sufficient potential for production had to exist in advance.

A key fallacy of the Soviet government is thus exposed. The government agrees to take enterprises at their word when they say that they use their productive capacities at a very high level and even touts this as one of the advantages of the Soviet economic system. Soviet technical and economic literature frequently reports that the steel industry's production capacity is almost totally (96 percent to 98 percent) utilized.

This is not the case. A government survey of steel-plant capacities done in the late 1960s is the most reliable information available on this point. The researchers found, after studying almost every Soviet steel plant, that the majority of them had deliberately underestimated their production capacity. The plants then -- falsely -- reported to Gosplan (the State Planning Committee) that they ran their plants at almost 100 percent of their capacity. Gosplan, in turn, accepted these figures and made them the basis for subsequent planning.

This is not an isolated situation. Yakov Kvasha, an authority on Soviet industrial statistics and a leading expert on industrial capacities, noted in 1970 that ``without exception there are rather significant amounts of reserve production capacity in every sector of Soviet industry.''

Gosplan knows of the deliberate understatement of production capacities; it is an open secret. But no one wants to establish the industry's true potential.

Why? The steel ministry, no less than the steel plants themselves, is interested in maintaining and building up production reserves. There are three reasons:

Enterprises need room for maneuvering, so that government planners don't commit them to produce more than they are capable of producing.

Plants must be able to produce on very short notice, in case the government asks them to overfulfill their plan for some special occasion, such as Lenin's birthday or the anniversary of the October Revolution.

Barter is essential to the Soviet economy, so managers must have at hand a certain amount of unreported production to trade with their fellow managers in other parts of industry for goods that are in short supply and that they can't get through official channels.

If production capacities were reported objectively, the true potential of most enterprises would be seen to be much higher, and the Soviet government would demand that the slack be tightened up.

Also, it would be clear that the plants are not operating on the high level suggested by Soviet statistics -- that, in fact, their performance would be comparable to that of the United States steel industry in its bad years -- an embarrassing admission for Soviet officialdom.

The same situation can be found in all branches of industry -- machine-building, chemical production, construction materials, and so on. Every Soviet industrial enterprise creates and conceals its real production capacities. This has been endemic to the Soviet economy from the very beginning.

Thus, the ability of Soviet industry to do more than Soviet planners expect of them is of considerable significance and could be quickly exploited in the event of a crisis. US specialists generally underestimate the Soviet industrial potential. In a crisis, the economy could perform much better than it does now, without any change to the existing system.

First of two articles. Next: defense spending.

Boris Rumer is a research associate at Harvard University's Russian Research Center.