The Soviet defence burden: Estimating hidden defence costs

Abstract

WHAT IS THE REAL SHARE of the Soviet Union's output allocated for defence purposes? This question has been debated for decades with the objective of ascertaining not only real Soviet defence expenditure but also the total size of the Soviet economy. The debate continues today despite the publication of previously secret Soviet GNP and defence budgetary statistics.1 According to Soviet government officials, defence expenditure comprises less than 7-8% of total GNP, a level comparable to that of the USA.2 In comparison, the CIA has estimated that the Soviet defence burden has declined from 17% to around 15% during the past two years.3 An alternative view advocated by many Soviet economists and some US analysts is that the real defence burden had been well above 20%.4 What are the reasons for such diverse estimates of the Soviet defence burden, given the increased openness on the part of Soviet government officials? The current consensus is that prices of Soviet defence goods and services do not reflect the real cost of resources allocated for defence relative to the cost of resources allocated for consumption and investment. Thus, critics of official Soviet and CIA estimates argue that prices in the defence sector are set at an artificially low level by means of various direct and indirect subsidies to conceal the real size of the defence burden. The same critics also argue that the official Soviet defence budget excludes a number of defence-related outlays which must be accounted for as part of the total defence burden. Those analysts who rely on US intelligence estimates believe that the CIA building block approach-pricing individual weapon systems and servicesmakes it possible to correct for most of the known inadequacies of Soviet centrally administered prices. Critics of US Intelligence estimates argue, however, that the building block approach is not well designed to measure the cost of goods and services produced in a unique Soviet military economy. This supposedly results in a significant underestimation of various hidden Soviet defence costs. As a rule, critics base their arguments on circumstantial evidence and 'common sense' arguments, making little attempt to analyse these costs within the framework of Soviet national accounts. For this reason, CIA officials readily dismiss alternative estimates based on criticising the building block approach as speculative and unwarranted.