Status of GAO's Review of Estimates of the Soviet Economy

Published by the Government Accountability Office on 1990-07-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


-                        United States General Accounting Of&e            /q    / 7 4; /

. GAO                    Testimony


    For Release     on
    Deliverv              Status    of GAO's Review        of Estimates         of the
    Expecteh    at        Soviet    Economy
    1O:OO a.m.
    July    16, 1990

                          Statement       of
                          Allan     I. Mendelowitz,      Director
                          Trade,      Energy,    and Finance     Issues
                          National      Security    and International           Affairs
                          Before    the
                          Committee     on Foreign      Relations
                          United    States  Senate

GAO/T-NSIAD-90-55                                                                GAO Form 160 (12/87)
 Dear Mr.         Chairman        and Members of the Committee:

 I am pleased         'to be here           today        to discuss         the      status       of our ongoing
 review     of estimates            and analyses                of the     size      of the       Soviet
economy.          We have focused               our work to date                  on (1)      identifying            key
estimates         and assessments               of the         economy and (2)             outlining,          on a
preliminary          basis,       the      key issues           and areas          of debate        with     respect
to these       estimates.               I should         note     at the outset            that     we have
encountered          difficulty            in obtaining            information           from the          Central
Intelligence          Agency,           which     prepares         a key estimate.


Within      the    U.S.     government,            the     Central         Intelligence            Agency      (CIA)
has responsibility                for     preparing            annual      estimates          of the       Soviet
Union's      gross      national          product         (GNP).         These estimates             are perhaps
the most widely             used and detailed                   alternative           to the       Soviet      Union's
problematic          official           estimates,         which        have been consistently
discounted         by Western            economists.             There      also     exist        a number of
critiques         of the CIA's            methodology            and calculations,                 as well       as
some alternate            estimates,            including         those       most recently             voiced        by
Soviet      economists.

To date,       we have concentrated                   on the        CIA's      estimate           and the
methodology          on which       it      is based.            The CIA estimates                 Soviet     GNP for
a base year          (currently           1982)      and then           calculates         real     growth       rates

 for       other      years      using      data        on changes                 in the     various       GNP
 components.             As described                  by the        CIA in various               publications,               the
 agency        follows        a number of steps                      in developing               the base year
estimate,            including

--          constructing           national             income accounts                  showing        incomes         and
            expenditures           for      the        public        and household               sectors,         from       which
           total      GNP in official                   (or      "established“)                ruble     prices         is

--         disaggregating                total         GNP by sectors                 of origin         (such      as
           agriculture           and industry)                  as well            as by end use (e.g.,
           consumption           and investment);                       and

--         adjusting          established               prices          to    "factor         cost"     prices1         by
           eliminating           the distortions                     caused         by turnover          taxes       and
           subsidies,          and replacing                  arbitrarily               set profit          margins          with
           uniform       rates      of      return         on capital.

[Jsing       this     methodology,               the     CIA produces                 estimates         of GNP in both
official            and factor         cost       prices          for        the    base year.           Real growth                in
GNP for         other      years       is computed                from        component         growth       rates
weighted            by the     value       added of these                     components          in the base year.
The growth            rates      are generally                  estimated             using     quantity         data,        but

1Using these adjusted     factor   costs provides a better                                                  measure          of
real resource allocations       among the GNP components.
 in some cases                rely      on ruble           values.          For 1989,            the    CIA estimated
 Soviet          GNP at factor             cost         to be 745.8          billion           rubles         (in     constant
 1982 rubles)--               representing               a growth         rate     of 1.4 percent                    over     the
preceding            year.

The CIA also                estimates            the     comparative             size      of the U.S.               and Soviet
economies.                 This      estimate           involves         constructing             purchasing                power
parity           ratios.           These       ratios       are computed                by comparing                the    amount
of rubles            relative           to dollars            required           to purchase            the         same
quantities             of comparable               goods        and services               in the       Soviet            Union     and
the       United       States.           A weighted             average          of these         ratios            becomes the
exchange            rate     used to compare                  the       two countries'             GNP estimates.
Using       this       methodology,               the     CIA estimated                 that     the    Soviet            economy
was about            half         the   size      of the        U.S.      economy in 1989.


The CIA itself                has highlighted                   a number of problems                       and
uncertainties                with       respect          to calculating                 Soviet     GNP; others                have
challenged             specific          elements           of the        CIA's         methodology.                 These
concerns            include

--         the     quality           of Soviet           official         statistics,             which        the        CIA uses
           in constructing                 its     estimates;

. 0

      --        the     difficulty           in accurately                 measuring           quality       changes;

      --        the     problem         of measuring              the       "second          economy"--the           variety         of
                private        and/or        illegal           activities             that     may     contribute           to GNP;

      --        the    problem          of limitations                in applying              purchasing           power parity
               methodology              to centrally              planned           economies          such as the            Soviet
               Union,        in which            shortages           exist         and are      not      reflected          in the
               price        statistics;

      --        the    appropriateness                   of the methodology                    used to compute
                adjusted         factor          cost      prices;         and

      --       the     variety          of potential              biases           in the      data      used to construct
               the     sector          indexes          that    could        influence          the      growth      rate
               calculations               both     upwards           and downwards.


      The CIA and the                Joint        Economic           Committee           have published              a
      substantial            body of work describing                           the     agency's          methodology.              The
      CIA has also,              through          conferences              and discussions                with      outside
      experts         and scholars,               made efforts               to      refine      its     methodology           and
      remain      sensitive             to the          need to make changes,                     where      necessary,            to
      improve         its    ability         to    calculate              Soviet       GNP.       CIA analysts              have

raised          many of the concerns                    cited        above in an effort                         to provide                 a
necessary           context        within        which         to understand                   the    limits            of the
agency's          GNP calculations.

Our own work to date                     has concentrated                     on collecting                    and analyzing
the     information             published          by the        CIA and others                      in order            to better
understand              the basis        for     the     estimates             the U.S. government                           produces
and     uses.           To improve        our      understanding                of the CIA's                    estimates,                 we

have asked the CIA for                         additional            information,                including
unclassified              publications             and the           names and written                         analyses          of
experts          that     we understand               the      CIA has employed                      to critique                its
methodology.                 We have also             requested              a series           of meetings               to
discuss          the CIA's        methodology                 in greater              detail.

However,          the CIA has declined                        to make available                      to us any
critiques           or evaluations               of     its     methodology,                 and has been
unwilling           to provide           the     names of experts                      it      has used to assess
its    methodology.               Moreover,             the     agency         has,         to date,            provided              none
of the          requested        publications,                 although          it      did     agree,          late        last
week,      to     send us two documents.                         We were able                   to obtain               other
requested          publications             elsewhere.                The CIA has also                         refused          to meet
with     us or provide              any briefings;                   its      position           is that           it     will
provide          briefings        on this          topic        to     its     congressional                    oversight
committees              as requested.              Because           we are still                in the process                       of
analyzing          the       available          data,         we cannot         yet tell              how severely                    the
CIA's     unwillingness           to cooperate       will   limit     our efforts       to respond
to your     request       that     we analyze    estimates          of the     Soviet   economy.

Mr. Chairman,         this       concludes   my statement.            I will     be happy to try
to respond      to any questions             you may have.