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Economic anS.dHrg. 102-586.Pt.2 I lOLQGICAL CHANGE: APR '^t1_ roRMER SSOOVVIIEETT UUNNIIOONN AND n Al ERN EUROPE, AND HAMPDEN LAW UBRARV iHINA HEARING BEFORETHE SUBCOMMITTEE ON TECHNOLOGY AND NATIONAL SECURITY OFTHE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ONE HUNDRED SECOND CONGRESS SECONDSESSION PART2 JUNE8ANDJULY27, 1992 PrintedfortheuseoftheJointEconomicCommittee mh Boston, 02116 GLOBAL ECONOMIC ANS.DHrg. 102-586,Pt.2 TECHNOLOGICAL CHANGE: FORMER SOVIET UNION AND EASTERN EUROPE, AND CHINA HEARING BEFORETHE SUBCOMMITTEE ON TECHNOLOGY AND NATIONAL SECURITY OFTHE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ONE HUNDRED SECOND CONGRESS SECOND SESSION PART2 JUNE8ANDJULY27, 1992 PrintedfortheuseoftheJointEconomicCommittee U.S.GOVERNMENTPRINTINGOFHCE WASHINGTON: 1993 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-040114-3 JOINT ECONOMIC COMMITTEE [Created pursuanttoSec. 5(a)ofPublic Law 304, 79thCongress] SENATE HOUSEOFREPRESENTATIVES PAULS. SARBANES. Maryland. LEEH. HAMILTTON, Indiana, Chairman ViceChairman LLOYD BENTSEN, Texas DAVIDR. OBEY. Wisconsin EDWARD M. KENNEDY. Massachusetts JAMES H. SCHEUER, New York JEFF BINGAMAN, New Mexico FORTNEY PETE STARK, California ALBERTGORE,Jr.,Tennessee STEPHENJ. SOLARZ, New York RICHARD H. BRYAN, Nevada KWEISI MFUME. Maryland WILLIAM V. ROTH.Jr., Delaware RICHARDK. ARMEY,Texas STEVE SYMMS. Idaho CHALMERS P. WYLIE, Ohio CONNIE MACK. Florida OLYMPIAJ. SNOWE. Maine ROBERTC. SMITH, New Hampshire HAMILTON FISH,Jr., New York STEPHEN A. QUICK. ExecutiveDirector RICHARDFKAUFMAN,GeneralCounsel EDWARDW. GILLESPIE.MinorityStaffDirector SUBCOMMITTEE ON TECHNOLOGY AND NATIONAL SECURITY SENATE HOUSEOFREPRESENTATIVES JEFFBINGAMAN, New Mexico DAVIDR. OBEY.Wisconsin Chairman JAMES H. SCHEUER, New York PAULS. SARBANES. Maryland KWEISI MFUME. Maryland RICHARD BRYAN. Nevada RICHARD K. ARMEY.Texas CONNIE MACK, Florida ROBERTC. SMITH. New Hampshire (ii) CONTENTS WITNESSES, STATEMENTS, ANDSUBMISSIONS FORTHERECORD Monday,June8, 1992 PAGE Bingaman,Hon. Jeff,ChairmanoftheSubcommitteeonTechnologicaland National Security,JointEconomicCommittee: OpeningStatement 1 ReportsbytheCentralIntelligenceAgencyandtheDefenseIntelligenceAgency entitled: "TheNewRussianRevolution: TheTransitiontoMarketsintheOther CommonwealthStates" 3 "EasternEurope: StrugglingtoStayontheReformTrack" 41 McLaughlin,John,DirectoroftheOfficeofSlavicandEurasianAnalysis, CentralIntelligenceAgency 93 Preparedstatement 100 Horste,Kathleen, SpecialAssistantforRussia/Eurasia,DefenseIntelligence Agency 106 Preparedstatement Ill Monday,July27, 1992 Bingaman,Hon. Jeff,ChairmanoftheSubcommitteeonTechnologicaland National Security,JointEconomicCommittee: OpeningStatement 129 Petersen,Martin,DeputyDirector,OfficeofEastAsiananalysis.Central IntelligenceAgency 130 Preparedstatement 137 Reportentitled "TheChineseEconomyin 1991 and 1992: Pressureto VisitReformMounts 143 (iii) ECONOMIES OF THE FORMER SOVIET UNION AND EASTERN EUROPE MONDAY,JUNE 8, 1992 CongressoftheUnitedStates, Subcommittee onTechnologyandNationalSecurity OFtheJointEconomicCommittee, Washington, DC. The Subcommittee met, pursuant to notice, at 2:05 p.m., in room SE)-628, Dirksen Senate Office Building, Honorable Jeff Bingaman (chairman ofthe Subcommittee) presiding. Present: Senator Bingaman. Also present: Richard F Kaufman, General Counsel. OPENING STATEMENTOFJEFF BINGAMAN, CHAIRMAN SenatorBingaman. The Subcommittee hearingwill come to order. The hearing marks an historical watershed in several respects. Today, we're receiving the last reports of the Central Intelligence Agency and the Defense Intelligence Agency on the Soviet Union, and their first on Russia and the otherrepublics ofthe former Soviet Union. As everyone is aware, the Soviet Union was dissolved as a political entity in December of last year and the republics that made up the USSR reformed themselves as independent, sovereign republics. The reports that we receive today will review economic performance and defense spending and related activities in 1991, which was the last year ofthe USSR's existence. The intelligence agencies will also report on what has occurred in the republics thus far in 1992, the first year of their existence since the breakup ofthe Soviet Union. As I understand what's been delivered to us now, we have a CIA re- port on the former Soviet Union. We have a CIA report on Eastern Europe. And we have a CIA report on Moscow's defense spending cuts accelerate. And then we also have a statement by the Defense Intelli- gence Agency that covers that whole range ofissues, as I understand it. In addition to having this broad range of issues reported on today, this hearing will be done in open public session, which is a circum- stance that was not possible duringthe long period ofthe Cold War. The most remarkable thing about the hearing, however, concerns the substance ofthe inquiry; namely, the shiftand transition from socialism (1) to market systems in the former Soviet Union and the former commu- nist countries ofEast Europe. It would be unfortunate ifwe took for granted the monumental im- portance ofthese historic changes. Russia and the other former socialist countries have decided to shift to market systems and they have taken meaningful steps in that direction. There are obviously going to be difficulties and mistakes, but the West and the United States, in particular, need to be helpftil ratherthan hypercritical. It is sometimes the case that we do not understand the value ofsome- thing until it is lost. It could be a tragedy ofglobal proportions ifthe West became too impatient in seeking rapid progress in the former communist countries and too demanding in obtaining compliance with conditions attached to economic aid. Our witnesses this morning are: John McLaughlin, Director of the CIA's Office of Slavic and Eurasian Analysis; John Gannon, Director of the CIA's Office of European Analysis; and Kathleen Horste, the Special Assistant for Russian and Eurasia in the Defense Intelligence Agency. Each will give an oral statement, following which we'll have some questions. [Reports presented to the Subcommittee by the Central Intelligence Agency and the Defense Intelligence Agency follow:] THENEWRUSSIAN REVOLUTION: THETRANSITIONTO MARKETS IN THEOTHERCOMMONWEALTH STATES ApaperpresentedbytheCentral IntelligenceAgencyandthe DefenseIntelligenceAgencytotheJoint EconomicCommittee's SubcommitteeonTechnologyandNational Security (embargoeduntil 14008June 1992) Summary When the Soviet Union met its end in December 1991, more than six decades of central planning had left its former member republics ill prepared forthe transition to independent marketeconomies. Recognizingthefailureoftheold system, however, all ofthe members ofthe new Commonwealth of Independent States (CIS) have intro- ducedeconomicreformsthatwereatbestdistantdreamsonlyayearago. ReformEfforts While all oftheCIS stateshavemade someprogress in reformingtheireconomies, Russia is clearly in the lead. In January 1992, Russia launched a comprehensive pro- gram to introduce key elements ofamarketeconomy and stabilize fiscal and monetary conditions. To date, Russiahas made considerable progress in liberalizingprices, rein- ing in the budget deficit, and cuttinggovernment spending on investment and defense. About 80 percentofwholesalepricesand percentofretail prices were freed on 2 Janu- ary, and furtherprice liberalizationhasfollowed. Thegovernment'sclaimsaboutreduc- ingthebudgetdeficitduringfirstquarterexaggerateitsaccomplishment, buteven when adjusted to comply with international accounting practices, the budget demonstrated substantial progresstoward fiscal restraint. In addition, Russian statements suggestthat 1992defensespendingwill fall sharply. More recently, a political backlash against the sacrifices these measures have entailed~most evident at the April meeting of the Russian Congress of People's Deputies-haspromptedthegovernmenttoadjust its program~forexample, by relaxing restraints on credit. Whilethe government hascontinued to move forward with painftil measures such as sharp hikes in energy prices, continuing calls formajorreductions in taxes, large increases in spending, and massive infusions ofcredit are increasing the pressureontheleadershiptocompromise itsstabilizationprogram. Muchworkremainstobedone, moreover, inprivatizingstateproperty, openingthe domesticeconomytotheoutsideworld,anddevelopingmarket-oriented lawsand insti- tutions. AccordingtoRussian statistics, fewerthan 1 percentofretail stores, publicdin- ingfacilities, andconsumerserviceoutletshadbeen privatized by 1 Aprilthisyear, and only about 2 percent ofagricultural land was in the hands ofprivate farmers. Many of theoperatorsofprivatebusinessesarenotftill ownersinthesensethatownership isun- derstood in most Western countriesand thereare important restrictions on the resale of land. Reorientingtradewith therestoftheworldwill be alengthyprocess, even ifpar- tial currency convertibility is achieved laterthis year as planned, and legal and institu- tional development will take longer still. The financial system, in particular, remains rudimentary;bankdeposits, forinstance, stillcannotbefreelyconvertedintocash. The non-Russian members of the CIS also have made progress toward market economies, but all ofthem lag considerably behind Russia. All ofthe other states, for example, have followed Russia's lead in liberalizingwholesaleand retail prices, but al- most all have left more extensive price controls in place. All ofthem also have made lessprogressthan Russiain liberalizingforeigntradeand inenactinglegislationtosup- portthetransitiontomarketeconomies.