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Thursday, March 1, 1990

Soviet Economic Reforms: An Inside Perspective

The crisis in the Soviet economy is now apparent to both Soviet and Western observers. The causes and manifestations of this crisis have been cogently described elsewhere. The response of the Soviet ruling class to the deteriorating economy and growing societal alienation was the program of reforms known as perestroika, which was initiated in 1985 and significantly amended in 1987 and 1989.

A number of scholars have provided interesting analyses of the perestroika reforms, drawing on the history of past attempts (in 1957, 1965, 1974, and 1979) to restructure and reform the Soviet economic system. Much less attention has been paid, however, to the problems involved in making the transition from a centrally planned economy to a market system. Understanding the challenges of this task is of crucial importance both for assessing the prospects for reform in the Soviet Union and Eastern Europe and for shaping a coherent policy toward events and reforms in these parts of the world.

Fast-moving events in the Soviet bloc hold out the promise of a possible end or amelioration of the decades- long conflict between East and West. In light of the stakes involved, it is urgent to understand accurately the nature of the declared reforms and prospects for their success.

The spectacular failure to date of the “radical” economic reforms in the U.S.S.R. has been due to the unwillingness or inability of Mikhail Gorbachev’s administration to part with the obsolete and economically destructive Marxist-Leninist ideology and its economic doctrines. Mr. Gorbachev and other spokesmen of the Communist Party are quick to point out that their commitment is not to abandon, but to “better and improve” the current system. They view the socialist system as progressive and correct; its failures in practice, they maintain, result from a lack of discipline and deviation from Marxist-Leninist principles.

The whole package of economic reforms adopted by the Communist Party Central Committee in June 1987 was aimed toward “perfection of the economic mechanism” and included measures which at best can be considered as inadequate to deal with the present situation. Designed by departmental bureaucrats and their academic assistants, these measures were rubber-stamped by inexperienced and economically incompetent officials who Were easily deceived by the radical talk of the new ministry heads. The effect of these “reforms” on the economy was disastrous—they seriously undermined the vertical system of economic management but failed to replace it with horizontal linkages between enterprises. While the set of negative incentives for managers (discipline was maintained by the fear of being relieved of their duties or even loss of their Party membership cards) no longer works, the positive incentives failed to appear.

The real character of the so-called centrally planned economy is well illustrated by a quip I heard some years ago by the Soviet economist Nikolai Fedorenko at a session of the Scientific Council of the Central Institute of Econometrics in Moscow. He said that a fully balanced, checked, and detailed economic plan for the next year would be ready, with the help of computers, in 30,000 years. There are millions of product variants. There are hundreds of thousands of enter prises in industry, agriculture, construction, transport, and distribution. It is necessary to make thousands of millions of decisions in the area of materials supply alone. The plans must also relate to labor force, wages, costs, prices, profits, investments, and economy of materials. These decisions originate from different parts of the planning hierarchy. They are all too often inconsistent with each other, as for instance when supplies don’t match the output plan. Bemuse next year’s plan must be ready by next year, and not in 29,999 years, it is inevitably neither balanced, nor disaggregated.

Today the concept of “directive planning” is being substituted by a system of economic norma-fives, state orders, and control figures which their creators claim are of a “truly revolutionary nature.” But what kind of revolution is it when the state orders usually cover from 80 to 100 percent of the enterprises and all supplies are based on “non-obligatory” control figures?

Moreover, the so-called “political economy of socialism,” formulated by Joseph Stalin in 1952, is still considered to be the sacrosanct theoretical foundation of economic policy and applied economic analysis in the U.S.S.R. It is nothing, however, but a collection of political slogans discredited by harsh economic realities. For example, according to the “political economy of socialism,” the main economic law of socialism is the “Law of the Complete Fulfillment of the Rising Needs and Requirements of the People.” Other “basic laws” include the “Law of Remuneration According to the Quality and Quantity of the Work Performed,” the “Law of Planned and Proportionate Development of the Socialist Economy,” the “Law of Reproduction of the Population on the Basis of Rising Standards of Life and Constant Improvements of Living and Working Conditions,” and so on.

It is a testimony to the strictures and rigidity of economic theory in the U.S.S.R. that much of the ferment of perestroika has involved little more than heated discussions about these Orwellian”laws.” Some Soviet scholars argue, for example, that these “laws” can implement themselves only through the rational, conscious activities of the planners. Others oppose this view with the notion that this approach is contrary to the Marxist-Leninist assumption of the independence of production relations (objective phenomena) from the will and mentality of the people (subjective phenomena). The absurdity of the current situation in Soviet economic science is manifested by the existence of a third school, which insists that economic laws can exist but not operate. None of these “scientific” discussions have helped increase the supply of goods on Soviet shelves. Instead the obso lete theories are a significant part of the problem.

Another basic problem is that for the last 70 years, Western economics has been depicted in the U.S.S.R. as “bourgeois vulgar political economy.” As a result, the vast majority of Soviet economists are unfamiliar with even its basic tenets. The old and discredited dogmas of Soviet economics are perpetuated by the system of higher education and academic training. The few Soviet economists who taught themselves modern economics have no access to the decision-making process, which is still dominated by economists like my former col leagues Abel Aganbegyan, Leonid Abalkin, and Boris Milner, and other economic advisors to the government, who may pretend to be reformers but still fall within the Marxist-Leninist mainstream.

The Economy Deteriorates

All of these factors, as well as the opposition of hard-line apparatchiks to any reforms (even the piecemeal ones), and widespread public confusion cause by the still-prevailing egalitarian thinking, have led to the serious deterioration of an already stagnant economy. The command economy was virtually disrupted by 1987, while the market economy failed to appear because of the inconsistency of the reforms package.

The most disastrous of all of the proclaimed “reforms” was in the field of labor and wage policy. Begun in September 1986, this reform was aimed at increasing wage differentials and reducing the army of 11.5 million industrial managers. The reform was supposed to establish special relations between wage hikes and productivity.

The execution of this reform was assigned to the State Committee of the U.S.S.R. on Labor and Social Affairs. The results were quite the opposite to those expected: managerial staff, instead of being reduced, rose by 600,000, while income differentials increased but with no relation to productivi-ty-all the gains were enjoyed by the very same managers whose numbers were supposed to be reduced. At many enterprises, the costs of the additional supervisory staff were simply included into the unit labor costs without any explanation or justification. The provision calling for linkage between wages and productivity was circumvented by false reporting, which is more common today than at any other time in Soviet economic history.

The labor/wage reform succeeded only in discrediting perestroika and Mr. Gorbachev in the eyes of the workers. The result has been the recent industrial unrest and the demands of the first Soviet free trade union—the “United Front of Workers”—for Mr. Gorbachev’s impeachment. The workers claim that the policy of restructuring was initiated by corrupt party and government officials, industrial managers, and liberal-minded, pro-Western intelligentsia who want to launder money they accumulated during Brezhnev’s era, to re-establish capitalism, and to enjoy new privileges at the expense of the working class. This labor hostility was manifested during last summer’s coal strikes, when the workers demanded the abolition of all forms of private business, especially cooperatives.

Rather than move forward with its reforms, the Soviet government is now trying to forestall social upheaval and reduce labor unrest by introducing rationing of most food items. The latest remedies and prescriptions issued by the Academy of Sciences of the U.S.S.R. and other government think tanks are testimony to the desperation of the Soviet leaders. For example, Academician Georgi Arbatov suggests that the U.S.S.R. must sell its strategic gold reserves to finance perestroika, arguing that this will immediately produce such positive economic results that the gold expended will very soon be replenished. Academician Leonid Abalkin seriously suggested in his speech to the Presidium of the Council of Ministers of the U.S.S.R. that one of the most important and urgent ways by which to stabilize the disintegrating economy was to construct boarding and lodging recreation facilities for families. Such construction, in his view, will absorb 20 to 30 billion rubles from the money market and thereby greatly improve the financial situation.

At the same time, bureaucrats with full support from the Academy of Sciences are introducing new prohibitive measures that seriously jeopardize any prospects for real improvement. For example, on August 15, 1989, new customs duties were introduced that at first sight seemed liberal—duties were reduced for 146 items including foodstuffs, children’s apparel, and footwear. However, new and heavy levies were imposed on all types of computers, electronics, and most durable goods. According to estimates by the Soviet Academy of Sciences, the Soviet Union’s computer capacity equals that of Thailand, which is 10,000 times less than that of the United States.

Lying with “Statistics”

The lack of sound economic theory is compounded by an absence of reliable economic and social statistics. Leading Soviet economists use CIA and other Western estimates rather than official Soviet statistics to support their arguments. (And Western estimates are no more reliable when they are based on Soviet data.) Until recently, statistics were treated as a form of economic propaganda and as such were used mostly to illustrate the “achievements” of the Communist Party. Even today, official statistics are frequently based on deliberately falsified reports of the ministries, republics, regions, districts, and enterprises, which are inclined to report economic indices in a way that is beneficial to them. National accounts in the U.S.S.R. are calculated by simply adding up the value of all material outputs at their stated prices. Services and other nonmaterial incomes aren’t included. This approach, based on the Marxist concept of “productive” and “non-productive” labor, leads to some of the paradoxical statements of Soviet economics. The dentist, for example, is a “non-productive” individual while the dental technician is a “productive” one.

In the Soviet Union, where the “market” (i.e., the existing system of distribution) is totally monopolized by government ministries and enterprises, prices do not reflect costs, nor do costs reflect anything except local or departmental bureaucratic interests. Centrally planned investment decisions, as well as government campaigns against the so-called “duplication and parallelism” of the 1960s and ‘70s, led to a situation where the rate of monopolization of production of most commodities is up to 100 percent. Moreover, Soviet prices are distorted by huge subsidies (104 billion rubles in 1989) and heavy indirect turnover taxes (105 billion rubles). These taxes sometimes constitute from 90 percent (cars) to 95 percent (alcoholic beverages) of the retail price.

Senseless economic decrees and regulations are being issued by the Council of Ministers of the U.S.S.R. at an accelerated speed of 2,000 per year, compared with “only” 500 to 700 a year during the Brezhnev stagnation years of 1965 to 1982. The 18 million bureaucrats employed by the system still determine everything in the sphere of production, distribution, and consumption. In the current situation, when 234 of 277 basic consumer goods included by the U.S.S.R. State Committee on Statistics in the “market basket” of the Soviet people are now outside the state distribution system, the power of these bureaucrats hasn’t diminished, as was expected by the advocates of reform, but has increased enormously. Given such a system, there is no room for hope that in the foreseeable future the needs of the customer will influence what is to be produced.

How Bad Is the Crisis?

Because of the lack of reliable economic data, it is impossible to quantify the depth of the economic and social crisis in the Soviet Union. Vital statistics, which to my mind are the best (although an indirect) source of information on the real economic situation and quality of life in the U.S.S.R., show absolutely desperate figures: life expectancy, the infant mortality rate, housing, and nutrition statistics can be compared only to those of developing countries. This is especially true in the more backward regions of the Soviet Union—central Asia, the autonomous republics in the northern part of the U.S.S.R., and Azerbaijan.

As my former supervisor, Deputy Prime Minister of the U.S.S.R. in charge of the economic reform, Academician Leonid Abalkin, has said, “If in 1.5 to 2 years the economic situation does not stabilize and no improvements are made, a shift of society to the right [i.e., to Stalinism] will be inevitable. What form this will take exactly, I don’t know” Unfortunately, there are no visible reasons for such a stabilization to occur.

Moreover, desperate economic adventurism is assuming larger and larger proportions. According to my estimates, the issuance of paper money unsupported by an adequate growth in the production of commodities reached 20 billion rubles in 1989. The devaluation of the ruble (from $1.60 to $0.16) in September 1989 is the direct result of decades of arbitrary expansion of cash in circulation which was not supported by an adequate growth in commodity production. Soviet consumers joke that the ruble has come to resemble a lottery ticket more than a currency. An estimated 300 billion “hot rubles” are in circulation—forced savings that would immediately be spent if anything worth buying appeared on the market.

An urgent discussion is now going on in the West about how best to assist the Soviet Union and Eastern European countries in their efforts to reform their crippled economies. The economic crisis confronting the U.S.S.R. and Eastern Europe offers the West a unique and unprecedented opportunity to stimulate genuine economic and political reforms there. Such constructive leverage can be brought to bear through active, coordinated, and disciplined financial and trade policies. The goals of financial and other economic assistance to the U.S.S.R., both on a bilateral and multilateral basis, should be the following:

1.       In the economic sphere

a) Massive privatization of the economy;

b) Denationalization of land and abandonment of the kolkhoz and sovkhoz system (collective and state farms), which is still based on forced labor;

c) Massive reallocation of resources away from the military to the civilian sectors of the economy;

d) Sharp reductions in the size and power of the bloated government bureaucracy, elimination of its expensive privileges, and limitation on the share of national income commanded by the state budget (81 percent in 1989).

2.       In the political sphere

a) Creation of a true multi-party system;

b) Legalization of free trade unions;

c) Establishment of a genuine legal system with an independent judiciary.

Continuing present, undisciplined Western lending practices (especially untied loans) serves only to postpone the need for genuine economic restructuring in the U.S.S.R. and thereby increases the likelihood of socio-economic chaos. The best form that Western assistance can take is to provide the Soviets with a thorough, dispassionate economic analysis of their situation and an economic theory of transition to a free market system. The truism that “nothing is more practical than a good theory” is completely applicable to the present situation in the U.S.S.R. and Eastern Europe.

So, the main problem of Soviet economies today is the lack of understanding that mere recognition of the crisis isn’t enough to deal with the situation. Today it is obvious that no amount of reforms aimed at the “perfection of the economic mechanism” can make the Soviet economy work unless the very foundations of the system are changed. The answer to the question “What should be done?” is obvious. That requires the establishment of a multi-party system, privatization of the economy, and denationalization of land. More specifically, the transition to a market economy should include:

• Introduction of employee shareholding plans at all industrial enterprises and most service es tablishments;

• Creation of stock exchanges and provision for free trade in shares; * Restructuring of kolkhoz and sovkhoz farms into genuine independent cooperatives securing the rights of the peasants to withdraw with their share of land and other common property;

• Elimination of state price controls starting with luxuries; – Creation of a national labor market by elimi nating residence requirements (propiska) and securing the rights to travel and work anywhere in the U.S.S.R.;

• Immediate demunicipalization of housing;

• Drastic cuts in military and other government spending;

• A Ludwig Erhard-type monetary reform and achievement of currency convertibility on international markets;

• Liberalization of foreign trade and creation of favorable conditions for foreign investors.

Suggestions such as these, unfortunately, are ignored by Soviet leaders because it is obvious to them that the implementation of such a program would lead to their ultimate loss of power. Certainly, the transition to a market economy would be rather painful, but, to my mind, unavoidable in view of the present situation which already is unbearable. As the Soviet economist O. Bogomolov recently admitted, “The final choice in favor of the market has not been made.” The time that will allow such a choice is expiring.

1.   See, for example, Abram Bergson, Planning and Performance in Socialist Economies: The U,S.S.R. and Eastern Europe (Boston: Boston University Press, 1988); Padma Desai, “Perestroika, Prices and Ruble Reform,” The Harriman Institute Forum, November 1989, pp. 1-8; S. Andreyev, “Struktura vlasti i zadachi ob- schestva,” Neva, 1989, No. 1, pp. 143-173; Rachel Walker, “Marxism-Leninism as Discourse: The Politics of the Empty Signifier and the Double Bind,” British Journal of Political Science, April 1989, pp. 161-89.

2.   Also cited in Alec Nova, “The Problems of Perestroika,” Dissent, Fall 1989, p, 463.

3.   For an overview, see A. Nekipelov, “Is plena mifov i doges,” Kommunist, 1989, No. 7, pp. 21-29.

4.   During the discussion of the Law on Taxation at the fall 1989 session of the Supreme Soviet, a People’s Deputy from Khakassia took the rostrum to declare that behind the new Soviet cooperatives lurk Washington and the CIA. (Moscow News, 1989, No. 33, p. 7)

5.   Yu. F. Chaplygin, “Ekonomicheskaya Reforma: v poiskakh putei razvitiya,” Izvestiya AN SSSR, Ser. Ekonomieheskaya, 1989, No. 3, pp. 18,19.

6.   Ibid., p. 21.

7.   See, for example, Franklyn D. Holzman, “Politics and Guesswork: CIA and DIA Estimates of Soviet Military Spending,” International Security, Fall 1989, pp. 101-31.

8.   Moscow News, 1989, No. 26, p. 12.

9.   The Washington Post, December 1,1989.

10.   Moscow News, 1989, No. 26, p. 12.

  • Professor Yuri Maltsev earned his B.A. and M.A. degrees at Moscow State University, and his Ph.D. in Labor Economics at the Institute of Labor Research in Moscow, Russia. Before defecting to the United States in 1989, he was a member of a senior Soviet economics team that worked on President Gorbachev’s reforms package of perestroika.