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 apparatchiksto 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.
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.
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