Business
as an Anathema
to Government:
The Path to Private Business in the USSR
Donald
F. Dixon
Faculty
ofBusiness
andPub• Adminirtration
TheOpenUniversity
oftheNetherlands
EvgenyV. Polyakov
The IVorld Bank
The ideological
underpinnings
of theSovieteconomic
system
areidentifiedin theUSSRConstitution;
ArticleIV states
that"thesocialist
ownership
of the instruments
and meansof production"
providesthe economicfoundationof the state.ArticleXI explainsthat the socialist
economicsystem
replaced
marketresource
allocation
by centraldecisions:
"Theeconomic
lifeof
the USSRis determined
anddirectedby the stateeconomic
plan."This plan
hasthepurpose
of "increasing
thepublicwealth,of steadily
raising
thematerial
and culturalstandards
of the workingpeople,and of consolidating
the
independence
of theUSSRandstrengthening
itsdefensive
capacity."
By the end of World War II the socialisteconomicsystemhad
transformed
an agrarian
countryinto an industrialized
word power.Post-war
recoverywas rapid.The fourthFive-YearPlan (1946-1950),aidedby productiveresources
drawnfromEasternEuropeandreparations
fromdefeated
nations,broughtmuchof the economyup to pre-warlevels.Rationingof
consumer
goodsendedin December1947anda series
of retailpricereductions
from 1947 to 1952 significantly
increasedreal incomesin urban areas.
However,theoutputof consumer
goodsfailedto achieve
plannedlevels.This
deficiency
represented
a planning
problemthatwascreated
by theverysuccess
of planning.
The growthin prosperity
wasexceptionally
rapid,especially
after
the deprivation
duringthe 1930sandtheWar,andthisledto a revolution
of
risingexpectations.
Complaints
aboutthequalityof consumer
goodsappeared
in thepress
almostassoonasrationing
ended.Therewerereportsof nailsandforksthat
bent,luggage
locksthatwouldneitheropennordose[Vakhitov,
1949],poorly
designedand finishedbicycles[Permyak,1949],toys that self-destructed
[Belfishchev,
1949],anddefective
electric
lightbulbs[Maksimov,
1949].A retail
storeDirectorcomplained
of poorqualityshoes
andstockings
[Balakhnenkov,
1949].Poorqualitygoodsoftenremained
unsold[Grek,1949].On the other
hand,productsshortages
were reportedfor itemssuchas lamps[Teterma,
1949]andrepairpartsforautosandradios[Chugunov,
1949;Pribylsky,
1949].
BUSINESSAND ECONOMIC HISTORY, Volume
Twenty-seven,
no.1,Fall1998.
Copyright
¸1998 bytheBusiness
HistoryConference.
ISSN0894-6825.
173
174 / DIXON
AND POLYAKOV
Thesecomplaints
continued
unabated
andthecause
of theproblem
was
identified
againandagain.Trudnotedthat"Mechanical,
ill-considered
planning
stillmakesitselffelt- planning
'in thinair,'withoutconsidering
thechanges
in
thelifeandhabitsof theworking
people
of thevarious
areas"
[CarryonTrade,
1951].A surveyof readers'
lettersreported
in Ix•vestia
is typifiedby a single
comment:
'•)ue to thesluggishness
andlackof interest
of individual
officials,
the consumer
doesnot always
findwhathe needsin the stores"[Studyand
Satisfy
Demands,
1951].The Russian
DeputyMinisterof Traderecognized
the
on-goingcriticism
andacknowledged
thatimprovements
wereneededin the
planning
process
[Pravotorov,
1952].
Weaknessof the Planning System
In privateenterprise
economies,
marketforcesachievea numberof
balances;
supply
anddemand
for goodsandmonetary
resources
arebalanced
bypricesandinterest
rates.Sovietphnnersattempted
to achieve
suchbalances
bycentraldecisions.
Forexample,
thedemand
andsupply
of consumer
goods
werebalanced
by adjusting
consumer
incomes
andtheoutputof goods.Raw
materials
andtheintermediate
goodsandservices
needed
to produce
consumer
goods
alsohadto bebalanced
withthedemands
of othersectors,
including
the
military.Phnsidentified
aggregate
objectives,
suchastonsof output,andthese
objectives
oftenwereincompatible.
Rapideconomic
growthwasachieved
by straining
producing
enterprises.
The fundamental
targetfor anyenterprise,
grossoutput,typicallyexceeded
enterprise
capacity.
Problemsalsoarosebecause
ministries
did not consult
subordinate
enterprises
whendraftingplans,and producers
often failedto
notifycustomers
of bottlenecks
thatprevented
deliveries
of promised
inputs.
Unforeseen
contingencies
meantthatresources
intended
for onepurpose
were
preempted
for another,
withdetrimental
impacts
on othersectors.
Facedwith
mattamable
demands,
managers
hoarded
whatever
wasavailable
in the"official"
economyregardless
of the needsof theirenterprises.
Thesehoardedinputs
werethenbartered
or soldwhenopportunities
arose.
Phnningbecame
morecomplicated
afterWorldWarII because
housing,
agriculture,
andconsumer
goodsallbecame
important.
Buttheplanning
system
hadbeendesigned
to dealwiththesingleobjective
of rapideconomic
growth;
this,in ram,meantanemphasis
oninvestment
in heavyindustry.
Theshareof
resources
available
to consumer
goodsindustries
fell continually
untilthe mid
1960s;untilthattime,increased
consumer
goodsproduction
wasto be derived
solelyfromincreases
in totaloutput.
Communist
Partyinfluence
overmanagerial
appointments
meantthat
administrative
positions
oftenwereentrusted
to "unqualified
andsometimes
to
questionable
individuals"
[Egadze,
1952].Partyinterference
probably
limited
thegroupfromwhichmanagers
werechosen
andthusreduced
thelevelof
managerial
competence.
Stillmoreimportantwasthe corruption
inherentin
thesystem
whichmeantthatthepoliticalstructure
benefited
fromthe status
quo.Theeconomic
bureaucracy
alsoengendered
corruption.
Onceappointed,
THE PATH TO PRIVATE BUSINESS IN THE USSR / 175
managers
continued
to beevaluated
onthebasis
of loyalty
ratherthanefficiency.
However,loyaltyto superiors
did not obligesubordinates
actuallyto fulfill
commands;falsifiedperformancereportswere the rule rather than the
exception.
Enterprise
managers
offereda varietyof goodsand services
as
bribesto thosewho appointed
them,andto othersuperionandcolleagues
who couldhelpthemin theircareers.
The relativeunimportance
of economic
efficiency
allowedmanagers
to absorbthecostsof briberywithoutbeingheld
accountable.
The Beginningsof ReformEfforts:The Khmshchev
Era (1953-1965)
Malenkov,Khrushchev's
rivalfor powerafterStalm'sdeath,proposed
reductions
in heavyindustryand militaryexpenditures
and an expansion
of
consumer
goodsoutput.Khmshchev
gainedpoliticalsupportby proposing
to
retainthe traditional
emphasis
on heavyindustryandofferedschemes
suchas
the cultivation
of "Virg/nLands"in the east.However,Khmshchev
realized
thathisregimerequired
thepublicsupport
thatwouldbe gainedfroma rising
levelof living.Thus,someconsumer
goodsprices
werelowered
andtheoutput
of consumer durables was increased.
An impressive
rateof economic
growthwasachieved
in theearly1950s,
buttheeconomic
successes
of theearlypost-war
yearsledto over-optimism,
so
thatthesixthFive-Year
Planhadto be abandoned
andwasreplaced
by a more
moderateSeven-Yearplan (1959-1965)which also proved to be overly
optimistic.
The expansion
of consumer
goodsoutputdid not meetexpectations, and there was abundant evidence of continued dissatisfactionwith the
available
goods.The pressrepeatedly
complained
that enterprises
turnedout
low-grade
itemsthatwereunsaleable
[Produce
Attractive,High-GradeGoods,
1954].The USSRMinisterof Trade formallyrecognized
that "The people's
demand for furniture,lumber,cement,householdmachinesand certainother
machines
isnotbeingfullymet,"and"[a]long
withtheshortage
of someitems,
tradeorganizations
have surplusstocksof kitchenhardware,haberdashery,
perflame,
certainkindsof watches,and staplefabrics...ptincipally
because
manyof themhavebeenmadein the sameform,color,anddesignfor several
years"[Pavlov,1956].The situationremainedunchanged
at the end of the
decade:
"Manytradeorganizations,
andalsoenterprises
manufacturing
consumergoods,havefailedto takeintoconsideration
themajorchanges
thathave
takenplacein tradein recenttimes,arisingmainlyout of the increase
in the
production
of goodsandthechanges
in publicdemand"[Skovoroda,
1960].
Khmshchev
considered
the planningbureaucracy
to be one causeof
economic
shortcomings,
because
of empirebuilding,
bureaucratic
delays,
and
inadequate
attentionto regionalcoordination.
The 1957Reformestablished
a
system
of regional
economic
councils
(Sovnarkho•)
sothatcommunication
no
longermovedalongverdcalministerial
linesbut movedhorizontally,
along
territoriallines.However,the planningprocedure
remainedunchanged
and
enterprises
stillwererequired
to fulfillcentralized
targets,
suchassteeltonnage
produced.
But the newlycreatedSovnarkhogy
not onlyhaddeficiencies
similar
176 / DIXON AND POLYAKOV
to thoseof the ministries
theyreplaced,
but alsotendedto givelocalinterests
toppriority.Corruption
alsocontinued
to be animportant
problem.In 1962
Khrushchevmentionedbribesfor allocating
housingand land,admission
to
colleges
and umversities,
and awarding
education
certificates
and academic
diplomas
[Simis,1977-78,p. 39].
By 1962theeconomic
situation
haddeteriorated
to theextentthatopen
debateonplanning
deficiencies
wassanctioned.
Theprimaryproposal,
madeby
EvseiLiberman,wasto changeeconomicfactorsratherthanmakeadministrativechanges
andto focusefforton theenterprise
ratherthanthephnning
bureaucracy.
Liberrnan
addressed
a majorproblemfacingenterprise
managers
- thelargenumberof assigned
objectives
andthe impossibility
of reconciling
theseobjectives
- by eliminating
all but threecentrallyplannedobjectives.
Bonusespaid for achievingthese objectiveswould dependupon the
achievement
of a targetprofitability
rate.
This proposal
wascriticized
on manygrounds.
Someobjectedto the
centralroleassigned
to profitsbecause
thisseemed
too muchlikecapitalism.
Othersfearedthat the phn'sintxoduction
wouldresultin fluctuating
prices,
unemployment,
and subordinating
capitalgoodsoutputto theproductionof
consumer
goods.Inconsistencies
alsowerenoted;fulfillmentof the assigned
targetsof productassortments,
productiongoals,and deliverydatesmight
conflictwith theachievement
of profitability
goals.The debatewascontinuing
when Khrushchev was removed from office in 1964.
The BrezlmevEra (1964-1985)
The periodfrom 1964to 1985is generally
referredto astheBrezhnev
era becausethe tenuresof the next two leaders,Andropovand Chemenko,
weretoo shortto havea significant
impacton therefomaprocess.
Brezhnev
cameto powerin October1964 and remainedin officeuntil his deathin
November1982. He was succeeded
by Andropov,the formerheadof the
KGB, whodiedin February1984.Chemenko,
whosucceeded
Andropov,died
after thirteen months in office.
Kosygin,Brezhnev'schief rival for power,proposedrefomasthat
echoedthoseof Malenkova decade
earlier.However,Kosygin's
proposals
were
sufficiently
"radical"thatBrezhnev
managed
to portrayhisownproposals
asa
lesserthreatto the traditional
valuesof SovietSociety.
Brezhnevrecentralized
theplanning
bureaucracy
in 1965andKhrushchev's
regional
economic
councils
wereabandoned.
A furtherstructural
change
combined
enterprises
into large
"production
associations,"
to gaineconomies
of scale,andreducebureaucracy.
The closecontrolof enterprise
managers
by planningauthorities
wasto be
reduced.Managers
wereto be encouraged
to respondto variouseconomic
"levers,"suchasprofitsandbonuses,
andincreased
authority
overinvestment,
thusmakingenterprises
moreefficient.
However,theimpactof therefomawaslimitedby theplanning
bureaucracy,whichsimplyrefusedto approvechanges
thatan enterprise
wishedto
make[Seleznev,
1965],nullifiedcontracts
madeby enterprises
[Sobolev,
1966;
THE PATH TO PRIVATE BUSINESS IN THE USSR / 177
ZolotovandAntonenko,
1967],andappropriated
any"surplus"
profitearned
[Borshch,1965]. Moreover,there were "undesirable"
managerialactions,
because
loopholes
in theplanmadeit possible
for managers
to increase
profit
withoutloweringcost,or to increasewageswithoutincreasing
productivity.
Managers
alsoobtained
verylargeshares
of bonusfunds,costsoftenwerenot
reduced,and labor productivityand qualityimprovementreceivedlittle
attention.
Theseloopholes
wereclosedby limitingmanagerial
discretion.
Sincethe reformonly adckessed
the enterprise
levelof the planning
structure,
leaving
intacttheplanning
system
logic,enterprises
continued
to face
shortages
of capitalequipment
andotherinputsthatmadeit difficultto meet
outputgoals.Factorymachinery
was unreliable
and sparepartsoften were
unobtainable
[Fkachev,Kravchukand Vasilyev,1968].Similarly,retailshops
lackedcalculating
cashregisters
andotheressential
equipment
[Pavlov,
1968].
Enterprises
alsofacedoperational
inconsistencies
andpricescontinued
to be
established
by centralauthority
withoutreference
to economic
factors,sosome
enterprises
werevery profitablewhereasothersfoundit impossible
to make
profits[Bakanov,
Serebryakov,
andFefflov,1967].
The eighthFive-YearPlan (1966-70)calledfor rapidlyincreasing
production
of consumer
durables;
forexample,
television
outputwasto double
and refrigerator
outputwas to triple.An agreement
wasmadewith Fiat to
cooperate
in autoproduction,
whichwasto increase
by 30 percent.
However,
no majorreallocation
of resources
occurred;the Plan envisioned
an increased
supplyof consumergoodsarisingfrom a restoration
of previousratesof
economic
growth.Sovieteconomic
growthdeteriorated
in the 1970sbut the
Brezhnevregimeseemed
moreconcerned
with maintaining
internalpolitical
stabilitythanwith economic
growth.After the Czechoslovak
crisisof 1968-9
suggested
that economic
reformcouldthreatenSovietpoliticalstability,
any
hopeof substantial
economic
reformwaslost.
Consumers
werestill"takingadvantage
of theirmoreimportant
position
in theeconomy,
buyingthethingstheylikeandlettingtheothersstand."Thus
unsoldgoodsbecame"a moreand more frequentphenomenon"
[Tyukov,
1967,p. 19]. The USSRMinisterof Tradepubliclyrecognized
shortages,
"particularly
suits,men'sand women's100%wool coats,fashionable
leather,
chrome-leather
andpatentleatherfootwear,
andTurkishtowels...refrigerators
of certainmodels,
heavy-duty
motorcycles
withsidecars,
high-quality
furniture
suites,and enameledchinawareand earthenwaredishes"[Stmyev,1973].
Queuesat retailstores
andgasstations
alsobroughtcomplaints.
Shortages
were closelylinkedwith continuedpoor quality;suitsand
ckesses
disintegrated
whencleaned
andeventhe managers
of shoefactories
wore importedshoes[Tarasyuk,
1976].Consumergoodsdid not meetworld
standards:
"Whenwe talkof newproducts...many
of them,in termsof quality
level,lagbehindworldachievements
in theirfield"[Borodin,
1973].Refrigerators
lackedautomatic
defrosting,
for example.
Poorqualitymeantfew purchases
and hrge inventories
of unsaleable
goods,especially
clothingand shoes
[Kravchenko,
1973].
178 / DIXON AND POLYAKOV
Althoughfew industrial
ministries
fulfilledplansfor consumer
goods
production
duringtheninthFive-YearPlan(1971-75),thetenthFive-YearPlan
(1976-80)promised
a 32% increase
in the production
of consumer
goods.In
December1977it wasannounced
thatthistargetwouldnot be met [Podgomy
and Georgadze,1976; Shiplet,1977].With earlierreform abandonedand
economic
growthcontinuing
to decline,
othermeansweresought
to improve
economicperformance.
From the mid-1970sto Brezhnev's
deathin 1982,
several
"reforms"wereannounced.
The mostsignificant
of thesewasa decree
in July1979thatspedfledwaysto makethephnningsystem
moreeffective,
including
betterinformation
onenterprise
capacity,
normsto replace
enterprise
indicators,
greateremphasis
on long-termplansand contracting
between
enterprises.
Still,resource
allocation
remained
unchanged.
By theendof theBrezhneverathesituation
of theSovietconsumer
was
muchasit hadbeentwentyyearsbefore.Officialsstillreported
thatindustry
"regularly
failsto fill thetradenetwork's
orders,
citinginsufficient
rawmaterials
andcapacity.
The upshotis that firstthere'sa surplus
of goods,and then
there's
a shortage"
[Darbinyan,
1984].It wasestimated
thatonlythirtypercent
of thedemand
of youngpeopleforclothing
wasmet,"Thevacuum
is filledby
expensive
articles
fromcustom
tailoring
shops
andbytheservices
of profiteers
andprivateclothing
makers
of various
sorts"[Logachev,
1984].
Unofficial Sphereof Society
The failureof the Sovietsystem
to providemeaningful
rewardsfor
individualeffortcaused
peopleto diverttheirenergyto "unofficial"activities
intended
to improvetheirlives.Thatis,privateactivity,
neitherstatecontrolled
normandated,
became
morerewarding
than"official"activity.
One manifes-
tationof thisprivafism
wasunofficial
cultural
andsocial
activity,
including
art,
music,and literature,
and foreignsources
of information,
includingradio
broadcasts
andcontact
withforeign
visitors.
Planning
deficiencies
alsoledto an
immensevolumeof unofficialeconomicactivity,someintendedto achieve
officialobjectives
andsomeforpersonal
gain.
Enterprise
managers,
whooftencouldnot obtainneededinputsfrom
officialsources,
developed
manyproduction
and exchange
techniques
in
contravention
of the law sothattheycouldmeetplantargets.
Superiors
not
onlywereaware
thatmanagers
engaged
in these
unofficial
activities
butexpected themto do so,sincethisactivityallowedtheplanning
system
to function
betterthanit otherwise
would.Suchactivity
alsoenabled
managers
to fulfill
plannedobjectives
andthusto maintaintheirpositions
andearnbonuses.
But
sometimes
managers
wereprosecuted
forengaging
in suchunofficial
activity.
Production
anddistribution
of agricultural
products
fromprivateplots
and"gardenplots"wasofficiallydiscouraged
from1953to 1964.In the 1950s
"personal
auxiliary
farming"
was"subjected
to administrative
andideological
attacksas a •resfige'of the past.This policyultimatelyhad an adverse
effect...onthegrowthof thepeople's
material
well-being."
But,in 1964the
"unwarranted
restrictions"
wereliftedand"stepstakento assist
thepublicin
THE PATH TO PRIVATE BUSINESS IN THE USSR / 179
developing
privateplots"[Raig,1984].Privateagricultural
production
was
encouraged
in the late 1970sandearly1980swhenharvests
wereverypoor.
The GreatSoviet
En•yckpedia
articleon the "smallplotof landaroundthehouse
thatis workedby the holder,"explicitly
recognized
the needfor suchplots:
"The economic
reasonfor theexistence
of personal
subsidiary
plots...isthat
socialproduction
doesnotyetfullyprovidesociety
withagricultural
products"
[Personal
Subsidiary
Plot,1977].
PrivateTrading
"Speculators"
werethosewho boughtgoodslegallyin areaswhere
thesegoodswereavailable
andresoldelsewhere
at higherprices.Sometimes
speculators
emerged
because
collective
farmshadnowayto transport
produce
to market[Zabolotny,
1972].Nevertheless,
speculators
oftenwerearrested
[Dubov,1972;Glazkov,1972].Evenif intermediaries
wereofficiallyignored
theymightbecriticized.
Forexample,
thosewhousedtheirprivateautomobiles
to transport
goodsto marketweresaidto engage
in "immoralandantisocial
action"which"willsoonrob a manof all dignity,of hishonesty,
conscience
andcapacity
for shame"[]3ochkarev
andZanozin,1974].Popularaversion
to
privatetradingwasespecially
apparent
whenchildren
wereinvolved.
Children
discovered
sellingflowersin a marketbroughtthe argument
that sincethe
market"is a bad phce for children...It is necessary
to forbidchildren
categorically
to engage
in trade"[Alexandrov,
1955].Moregenerally,
"Parents
who sendtheirchildrento the marketplace
are out of stepwith the 20th
century"[Niyazmatov
andShchekochikhin,
1976].
A limitedamountof privatetradingin second-hand
goodswaslegal.
Commission
storesestablished
by the stateprovided
onemeansof selling
second-hand
goods,
butfleamarkets
seemed
to bepreferred.
As theneedfor
private
trading
continued
to increase,
fleamarkets
werepermitted
in manylarge
cities,and it was not unusualfor the goodssoldin thesemarketsto be
"rdafively
newandstylish"
ratherthansecond
hand[Yakovlev,
1983].
Private Production
A reviewof permitted
privateproduction
notedthat"Individual
laborin
thesphere
of handicrafts,
agriculture
andconsmetservices
ispermitted
in the
USSRby law."Specific
typesof legalactivityincluded
tailoring,
carpentry,
watchrepair,hairdressing,
carpet
weaving,
andmotorvehicle
repair,aswellas
personal
services
suchasmedical
anddentalcare,privateinstruction,
andlegal
practice.
Suchindividual
laborseemed
to gainfavor;thetaxonincomeearned
fromprivate
production
wasreduced
several
times
after1970[Zavadskaya,
1984].
Largescale
private
production
thatinvolved
hiringworkers
supposedly
wasillegal,
but"moonlighters"
provided
needed
services.
Forexample,
during
the summergroupsof students,
professionals,
andothersformedso-called
construction
brigades
that offeredtheir services
to enterprises
and farms.
Although
thisactivity
seems
to havebeentolerated
bytheauthorities,
it often
180 / DIXON AND POLYAKOV
wasillegalbecause
stolenbuildingmaterials
wereused.One ebboratescheme
to providebricksfor construction
at a statefarminvolvedthe"disappearance"
of trainloadsof bricksfrom a largebrickplant.One of the farm'sdirectors
explained
hisviohfionof the lawby asking'•qhat elsecouldwe do?... The
higher-ups
comearoundandpraiseus:We'redoing%igconstruction.'
Nobody
careshowwe gotthedamned
bricks"[Shcherban,
1985].
Production
for privatesalealsowascarriedout in statefactories
using
materials
andlaborthatwerenotrequi•edto meetplannedoutputtargets.Such
surplus
outputpassed
tlxtough
officialchannels,
butwaspurchased
andsoldon
privateaccount.
The laborwasprovidedby workersalreadyemployed
at the
plant,who received
unrecorded
overtimerates.The outputwasdistributed
in
thesamemannerasofficialoutputbutwasboughtandsoldon privateaccount.
Suchoperations
were profitable,despitehighwagesand bribesto officials,
becausethe materialusedwas stolenfrom the state.Sometimes
private
productionwithin a state enterprisewas especiallyingenious.Sinyavsky
describes
a casein whichworkersat a citywansport
depotrestored
a tramthat
hadbeenscrapped
andplacedit in service.Of coursethe faresreceivedwere
retainedby theworkers[Sinyavsky,
1990,p. 181].
Cormpriori
Transcending
the economicsignificance
of unofficalactivitywas its
effect on corruption.The Sovietpoliticalsystemdevelopeda traditionof
corruptionreachinginto nearlyall cornersof societyandup anddownnearly
all levelsof the formalhierarchy.
It wascommonfor individuals
to paybribes
simplyto ensurethat bureaucrats
and otherswould performtheir official
functions.
Bribesalsoinducedofficialsto commitillegalacts.For example,
highwaypolicereceived
bribesso that driverscouldavoidthe legalconsequences
of trafficviolations.
Theft was common,varyingin scalefrom trivialto vast,and often
remainedunpunished
[Serobyan,
1976].One of the reasonsfor widespread
dishonesty
wasthat "The Paxty's
rulethatcadresshouldbe selected
for their
politicaland businesslike
qualifiesis flagrantly
violated.The wrongkind of
people- speculators
andplunderers
of publicproperty- oftenmanageto get
jobsthat involvethe safeguarding
of valuableproperty"[On Intensifying
the
Struggle,
1955].
Somepersons
wereableto profitbecause
theyhadfirstaccess
to goods.
Retailstoreworkers
wereableto appropriate
goods
thatwerein shortsupply
to
sellprivatelyat inflatedprices.Goodsalsocouldbe obtainedby cheating
customers
andsuppliers.
Retailstoreclerkssharedthe proceeds
of under-thecountersales
withtheirstoremanagers.
Sometimes
goodsthatwereunavailable
in retailstorescouldbe obtainedillegallyfrom othersources.
Automobiles
ownedby the statewereofferedfor hireby theirdriverswhennot neededfor
"official"business.
Offidal driversalsowereableto stealgasoline
coupons
to
sell to consumeœs.
THE PATH TO PRIVATE BUSINESS IN THE USSR / 181
Illegalprivatetradinggreatlyexpanded
opportunities
for corruption.
Managers
of storesandotherenterprises
bribedauditors
andinspectors.
Even
thosecharged
withthecustody
of stateproperty
werebribedto permittheft
[Simis,
1977-78].
Bribesprovided
"goodwill"thatwasusefulto protectoneself
frominvestigations
andpunishment:
"Thereareofficials
whonotonlyignore
the actions
of the speculators'
accomplices
butwho sometimes
actually
come
to theirdefenseor try to coverup for them"[Dorogavtsev,
1956].Corrupt
officialsoften escapedpunishment[Gavrilko,1968], and if discovered,
punishment
oftenwasverylight.A Partyofficialsupervising
the construction
of a Moscowapartmentbuilding,who alteredthe plansto have a private
apartment
added,received
a reprimand
"because
he deplores
the offenses"
[Punished
for Abuses,1984].But sometimes
the offenses
wereso seriousthat
thedeathpenaltywasimposed;
twoimportanttradeofficialswereexecuted
in
1984[In the USSRSupremeCourt,1984].
The Extent of PrivateEconomicActivity
Consumers
typically
mettheirneedsfor betterclothing
andothergoods,
medicalcare,and education
by purchases
in unofficialmarketsthat were
referredto variouslyas "parallel"or "underground"
markets;the unofficial
productionand distribution
of goodsand services
collectively
often was
referredto as the "secondeconomy."
Simescontended
that "The ordinary
Sovietcitizenusesthe parallelmarketon an almostdailybasis"[1975,p. 44].
The referenceis confinedto the "ordinary"citizenbecause
membersof the
elitedid not needthe parallelmarket;theyhadaccess
to special
shopsselling
scarce
goods,special
medicalcare,andrecreational
facilities.
Severalattemptshavebeenmadeto estimate
the economic
impactof
this"second
economy."
Oneestimate
isthatin the1970s,tento twelvepercent
of Sovietpersonal
incomecamefrom privatesources
[Gregoryand Stuart,
1990,p. 275];"It wouldseemon the basisof reportspublished
in Soviet
periodicals,
thattheentireSovieteconomic
system
couldnot survive
without
theparallelmarket"[Simes,1975,p. 48].Anotherestimate
is thatin the 1980s
urbanconsumers
obtained45% of their apartment
repairs,half of clothing
repairs,
and30%of homeappliance
repairsfromthesecond
economy
[Hewett,
1988,p. 180].In the firsthalfof 1989a surveyfoundthatnearlytwo-thirds
of
all famih'es
purchased
goodsfrom "speculators"
payingpricesthat averaged
nearlyone-third
abovethosein statestores[Schroeder,
1982,p. 98].
Gorbachev'sReformEfforts (1985-1991)
Gorbachev's
initialresponse
to the Sovieteconomicdifficulties
was
basedon squeezing
moreoutputfrom the existingstructure.
An anti-alcohol
campaign
wasaimedat increasing
productivity,
and emphasis
wasplacedon
labordiscipline.
In January1988plarming
reformrernmiscent
of theLiberman
proposals
tookthe formof a LawonStateEnterprise.
ThisLawwasintendedto
motivateenterprises
to increase
outputqualityandto adjustoutputto meet
182 / DIXON AND POLYAKOV
customerneeds.However,as in the caseof the 1965 reform,enterprise
management
typicallyraisedwagesand salaries
and failedto meetplanned
output targets.
The defidencies
of the old system
werecontinually
denounced
in the
media;a changewas neededin the way thingswere doneratherthan just a
changein the planningstructure.
Therewas a recognition
that the private
economicactivitythat had emergedwithinthe frameworkof shortages
and
low-quality
goodshadled to consumer
benefits.
Of coursethiswasa heresy.
Privateenterprise
meantprivategain,and privategainwas associated
with
capitalistexploitation.
On the other hand,it was recognizedthat private
enterprise
couldmeetneedsthatwerenot beingmetby the state.The ideologically
explosive
natureof a movetowarda marketeconomy
wasobvious,
andGorbachev
hadto overcome
strongopposition.
However,in July1987a
LasvonPrivate
E•vnoraic
Activi•wasintroduced
allowing
a widerangeof private
economic
activities
to be carriedout,eitheron a part-me basis,or by students
or pensioners.
A Law on Cooperatives,
enactedin July 1988, permittedthe
operation
of small-scale
urbancooperatives
suchasrestaurants
andautorepair
facilities.
However,
privatebusiness
activityfrequently
wasobstructed
bylocal
authorities
and restrictive
legislation,
as well as by blackmailing
by official
distributors and the underworld.
In 1991 there was a generalcollapseof stateplanningand the
deterioration
of the economy
accelerated.
A shortage
of imports,caused
by
balanceof payments
problems,
limitedfoodprocessing
andlightindustries.
Investment
in manysectors
of theeconomy
hadbeenfallingfor several
years,
so thatexistingplantandequipment
couldnot maintainneededproduction
levels.Tradelimitations,
imposed
by newlyindependent
regions
andrepublics
tryingto protecttheir consumers,
furtherlimitedthe supplyof consumer
goods.Pravdareported:"Societyis literallyfilled with fear of possible
unemployment,
of inflation,
of thelonglinesin stores...
Addto thatthejumps
in prices,
wages
thatbuylessandless,andthethreatof losingthehousing
one
alreadyhasor the prospect
of nevergettingout of a communal
apartment
[Volynsky,
19911.
In brief,the Gorbachevreformeffortsweretoo little,andtoo late.
Conclusion
Theissueof economic
reformwason theagenda
of everyregimeafter
Stalin'sdeath,but it tooknearlyfortyyearsto recognize
that partialreform
wouldnot solvetheproblems
inherent
in thecommand
system.
The failureof
thecentralplanning
mechanism
to meetthegrowingandincreasingly
sophisticateddemands
of the population
causedillegalprivatebusiness
activityto
expand.Privatetrade,andevenprivatemanufacturing,
flourished
andfurther
corruptedstateandpartyofficialswho becamecaughtup in the illegaleconomy,both as activeparticipants
andas recipients
of bribesto permitillegal
activity.
Thiscorruption
contributed
to thefailureof attempts
to bringanorderly
transition,
sothemarketeconomy
burstforthandinitiateda newrevolution.
THE PATH TO PRIVATE BUSINESS IN THE USSR / 183
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