The Soviet Command Economy I. History 1. The Bolshevik revolution 1917. 2. Two economic experiments:
· War communism (1917­1921)­to promote recovery from the Russian civil war , implemented by Lenin
· To instill econ recovery Lenin introduced the New Econ Policy (NEP) in 1921 to return to private ownership, reintroduction of the mkt for resource allocation, the implementation of tax on agri. 3. At the end of 1920’s Stalin ­system of central planning based on compulsory state & party directives were established ­agriculture was collectivized ­totalitarian system of political governance 4. 1985­Gorbachev II. The Setting
· Territory­8.6 mil square miles;
· Population­290mil;
· SU­15 republics;
· Different natural environment III. The Soviet Economy: 1. Political and Economic Institutions
· Organization of the Communist Party
1 o General Secretary is the most powerful person in society o Politburo is the most powerful political group of the Communist Party, controlling domestic and foreign policy and appointments to top positions; drafted government policy. o Secretariat was responsible for the central administration of the party; directed work of Central Committee departments, which controlled appointments to other high­level positions. o Central Committee—about 300 members from national and regional agencies. Conducted the day­to­day business of the Party and the government. Elected Politburo and Secretariat, controlled press organizations, provided forum for communication and debate. o Party Congress—supposed supreme body of the Party, provided media event to "elect" new Central Committee and announce policies.
· The Legislature o Supreme Soviet was "rubber stamp" legislature until 1989 o Presidium of the Supreme Soviet (smaller and more powerful) o Chairman of the Presidium, or President, was ceremonial head of state.
· The Administration o Premier (chairman of the Council of Ministers) had direct responsibility for management of the economy. o Council of Ministers—supreme administrative body.
2 o State Planning Committee (Gosplan)—coordinated creation and execution of plans. o Ministries and state committees—administered all aspects of the economy, including production, distribution, prices, and wages. o Farms and enterprises—handled actual production. 2. Decision­making hierarchy—vertical structure Organizational Chart of State Sector All levels of government shadowed by the Communist Party headed by the Central Committee Presidium Council of Ministers Planning (Gosplan), Material & Technical Supply (Gossnab), Construction (Gostroy), State Security (KGB), State Bank, etc. State Committees Ministries Departments Enterprises Over 50 Union (high priority) ministries and numerous Republic ministries Groupings of enterprises by output or geographical location 41,000 industrial 27,000 construction 22,000 state farms 3. Mechanism for providing information a) Highly centralized ES­national economic plan b) administrative­command economy mechanism for resource allocation. •Council of Ministers and Communist Party leadership set broad objectives and approves final plan
3 •Actual tasks of planning conducted by several specialized planning agencies •State Planning Committee (Gosplan) in charge of overall coordination and planning of outputs and investment •State Bank in charge of planning and monitoring financial flows c) Planning in Theory­the material balance system d) Planning in Reality Annual Planning Timetable •Spring—Directives – Council of Ministers and Communist Party set aggregate growth targets – Targets reflect • goals of current five­year plan • Gosplan’s assessment of feasibility – Directives (tentative plan assignments at highly aggregated level) sent to each ministry •Summer—Input claims and bargaining – each ministry makes up separate tentative output assignments for each of its departments – each department makes tentative output assignment for each of its enterprises – each enterprise then requests inputs from its department – each department aggregates input claims and requests total from ministry – each ministry makes its requests from Gosplan – intense bargaining at each step as lower level attempts to bargain with higher level for easier output and input assignments •Fall—Balancing – Gosplan and other planning agencies balance revised aggregate assignments into a consistent national plan
4 •November and December—Approval – Plan submitted to Council of Ministers in November and ratified by Supreme Soviet in December •December—Disaggregation – Gosplan sends each ministry its plan – each ministry sends each department its plan – each department sends each enterprise its plan •After plan approval, State Committee for Material and Technical Supply (Gossnab) matches up supplying and customer enterprises Material Balances •Major objective to achieve consistency between planned supplies and planned uses of each commodity •Thousands of material balances constructed – each expressed in physical units •Balance identifies planned sources and uses during the period The Soviet Manager: The Principal­Agent Problem Enterprise Management •Formal organization – director – executives in charge of material supply, labor, production, accounting, etc. – superintendents of production units – foremen •Communist Party – head of Communist Party group in enterprise plays an important decision making role
5 •Trade union – head of unit shares management responsibilities • eliciting worker discipline, etc. The Enterprise Plan •Soviets referred to an enterprise as being “economically accountable” – legal entity with own fixed capital and funds provided by budget grants – own account at State Bank and right to borrow additional funds from the Bank – expected to enter into contracts with suppliers and customers in accordance with plan – expected to earn a profit, most of which was handed over to Ministry of Finance •Enterprise received detailed plan specifying – quantities of outputs by type and the corresponding value of sales at the centrally determined wholesale prices (e.g. the assortment) – amounts of materials, components, fuels, allocated for which it pays at the industrial wholesale prices – authorized number of workers, distributed by major categories, total wage fund, and productivity (output per worker) – profit – amount of capital investment in construction and equipment •These plans were very demanding •It was often impossible to achieve production and investment assignments with the resources allocated •Resources allocated often turned out to be unavailable
6 Managerial Incentives •Material – high salary – prospect of large bonus – prospect of promotion for good performance • higher salary and bonuses – prospect of demotion for poor performance • lower salary and bonuses •Non­material – power – status – recognition Manager’s Response to Incentives • Full rewards depended on plan fulfillment. If plans were overfulfilled, bonuses increased slightly. Managers avoided over fulfilling targets (to avoid higher targets in future) •Managers bargained with superiors for easy targets – Bonus system caused managers to misrepresent input needs and production capacity, understated enterprise potential (complained of breakdowns and long repair times) •Tried to stash concealed inventories of outputs and inputs •Resisted specialization, especially at later stages of production – the more specialized, the more dependant on suppliers who are likely not to be able to deliver •Resisted technological innovation, which was poorly rewarded
7 – innovation introduced uncertainty – loss of production during installation and training – required new sources of materials more specialized labor which was often hard to get •Resulted in huge, unspecialized enterprises using outdated technology •Used expeditors – greatest problem was material supply – supply expeditors (tolkachy) were workers who had connections at other enterprises and could barter for needed supplies; arrange unplanned transactions. • black market • a form of horizontal communication • illegal but usually tolerated as long as it wasn’t too obvious •Engaged in forms of simulation – substitution of inputs when unable to get certain inputs (e.g., using a thinner grade of sheet metal than that specified in plan) – substitution of outputs when unable to get adequate supplies of inputs (e.g., shirt factory producing more small sizes and fewer large sizes to save on cloth) – false reporting (claiming better results than were achieved) – monitoring by State Bank made it hard to get away with simulation – tends to make subsequent plans harder •Approaching deadlines caused – Storming (last minute spurt of activity as period nears end) – Lethargy (when obvious that targets won’t be met)
8 Soviet enterprises operated on soft budget constraint, means that enterprises that failed to cover their costs could count on automatic subsidies from their ministry, which redistributed profits from profitable to unprofitable enterprises, or from the state budget.
· Monitoring of Agents­the communist party and the state had their own control commission to punish illegal managerial behavior
· Ruble control—surveillance of enterprises by the State Bank to monitor and enforce plan fulfillment. The Rural Economy
· Agricultural Organization o Kolkhoz—Collective farm, supposedly owned and managed by members, but members had few ownership rights. (Impoverished before 1958 by low prices of compulsory deliveries) o Sovkhoz—State farm, organized like an industrial enterprise; huge acreage. Management was appointed by the government and workers were paid by a wage and bonus system. o Private Plots—Gardens assigned to agricultural or industrial workers. Output could be sold at market prices. Denounced by Stalin, but supported by Gorbachev (controlled 3 % of the land, but produced 29% of output; stronger incentives).
· Suffered from all the problems of industry
9 4. Property rights a) State Sector •The state owned all natural resources—land, timber, minerals. •The state controlled virtually all major non­agricultural production—industry, construction, transportation, communication, health, education. •The state share was smaller but still large in: – retail trade (70%) – agriculture (50%) – housing (75% urban, 25% rural) b) Collective Sector •Collective farms and consumer cooperatives •Formal ownership by members, but actual control by state – a farm’s output planned by state – output required to be sent to state – prices set by state – inputs set by state – workers’ wages set state •Management formally elected by worker­members but, in fact, determined by Communist Party and government officials c) Private Sector •Individual could own – consumer goods – a house – livestock – tools and small farm equipment – a car – savings account at the State Bank
10 – government lottery bonds – currency •Primary productive activity was the private plot – 1/2 to 3 acres – produced outputs that could be produced with household labor and little capital • 1/3 of milk and meat consumed in Soviet Union • 2/3 of potatoes • 40% of fruit and vegetables – part consumed by household – rest sold to state at prices set by state •About a fifth of new housing construction private – materials purchased from state – labor provided by household – friends – moonlighting construction workers •Moonlighting permitted for – doctors – artists and craftsmen – construction workers •Employment of a person by another prohibited •Any purchase with intent to resell at profit prohibited •Lending at interest prohibited •Renting apartment from another individual prohibited •Renting a car from another individual prohibited
11 5. The Role of Prices and Money a) Measure of value
· aggregation and comparison of outputs
· calculation of revenues
· input costs
· national product b) Played role in distribution of income
· workers paid money wages
· money bonuses
· households spend their incomes on goods and services c) Prices affect allocation in private sector d) Prices affect enterprise behavior (enterprises supposed to minimize money costs and maximize revenue within constraints of plan). e) Prices within state and cooperative sectors set by State Price Committee
· reflect political/ideological concerns
· do not reflect supply and demand
· wholesale price is equal to the average (not marginal) industry­wide unit cost plus small profit markup
· enterprises with above­average costs immediately ran losses, requiring state subsidies
· Provided little incentive for enterprises to respond to consumer demand
· Retail prices—initially
set to equate quantity demanded with quantity supplied (as controlled by planners) with some adjustments. f) Problems: § Shortages, long lines, black­market activities, encouraging corruption and dilution of work incentives § Budgetary problem when many wholesale prices exceeded retail prices.
12 6. Investment a) Gosplan and political leadership decide
· investment’s share of national product
· distribution of total investment by industry and region
· design of investment projects based on cost minimization (true economic costs not minimized because prices do not reflect scarcity) 7. Finance a) No checking accounts; no credit cards b) Currency used between individuals c) Currency used between enterprises and individuals (wage payments) d) Credit/debit entries at State Bank used for transactions between enterprises e) State Bank responsible for planning enough (but not too much) currency for intended transactions f) State Bank serves as control agency since all deposits must be at State Bank and all transactions between enterprises must be through State Bank accounts g) Hard for enterprises to hide transactions 8. Foreign Trade—was a state monopoly a) Planning by Gosplan b) Actual import and export operations carried out by more than 60 foreign trade organizations (FTO) under the Ministry of Foreign Trade. – FTO acts as intermediary; exports are sold to FTOs at domestic prices, and sold overseas at international prices. Price differences cause losses and profits for FTOs, which are canceled by governmental taxes and subsidies. – No direct interaction by a Soviet enterprise and a foreign entity c) Bilateral negotiations­barter
13 9. Labor market a) All able­bodied adults expected to work full time unless they were
· full­time students
· in prison b) Free to find own jobs unless
· drafted in military
· on assignment in return for advanced training opportunities c) Planners had variety of ways to channel workers into planned jobs
· system of differential wages
· control of occupational training
· placement services
· residence permits
· control of housing availability ­­very short supply ­­much of housing stock assigned to enterprises d) Labor market was subject to some frictional unemployment
· unemployment as workers look for jobs e) There was evidence of some structural unemployment
· mismatch between skills and employment opportunities ­­tended to be a greater problem with wives seeking jobs in light industry and service sectors in areas where most jobs were in mining or heavy industry) ­­No cyclical unemployment Wage Structure •Wages determined by several factors – Occupation, e.g., engineer’s wages were double that of retail clerks, on average
14 – Skill, e.g. top grade in occupation earns double lowest grade – compensating differential for difficult conditions – priority of industry, e.g. workers in steel industry earned more than workers in retail trade Non Wage Income •Interest from savings account •Second economy income (private plot, moonlighting) •Transfers •Publicly provided free goods (education, health care) Transfers •Major transfer was the pension – retirement for men at 60 after at least 25 years work – retirement for women at 55 after at least 20 years work •Other transfers – paid maternity leaves – survivor benefits upon death of spouse – sick leaves – child allowances – income supplements for the poor 10.Income Distribution and Poverty a) Inequality persisted, as income rewarded plan fulfillment, skill, and high­priority professions. b) Inequalities reduced through price subsidies, public goods, and small wage differentials.
15 IV. Centrally­Planned Economy (CPE) 1. The objectives of a Centrally­Planned Economy (CPE). a) Rapid growth b) Industrialization c) Centralization of decision making and control 2. Key Elements of the CPE a) State ownership—seen as a primary means to
· achieve rapid growth
· maintain centralized control b) CPEs are command economies
· centralized, bureaucratic management of economy c) CPEs are pressure economies
· high rate of forced saving
· planning of o outputs o inputs o inventories d) CPEs are priority economies
· planning based on priorities reflecting o political criteria and socialist ideology e) CPEs rely on extensive development
· growth and industrialization through massive increases in resources
· the alternative is intensive development—growth through productivity increasing innovation f) CPEs are closed economies
· foreign trade suppressed g) CPEs are shortage economies
16