Reforming the Soviet Economy

...Efficiency remains the foremost concern and overrides any notions of redistributive equity that have been associated with the macroeconomic policies of Western governments for the past half century...

...When Thatcher closed coal mines, there was 50 percent unemployment in some towns for several years...

...High prices, moreover, led to thriving illegal and semilegal sales by state-owned enterprises to the black and "shadow" markets and to cooperatives, raising final sales prices further and handicapping official wholesale and retail channels that must buy and sell at fixed prices...

...State enterprises are to be "commercialized," that is, they are to be managed as autonomous firms, eventually to be supervised by holding companies and subject to "hard budget constraints," meaning that they must pay their debts and meet their costs under threat of bankruptcy and closure...

...3 Under these circumstances prices soared, so that real incomes dropped sharply, reflected in the fact that retail sales reported no significant rise even in inflated rubles in early 1991...

...Full employment would be a firm policy goal...

...For while the writ of the old center has been derogated and its coordinating functions weakened, "the command-administrative center has not been destroyed but has been fragmented and has taken a second breath at the regional level...

...By contrast, the evolving "bureaucratic capitalism" thrives under the umbrella of regional and local authorities and the close personal and business relations among managers, administrators, and political bosses this umbrella fosters, as well as the monopoly position it safeguards...

...Underlying barter has been the rapid loss in the value of the ruble, as well as the trend to autarchy of regions and localities (for example, proof of residence has had to be shown in Moscow to obtain certain foods...

...Forms of market regulation in addition to, and, where needful, overruling prices must be found...

...In whatever ways legitimacy evolves, the ever more autonomous industrial enterprises in the Soviet Union tend to further the political and economic fragmentation of the country...

...There followed a systemic breakdown that has lain at the root of the economic crisis...

...What then are the prospects for the Soviet economy...

...Ens...

...its authors doubt that marketization reforms are possible if the locus of power is not centered in the Union, in Moscow...

...Thatcher's Revolution (Cambridge, Mass.: Harvard University Press, 1988...

...Although "spontaneous privatization" would seem at first blush to accord with the marketization perspective of Western agencies and Soviet economists, it lacks the legitimacy that only a foundation in civil law, firmly anchored in and enforced by state institutions can ensure (it is, after all, "the greatest management theft...

...The reason given is that the hardships that the reforms will visit upon the population will give rise to political resistance, best dealt with before it gathers too much strength...

...EDS...

...The economic reform urged upon the Soviet Union by the great international financial institutions reduce to three elements— macroeconomic stabilization, freeing of all but a few prices, and ownership reform...

...The autarchy in which the various regions have encapsulated themselves makes them the nodal points through which the economic and financial links to other regions and countries now run, and with which enterprise management must deal...

...As Anders Aslund noted: "The traditional centrally planned system has largely collapsed but has not been replaced by a functioning market system...

...WINTER • 1992 • 15...

...5 lzvestiya, November 21, 1990, quoted in Aslund, op...

...Inflation (the ruble's loss in real value) has been attributed to two sources—excess demand by households fueled by wage hikes (the annual rate of remuneration in 1989 and 1990 ran more than four times that for 1985-87) and the much more active use of money by enterprises, which under the central planning system had been used simply as a unit of account to check plan fulfillment...

...Furthermore, the liberalization of foreign trade and the right of firms to retain foreign exchange earnings have also led to increased export of scarce domestic goods, and thus to higher prices...

...These spread from one product to another, in a sort of chain effect that arose from worsening disruptions in the production and delivery of raw materials, intermediate, and end products—disruptions that had been a common occurrence earlier and had somehow been dealt with, but which now became a chronic breaching of accustomed linkages...

...The analysis and recommendations contained in the document are by and large in harmony with those advanced by the Soviet economists who had advised Mikhail Gorbachev prior to his "rightward" turn in the fall of 1990, and who had designed the "500-day" program he later rejected...

...It will exact sacrifices that must ultimately be ascribed to the bankruptcy of the command system, sustained for decades by a totalitarian party apparatus...

...It does not unambiguously apply to state enterprises, which account for about 85 percent of employment...

...Moreover, only part of the revenue that the republics that compose (or composed) the Soviet Union had agreed upon to remit to the center were in fact received, further enlarging the deficit...

...Notes 1 For an easily accessible representative point of view of Soviet economists, see Graham Allison and Grigory Yavlinsky, Window of Opportunity: The Grand Bargain for Democracy in the Soviet Union (New York: Pantheon Books, 1991...

...4 It seems to me that perestroika failed on quite other grounds: it caused the center of the command economy to be irreversibly weakened by such measures as restricting the right of the industrial ministries to intervene in their tutelary enterprises on behalf of larger economic and social interests...

...Not by accident, the IMF study explicitly refers in its title to the USSR...

...For both the international institutions and Soviet economists, the transformation of the Soviet economy into one where the market governs spells efficiency and economic growth...

...The "freeing" of prices demanded by the IMF study became reality some time ago...

...See also the extensive and cogent discussion in Nicolas Spulber, Restructuring the Soviet Economy: In Search of the Market (Ann Arbor: University of Michigan Press, 1991...

...Paradoxically, then, the advocates of marketization require a strong state—a state that protects property, legalizes the proposed holding companies to provide some measure of public control over the commercialized state enterprises, and maintains competition by "demonopolizing" the virtual cartels that the various industrial ministries have constituted...

...It is revealing that a British adviser to the Polish Finance Ministry, responding to protestations that the "market" should not be allowed to close a factory employing 35,000 people, thought, why not...

...cit., p. 96...

...Yet Thatcherism has been the politicaleconomic model for influential groups of East European economists...

...2 Anders Aslund, Gorbachev's Struggle for Economic Reform (Ithaca, N.Y.: Cornell University Press), p. 188...

...The freeing of prices is to take place in conditions of "increased domestic and external competition," spelling the gradual integration of the Soviet Union into the global economy, and it is expected to lead to the "efficient allocation of resources...

...5 Enterprise management remains tied to the regional and local political apparatchiks...

...One is the global corporate capitalism whose interests and ideology are advanced by the IMF study and whose model of the market economy is accepted by the Soviet economists mentioned earlier as the path to efficiency, prosperity, and political liberation from a heavy-handed bureaucracy...

...6 Y. Antosenkov, "A New Employment Concept in Soviet Labor Legislation," in Guy Standing, ed., The New Soviet Labour Market: In Search of Flexibility (Geneva: International Labour Office, 1991), p. 74...

...and here the way has been shown by Ota Sik, the Czech economist...

...And the IMF study reports that "a process of spontaneous privatization is taking place in large sectors of industry through the leasing of facilities to cooperatives consisting of the managers and workers of state enterprises...

...Ibid., p. 225...

...7 As Peter Jenkins has written, Thatcherism signified the deliberate abandonment of full employment...

...6 Thus, unemployment will likely be as profound a social problem for the Soviet Union as ethnic strife, itself already a major source of employment dislocations...

...They led to, as well as resulted from, inter-enterprise barter of materials and products...

...3 Ibid., p. 187...

...8 Unemployment in fact, far from being of brief duration, has been the scourge of European OECD countries generally throughout the 1980s, hovering between 8 percent and 11 percent, with fifteen million of their residents unemployed in 1989...

...Perestroika has been called an economic failure by noted scholars, chiefly because it supposedly consisted of half measures and did not institute free-market relations...

...Two sets of forces are at work...

...Such proposals also have implications for employment, which the IMF study fails to analyze but which are foreshadowed by the enormous amount of unemployment in Poland and East Germany...

...Such matters are treated virtually as asides, crumbs thrown to worried liberals and socialists...

...This emergence is viewed with considerable alarm by Western observers, but it has strong native roots and is likely to prove irresistible...

...and unemployment, which averaged between 7 percent and 12 percent of the labor force between 1981 and 1989, ran to 25 percent in the country's vast public housing estates...

...7 Quoted in the New York Times, October 25, 1991, p. D4...

...14 • DISSENT After the Ralf Instead there will probably arise a species of Thatcherism in the Soviet Union, so that the assurances that unemployment will be short term and transitional will turn out to be empty...

...Among the features of Sik's Third Way is the democratic determination of the distribution of real resources between investment and consumption, with the market and its price system allocating the resources, given such determination...

...the cost of recovery from the long recession of the 1980s was the neglect of the poorer sections of Great Britain's cities...

...Both sets, however, must labor under a common condition, the one by choice, the other by necessity: both will be subject to a "hard budget constraint," since the financial means to subsidize such enterprise functions as capital investment will be sparse, if available at all...

...Beyond question, the transformation of the Soviet economy is a necessity...

...That is bound to lead to high costs, compelling the installing of labor-saving devices, the shedding of labor, and weeding out losing product lines and firms...

...The callous disregard of the social consequences of Thatcherism and of the marketization these economists have tried to introduce in their own countries recalls a similar disregard shown by the old communists in pursuit of their "historical mission," although that mission at least derived from a vision more generous than that of the freemarket advocates...

...Ownership is to center upon the distributional and service trades and other small-scale operations...

...These hardships, we are assured, will be "short-term" or "transitional," and are to be relieved by unemployment insurance, food stamps, minimum wages, and so on...

...The extremism of Thatcher's attack on British social democracy evidently impressed these groups as a way to stir the workers of Eastern Europe from their alleged lethargy and indifference to productive work...

...and rapidity of implementation is the recommendation of nearly all economists and institutions concerned with Soviet economic reform...

...These economists are now close to Boris Yeltsin...

...It spells an inevitable rise in unemployment, a rise which Soviet labor analysts have estimated at sixteen to eighteen million persons over the next few years, roughly 13 percent of the Soviet labor force...

...Expenditures actually did not rise very much, but revenues dropped sharply, chiefly because of liberalization of enterprise finances and foreign-trade taxation...

...These are discussed in The Economy of the USSR, a fifty-one page summary of more detailed studies, issued jointly by the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, and the Organization for Economic Cooperation and Development (hereafter the IMF study...

...It has manifested itself first of all in aggravated shortages—shortages that began greatly to exceed their "usual" magnitudes...

...its supply-side economics were chiefly directed against labor market "rigidities...

...Can these sacrifices be lightened...

...Allowances are made for relieving the hardships that transformation entails, such as soaring prices, high unemployment, and deepening poverty of the aged, women, and youth...

...Much additional evidence for this development is available...

...Nevertheless, we believe that the analyses in both articles remain cogent...

...The evidently uncontrollable rise in the money supply has also stemmed from unprecedented increases in the Soviet Union's budgetary deficit, which had barely exceeded 2 percent in relation to the national product over the decades prior to 1986, but hit 10 percent and more in the late 1980s...

...Whatever the reasons for the rejection, the program was to be implemented with extreme rapidity...

...8 See Peter Jenkins, Mrs...

...You have three to four to five years of 50 percent unemployment in some towns...

...A longer article by H. Brand on the subject of the failure of the Soviet economy will appear in the Spring issue of Dissent...

...Ministry staffs were cut by about one half, further undermining the center's enforcement powers...

...But, as in other great nations, the people of the Soviet Union are capable of producing self-healing forces, as proved by the very emergence of glasnost and perestroika, however flawed...

...2 Owing to earlier reforms, enterprises' own and freely disposable funds rose by a factor of eight between 1985 and 1989...

...True, no precedent exists for the depth of economic breakdown experienced in the Soviet Union that might be a "model," a rough guide for the way out...

...Possibly, Sik's Third Way could be applied in Soviet conditions, but this is not likely to happen...

...Other materials also were drawn upon...

...Quietly, the union ministries are transforming themselves into Russian WINTER • 1992 • 13 After the Fall industrial corporations in the greatest management theft of the century, and nothing can stop them," writes Aslund...

...The two sets of forces will likely be in a persistent conflict whose outcomes will be largely determined by the political power they can muster...

...The crisis of the Soviet economy has 12 • DISSENT Alter the Fall followed upon a long period of declining economic growth, declining productivity, lessening effectiveness of capital investment in terms of the output it produced, lack of innovation, and technological stagnation...

...Stabilization implies reduction of soaring budgetary deficits and tightening of credit, including an end to the subsidization of enterprises—such subsidization has been used to maintain relatively fixed prices, especially for food...

...The other consists in what we might call the "bureaucratic capitalism" that has been emerging from the fading Stalinoid structure of the Soviet economy...