Gregory Paul R., Stuart Robert C. - Soviet and Post-Soviet Economic Structure and Performance 1994

SOVIET
AND OST- OVIIT

ECONOMIC STRUCTURE
AND
PERfORMANCE
· · ·4ii14d'i·'ii'·M• · ··
PAUL R. GREGORY
ROBERT C. S'llJART
SOVIET AND POST-SOVIET
ECONOMIC STRUCTURE
AND PERFORMANCE
EDITION
••

ECONOMIC STRUCTURE
AND PERFORMANCE
PAUL R. GREGORY
UNIVERSITY OF HOUSTON
ROBERT c. STUART
RUTGERS UNIVERSITY
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Library of Congress Cataloging-in-Publication Data
Gregory, Paul R.
Soviet and post-Soviet economic structure and performance I
Paul R. Gregory, Robert C. Stuart.
p. cm. - (The HarperCollins series in economics)
Rev. ed. of: Soviet economic structure and performance. 4th ed.
c1990.
Includes bibliographical references and index.
ISBN 0-673-46971-9
1. Soviet Union-Economic conditions. 2. Soviet Union-Economic
policy. 3. Former Soviet republics-Economic conditions. 4. Former
Soviet republics-Economic policy. I. Stuart, Robert C., 1938-
11. Gregory, Paul R. Soviet economic structure and performance.
III. Title. IV. Series.
HC335.G723 1994
330.94 7'0854-dc20 93-25970
CIP
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••
Preface xi
' ·CJI O~E J The Origins of the Soviet Economy 1
Chapter 1 The Administrative-Command Economy 3

The Legacy of the Administrative-Command Economy 5
Reasons for Continued Study 6
Market or Plan: Is There a Third Way? 7
The Tsarist Economy as a Model 8
The 1920s as a Model 9
Conclusions 11
Chapter 2 Economic History of Russia to 1917 13

Was the Tsarist Economy a Success? 13
Russia's Dependence on the West 30
Chapter 3 War Communism and the New Economic Policy

(1918-1928) 45
The Revolution and Its Aftermath 46
War Communism (1918-1921) 48
The New Economic Policy (1921-1928) 54
The Precedents of the 1920s 66
Chapter 4 The Soviet Industrialization Debate (1924-1928) 75

The Setting of the Soviet Industrialization Debate 75
The Marxist-Leninist Legacy 77
vii
viii Contents
Preobrazhensky-Unbalanced Growth 80
Bukharin-Balanced Growth 83
Stalin's Consolidation of Power 85
The Outcome of the Soviet Industrialization Debate 87
Rehabilitations and Reevaluations 89
Chapter 5 Creating the Administrative-Command System:

Planning, Collectivization, and War (1928-1945) 95
What Should Planners Do? 96
The Decision to Collectivize 100
Was Collectivization Necessary? 107
War and the Administrative-Command Economy 114
The Soviet Economy Through World War II: A Summary 118
Chapter 6 The Soviet Economy in the Postwar Era 125

The Early Years-Postwar Transition 126
The Khrushchev Years 128
The Brezhnev Years 132
The Gorbachev Years 136
IJ!i!ti TWO I How the Administrative-Command Economy

•••• - • _ Operated 145
Chapter 7 Bureaucracy, Planning, Money, and Investment 147

The Soviet Economic Bureaucracy 148
The State Bureaucracy 149
Planning Versus Resource Management 154
Investment 15 5
Money and Credit in the Administrative-Command
Economy 158
The State Budget 163
How Well Does Administrative-Command Planning Work? 165
Chapter 8 The Administrative-Command Economy:

Management, Labor, and Pricing 173
Enterprise Managers 173
Labor Allocation in the Administrative-Command Economy 180
Contents ix
The Price System 186

Planning Without Relative Scarcities 193
Conclusions 194
Chapter 9 Foreign Trade in the Soviet Administrative-Command

Economy 207
Trade in the Administrative-Command Economy 208
Problems of Economic Integration 213
Trade with the West 215
Balance-of-Payments Problems with the West 216
The Administrative-Command Economy: Barriers to Attracting
Capital 218
li4iJirHREEj Reform and Change in the Soviet Era 227
Chapter 10 The Administrative-Command Economy: Growth and

Performance 229
Problems of Measurement 230
Soviet Economic Growth 231
The Record: Long-Term International Comparisons 238
The Productivity Issue 241
Soviet Static Efficiency 245
The Technology Issue 249
Equity of Income Distribution 250
Consumer Welfare in the Soviet Union 253
Chapter 11 Performance Continued: Human Capital, Economic

Stability, and the Environment 269
Human Capital 269
Economic Stability 276
Environmental Protection 2 78
Conclusions 280
Chapter 12 Change of Economic Systems: Reform and

Transition 289
Taxonomy of Economic Reform 290
Economic Reform: The Soviet Era 293
x Contents
Economic Reform in Retrospect: The Early Years 305

Transition: System Change in the 1990s 306
Chapter 13 Perestroika: The Last Reform 323

Gorbachev's Reform Themes: The First Phase of
Perestroika 325
The Content of Perestroika 327
The Implementation of Perestroika 334
Perestroika: The End 335
Perestroika and Economic Decline: Understanding the End 337
liaiiiiFOURI Russia and the Independent States 345
Chapter 14 Russia and the Independent States: Basic

Characteristics 347
Russia and the Independent States: Impact of the Soviet Past 349
Regional Issues and the New States 352
Basic Characteristics: The Impact on Transition 354
Chapter 15 The Russian Economy 35 7

Transition: The Yeltsin Era 358
Assessing Russian Economic Performance 360
The Russian Economy: the Status of Transition 362
The Russian Economy and Beyond: Special Issues 364
The Former Republics: A Summary of Reform Issues 369
Transition and the Independent States: What Is Next? 3 72
Chapter 16 Conclusions and Prospects 377

Soviet Economic Achievements 3 78
The Costs of Soviet Economic Achievements 3 79
The Transition and Beyond: Russia and the Independent States
in the Year 2000 380
INDEX 383
••
The first three editions of this book described and analyzed the major
features of the Soviet economic system and the Soviet development expe-
rience. In the fourth edition, a good deal of attention was devoted to
perestroika-what in the mid- and late 1980s would be described by
Mikhail Gorbachev as radical economic reform. At the time of this fifth
edition, perestroika has ended; the Soviet Union and the Communist Party
of the Soviet Union have collapsed. The focus is now on reorganization
and the transition from plan to market economies.
To understand the present, it is necessary to examine the past. Thus in
this fifth edition we examine the history of the Soviet Union, though in
greater brevity than in previous editions. Moreover, readers will note that
there is a great deal of new material.
Those who study the former Soviet Union do so for a variety of
reasons. With the formal demise of the Soviet Union, some of these reasons
have changed, others have not. For example, with the end of the "evil
empire" and the cold war, obvious security concerns and the related
interest in defense issues have lessened. At the same time, the working
arrangements of the former Soviet Union remain of great interest, and
especially so as we attempt to understand the transition to markets in a
very new setting. Sixty years of Soviet arrangements will not be superseded
in a short span of years.
The focus of this fifth edition is Russia and the CIS states-the nature
of their immediate Soviet past, the meaning of that past experience for
current problems and policies, and finally the nature of contemporary
working arrangements and outcomes. The critical issue of the 1990s is
transition. Can Russia and the CIS states replace past arrangements with
new arrangements that will allow a restive population to continue to
support political and economic change?
ORGANIZATION OF THE TEXT

This book is designed to serve as a basic text dealing with the Soviet/Rus-
sian experience, whether taught from the perspective of our past interest
in Soviet arrangements or more generally presented in the comparative
xi
xii Preface
framework. We assume familiarity with basic microeconomics and macro-

economics.
The book is divided into four major parts. In Part One entitled "The
Origins of the Soviet Economy," we emphasize the tsarist legacy, the.
developments leading up to the introduction of planning and collectiviza-
tion, and the aftermath of these critical historical developments. In Part
Two, "How the Administrative-Command Economy Operated," we turn
our attention to the working arrangements of the Soviet economic system.
The important theme here is planning-how the plan was formulated and
how it was executed through the system of ministries and industrial and
agricultural managers. ·
Part Three, "Reform and Change in the Soviet Era," deals with the
series of attempts to reform the Soviet economic system in a continuing
effort to address the problems of lagging economic performance. This
section discusses the reform era through the end of perestroika and the
shift of emphasis from reform to transition, or the ultimate rejection of the
planned socialist economic system and its replacement by markets.
Finally, Part Four, "Russia and the Independent States," deals with
contemporary Russia and the CIS states. There are three important ques-
tions addressed in this section. (1) What was the nature of Russia and the
CIS states as they emerged from the Soviet past? (2) What sorts of working
arrangements have been put in place to guide resource allocation, and how
do these arrangements differ among the various states? (3) What problems
have emerged, and what are the prospects for successful transition?
Any work developed during an era of change is likely to quickly
become dated. However, we now have new evidence to judge the Soviet
past, a great deal of information about the makeup of the new states, and
sufficient evidence on transition to make useful observations about both
problems and prospects. We argue that this body of evidence is useful in
interpreting day-to-day change, even if the extent of that change is greater
than we anticipate as we undertake the task of revising this book.
DGMENTS
••
This book was always designed to represent the best scholarship of the
field. As such, our debt to a large number of scholars is great. We single
out Abram Bergson and David Granick for their guidance during our years
of graduate study, and the hospitality of the Harvard University Russian
Research Center for providing the intellectual stimulation that played an
important role in the project's original conception in 1970.
Over the years, a number of scholars have participated directly in the
improvement of the work. In particular, thanks are due to Carl McMillan,
Franklyn D. Holzman, Holland Hunter, Keith Bush, and H. Peter Gray, all
of whom commented on some aspect of the first edition. Valuable sugges-
tions for revision of the first edition were made by James Millar, Thomas
Wolf, Edward Hewett, Earl Brubaker, Vladimir Treml, Gertrude Schroeder
Greenslade, Frank Durgin, Anna Kuniansky, and Susan Linz. For the third
edition, we would like to thank Judith Thornton, Gertrude Schroeder
Greenslade, Holland Hunter, Susan Linz, Hugh Neary, Ken Gray, Morris
Bornstein, Marvin Jackson, and Fyodor Kushnirsky. Valuable suggestions
for the fourth edition were made by Yasuhiko Yoshida, John P. Farrell, and
Morris Bornstein.
For comments relating to the fifth edition, we thank John P. Bonin,
Marshall I. Goldman, Mark Knell, Herbert S. Levine, Stephen Lewarne,
George G.S. Murphy, Gerald Nordquist, and William N. Trumbull.
While our debt to others is great, we accept full responsibility for the
conception, development, and presentation of this work.
Paul R. Gregory
Robert C. Stuart
xiii
ECONOMIC STRUCTURE
AND PERFORMANCE
0 NE
••
THE ORIGINS
Of THE
SOVIET ECONOMY
ONE
••
The
Administrative-Command
Economy
h e collapse of the Soviet Union in late 1991 strengthened the resolve

of the new leadership of the former Soviet Union to create a market
economy. The majority of the former Soviet republics favored, both in
word and in deed, radical reform. To date, radical reform has been pushed
most rapidly in Russia and in the Baltic states. Most have banded together
in the loosely organized Commonwealth of Independent States (CIS) .
Although there is still disagreement about the appropriate pace of transi-
tion, little doubt remains that there is no way back to the old system. The
Communist Party monopoly has been crushed as has the old system of
centralized management and planning.
The transition formula has yet to be found, and the outcome of the
political-economic battle over reform will not be known for a number of
years.
In Russia, a government that appears to favor a go-slow approach has
replaced one that favored shock therapy. The battle over the course of
reform between a pro-reform president and a more conservative parlia-
ment continues. In the provinces, former Communist Party officials con-
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Figure 1.1 COMMONWEALTH OF INDEPENDENT STATES

The Administrative-Command Economy 5
tinue to rule. Old-line factory managers and directors continue to com-

mand state enterprises, and the number of privatized enterprises remains
small. Leaders of the former Communist Party have won elections in
Lithuania, the Ukraine, and other republics. How this all will turn out, no
one knows.
Gorbachev's reform programs, begun in the second half of the 1980s,
represented the first serious effort to replace the Stalinist command model
with a more efficient economic system. The Soviet leadership, under
Gorbachev, sought a middle ground between the failed Stalinist model and
the market system of the industrialized West, which it viewed with suspi-
cion. The major lesson of the Gorbachev era was the futility of half-meas-
ures. Whether this lesson will be duly noted by the new leaderships of the
fragile CIS remains to be seen.
THE LEGACY OF THE ADMINISTRATIVE-COMMAND ECONOMY
Various terms have been used to describe the Soviet Union's economy. The
Soviet-type economy, the centrally planned economy, and the planned-so-
cialist economy are some of the labels that have been used to represent
how the Soviet economy worked between the 1930s and the early 1990s.
As this type of economy came to be criticized openly, even by the highest
leadership of the Communist Party in the mid 1980s, Soviet authorities
themselves began to use a term-the administrative-command economy-
that aptly described the Soviet economic system.
The administrative-command system was installed in the 1930s and
probably reached its peak in the 1950s. The second part of this book
describes how this economic system worked. The administrative-com-
mand economy was indeed the great Soviet experiment of the twentieth
century-an attempt to run an entire economy of a geographically and
politically significant country by administrative command rather than by
markets.
The Soviet administrative-command system has directed resource al-
location since the 1930s. In the mid-1990s, resource allocation throughout
the former Soviet Union resembles the administrative-command system
much more closely than a market system.
Starting in 1928, Stalin eliminated private ownership in industry,
trade, and agriculture; operated material balances through a planning
commission and industrial ministries; forced requisitions from the collec-
tive farms that replaced peasant agriculture; and created a foreign trade
monopoly that divorced producers and consumers from world markets.
Administrative directives replaced private decision making throughout the
economy.
6 The Origins of the Soviet Economy
The Stalinist model oversaw the rapid transformation of the Russian

economy from an agricultural, rural, light industry-oriented economy to
an urbanized industrial economy. It created military power that in the
1970s and 1980s was purported to rival the military strength of the United
States. The industrial transformation that took place between 1928 and
1940 required 50 to 100 years in the industrialized West. 1
The durability of the administrative-command economy does not
mean that it worked well. Its weaknesses have been apparent since the
early 1930s. The Stalinist system does not operate at levels of efficiency
anywhere near those of the industrialized West. It can neither create nor
implement new technology; it does not produce the quality and variety of
consumer goods desired by the Soviet population; and it has created an
inefficient and unproductive agriculture that has not shared in the rest of
the world's green revolution.
The task for reformers in the former Soviet Union is to transfer to a
new economic system that provides acceptable levels of efficiency and
tolerable standards of living reasonably consistent with the underlying
resource base. It would be unrealistic to expect them to find an ideal
solution in the near future. If the reform leaderships can create a workable
system, similar in efficiency to those of countries like contemporary Tur-
key or Israel, this would be a remarkable achievement.
REASONS FOR CONTINUED STUDY
For a number of reasons other than pure intellectual curiosity, we should

continue to study the administrative-command economy.
The administrative-command system is not dead. It is still actively
pursued in China, a country that accounts for a significant portion of the
world's population. The Chinese economic system is by no means a pure
administrative-command system but does follow its basic precepts.
The problems of transition and the inborn resistance to reform cannot
be appreciated without understanding the Soviet administrative-command
system. A ruling elite called the nomenklatura was installed to manage the
administrative-command system. This group received its practical experi-
ence working within the system and had little experience with alternate
systems. The administrativecommand system inculcated a unique way of
thinking about the economy in its labor force and managerial classes; it
created its own way of reporting economic outcomes.
All of these factors create pressures that work against the installation
of normal market forces and the transition to a market economy. The
pressures and frictions working against the transition can only be grasped
by understanding the 65 years of the administrative-command system.
It is important to chronicle the reasons for the failure of the adminis-

trative-command system. For decades the Soviet leadership claimed that
the underlying economic system was sound; the problem was that the
people running the system were imperfect. This type of thinking cleared
the way for the Stalin purges of the 1930s: If the economic system is sound
yet failures abound, it must be the fault of saboteurs. Such thinking was
apparent in a less extreme form in the 1960s and 1970s. Economic failures
could be corrected by firing the minister or by starting a new campaign.
As time passes, there is a danger of a resurgence of this type of
apologistic thinking. Once belief in this conclusion is widely shared, there
will be a temptation to try it again. Deep understanding of the faults of
the administrative-command system may be required to create the social
patience required to endure the difficult transition period. The nostalgia
for the old system and the stirring of Stalinism encountered in the early
1990s point to the danger of an incomplete understanding of the old
system. If the transition requires things to get worse before they get better,
the public may conclude that it was indeed better off under the old order.
MARKET OR PLAN: Is THERE A THIRD WAY?
The collapse of the Soviet Union and the decision of the necessity of
transition to a market system bear witness to the failure of the administra-
tive-command economy. The leaders of the republics of the former Soviet
Union have determined to install an economic system other than the
administrative-command system in their territories. They look admiringly
at the prosperity that the market economy has giv:en the industrialized
West. They would like to share in this prosperity; yet they realize that their
way to prosperity may have to be different. Their economic and political
heritage has been different from the industrialized West; they must bear
the legacy of the administrative-command system. Perhaps they must
search for a third way.
Large-scale social experiments, such as fundamental reform of an
entire socioeconomic system, must look to precedents and parallels for
guidance. There are few to these to guide reform in the former Soviet
Union.
Reformers can look to the present industrialized market economies
that may provide models for emulation. In the late 1980s, Sweden with its
high income, social safety net, and equal distribution of income was touted
as a potential model, but this was unrealistic. The adaptation of the
Swedish model to Soviet reality obviously would have been difficult;
Sweden has been a wealthy industrialized nation for over a century. It can
better afford the efficiency losses associated with massive income redis-
tributions.
Reformers in the former Soviet Union could monitor the ongoing
reforms in turbulent Eastern Europe and China and hope that someone
somewhere has discovered how to dismantle successfully the Stalinist
command model. This Eastern European parallel may be more relevant
because the Soviet Union and Eastern Europe had a shared experience with
the Stalinist economic model. Procedures for converting the command
model may be the same, despite the vast social, cultural, and economic
differences between the Soviet Union and Eastern Europe. It is unclear
how long the Soviet leadership must wait before the Eastern European
experiments yield clear-cut patterns of success or failure. The experiences
to date, especially those of Poland, provide some comforting guidance.
THE TSARIST ECONOMY AS A MODEL
If the reform leadership of the former Soviet Union looks back to the
tsarist period, it encounters an economy shrouded in myths and stereo-
types. Although some historians have argued that Russia never had a
market economy, the last 40 years of tsarist government was the final
period of market resource allocation in what was to become the Soviet
Union.
Soviet historians were constrained by the research agenda set by Lenin
in his The Development of Capitalism in Russia. 2 Lenin was determined
to prove that the socialist revolution would occur in Russia, the most
economically backward European country. Lenin pictured Russia as a dual
economy, combining backward semifeudal agriculture and handicraft with
advanced enclaves of heavy industry. Lenin saw tsarist Russia as a semi-
colony of the capitalist West, whose investments created anomalous pock-
ets of modern industry in a backward economy.
Lenin felt that industrial capitalism in Russia was more brutal and
concentrated than in the West, where it was restrained by labor unions and
progressive legislation. Because it exploited the factory worker more, the
Russian factory spawned a revolutionary proletariat more motivated to
overthrow their capitalist bosses. Moreover, the Russian industrial worker
had a natural revolutionary ally-the peasant burdened by the remnants
of feudalism. In Lenin's model, Russia, as the weak link in the capitalist
chain, would be the host of the first socialist revolution.
The Leninist interpretation of Russian economic history captivated
historians in both the East and the West. It painted a picture of capitalism
in crisis-a capitalism bound to be overthrown by a superior economic
system. Russian history as written in both the East and the West focused
on revolution-on explaining in a logical manner why the Russian revo-
lution occurred. 3 If the Russian revolution was to be consistent with the
Marxian dialectic of inevitable socialist revolution, then internal contra-
dictions (crises) must have characterized the final stages of capitalism.
Historians have sought to capture these contradictions. Russian economic
history was, therefore, a history of perceived crises-agrarian crises, de-
pressions, stock market busts, and political unrest.
That the economic performance of the tsarist economy was unsatisfac-
tory was a foregone conclusion dictated by the dominant research agenda.
The Russian revolution itself served as the ultimate proof of the failure of
capitalism in Russia.
Soviet economic reformers initially paid scant attention to Russia's
capitalist past; they simply assumed that capitalist Russia was a dismal
failure. Why return to an unstable economic model that spawned crises
and revolution?
The official Soviet presumption of economic failure was not based
upon objective factual information. In fact, the use of the theory of
revolution to interpret Russian economic history is.full of pitfalls. Just as
economists are novices at explaining political phenomena, so are histori-
ans novices in understanding economic history. The link between econom-
ics and politics has always been weak and subject to misinterpretation.
When economics is used to explain the dynamics of revolution, misinter-
pretations and misunderstandings typically reach their maximum.
THE 1920s AS A MODEL

The Soviet Union lived without capitalism for almost three-quarters of a
century. The Russian civil war saw the introduction of War Communism-
an abortive system that tried to direct resources administratively without
the discipline of a developed administrative planning structure. It was
during War Communism that the demolition of capitalist institutions
began in earnest (see Chapter 3 ). The Land Decree of November 8, 1917,
distributed the remaining large estates among the peasants. Industry and
handicraft enterprises, even those employing only one or two workers,
were nationalized. Private trade was declared illegal. The hyperinflation
that accompanied the Civil War changed the monetary economy into a
barter economy. Peasant agriculture's "surpluses" were requisitioned by
force.
Although War Communism did allow the Soviet leadership to emerge
victorious from the Civil War, the program's inconsistencies became in-
creasingly apparent. Industry, agriculture, and transportation collapsed

under the weight of War Communism's inefficiency, and a new economic
system was required for recovery.
The New Economic Policy (NEP) was announced by Lenin in March
of 1921. NEP was a compromise blend of market and command. 4 The
state continued to control the (so-called) commanding heights (major
sectors) of heavy industry, banking, transportation, and wholesale trade,
while markets directed agriculture, retail trade, and small-scale industry.
A monetary reform, completed in 1923, reestablished a stable currency,
the chervonetz, which was the Soviet Union's last convertible currency. In
agriculture, a proportional tax replaced forced requisitioning, and peas-
ants were again allowed to sell in relatively free agricultural markets.
The NEP system prompted rapid recovery from the ravages of war,
revolution, and civil war, but it was replaced in the late 1920s with the
administrative- command economy. Stalin cited the exhaustion of recovery
opportunities and the unreliability of peasant agriculture as reasons for
abandoning NEP. The NEP economy provided the Soviet population with
a standard of living that remained unmatched for the next four decades.
NEP saw a spectrum of private, cooperative, and state ownership arrange-
ments, with private ownership dominating in agriculture, retail trade, and
handicraft. Markets governed most resource allocations in small-scale
manufacturing and agriculture. NEP provided a number of bold experi-
ments with foreign ownership and concessions.
It is no wonder that Soviet reformers refocused attention on NEP in
the late 1980s. The parallels between the introduction of NEP in 1921 and
Gorbachev's perestroika are striking. In both cases, reform was proposed
by the highest political authority (Lenin and Gorbachev). Both reforms
represented a move from command allocation to market allocation; both
sought to find an optimal mix of planned and market relations. NEP and
perestroika both faced strong ideological opposition from the Communist
Party orthodoxy.
Although some contemporary observers romanticized NEP as an ideal
economic plan, Soviet officialdom continued to represent NEP as a failed
system. 5 NEP was pictured as a crisis-ridden economic system, particularly
in agriculture, that failed to offer the Soviet leadership a viable alternative
to collectivization and superindustrialization.
Western assessment of NEP has been orchestrated to a remarkable
extent by Stalin's interpretation of events. 6 The Soviet and Western litera-
tures both characterized NEP as an unstable, crisis-ridden system whose
replacement was inevitable.
Did the Western and Soviet literatures give NEP an undeserved repu-
tation for failure? The NEP system spawned a remarkable recovery from
the ravages of the Civil War. The agricultural crisis of the early 1920s was
the panicked response of the Soviet leadership to market phenomena they
failed to understand. The grain collection crises at the end of the period
were caused by inept state pricing policy, the obsession with government
grain collections, and the ultimate desire to alter the social and political
structure of the Soviet Union. The recovery was far from complete at the
end of NEP-contrary to the official depiction of NEP as having exhausted
recovery possibilities.
The lessons of NEP are extremely important to current-day reform.
The NEP economy reveals many of the problems that an economy that
combines market and plan inevitably will encounter. It shows the uneasy
coexistence of administrative decrees and market allocation. Many natural
market phenomena-such as the amount of grain offered to the market or
speculative behavior-tend to be interpreted as political rather than eco-
nomic actions in such a setting. The greater flexibility of the private sector
permits it to bid resources away from the state, thereby incurring the
wrath of the state leadership. Moreover, there is a tendency not to trust
market allocation during periods of shocks to the economy. The tempta-
tion to substitute administrative directives for market forces is particularly
strong.
CONCLUSIONS
As the republics of the former Soviet Union proceed with the difficult task
of transition, they must look forward and backward. They must analyze
the legacy of the administrative-command system and its effects on the
psyche of their citizens. They must understand their own past. The past
explains how the administrative-command system came into being. In the
Soviet case, confronting the past is a painful exercise. If there was no
rational reason for the Stalinist system, its immense costs cannot be
rationalized. A citizenry that has endured enormous sacrifices will find it
hard to confront this painful truth.
REFERENCES
1. S. Kuznets, "A Comparative Appraisal," in A. Bergson and S. Kuznets, eds.,

Economic Trends in the Soviet Union (Cambridge, Mass.: Harvard University
Press, 1963), pp. 345-347.
2. V. I. Lenin, The Development of Capitalism in Russia (Moscow: Foreign
Languages Publishing House, 1956).
3. Even the influential writings of Alexander Gerschenkron focus on Russian
economic history as a means of explaining revolutionary tendencies. See
A. Gerschenkron, Economic Backwardness in Historical Perspective (Cam-

bridge, Mass.: Harvard University Press, 1962), essay 1.
4. A. Nove, An Economic History of the USSR (London: Penguin, 1969), chaps.
3-6; M. Lewin, Russian Peasants and Soviet Power (London: Allen & Unwin,
1968); and S. Merl, Der Agrarmarkt und die Neue Okonomische Politik [The
agrarian market and the New Economic Policy] (Munich; Oldenbourg Verlag,
1981).
5. For a discussion of different assessments of NEP by Soviet reformers, see Y. P.
Bokarev, "NEP i problemy perstroiki," [NEP and the problems of Perestroika]
presented at Soviet-American Conference on Soviet Economic Reform, Hous-
ton, Texas. December 1989. For an official assessment of the failures of NEP
published shortly before the collapse of the Soviet Union, see G. L. Smirnov,
"Vremiia trudnykh voprosov, Istoriia 20-30-x godov i sovremenaia obshchest-
vennaia mysl,' " [A time of difficult questions, the history of the 1920s and
1930s in contemporary social thought] Pravda, September 30, 1988; October
3, 1988.
6. M. Dobb, Soviet Economic Development Since 1917, 5th ed. (London: Rout-
ledge & Kegan Paul, 1960), chaps. 4-9 (first published in the 1930s) left a
lasting imprint on Western thinking about the NEP period, even though Dobb
fully accepted the Stalinist version of the NEP crises.
TWO
••
Economic History of
Russia to 1917
WAS THE TSARIST ECONOMY A Success?

The question of Russia's economic performance during the region's last
experience with a market economy is important for two reasons. First, if
Russia's last experience with a market economy can be demonstrated to
be a relative success, as opposed to the failure always promulgated by the
Soviet leadership, then a return to a market economy could be justified
more easily. Second, we cannot judge economic performance during the
Soviet era without knowing how well the predecessor to the Soviet admin-
istrative-command economy performed.
There is no simple way to answer the question of Russia's economic
performance. We have no magic standard for evaluating economic per-
formance, such as 4 percent per annum real growth or above constitutes
"good" performance. What we do know is that economic success, to the
present day, remains limited to a small number of countries-the industri-
alized world-that account for not more than 20 percent of the world's
population.
13
The economic performance of any country must be judged in appro-

priate historical context. The standard for evaluating the tsarist Russian
economy would necessarily be its performance in the late nineteenth and
early twentieth ,centuries relative to the industrialized countries of the
European continent and North America and to industrializing Japan. Did
the Russian economy perform as well, better, or worse than the economies
of the then industrialized West?
Insofar as there were relatively few industrialized countries in this
period (less than 20) and their performances differed, we can only specify
general trends and limits based upon the relatively small sample of suc-
cessful countries. Oµr appraisal of the Soviet Union's previous full-fledged
experience with market capitalism focuses on the last 30 years of the
prerevolutionary era for two reasons. First, it makes little sense to examine
Russia's premodern past. We date the modern era to the period after the
1861 serf emancipation and after the construction of the rail network. By
the mid-1880s, both these events had worked their way through the
system. It was in the 1880s that industrialization began in earnest. Second,
reliable estimates of tsarist economic growth and performance prior to the
1880s are not available.
The Weakest Link

The economic record of the Soviet period cannot be evaluated in proper
perspective without knowing the economic base the Bolsheviks inherited
from the tsars. If economic development during the tsarist period had been
extensive, then the rapid industrialization of the 1930s would be merely a
continuation of past development. If, on the other hand, the Bolsheviks
inherited a backward and stagnant economy, then their achievements must
be gauged differently.
Both the rate and the level of Russian economic development prior to
1917 are matters of some controversy. Lenin proclaimed the backward
tsarist economy, with its isolated pockets of modernity, as the "weakest
link" in the capitalist chain; official Soviet ideology argued that the eco-
nomic backwardness inherited from the tsarist period made the sacrifices
of the 1930s necessary. Were it not for the dramatic restructuring of the
economic system in the 1930s, today's Soviet economy would not be as
far advanced as it is. Western economic historians (such as Alexander
Gerschenkron and W. W. Rostow) have focused on the rapid industrial
growth achieved after 1880 while emphasizing the feudal problems of
Russian agriculture. 1 Other Western historians have tended to view tsarist
agriculture in a more favorable light.
Our approach to the question of Russian economic development is to
first consider the development of industry and agriculture during the last
Economic History of Russia to 1917 15
half-century of tsarist rule, and then turn to other factors, such as growth
of per capita GNP, changes of industrial structure, and demographic
characteristics, suggested by Simon Kuznets as being indicators of "mod-
ern economic growth. " 2
Industrial Growth Under the Tsars

Although it is usually difficult to trace the development of the industrial
sector in a country as ancient as Russia, the reign of Peter the Great
(1698-1725) provides us with an important turning point in Russian
economic history.
Peter the Great, impressed by the technology and industrial expertise
he observed during his extensive early travels in Western Europe, deter-
mined to industrialize Russia by importing Western technology and tech-
nicians en masse. Military considerations played an important role in this
decision. Peter the Great provided the initial impetus to move the back-
ward Russian economy toward the development of an increasingly mod-
ern industrial sector, by eighteenth-century standards. As a result,
eighteenth-century Russia acquired a nascent industry that, when com-
bined with its vast natural and manpower resources, enabled it to compete
militarily with the West for nearly two centuries despite a succession of
less vigorous Russian tsars. After Peter, however, a gap began to widen
between the Russian economy and its industrializing Western European
competitors, especially during the nineteenth century. 3 In fact, during this
two-century period, industrialization came to be regarded in Russia as a
threat to the autocracy. Tsarist authorities feared that railroads would
spread egalitarianism and that the growth of factory towns would spawn
a rebellious proletariat. 4 One of history's great ironies was the firm en-
trenchment during Peter's reign of feudalism, a retrogressive social institu-
tion that later was to become a great obstacle to long-term economic
development. Serfdom was used by Peter the Great to finance his military
ventures; and, indeed, he staffed his new factories, mines, and postal
system with serf labor to implement his progressive industrial policies.
The Crimean War (1854-1856) forced Russian leaders to realize the
relative industrial backwardness of Russia vis-a-vis the industrializing
Western powers. The potential dangers of this gap were painfully obvious,
especially to an empire-conscious country accustomed to respect as a
formidable military power. As a result, the Russian government began to
promote industrialization in a reversal of its earlier anti-industrialization
stance, especially under the forceful leadership of Count Sergei Witte, the
minister of finance from 1892 to 1903. Industrial development was fos-
tered by the government in a variety of ways. The state sponsored massive
railroad construction, spurred by the obvious military importance of
railway transport in a land as massive as the Russian Empire. In 1860, the

Russian rail network consisted of 1,600 kilometers of track. By 1917,
81,000 kilometers had been built. 5 This new transportation network
opened up the iron and coal resources of the Ukraine, which soon over-
took the Ural region as the metallurgical center of the Russian Empire. In
addition, it opened up world markets for Russian wheat. Russian exports
of wheat products increased five times between the 1860s and 1900,
competing with North American wheat, which had also been made avail-
able to the world market by the railroads. 6 The state acted as guarantor
of bonds, thereby promoting the widespread participation of foreign capi-
tal in industrial development. A succession of finance ministers pursued a
conservative monetary policy, which stabilized the ruble exchange rate and
allowed Russia to join the international gold standard in 1897. Domestic
heavy industry was promoted by a series of measures such as high protec-
tive tariffs, profit guarantees, tax reductions and exemptions, police help
in labor disputes, and government orders at high prices to ensure adequate
demand for domestic production. In addition, the state actively recruited
foreign entrepreneurs for Russian industry. The military objectives of the
state are seen in the ministry of finance's promotion of heavy industry over
the small-scale light industry during this period. 7
A modern entrepreneurial class began to form in nineteenth-century
Russia. Russian entrepreneurs were drawn from the civil service and
nobility as well as the ranks of Jewish merchants and Old Believer sects. 8
Russian entrepreneurs, like the Western entrepreneurs working in Russia,
operated in a legal setting that was ambivalent toward private enterprise.
The tsar's signature was required on the charter of every joint-stock
company, placing the tsarist bureaucracy in a position to determine who
would be allowed to form limited liability corporations. Russian industri-
alists often got their start in business through state subsidies, tariffs, or
preferential state orders. Corrupt practices were common, with industri-
alists purchasing state favors with bribes. Bribery appeared to be one of
the ordinary costs of conducting business in bureaucratic Russia. For its
part, the Russian economic bureaucracy, under the leadership of the
finance ministry, was ambivalent in its attitude toward modern capitalist
institutions. On the one hand, the succession of able finance ministers
understood the importance of promoting private initiative and attempted
by and large to recruit entrepreneurs on the basis of talent rather than
family connections. On the other hand, the Russian state feared the
consequences of unbridled capitalism. Russian industrialists, who banded
into lobbying organizations such as the Association of Industry and Trade,
shared this ambivalence. They argued for fewer restrictions on their activi-
ties while at the same time continuing to rely on state protection, subsidies,
and state credits.
The Russian legal and state system at the turn of the twentieth century
was not unusual for a relatively backward country with great economic
potential and a firmly entrenched state bureaucracy. The economic poten-
tial was sufficiently great to bring in foreign capital from abroad, attracted
primarily by the higher rates of return in Russia. The profit potential was
sufficiently great to cause the emergence of a class of home-grown entre-
preneurs, while at the same time promoting bureaucratic corruption that
added to the business costs of Russian industrialists. The entrenched
Russian bureaucracy, unlike the less well-entrenched British bureaucracy:
found it difficult to sit on the sidelines. As a result, there was more active
bureaucratic meddling in economic affairs.
In the 1880s, an acceleration in the rate of growth of industrial output
took place. There has been considerable debate about the causes of this
acceleration. Some economic historians, such as Arcadius Kahan, have
argued that the upturn in industrial growth was a consequence of natural
market forces, spurred by the enormous profit potential of the resource-
rich Russian empire. 9 Kahan and others maintain that state activities either
hampered {or did not contribute to in a significant way) industrial growth,
and they cite the fact that state subsidies to industry were actually quite
modest during this period. Others have argued that the acceleration {or
"spurt") in industrial growth was the direct result of state intervention.
A prominent scholar of Russian economic history, Alexander Ger-
schenkron, has proposed the relative backwardness hypothesis to explain
this spurt. 10 He suggests that whenever the gap between economic poten-
tial and economic actuality of a nation becomes too great, that is, when-
ever a nation with great economic promise as measured by its total
resource endowment becomes backward relative to other countries {as
Russia was around 1860), tension is created, new institutions are substi-
tuted for missing preconditions, and a spurt of industrial growth occurs.
In the case of Russia, the tension was great, the resulting industrial spurt
was significant, and the Russian state, which acted as a substitute for
missing entrepreneurial resources and deficient demand, was the instigator
of industrialization.
Between 1880 and 1900, industrial production more than tripled,
accelerating again between 1906 and 1914 after the depression at the turn
of the century and the political instability of the 1905 revolution. 11 The
extent of Russian industrial progress between 1861 and 1913 is shown in
Table 2.1, which indicates that by 1913, Russia had risen to become the
world's fifth-largest industrial power, behind the United States, England,
Germany, and France, and had succeeded in narrowing the gap between
itself and the leading producers of key industrial products.
These aggregate figures mask the low per capita output of Russian
industry, which can be inferred from the population and output figures in
Table 2.1 SELECTED ECONOMIC AND SOCIAL INDICATORS, RUSSIA AND OTHER COUNTRIES,
1861 AND 1913
National
income, Per capita Grain Coal output
Population 1913 rubies national output (100 (million
(millions) (millions) income metric tons) metric tons)
1861
Russia 74 5.269 71 41,500 0.38
United Kingdom 20 6.469 323 n.a. 85.0
France 37 5,554 150 26,220 9.4
Germany 36 6,313 175 28,706 18.7
United States 32 14,405 450 39,318 13.3
Netherlands 3 n.a. n.a. 292 n.a.
Norway 2 331 166 802 n.a.
Sweden 4 449 112 1,265 0.03
Italy 25 4,570 183 6,455 0.03
Spain 16 n.a. n.a. n.a. 0.35
Austria-Hungary 35 n.a. n.a. 20,745 2.5
1913
Russia 171 20,266 119 123,000 36.1
United Kingdom 36 20,869 580 8,948 292.0
France 39 11,816 303 30,870 40.8
Germany 65 24,280 374 85,445 277.3
United States 93 96,030 1,033 146,100 517.0
Netherlands 6 2,195 366 3,686 1.9
Norway 2 918 659 1,076 n.a.
Sweden 6 2,040 340 4,979 0.36
Italy 35 9,140 261 13,128 0.7
Spain 20 3,975 199 9,025 3.9
Austria-Hungary 50 9,500 190 38,953 54.2
aAverage 1867-1869. (Continued on facing page)

Source: P. R. Gregory, Russian National Income, 1895-1913 (Cambridge University Press). pp. 155-156; n.a. denotes figure not
available.
Table 2.1. Despite the considerable growth of industrial output, Russia on

the eve of World War I belonged to the group of poor Western European
countries (Spain, Italy, and Austria-Hungary) in terms of industrial output
per capita.
Russian industrial growth between 1880 and 1913 was rapid, and the
industrial gap between Russia and the more advanced industrialized coun-
tries, although it remained significant, was narrowed. For this reason, eco-
nomic historians who have concentrated on Russian industrial development
prior to 1917 have traditionally taken a fairly sanguine view of Russian
economic development during the last three decades of tsarist rule.
Pig iron Crude steel Rail Infant

(1000 (1000 Raw cotton network mortality
metric tons) metric tons) (100 meters) (1000 km) (per 1000)
320 7 43.0 2.2 239 8

3,772 334 456.0 14.6 148
967 84 110.0 9.6 190
592 143 74.0 11.5 260
830 12 213.0 50.3 n.a.
n.a. n.a. 3.6 0.34 196
0 n.a. n.a. 0.07 113
170 0 7.7 0.57 124
27 0 12.0 2.8 232
67 n.a. 27.0 2.9 174
315 22 44.0 3.2 264
4,641 4,918 424 70.2 237

10.425 7,787 988 32.6 108
5,207 4,687 271 40.7 112
16,761 17,609 478 63.4 151
34,700 31,800 1.458 400.0 115
n.a. n.a. 36 3.2 91
n.a. 0 n.a. 3.1 64
730 591 22 14.3 70
427 934 202 18.9 138
425 242 88 15.1 155
2,381 2,611 210 23.0 190
Is this conclusion justified? While significant industrial development is

a necessary condition, it is not sufficient in itself to produce overall
economic development. Insofar as the growth of GNP (industry, agricul-
ture, services) and per capita GNP-not industrial growth alone-are the
most generally accepted indicators of the rate of economic development,
we must focus upon the performance of the second major sector, agricul-
ture, during this period of rapid industrialization, before a balanced pic-
ture of Russian economic development can be obtained.
Russian Agriculture Under the Tsars

The agricultural revolutions that accompanied the industrialization of
Western Europe and England were generally preceded by the breakdown
of feudalism, which prepared the way for a modern agriculture unfettered

by traditional cultivation methods and restrictions. Feudalism developed
rather late in Russia, at a time when this institution was declining or
extinct in the more advanced Western nations. Perhaps as a result of its
late emergence, feudalism in Russia embodied particularly odious forms
of servitude in which serfs were bound to the soil, could be deported to
Siberia, were conscripted virtually for life into the army, and were sold on
the open market by their masters. Depending on the region of the country,
Russian serfs were either required to provide labor services on the land-
lord's land (barshchina) or to make payments in kind from their crops
(later money) for the use of their allotted land (obrok). In addition,
peasant land was held communally and was periodically redistributed by
the village elders, who constituted a form of village self-government.
Russian feudal agriculture provided little incentive for the individual
peasant. Serf labor was so inefficient that it became customary to call
barshchina "all that is done slowly, incorrectly, and without incentive." 12
Mobility from the countryside to the town was limited. A peasant working
in the town not only had to pay a large portion of his earnings to his
master but also had to return to his village if so ordered, unlike the earlier
Western European practice whereby serfs could gain their freedom by
living in the town.
The Emancipation Act of 1861, which freed serfs and divided the land
holdings of the landed aristocracy (the gentry) between the peasant and
the gentry, was a significant watershed, for it provided a unique opportu-
nity to establish the foundations for a modern Russian agriculture. How-
ever, the primary objective of the Russian emancipation, initiated by the
tsar himself, was not to promote economic development but to prevent
further peasant revolts and preserve the autocracy while retaining a form
of agriculture that could still be controlled. The vested land interests were
favored. While the peasants received their juridical freedom, they were
allotted plots of gentry land to be "redeemed" by the holder. The remain-
ing gentry land (well over 50 percent) was retained by its original owners.
The peasants were generally dissatisfied with the size of their plots; many
were too small to provide earnings for the redemption payments due to
the state (which had purchased the land from the gentry).
Some peasants accepted "beggar's allotments"-small plots of land
free from all obligations-and became small freeholders. The state peas-
ants received land as well, under more generous terms; but as late as 1877,
the crown and the state treasury still owned almost 50 percent of the land
in European Russia.
Let us now consider the principal features of the Emancipation Act of
1861 from the viewpoint of economic efficiency. 13 While the reform did
contain positive elements-an increase in the large estates that created

export surpluses, the introduction of a money economy into the country-
side via redemption payments, and the psychological impact of emancipa-
tion-it placed serious constraints on agricultural development.
Communal agriculture was retained, as a means of control over the rural
population, in the institution of the mir or obshchina (the village commu-
nal organizations). The agricultural communes were held responsible for
the debts of their individual members; therefore, the more prosperous
commune members were liable for the defaults of the poorer. With this
feature, there was reduced incentive to accumulate wealth within the
commune. 14 The peasant family could not officially withdraw its land from
the commune until all debts on the land were met and then only with a
two-thirds vote of the membership. Nor could the peasant leave agricul-
ture permanently for the city until his land was free of obligations-the
rigid internal passport system was supposed to ensure peasant compliance.
In addition, the land was to be redistributed periodically within the com-
mune, thereby reducing incentives to improve a particular plot. In short,
the Emancipation Act made it difficult for a peasant to develop both a
sense of private property and an interest in long-term productivity im-
provements, factors that had proved crucial in the agricultural revolutions
of other countries.
According to Gerschenkron, the guiding principles of the Russian
agrarian program between 1861 and 1906 were:
To preserve the obshchina until the liquidation of the redemption

debt, to prolong the amortization of that debt so as to protect the
obshchina, and at the same time to continue to hold the peasantry in
the vise of ruinous aggregate taxation. 15
Gerschenkron has argued (along with Lenin and Soviet scholars) that
massive peasant dissatisfaction with the Emancipation Act was a signifi-
cant cause of the Revolution of 1905. Peasant unrest during this period
bordered on spontaneous armed rebellion in the countryside, which
prompted the state to enact measures to improve the lot of the peasant:
joint responsibility was abolished in 1903, and 50 percent of peasant
indebtedness was forgiven in 1906 and finally canceled fully in 1907.
From the point of view of long-run economic development, the Stolypin
Reforms of 1906 and 1910 were significant government measures be-
cause they sought to weaken communal agriculture and to create a class
of small peasant proprietors. Their principal provision made it easier for
individual peasants to withdraw from the commune, which-combined
with the reduced indebtedness of the peasantry-opened the way for
private agriculture in Russia. Heads of households could demand their
portion of commune land and withdraw from the commune. They could
further demand consolidation of their land into a single area.
It is difficult to predict what impact the Stolypin Reforms would have
had on the Russian economy had they been given sufficient time to take
effect. Most authorities agree that they would have strengthened Russian
agriculture. Western authorities (Gerschenkron, Lazar Volin, Jerome
Blum, and G. T. Robinson) have joined tsarist and Soviet scholars in
emphasizing the poor performance of Russian agriculture after 1861.
These authorities point to a possible decline in per capita grain availability
between 1870 and the 1890s, accounts of appalling poverty in the Russian
village, 16 rising peasant tax arrears, and the increasing number of mort-
gaged estates as evidence of an "agrarian crisis." Moreover, the existence
of an agrarian crisis provides a convenient explanation for the Revolution
of 1905 and support for the Gerschenkron proposition that the burden of
industrialization was borne by the Russian peasant.
This entirely pessimistic picture of Russian agriculture has been ques-
tioned by a number of scholars. Internal passport data have been analyzed
to demonstrate that the Russian peasant was relatively free to go to the
city or to outlying provinces, despite official restrictions on such move-
ments. Analyses of peasant taxes reveal that the growing arrears may not
have been indicative of the exhaustion of the taxpaying capacity of the
Russian village. In fact, Russian peasants may have adjusted their tax
payments automatically according to their sense of social justice.17 Most
importantly, recent studies demonstrate that the output and marketing
performance of Russian agriculture was much better than the earlier
literature had suggested.
Basically, the more recent studies of Russian agricultural output and
peasant living standards find that, on average, Russian peasants were
experiencing rising living standards (alongside urban workers) during the
period of rapid industrialization. Over the 1885-1913 period, there does
not appear to have been a noticeable shift in the distribution of consump-
tion expenditures between the city and countryside. The growth rates of
agricultural output and of output per capita were quite respectable by
Western European standards, lagging only slightly behind the growth rate
of total output. There was positive growth of agricultural labor produc-
tivity, at perhaps two-thirds the rate in industry. 18 The aggregate figures
point to rising peasant living standards, rising agricultural productivity
and rising per capita agricultural output. Agricultural progress was, how-
ever, quite uneven. The Russian grain market was not integrated (there
was substantial regional variation in agricultural prices); the regional
distribution of transportation services was uneven; and significant re-
sources continued to be devoted to agriculture in grain-deficit regions
ill-suited by climate and soil conditions to agriculture pursuits. 19 A gener-

ally rising trend in agriculture is quite consistent with the accounts of
regional and individual poverty that abound in the Russian and Soviet
literatures (see reference 16, for example).
The conclusion that Russian agriculture performed reasonably well
despite the strictures placed upon it by the 1861 emancipation is not
surprising. In a country as vast as Russia, it would have been difficult for
the bureaucracy to restrain peasant mobility (as the passport data demon-
strate). An artificial separation of the economy into a prosperous and
growing industrial sector and a backward and stagnant agricultural sector
would be an unexpected economic result. Unless the agrarian population
could be rendered immobile, the natural tendency would be for labor to
seek out its highest return, and this tendency would lead to a rough
equalization of real wages between the city and countryside in the long
run. It would also be difficult to keep Russian agriculture, with its close
ties to world markets, isolated from the agricultural revolutions of West-
ern Europe, North America, and Australia. It should also be remembered
that Russian agriculture was expanding extensively during the late nine-
teenth century into new areas not subject to the restrictions of the peasant
emancipation.
Economic Growth Under the Tsars

Russian industrial growth was more rapid than that of its European
neighbors after 1880. Russian agricultural performance, according to
recent evidence, was better during the industrialization era than had been
thought by earlier historians. To provide some perspective on the issue of
modern economic growth in Russia, an assessment of Russian economic
performance relative to that of the industrialized countries is required. In
such an assessment, the position of the Russian Empire at the beginning
of the "modern era" (1861) and on the eve of World War I must be
established, and the Russian record of economic growth and structural
change must be considered.
Data on population, national income, and various output series have
been assembled (see Table 2.1) for Russia and other countries for the years
1861 and 1913. These figures allow one to draw a general picture of the
Russian economy at the end of the tsarist era and to trace its progress from
the emancipation to the eve of World War I.
On the eve of the war, Russia was one of the world's major economic
powers, but the dichotomy between the country's aggregate economic
power, as dictated by the magnitude of the Russian Empire, and its relative
poverty on a per capita basis is striking. Russia began its modern era with
a population twice as large as its next most populous neighbor (France)
and ended the era three times as large as its largest European neighbor
(Germany). This increase indicates the more rapid growth of population
in Russia than in Europe. Russian population growth was much like that
in the European offshoots, Australia and North America, with a crucial
difference. Russia's rapid population growth was due entirely to high rates
of natural increase, while immigration played an important role in North
America and Australia.
With such a large population, exceptionally low per capita output
levels would be required to prevent Russia from being one of the world's
major economic powers. This point is confirmed by the national income
rankings. By 1913, Russia's national output was above France's, equal to
England's, 80 percent that of Germany, and twice that of Austria-Hungary.
In relative terms, the only decline between 1861 and 1913 was vis-a-vis
the United States, a country that experienced a rapid growth of population
and national output during this period.
Russia's economic power was concentrated in agriculture. In 1861,
Russia produced more grain than any other country and was surpassed
only by the United States in 1913. On a per capita basis, however, Russia
ranked well behind the more advanced grain-producing countries, such as
the United States and Germany, but was roughly on a par with countries
such as France and Austria-Hungary. Russia's position as a major indus-
trial power was less well established. In 1861, Russia was a minor pro-
ducer of major industrial commodities (coal, iron, and steel) and had only
a rudimentary transportation system, despite its vast territory. By 1913,
Russia's position had improved somewhat, especially relative to France
and Austria-Hungary, but Russia still lagged seriously behind the major
industrial powers. It was only in textiles that Russia occupied a position
roughly equivalent to that of Germany, the continent's largest industrial
producer.
The relative backwardness of the Russian economy is masked by
aggregate figures but is evident from per capita comparisons. Russia
began its modern era with a per capita income one-half France's and
Germany's, one-fifth England's, and 15 percent that of the United
States. By 1913, Russia's relative position had declined, due primarily
to rapid population growth and slow output growth until the 1880s.
Russia's 1913 per capita income was less than 40 percent that of France
and 33 percent that of Germany, still one-fifth England's, and one-tenth
that of the United States. On a per capita income basis, 1913 Russia was
a poor European country, ranking well below Spain, Italy, and Austria-
Hungary.
Russia's most important relative achievement was the development of

a rail network that was Europe's largest by 1913 and was comparable on
a per capita basis to countries like Italy and Austria-Hungary. The one
social indicator in Table 2.1, infant mortality, shows that the advances in
public health experienced in other countries were not shared by the masses
in the Russian village. Russia entered its modern era in 1861 with a rate
of infant mortality not much different from that of Western Europe. Yet
50 years later, infant mortality was virtually unchanged in Russia, while
in other countries it had declined significantly.
Growth of Per Capita Output

A distinctive feature of modern economic growth is accelerated and sus-
tained growth of per capita output. This rapid growth contrasts with the
secular stagnation of the premodern period. Annual rates of growth of
Russian net national product (NNP), population, and per capita NNP are
given in Table 2.2. These figures suffer from several weaknesses, yet they
should be accurate within a reasonable margin of error.
The growth of Russian NNP was relatively slow from the emancipa-
tion to the early 1880s, but this was prior to the establishment of a modern
transportation system. Between 1861 and 1883, the growth rate of per
capita income was negligible, and labor productivity apparently failed to
increase. However, in assessing tsarist economic growth, one should focus
on the "industrialization era" from the mid-1880s and compare Russian
growth performance with that of the industrialized countries.
During Russia's industrialization era, the growth of Russian national
income was above average when compared to other countries during the
same period. The Russian growth rate of 3.3 percent per annum was
equaled or surpassed by only four countries and exceeded the growth rate
of the two other "follower" countries, Italy and Japan. 20 Russian growth
Table 2.2 PATTERNS OF RUSSIAN GROWTH (Percent per Annum)
Per capita Labor NNP per

NNP Population NNP force worker
1861-1863 to 1881-1883 1.8 1.1 0.7 1.9 0.1

1883-1887 to 1909-1913 3.3 1.6 1.7 1.7 1.6
Sources: The 1861-1883 figures are for the 50 European provinces and are from P. R. Gregory, "Economic
Growth and Structural Change in Tsarist Russia: A Case of Modern Economic Growth?" Soviet Studies, vol.
23, no. 1 (January 1972). 422. The 1883-1913 figures are for the Russian Empire and are from P. R.
Gregory, "Economic Growth and Structural Change in Tsarist Russia and the Soviet Union: A Long-Term
Comparison," in S. Rosefielde, ed., Economic Welfare and the Economics of Soviet Socialism (Cambridge:
Cambridge University Press, 1981).
was similar to that of the European offshoots in North America and

Australia, which also experienced rapid population growth.
On a per capita and per worker basis, Russian output growth was
average relative to the industrialized countries. Thus, Russia's above-aver-
age output growth was largely the consequence of relatively rapid popu-
lation and labor force growth. Russian economic growth was, therefore,
of a largely "extensive" character, that is, was caused principally by the
growth of inputs rather than the growth of output per unit of input. The
less reliable evidence on tsarist capital stock suggests that roughly two-
thirds of Russian output growth was accounted for by the growth of
conventional labor and capital inputs. 21 Again, the Russian experience is
similar to that of the European offshoots, which also grew "extensively"
during this period.
The conclusion follows from this evidence that after 1885, the Russian
Empire grew at total, per capita, and per worker rates that were at least
average relative to those of the industrialized countries. Although Russian
growth over the entire 1861 to 1913 period was indeed relatively slow, 22
this was due to the slow growth until the 1880s. During the industrializa-
tion era, Russian growth appears to have taken on the classical features of
modern economic growth.
Structural Change
Another means of establishing whether Russia was indeed undergoing the
initial stages of modern economic growth after the mid-1880s is to com-
pare Russian structural change with that of the industrialized countries
during the early phases of modern economic growth. In Table 2.3, shifts
in the structure of Russian national income both by producing sector and
by final use are shown. These shifts reveal the expected modern economic
growth pattern of structural change-rising shares of industry, falling
shares of agriculture, rising shares of net investment, and falling shares of
personal consumption.
One way to assess these changes is to compare them with the struc-
tural shifts experienced by the industrialized countries during their first 30
years of modern economic growth. Utilizing data from Kuznets, 23 one
finds that the amount of structural change experienced in Russia during
its industrialization era was about average (or perhaps slightly below
average) for a country undergoing the initial stages of modern economic
growth. Thus, the evidence on structural change supports the proposition
that Russia was in the process of embarking upon a path of modern
economic growth during its industrialization era.
Table 2.3 RUSSIAN ECONOMIC STRUCTURE DURING THE INDUSTRIALIZATION ERA
Shares in national product by producing sector

(percentages)
Industry, construction,
transportation, and Trade and
Agriculture communication services
1883-1887 57.5 23.5 19.0

1909-1913 51.0 32.0 17.0
Shares in national product by final use (percentages)
Personal Net domestic Net foreign

consumption Government investment investment
1885-1889 83.5 8.1 8.1 0.3

1909-1913 79.6 9.7 12.1 -1.5
Source: P. R. Gregory, "Economic Growth and Structural Change in Tsarist Russia and the Soviet
Union: A Long-Term Comparison," in S. Rosefielde, ed., Economic Welfare and the Economics of
Soviet Socialism (Cambridge: Cambridge University Press. 1981 ).
Investment in Human Capital

Between the emancipation and the 1880s, labor productivity failed to
increase; thereafter, it grew at an average rate relative to that of the
industrialized countries. One possible explanation for the initiation of
productivity growth is the increased public and private investment in
human capital after 1880. There is little firm evidence on literacy rates
prior to 1897, but data on the literacy rates of military recruits and in St.
Petersburg and Moscow show that the increase in literacy was barely
perceptible prior to the early 1880s.24 From the mid-1880s on, however,
the growth of literacy rates accelerated. Between 1884 and 1904, the
literacy rates of military recruits more than doubled, from 26 percent to
56 percent. For the country as a whole, the 1897 illiteracy rate was 72
percent (see Table 2.4 ), with urban literacy almost three times rural
literacy. Between 1897 and 1913, further progress was made in providing
education to the population, and a rough estimate places Russian illiteracy
in 1913 at 60 percent of the over-10-year-old population. For comparison,
we note that U.S. illiteracy in 1900 was only 11 percent of the over-10
population.
The low literacy rates of the Russian population prior to the revolu-
tion is a fairly convincing indicator of the social backwardness of the
Table 2.4 ILLITERACY RATES: RUSSIA IN 1897 AND 1913-UNITED STATES IN 1990
Percent of Total Population over 10 Years of Age
Urban Rural Total
Russia 1897 55• 83 8 72

1913 60
United States 1900 11
8 Percent of entire population.
Source: A. G. Rashin, Formirovanie rabochego klassa v Rossii

[The formation of the working class in Russia]
(Moscow: Sotzekisdat 1958), pp. 579--581.
economy. The limited pool of educated workers constrained overall indus-

trialization and may have forced Russian industry to adopt capital-inten-
sive production techniques to utilize more efficiently the limited supply of
skilled industrial laborers (some of whom were imported from abroad). 25
The extremely low rural literacy rates show that while the pool of rural
labor was substantial, it was not perhaps suited for employment under
modern factory conditions.
Although the level of human capital remained low, Russian human
capital was indeed growing at a relatively rapid rate. Arcadius Kahan has
emphasized the rising investment in primary education, the 2560 percent
increase in the number of elementary schools, and the 3.5-fold increase in
primary school enrollment between 1890 and 1914. 26 In fact, Kahan
argues that the growth of human capital was more important than that of
physical capital to Russia's growth during this period.
Population
Modern economic growth has characteristic demographic patterns as well.
As Kuznets 27 notes, the dominant trend in birthrates is downward
throughout the modern period, although changes in premodern institu-
tional practices may create initial increases in birthrates. The death rate
declines rapidly during modern economic growth, being the principal
factor behind the acceleration of population growth. The most conspicu-
ous benefactors of the declining death rate are the younger age groups,
owing to increased control over infant mortality. Comparing premodern
and modern rates, Kuznets notes that premodern birthrates varied sub-
stantially among countries, ranging from highs of 5 5 per 1OOO to lows of
31 per 1000. The average premodern death rate was around 30 per 1000
in Western Europe and somewhat lower in the areas of European settle-
ment in North America and Australia. From these initial levels, birth and
death rates declined, the death rate approaching a lower limit of around
10 per 1OOO in recent times.
Russia began its postemancipation development in 1861 with a demo-
graphic base like that of Western Europe and North America some 75 to
100 years earlier (see Table 2.5). The Russian birthrates of the early 1860s
were exceeded only by the U.S. rates of the 1790-1800 period. The
Russian 1861 death rate was well above the eighteenth-century Western
Europe average of approximately 30 per 1000. The Russian death rate
began to decline steadily during the late 1890s but remained high relative
to Western European 'Standards. The 1913 Russian death rate of 27 per
1000 was still more than double the Western European average of 13 per
1OOO for that same year.
The high Russian death rate can be explained by the high rate of infant
mortality-27 deaths per 100 during the 1867-1871 period and 24 deaths
per 100 in 1911. This limited decline over a 40-year period indicates the
meager success that tsarist Russia had in reducing infant mortality. 28
The Russian birthrate hovered around 50 per 1000 from 1860 to
1900, after which it declined steadily; but in 1913, it was still twice the
Western European average of the same year. Thus, although Russian birth
and death rates began to conform to modern economic growth patterns
around the turn of the century, they still roughly corresponded to premod-
ern levels at the time of the Revolution.
Table 2.5 BIRTHRATES, DEATH RATES, AND RATES OF NATURAL INCREASE:

50 EUROPEAN RUSSIAN PROVINCES, 1861-1913
Per1000
Rate of natural
Birthrate Death rate increase
1861-1865 51 37 14
1866-1870 50 37 12
1871-1875 51 37 14
1876-1880 50 36 14
1881-1885 51 36 14
1886-1890 50 35 16
1891-1895 49 36 13
1896-1900 50 32 17
1901-1905 48 31 17
1906-1910 46 30 16
1910-1913 44 27 17
Source: A. G. Rashin, Naselenie Rossii za 100 let IThe population

of Russia for 100 yearsl (Moscow: Sotzekizdat, 1956). p. 155.
RUSSIA'S DEPENDENCE ON THE WEST
Tsarist Russia's economic dependence on the West was a topic of consid-

erable importance during the Soviet industrialization debates of the 1920s
(Chapter 3). Russia's dependence on foreign capital goods bears on our
discussion of Russia's economic development because heavy dependence is
accepted as an indicator of underdevelopment. 29 As an economy develops,
it becomes able to produce domestically the capital equipment that it had
been required to import earlier (import substitution) and thus to reduce
its dependence on foreign capital.
To determine Russia's dependence on foreign technology, one must
first consider its domestic production of capital equipment. A possible
rough indicator of Russia's domestic machinery-producing capacity was
the relative importance of metal products (engineering) in the tsarist
Russian economy. In 1913, metal products accounted for 10 and 12
percent of manufacturing net output and labor force, respectively. During
that same period, the average manufacturing product share of engineering
in England, the United States, and Germany was 21 percent. 30 Russia in
1913 devoted less than half as much of its manufacturing resources to
machinery as did the major industrial powers of the West. Inasmuch as
Russia in 1913 devoted a much smaller proportion of total resources to
manufacturing than the three major industrial powers, the share of total
resources devoted to the production of capital equipment was even
smaller.
The relatively small portion of resources devoted to capital goods is
perhaps surprising in view of the apparent zeal with which the Russian
state one-sidedly promoted the investment goods industries at the expense
of consumer goods industries during the 1890s, which, according to
Gerschenkron, resulted "in the relative top-heaviness of the Russian indus-
trial structure as well as its relative concentration upon producer goods. " 31
It is clear that the development of the tsarist economy was dependent
on the transfer of foreign technology and equipment. The data also show
that Russian development was aided by the receipt of savings from abroad
to finance domestic capital formation. Russia was, in fact, a large debtor
country during the 1880-1913 period, receiving significant capital inflows
from France, England, and Belgium. Foreign capital probably accounted
for 40 percent of industrial investment, 15 to 20 percent of total invest-
ment, and about 2 percent of NNP at the end of the tsarist era. 32
As a frame of reference, one might compare the Russian foreign debt
experience with that of two other large countries, the United States and
Japan, both of which were debtor countries at early stages of their eco-
nomic development. Foreign capital accounted for about 1 percent of U.S.
GNP and 10 percent of investment during the mid-1880s, when U.S.

dependence on foreign capital was at its peak. It accounted for 0.2 percent
of Japanese GNP between 1887 and 1896, rising briefly to a high of
4 percent between 1897 and 1906, after which Japan became a capital
exporter. 33 This comparison suggests that tsarist Russia was more depend-
ent on foreign capital in both magnitude and duration than were either the
United States or Japan during their dependence periods. The inability of
the domestic economy to meet the needs of industrialization and the
resulting extensive dependence on foreign capital left a deep impression on
the Bolshevik leaders and played an important role in Stalin's industrial-
ization and collectivization decisions of 1928 and 1929 (Chapter 4).
Was Russia Underdeveloped in 1914?

Imperial Russia began the initial phases of modern economic growth
during the industrialization era after the early 1880s. Prior to 1880, the
rate of growth of national output was quite slow in aggregate and per
capita terms, and labor productivity was not increasing. During the indus-
trialization era, the growth of national output was rapid relative to the
industrialized countries, while per capita and per worket growth rates
were average vis-a-vis the industrialized countries. Suggested causes of the
improvement in Russian growth performance are the creation of a modern
transportation network and the growing investment in human capital. In
addition to the acceleration in growth rates and efficiency characteristic of
modern economic growth, Russia experienced between the 1880s and
1913 the structural shifts typical of modern economic growth. The Rus-
sian economy was well integrated into the world economy by the 1880s.
Russia and the United States were the major suppliers in world wheat
markets, a relatively modern rail and shipping network linked Russia with
world markets, and the Russian economy participated in the booms and
busts of the European business cycle.
Despite this sustained progress over a 30-year period, the tsarist econ-
omy was still relatively backward on the eve of World War I. Russia's per
capita income ranking placed it among the poorest countries of Europe.
The sheer size of the Russian Empire and the magnitude of Russian
agricultural output masked the per capita weakness of industrial outputs.
The peasant, not the industrial worker, was still the dominant figure in the
Russian economy. A minority of the population-and therefore the labor
force-was literate, indicating poorly developed human capital; illiteracy
was nearly complete among the va~t, underemployed peasant population.
Russia's demographic pattern was still roughly comparable to that of the
developed countries during their premodern periods. Birthrates, death

rates, and especially, rates of infant mortality remained stubbornly high.
Industrialization remained dependent on foreign capital. It is not clear
whether the most highly organized institution, the tsarist bureaucracy, was
a help or hindrance to economic development.
The formidable task of creating a modern industrialized economy still
lay ahead when the Bolsheviks came to power in 1917. The Soviets
directed themselves to their task in 1928, after recovery from the ravages
of World War I and the Civil War (1917 to 1920), and came to grips with
the universal economic and political problems of economic development
that the developed countries had faced before them. The Soviet response
to this task was distinctive in that the Soviets chose to combine nonmarket
forces with political dictatorship to generate rapid development, whereas
other countries chose to rely primarily upon market forces and some form
of political representation.
The assessment of economic performance during the late tsarist era is
important for two reasons. The first is that it permits us to evaluate
economic performance during the Soviet era. Without knowing the eco-
nomic base and the growth tradition inherited by the Soviet leadership,
one cannot judge properly the achievements of the Soviet period. For this
reason, we shall return to the tsarist period base in our assessment of
Soviet economic performance. The second reason is that one cannot judge
the relevance of the Soviet development model for use by contemporary
less-developed countries (LDCs) without knowing the starting point of the
Soviet experiment. Did the Soviet leadership launch its industrialization
drive in 1928 from an economic base superior to that of today's LDCs?
In many respects, the similarities between the Russian economy in
1914 and the contemporary LDCs are striking: th.e low literacy rates, the
high rates of birth and infant mortality, the concentration of the labor
force in agriculture, and the dependence on foreign capital. Yet despite
these features of relative backwardness, the evidence suggests that the
Russian economy did have a substantial head start when compared to that
of today's LDCs.
First, Russia in 1914 was a much richer country on a per capita
income basis than most LDCs today. In 1914, Russian per capita income
was some 33 to 40 percent that of its richest European neighbors, whereas
per capita incomes in contemporary LDCs are only a small fraction of
those in industrialized countries. Although one cannot compare income
levels of countries 65 years apart, it is nevertheless informative to note that
1913 Russian per capita income in 1988 U.S. dollars was in the range of
$750 to $1334, 34 figures that would place it in the middle range of
contemporary LDCs. Moreover, 1913 Russian per capita income was not
notoriously high or low compared with the modern economic growth

starting points in Europe and North America. 35
A second advantage vis-a-vis the contemporary LDCs related to agri-
cultural marketings. During the industrialization era, Russian agriculture
tended to market a fairly substantial portion of its output outside of
villages. For grain, the marketed portion averaged a fairly steady 25
percent from the 1880s to 1913. 36 Thus, Russian agriculture was able to
produce a marketed surplus available for export and industrial raw mate-
rials, and was able to feed the urban population-a crucial requirement
for successful economic development. In the poorer LDCs, agriculture
tends to operate closer to peasant subsistence levels and is unable to
provide the margin so crucial to industrial development.
A third advantage inherited by the Soviet regime was the Russian
experience with rapid industrial growth and infrastructure investment,
especially after 1880. In fact, we have argued that the beginnings of
modern economic growth can be discerned duririg this period. This indus-
trialization provided the nucleus of a factory labor force and management
personnel, and the rail network served as a valuable asset for an industri-
alizing country. Few LDCs can launch industrialization from such a favor-
able base. 37
Russia's comparatively favorable starting point relative to the LDCs
should not obscure the basic point of its relative poverty to the indus-
trialized countries of Europe and North America in 1914. Life expec-
tancy in Russia was still below what it had been in colonial America 150
years earlier. Russia was still subject to plagues and famine, while the
industrialized countries had developed a strong degree of immunity.
Russia had still to create a rule of law conducive to contract enforce-
ment. There is no doubt that the Bolshevik leadership inherited one of the
most backward economies of Europe despite the impressive progress after
1880. 38
Did Russia Have a Market Economy?

Contemporary thinkers and leaders have argued that prerevolutionary
Russia never had a market economy. Can one legitimately describe the
Russian economy of the period 1880 to 1913 as a market economy?
Some historians have argued that Russia was somehow unique-that
its economic and social institutions were significantly different from those
of the West. Russian rural life, with its communal institutions, was an
exception to the rule of market agriculture. The Russian "factories in the
field," described by M. Tugan-Baranovsky, differentiated Russian manu-
facturing from that of Europe. 39
Lenin described Russia as a dual economy comprised of a unique

blend of backward agriculture and handicraft and of modern factory
industry. Although Lenin recognized isolated elements of advanced capi-
talism in Russian industry, most resource-allocation decisions were based
upon custom and tradition.
The case that Russia was not a market economy rests upon two main
ideas. The first is that Russian agriculture was feudal in nature. Resource-
allocation decisions were not based upon normal market principles but
rather on customs and tradition. The most influential purveyor of this
opinion was A. V. Chayanov, who argued that the Russian peasant house-
hold's economic decision processes were basically different from those of
a capitalist farm. 40 The peasant household operated without hired labor
and made its production, consumption, and leisure choices quite differ-
ently from the capitalist farm. The second idea was provided by Alexander
Gerschenkron, who argued that the Russian state replaced so many of the
functions of the market that the Russian economy was no longer a market
economy in the normal sense of the term. 41 State officials served as entre-
preneurs; government orders replaced private markets; and state industrial
policy dictated the direction of economic activity. Gerschenkron also
joined Chayanov in stressing the unique noncapitalist features of Russian
agriculture, which were the consequence of the Russian state's option for
communal agriculture at the time of the 1861 emancipation.
Despite the formidable writings of Chayanov and of Gerschenkron,
there are abundant signs and evidence that the tsarist economy in its last
30 to 40 years was indeed a market economy.
The economic role of the Russian state was much less pervasive than
Gerschenkron thought. State enterprises were no more prevalent in Russia
than in Western Europe. Significant budgetary subsidies, which would
have formed the backbone of a state industrial policy, cannot be found in
state budget data. Tariffs and indirect taxes were levied strictly for the
revenue needs of the state and played no industrial policy role. The
Russian state did play a significant role in railroad construction, but state
financing of railroads does not make a case for nonmarket resource
allocation in Russia. 42
The Russian state did not engage in economic planning, and product
prices and factor prices were set by markets. Russia had active commodity
markets and participated actively in world capital markets. Substantial
flows of foreign investment came into Russia (as the world's largest debtor
nation of the period) in response to normal profit incentives, and the
stocks of Russian corporations were listed in both domestic and foreign
stock exchanges. As John McKay has ably demonstrated, foreign invest-
ment flowed into Russia because Russia-as a newly industrializing econ-
omy-offered sufficiently high rates of return to compensate for the

greater risk. 43
Although Russia developed the institutions of modern capitalism later
than Western Europe, by the last quarter of the nineteenth century, Russia
had its corporate laws in place and had developed its own commodity and
capital markets. 44 The student of Russian economic history can thumb
through the elaborate records of Russian stock market and commodity
market quotations to obtain a feel for the commercial life of Moscow and
Peters burg.
Although Russian industry increasingly came to be dominated by
trusts in its last 30 years, the existence of trusts does not make a case for
nonmarket resource allocation. It simply means that trusts may have
engaged in monopoly pricing; but even this conclusion is questionable. We
do not know enough about the pricing policies of Russian trusts, and those
trusts that produced raw materials-for example, oil and metals-would
have had to charge world market prices.
Although the Emancipation Act of 1861 called for the retention of
communal agriculture, Russian peasants sought out ways to circumvent
those features of feudal agriculture that depressed agricultural output.
Although the emancipation provisions were supposed to freeze rural labor,
there is ample evidence of considerable peasant mobility, which allowed
the rapid growth of the industrial labor force and the regional redistribu-
tion of labor.
The most convincing evidence that Russian agriculture was largely
operating according to market principles was the striking performance
of Russian agriculture after railroad construction was completed in the
1880s. Russia became the world's largest exporter of grain, and the
econometric studies of Soviet economic historians show that regional
price dispersion fell as transportation costs were lowered and that agri-
cultural marketings and land rents were dictated by "normal" market
principles. 45
Macroeconomic evidence also points to the fact that the Russian
economy was a market economy integrated into the world economy. The
Russian business cycle was dictated by the European business cycle. More-
over, the structure of the Russian economy on the eve of the October
Revolution was like that of other market economies at that level of
economic development. 46
The above evidence convincingly establishes that Russia had devel-
oped a market economy by the eve of World War I. Those who wish to
dispute this conclusion must provide counterevidence that industrial, ag-
ricultural, labor, and capital resources were being allocated by some yet-
to-be-identified nonmarket mechanism. The major test of a market
economy-prices being set by market forces free of government interven-

tion-definitely was being met.
Russia's Prospects as a Market Economy

On the eve of the October Revolution, the Russian economy was the most
backward of the major European countries. This backwardness developed
as a consequence of Russia's failure to participate early in the process of
modern economic growth that began in England in the mid-18th century
and then spread to Western Europe and to North America. The Russian
Empire began to experience modern economic growth in the 1880s, and
from the 1880s to 1913 it was able to keep pace with the industrialized
economies of Europe in per capita terms and even to catch up in terms of
total product.
During the last 30 years of the Russian Empire, Russian economic
growth was more rapid than that of Western Europe, but Russia's rapid
population growth held per capita growth to the West European average.
The structural changes that occurred during the 30 years preceding World
War I were in line with the first 30 years of modern economic growth
elsewhere. By the outbreak of World War I, Russia definitely had begun
the process of modern economic growth.
Russian modern economic growth began under fairly unfavorable
circumstances. Long-term property rights had not been established in
agriculture; tariff barriers protected the domestic economy from competi-
tion; political instability had begun to grow, and the government bureau-
cracy was rife with corruption. Yet fundamental economic forces dictated
sustained economic growth and profound structural changes. As barriers
to growth would have continued to disappear, Russian growth likely
would have accelerated. If this insight is correct, Russian growth over the
next half-century (1913 to 1953) would have exceeded the rates recorded
for the period 1885 to 1913.
We have no way of knowing for sure what would have happened had
there been no World War I, no October Revolution, and no Russian Civil
War. What we can say is that the Russian economy had begun the process
of overcoming its relative backwardness and was on the way to sharing
the affluence of Western Europe and North America.
The branding of the Russian economy as a failure was a consequence
of the Leninist desire to show the ripeness of Russia for socialist revolu-
tion. It is not supported by the empirical facts. In fact, a remarkable
feature of the debate over the state of the Russian economy prior to the
October Revolution is the lack of use of empirical data. The empirical
data, as we have shown, present a fairly clear picture of an economy taking
the first steps toward affluence.
REFERENCES
1. A. Gerschenkron, Economic Backwardness in Historical Perspective (Cam-
bridge, Mass.: Harvard University Press, 1962), chap. 1; W.W. Rostow, The
Stages of Economic Growth (Cambridge: Cambridge University Press, 1965),
p. 67; W.W. Rostow, The World Economy: History and Prospect (Austin and
London: University of Texas Press, 1978), pp. 426-429; M. E. Falkus, The
Industrialization of Russia, 1700-1914 (London and Basingstoke: MacMil-
lan, 1972), pp. 1-25; and V. I. Lenin, The Development of Capitalism in
Russia (Moscow: Progress Publishers, 1977).
2. S. Kuznets, Modern Economic Growth (New Haven, Conn.: Yale University
Press, 1966), chap. 1.
3. A. Kahan, "Continuity in Economic Activity and Policy During the Post-
Petrine Period in Russia," in W. L. Blackwell, ed., Russian Economic Devel-
opment from Peter the Great to Stalin (New York: New Viewpoints, 1974),
pp. 51-70.
4. A. Gerschenkron, "Russian Agrarian Policies and Industrialization, 1861-
1917," in Continuity in History and Other Essays (Cambridge, Mass.: Har-
vard University Press, 1968), pp. 144-147.
5. P. A. Khromov, Ekonomicheskoe razvitie Rossii [The economic development
of Russia] (Moscow: 1967), p. 280.
6. Ibid., pp. 361-362; M. E. Falkus, "Russia and the International Wheat
Trade, 1861-1914," Economica, vol. 33, no. 132 (November 1966), 416-
429; and J. Metzer, "Railroad Development and Market Integration: The
Case of Tsarist Russia," Journal of Economic History, vol. 34, no. 3 (Septem-
ber 1974), 529-550.
7. A. Gerschenkron, "The Early Phases of Industrialization in Russia: After-
thoughts and Counterthoughts," in W. W. Rostow, ed., The Economics of
Takeoff into Sustained Growth (New York: St. Martin's Press, 1963),
pp. 152-154; and J.P. McKay, Pioneers for Profit: Foreign Entrepreneurship
and Russian Industrialization, 1885-1913 (Chicago: University of Chicago
Press, 1970).
8. For a collection of authoritative studies of Russian entrepreneurship, see
G. Guroff and F. V. Carstensen, eds., Entrepreneurship in Imperial Russia and
the Soviet Union (Princeton, N.J.: Princeton University Press, 1983). In par-
ticular, see the studies by Thomas Owen, Arcadius Kahan, Boris Anan'ich,
Fred Carstensen, and Ruth Amende Roosa.
9. Arcadius Kahan has examined the pattern of state expenditures during the
period of rapid industrialization and found that only a very small portion of
the imperial budget was devoted to promoting industrialization. It is primarily
for this reason that Kahan has disputed the fact that the Russian state played
a crucial role in promoting Russian industrialization. For further information,
see A. Kahan, "Government Policies and the Industrialization of Russia,"
Journal of Economic History, vol. 27, no. 4 (December 1967), 460-477.
10. Gerschenkron, Economic Backwardness, chap. 1.
11. R. Goldsmith, "The Economic Growth in Tsarist Russia, 1860-1913," Eco-
nomic Development and Cultural Change, vol. 9, no. 3 (April 1961), 462-
463; and A. Gerschenkron, "The Rate of Growth in Russia Since 1885,"

Journal of Economic History (supplement), vol. 7 (1947), 144-174.
12. M. V. Dovnar-Zapol'skii, Na zare krestianskoi svobody [At the daybreak of
peasant emancipation] (Kiev: 1911), p. 179.
13. The following discussion is based primarily upon Gerschenkron, "Russian
Agrarian Policies," pp. 140-256; and L. Volin, A Century of Russian Agricul-
ture from Alexander II to Khrushchev (Cambridge, Mass.: Harvard Univer-
sity Press, 1970), part I.
14. Olga Crisp argues that this provision served to introduce a form of income
tax, graduated according to ability to pay within the commune: 0. Crisp,
Studies in the Russian Economy Before 1914 (London and Basingstoke:
Macmillan, 1976), essay 3.
15. Gerschenkron, "Russian Agrarian Policies," 144-147.
16. We relate a couple of examples of rural poverty in Russia during the 1870s
and 1880s. In the Kazan province, it was estimated that the yield per desiatin
(1.09254 hectare or 2.6997 acres), on fertile land was about 1.9 rubies.
Obligations (taxes, redemption payments, etc.) per desiatin, however, were
2.8 rubies, which means that the peasant had to make up the difference by
gainful employment either in industry or as a hired hand: Y. Yanson, Opyt
statisticheskogo isledovaniia o krestianskikh nadelakh i platezhakh [Experi-
ence of statistical investigations of peasant plots and payments] (St. Peters-
burg: 1877), pp. 75-85. A study of the Novgorod province revealed that total
peasant income was 8.8 million rubies, of which 70 percent was earned
outside agriculture. Bread purchases, taxes, and other obligations came to 6.3
million rubies, leaving a remainder of 2.6 million rubies, or 12 rubies per
household for other consumption items: A. A. Kornilov, Krestianskaia re-
forma [The peasant reform] (St. Petersburg: Vaisberg and Gershunina, 1905),
pp. 194-195.
17. Crisp, Studies in the Russian Economy, essays 1 and 3; and J. Simms, "The
Crisis in Russian Agriculture at the End of the 19th Century," Slavic Review,
vol. 36, no. 3 (September 1977), 377-398. For more on this point, see the
discussion between J. Sanders and J. Simms in "Once More into the Breach,
Dear Friends: A Closer Look at Indirect Tax Receipts and the Condition of
the Russian Peasantry, 1881-1899," Slavic Review, vol. 43, no. 4 (Winter
1984), 657-671.
18. The available studies of Russian national income point to agricultural output
rising more rapidly than the rural population. Studies of Russian capital stock
find that agricultural capital stock (livestock, structures, and equipment) was
rising on a per capita basis. Available statistics also point to agricultural
exports rising more rapidly than agricultural output. A study of Russian
peasant living standards points to rising per capita consumption of the Rus-
sian agrarian population. On these points, see A. Kahan, "Capital Formation
During the Period of Early Industrialization in Russia 1890-1913," Cam-
bridge Economic History of Europe, vol. VII, part II (Cambridge: Cambridge
University Press, 1982), appendices 8 and 9; Goldsmith, "Economic Growth
in Tsarist Russia," 462-463; P. Gregory, "Grain Marketings and Peasant

Consumption, Russia, 1885-1913," Explorations in Economic History, vol.
17, no. 2 (April 1980), 135-164; and P.R. Gregory, Russian National Income
(Cambridge: Cambridge University Press, 1982), chap. 6. Curiously, statisti-
cal studies conducted by Russian economists in the early twentieth century
generally find rising per capita output in agriculture. For the most authorita-
tive sources, see P. I. Liaschenko, Ocherki agrarnoi evoliutsii Rossii [Studies
of the agrarian evolution in Russia] (Petersburg: no publisher given, 1908);
and S. N. Prokopovich, Opyt ischisleniia narodnogo dokhoda 50 gubernii
Evropeiskoi Rossii v. 1900-1913 gg. [An attempt to estimate the national
income of the 50 European Russian provinces in the years 1900 and 1913]
(Moscow: Soviet Vserossiiskikh Kooperativnykh Siezdov, 1918).
19. For authoritative studies of regional aspects of Russian agricultural produc-
tion, see A. I. Chuprov and A. S. Posnikov, eds., Vliianie neorozhaev i khleb-
nykh tsen na nekotoryie storony russkago narodnogo khoziastva [Influence
of harvests and grain prices on several aspects of the Russian national econ-
omy] (Petersburg: Kirshbaum, 1897); and I. D. Koval'chenko and L. V.
Milov, Vserossiisky agrarny rynok XVIII-nachalo XX veka [The all-Russian
agrarian market from the eighteenth to the beginning of the twentieth cen-
tury] (Moscow: Nauka, 1974).
20. P. R. Gregory, "Economic Growth and Structural Change in Tsarist Russia
and the Soviet Union: A Long-Term Comparison," in S. Rosefielde, ed.,
Economic Welfare and the Economics of Soviet Socialism (Cambridge: Cam-
bridge University Press, 1981), pp. 25-52.
21. Ibid.
22. Goldsmith, "The Rate of Growth in Tsarist Russia," pp. 441-443.
23. These results are reported in Gregory, "Economic Growth and Structural
Change in Tsarist Russia and the Soviet Union," 39.
24. Data on investment in schooling in Russia are summarized in 0. Crisp,
"Labor and Industrialization in Russia," Cambridge Economic History of
Europe (Cambridge: Cambridge University Press, 1978), vol. 7, part 2,
pp. 387-399; and in A. Kahan, "Capital Formation During the Period of
Early Industrialization in Russia," in the same volume, pp. 293-295.
25. Gerschenkron writes, "[the] labor supply to Russian industry was inadequate
in quantity and inferior in quality.... Therein lies the explanation for the
paradoxical situation that a country, so poor in capital and holding much of
its accumulated wealth in hands that would not make it available for indus-
trial venture, contrived to build up ... a modern industrial structure ...
[which] compared favorably with those of economically advanced countries."
In Gerschenkron, "Russian Agrarian Policies," pp. 210-211. For a contrary
interpretation, see P.R. Gregory, "Some Empirical Comments on the Theory
of Relative Backwardness: The Russian Case," Economic Development and
Cultural Change, vol. 22, no. 4 (July 1974), 654-665.
26. Kahan, "Capital Formation During the Period of Early Industrialization in
Russia," p. 307.
27. Kuznets, Modern Economic Growth, pp. 40-51.

28. In 1886, the average life span was 29 years for males and 32 for females,
which shows the marked effect of the high rate of infant mortality on age
structure. See A. G. Rashin, Naselenie Rossii za 100 let [The population of
Russia for 100 years] (Moscow: Gostatizdat, 1956), p. 205.
29. See in particular H. Chenery, "Patterns of Industrial Growth," American
Economic Review, vol. 50, no. 4 (September 1960), 624-653.
30. P. R. Gregory, Socialist and Nonsocialist Industrialization Patterns (New
York: Praeger, 1970), pp. 28-29, 34, 171-174.
31. Gerschenkron, "The Early Phases of Industrialization in Russia," pp. 152-
154. For a study that seeks to demonstrate that Russian industry was not
top-heavy in heavy industry, see Gregory, "Some Empirical Comments."
32. These figures are from B. Bonwetsch, "Das auslandische Kapital in Russland"
[Foreign capital in Russia], ]ahrbucher fur die Geschichte Osteuropas [Year-
books for the History of Eastern Europe], Band 22, Heft 3, 1974, pp. 416-
418; and P. R. Gregory, "The Russian Balance of Payments, the Gold
Standard, and Monetary Policy," Journal of Economic History, vol. 39, no. 2
(June 1979), 379-399.
33. Kuznets, Modern Economic Growth, pp. 332-334.
34. S. Cohn, Economic Development in the Soviet Union (Lexington, Mass.:
Heath, 1970), p. 111.
35. S. Kuznets, Economic Growth of Nations (Cambridge, Mass.: Harvard Uni-
versity Press, 1971), p. 24.
36. S. G. Wheatcroft, "The Reliability of Russian Prewar Grain Output Statis-
tics," Soviet Studies, vol. 26, no. 2 (April 1974), pp. 157, 180; Gregory,
"Grain Marketings and Peasant Consumption."
37. C. Wilber, The Soviet Model and the Underdeveloped Countries (Chapel Hill:
University of North Carolina Press, 1969), disagrees with this assessment. He
argues that the combined populations of LDCs with economic bases at least
equal to the Soviet Union's 1928 base number more than 900 million. This
conclusion is based upon physical indicators-literacy, wheat yields, energy
consumption, and so on.
38. For a comparison of the economic development of Russia and America
from the seventeenth to nineteenth centuries, see Colin White, Russia and
America: The Roots of Economic Divergence (Beckenham, Kent: Croom
Helm, 1987).
39. M. I. Tugan-Baranovsky, The Russian Factory in the 19th Century, translated
by S. Levin (Homewood, Ill.: Irwin, 1970).
40. A. V. Chayanov, The Theory of Peasant Economy, D. Thorner et al., eds.
(Homewood, Ill.: Irwin, 1966).
41. A. Gerschenkron, Economic Backwardness in Historical Perspective (Cam-
bridge, Mass.: Harvard University Press, 1968), essay 1.
42. These results are summarized from P. R. Gregory, "The Role of the State in
Promoting Economic Development: The Russian Case and Its General Impli-
cations," in R. Sylla and G. Toniolo, eds., Patterns of European Industrial-
ization (London: Routledge, 1991), pp. 64-79.
43. J.· McKay, Pioneers For Profit: Foreign Entrepreneurship and Russian Indus-
trialization, 1885-1913 (Chicago: Chicago University Press, 1970).
44. T. Owen, The Corporation Under Russian Law, 1800-1917: A Study in
Tsarist Economic Policy (New York: Cambridge University Press, 1991).
45. B. N. Mironov, Khlebnye tseny v Rossii za dva stoletiia [Grain prices in Russia
over two hundred years] (Leningrad: Nauka, 1985); I. D. Kovalchenko and
L. V. Milov, Vserossiiski agrarny rynok XVIII-Nachalo XX veka [The agrar-
ian market of the Russian empire in the 18th and beginning of the 19th
centuries] (Moscow: Nauka, 1974).
46. P. R. Gregory, "A Note on Relative Backwardness and Industrial Structure,"
Quarterly Journal of Economics, vol. 78, no. 3 (August 1974), 520-527.
SELECTED BIBLIOGRAPHY
Non-Soviet Sources
A. N. Antisiferov, Russian Agriculture During the War (New York: Greenwood
Press, 1930).
W. Blackwell, ed., Russian Economic Development from Peter the Great to Stalin
(New York: New Viewpoints, 1974).
J. Blum, Lord and Peasant in Russia (New York: Atheneum, 1965).
0. Crisp, Studies in the Russian Economy Before 1914 (London and Basingstoke:
Macmillan, 1976).
Linda Edmundson and Peter Waldron, eds., Economy and Society in Russia and
the Soviet Union, 1860-1930: Essays for Olga Crisp (London: St. Martin's
Press, 1992).
M. E. Falkus, The Industrialization of Russia, 1700-1914 (London and Basing-
stoke: Macmillan, 1972).
P. Gatrell, The Tsarist Economy, 1850-1917 (New York: St. Martin's Press, 1986).
A. Gerschenkron, "Russian Agrarian Policies and Industrialization, 1861-1917,"
The Cambridge Economic History of Europe, vol. 6 (Cambridge: Cam-
- - - , "The Early Phases of Industrialization in Russia: Afterthoughts and
Counterthoughts," in W. W. Rostow, ed., The Economics of Takeoff into
Sustained Growth (New York: St. Martin's Press, 1963).
---,"The Rate of Growth in Russia Since 1885," Journal of Economic History
(supplement), vol. 7 (1947), 144-174.
D. Geyer, ed., Wirtschaft und Gesellschaft in vorrevolutioniiren Russ/and [Econ-
omy and society in prerevolutionary Russia] (Cologne: Kiepenheuer &
Witsch, 1975).
R. Goldsmith, "The Economic Growth of Tsarist Russia, 1860-1913," Economic
Development and Cultural Change, vol. 9, no. 3 (April 1961), 441-476.
P. R. Gregory, Russian National Income, 1885-1913 (Cambridge: Cambridge

University Press, 1982).
G. Guroff and F. V. Carstensen, Entrepreneurship in Imperial Russia and the
Soviet Union (Princeton, N.J.: Princeton University Press, 1983).
A. Kahan, Russia's Economic History: The Nineteenth Century (Chicago: Univer-
sity of Chicago Press, 1989).
W. Kirchner, Die Deutsche Industrie und die Industrialisierung Russlands 1815-
1914 (St. Katharinen: Scripta Mercaturae Verlag, 1986).
J. P. McKay, Pioneers for Profit: Foreign Entrepreneurship and Russian Industri-
alization, 1885-1913 (Chicago: University of Chicago Press, 1970).
R. Munting, The Economic Development of the USSR (London: Croom Helm,
1982), chap. 1.
J. Notzold, Wirtschaftspolitische Alternativen der Entwicklung in der Ara Witte
und Stolypin [Economic political alternatives in the era of Witte and
Stolypin,] (Berlin: Duncker & Humblot, 1966).
T. C. Owen, Capitalism and Politics in Russia: A Social History of the Moscow
Merchants (Cambridge: Cambridge University Press, 1981).
- - - , The Corporation Under Russian Law, 1800-1917: A Study in Tsarist
Economic Policy (New York: Cambridge University Press, 1991).
R. Portal, "The Industrialization of Russia," The Cambridge Economic History
of Europe, vol. 6 (Cambridge: Cambridge University Press, 1965), pp. 801-
872.
M. M. Postan and Peter Mathias, eds., The Cambridge Economic History of
Europe, vol. 7, part 2 (Cambridge: Cambridge University Press, 1978),
section on Russia.
G. T. Robinson, Russia Under the Old Regime (New York: Macmillan, 1949).
M. I. Tugan-Baranovsky, The Russian Factory in the 19th Century, translated by
A. and C. Levin (Homewood, Ill.: Irwin, 1970).
L. Volin, A Century of Russian Agriculture (Cambridge, Mass.: Harvard Univer-
sity Press, 1970).
T. von Laue, Sergei Witte and the Industrialization of Russia (New York: Colum-
bia University Press, 1963).
C. White, Russia and America: The Roots of Economic Divergence (Beckenham,
Kent: Croom Helm, 1987).
Soviet Sources
V. I. Bovykin, Formirovanie finansogo Kapitala v Rossii [Formation of financial
capital in Russia] (Moscow: Nauka, 1984).
P. A. Khromov, Ekonomicheskoe razvitie Rossii [The economic development of
Russia] (Moscow: Nauka, 1967).
- - - , Ekonomicheskoe razvitie Rossii v 19. i 20. vekakh [The economic devel-

opment of Russia in the 19th and 20th centuries] (Moscow: Gospolitizdat,
1950).
V. I. Lenin, Development of Capitalism in Russia (Moscow: Progress, 1977).
P. I. Lyaschenko, History of the National Economy of Russia to the 1917 Revo-
lution (New York: Macmillan, 1949).
B. N. Mironov, Khlebnye tseny v Rossii za dva stoletiia [Grain prices in Russia for
two centuries] (Leningrad: Nauka, 1985).
A. G. Rashin, Formirovanie rabochego klassa v Rossii [The formation of the
working class in Russia] (Moscow: Sosteklitizdat, 1958).
- - - , Naselenie Rossii za 100 let [The population of Russia for 100 years]
(Moscow: Gostatizdat, 1956).
THREE
••
War Communism and the

New Economic Policy
(1918-1928)
1:is chapter considers the events of the period 1918-1928 and their
impact on later Soviet economic policies. During this period, the economy
operated under two quite different administrative regimes-War Commu-
nism and the New Economic Policy (NEP)-which provided experience to
assist in making the final choice of comprehensive central planning (1928)
and collectivization of agriculture (1929).
The lessons of War Communism and the New Economic Policy ex-
plain the evolution of the Soviet economic system. The Soviet planning
system did not appear from a vacuum; rather, it emerged as a response to
the practical economic problems of earlier periods. The NEP period was
especially significant as an attempt to combine administrative allocation
with markets. NEP's abandonment signaled the leadership's conclusion
that this combination was not working. NEP also illustrates the problems
that are likely to be encountered as the administrative-command system is
being dismantled.
45
THE REVOLUTION AND ITS AFTERMATH
Two 1917 revolutions ended tsarist rule and led to the creation of the
Union of Soviet Socialist Republics (USSR). The March Revolution over-
threw the imperial monarchy and installed a provisional government. The
October Revolution, organized by the Bolshevik party under the leader-
ship of V. I. Lenin, overthrew the provisional government and installed a
new socialist government dedicated to radical economic and political
change.
In his first appearance at the Congress of Soviets, Lenin declared his
intent to construct a "new socialist order." The Congress's first two
actions were to propose an immediate armistice to end Russia's participa-
tion in World War I and to issue a land decree annulling the right to
private property and placing all landed estates and the holdings of mon-
asteries and churches under the protection of local Soviets.
Lenin dispersed the elected constituent assembly with armed forces
and made it clear that Russia was to be ruled by the Bolsheviks. The
Communist (Bolshevik) Party's monopoly over political power had begun.
Lenin's Land Decree of November 8, 1917, nationalized land and
sanctioned its distribution among the peasants. This action legalized in
part the spontaneous appropriation of land by the peasantry, a process
that had already taken place to a large degree. Irrespective of its causes,
this change in land tenure was to have a far-reaching impact upon eco-
nomic policy throughout the 1920s. In their enhanced capacity as full
proprietors, the peasants were no longer obligated to deliver a prescribed
portion of their output either to the landlord (as a rental payment) or
to the state (as a tax or principal payment). Now they, not the state
or landlord, made the basic decisions about how much to produce and
what portion of this output would be sold. Thus, the total agricultural
output and the marketed portion thereof became dependent for the first
time upon the Russian peasant. Moreover, in 1917 the revolution essen-
tially did away with large farm production units. Before the revolution,
4 percent of the farm households farmed more than 13 desiatins of land
and another 13 percent were landless. By 1922, virtually no farm families
had land holdings of more the 13 desiatins, and only 5 percent were
without land. 1
There was a revival of the mir during and after the Revolution. The
mir was the institution that had confiscated and redistributed the land of
the gentry, and it remained the principal voice of legal and administrative
authority within the village during the early years of Soviet rule. 2 The
village assembly settled most of the questions of interest to the peasants
and was able to steer a course independent of the selsovet, the local
War Communism and the New Economic Policy (1918-1928) 47
administrative arm of the Bolshevik government. However, as M. Lewin

writes, one should not overemphasize the socialist instincts of the peas-
ants. 3 The peasants remained attached to their village communities, and in
their eyes, the purpose of the revolution had been to give them their own
farms. That the land was nationalized and belonged to the mir did not
detract from the peasants' conviction that the land was theirs to farm and
manage as they saw fit.
The initial Bolshevik attitude toward private industry was cautious
and restrained, since an uneasy truce between Bolshevik and capitalist was
required to prevent a drop in industrial output. Trade unions were formed
after the October Revolution, 2000 in the first two months. Workers'
Committees in privately owned enterprises were given the right to super-
vise management, but at the same time, the proprietor received the execu-
tive right to give orders that could not be countermanded by the Workers'
Committees. Also, the Workers' Committees were denied the right to take
over enterprises without the permission of higher authorities. Only enter-
prises of key importance-such as banking, grain purchasing and storage,
transportation, oil, and war industries-were nationalized, establishing a
form of state capitalism based on state control of key positions in the
economy, mixed management of enterprises, and private ownership of
agriculture, retail trade, and small-scale industry.
The uneasy truce between the Bolsheviks and the capitalists and the
peasants did not last long. By 1918, the Bolsheviks were locked in a
struggle for survival with the White Russian forces supported in part by
foreign powers. The Germans were in possession of the Ukraine, while the
White Russian armies occupied the Urals, Siberia, North Caucasus, and
other economically important regions. Poland invaded in May 1920. At
one time, the Bolsheviks retained only 10 percent of the coal supplies,
25 percent of the iron foundries, less than 50 percent of the grain area,
and less than 10 percent of the sugar beet sources of the former Russian
Empire. 4 At one point, three-quarters of USSR territory was occupied by
opponents of Soviet authority.
To divert industrial and agricultural resources from private into mili-
tary uses, the Bolsheviks, lacking a domestic tax base and access to foreign
aid, resorted to printing money. This expansion of the money supply
combined with shrinking supplies of consumer goods created hyperinfla-
tion. On November 1, 1917, the amount of money in circulation was
20 billion rubies. The rate of monetary emission accelerated thereafter,
and by July 1, 1921, 2.5 trillion rubies were in circulation. In the spring
of 1919, printing presses could no longer print money at a fast enough
pace. Supplies of consumer goods offered for sale dwindled as materials
were diverted to military uses, and prices rose more rapidly than the rate
of growth of the money supply. Between 1917 and 1921, prices increased
8000-fold. 5
The hyperinflation resulted in the near destruction of the market
exchange economy. Peasants were reluctant to exchange their products for
depreciating money, as were manufacturers and artisans. The economy
increasingly employed barter to effect transactions, and this led to what
the Soviets call the "naturalization" (demonetization) of the economy.
This naturalization process was welcomed by the left wing of the Bolshe-
vik party, which termed the government printing press "that machine gun
which attacked the bourgeois regime in its rear, namely, through the
monetary system. " 6 The naturalization of the economy created, however,
an immediate crisis for the Soviet leadership. The central government
found itself powerless to obtain through the market those goods, food
supplies in particular, that it needed to fight the war.
Civil war, hyperinflation, and naturalization caused the Bolsheviks to
introduce War Communism, a system by which the leaders attempted to
substitute administrative for market allocation to marshal resources for
the war.
WAR COMMUNISM (1918-1921)7

War Communism was an abortive attempt by the inexperienced Bolshevik
leadership to attain full communism without going through any prepara-
tory intermediate stages: money was virtually eliminated, private trade
was abolished, workers were militarized and paid equal wages in kind, and
farm output was requisitioned. Were these war measures the product of
the ideological intent of the Bolshevik leadership to establish full commu-
nism directly, or were they forced responses to the Civil War? The most
generally accepted view, as postulated by the well-known British authori-
ties on War Communism, Maurice Dobb and E. H. Carr, is that War
Communism was forced upon the Bolshevik leadership by the Russian
Civil War and that the various theoretical arguments posited by the
Bolshevik leadership in support of War Communism were "no more than
flights of leftist fancy." In fact, Lenin-and Leon Trotsky-often referred
to War Communism as the measures of a "besieged fortress." Other
scholars argue that Lenin originally conceived War Communism, with its
elimination of market institutions and its introduction of administrative
controls, as a necessary step in the socialist revolution. 8 War Communism
was adopted for ideological reasons as a product of Marxian ideas (as
interpreted by Lenin), not as a forced response to the wartime emergency.
In fact, the Bolshevik regime sought to strengthen the War Communism
system at the end of the Civil War, only to be forced to abandon it by

growing civil unrest.
War Communism Policies

The crux of War Communism was its policy of forcibly requisitioning
agricultural surpluses. Police (the Cheka) and party activists were sent into
the countryside to collect the "surpluses" of the rich and middle peas-
antry-a policy that severed the existing market link between industry and
agriculture. In theory at least, the link was to be maintained by state
allocation of manufactured products to the peasants and barter transac-
tions for the remaining agricultural output. In fact, the peasants received
only from 12 to 15 percent of prewar supplies of manufactured goods.
Initially, the regime had hoped to preserve the market link with agriculture
by setting aside manufactured commodities to promote exchange with the
countryside, but the peasants failed to respond. On May 9, 1918, the
system of requisitioning (called the prodrazverstka) was initiated, and the
commissar for food was vested with extraordinary powers to confiscate
food products from the farm population. Thus, a "food dictatorship" was
established, and the Bolshevik government took over the task of collecting
and distributing agricultural products. The distribution of manufactured
goods to rural areas was based on the food requisitioned from the com-
munity, not on that delivered by individual production units. This system
broke the link between agricultural deliveries and rewards for those deliv-
eries.9
Nationalization of the economy was the second major policy of War
Communism. The sugar industry was the first to be nationalized in the
spring of 1918, and by the autumn of 1920, a total of 37,000 enterprises
had been nationalized, of which roughly half were small-scale businesses
that did not use mechanical power. This pervasive nationalization of
industry may be regarded in part as a crisis response, for a large number
of former industrial proprietors had gone over to the White Russian side,
and there was widespread fear of German takeovers of German-owned
enterprises. Also, "punitive" nationalization from below by workers had
been proceeding at a rapid pace despite government attempts to control
unauthorized worker takeovers. On the other hand, the excessive nation-
alization from above down to enterprises employing only one worker may
perhaps be regarded as an ideological response not to be justified by the
crisis situation. Nominally, the nationalized enterprises were subject to
central direction by the state budget and national industrial boards. In
actual practice, centralized coordination was generally lacking.
The abolition of private trade was the third cornerstone of War

Communism policy. Private trade was regarded as incompatible with the
War Communism system of centralized requisitioning and allocation.
Government trade monopolies and monopsonies (mainly the Commissar-
iat of Supply and the Commissariat of Agriculture) were set up to replace
private organizations and concentrate commodity distribution in the
hands of the state. In November 1918, all private internal trade was
abolished, and the state ostensibly became the sole supplier of consumer
goods to the population. In fact, the black market continued to supply a
significant portion of total consumption goods and was unofficially toler-
ated by the authorities, especially up to 1920. 10 In the most critical mo-
ments of 1918, the Soviet government made it legal for workers to
purchase up to 20 kilograms of grain directly from peasants, but this
provision was quickly rescinded when it threatened to disrupt government
requisitioning. 11
Semimilitary controls over industrial workers became a major means
of labor allocation. The movement of industrial workers was restricted,
and they could be mobilized for special work. In some cases, army person-
nel were used for special projects. Labor deserters received severe penalties
according to a decree of November 28, 1919, which placed the employees
of state enterprises under military discipline.
The mobilization of labor was managed in large part by Leon Trotsky,
the organizer of the Red Army. Trotsky's intention was to create a system
of universal labor mobilization, and by the end of 1918, his mobilization
plans were being put into effect. Labor was decreed to be compulsory for
all able-bodied persons, compulsory labor service was declared for the
peasantry, labor armies (one under the leadership of Stalin in the Ukraine)
were created by delaying demobilization, and the Commission for the
Universal Labor Service was created with Trotsky at its head.12 In 1920,
railway workers, fire fighters, miners, construction workers, metal work-
ers, and shipbuilders were mobilized. The Siberian labor army was en-
gaged in coal mining, forestry, and rail construction; and the Caucasian
labor army was charged with rail construction and crude oil extraction. 13
The War Communism system of distribution attempted to apply class
and social principles to distribution. Under the "class ration," introduced
in 1918, wages were to be based on the type of work being done. Since
money wages had lost most of their meaning as a consequence of hyper-
inflation, the highest ration (wage) would go to workers performing heavy
work under dangerous conditions; the lowest, to the free professions and
the unemployed. The highest category was to receive a ration four times
that of the lowest category. The wartime chaos of the period made it
difficult for the state to adhere to these class ration principles because in
most regions state supply agencies were doing well to keep the population
above subsistence. Special rations were used, however, to supply the work-
ers of priority industries, and in 1919, 30 categories of workers were
placed on preferential rations. 14
The final feature of War Communism was the naturalization of eco-
nomic life. The procurement of agricultural products through requisi-
tioning and confiscation replaced the market link between the city and
countryside. Every citizen had to be registered with a state or cooperative
shop to obtain legal rations. Settlements among state enterprises were
made via bookkeeping transactions that had little real meaning. In 1920,
postal services, housing, gas, electricity, and public transportation were
made available free of charge, and it was decided that foodstuffs supplied
through the Food Commissariat should also be free of charge. 15
An Evaluation of War Communism

Any evaluation of War Communism must emphasize a frequently ne-
glected point made by the Soviet literature: War Communism did enable
the Bolsheviks to muster sufficient resources to win the Civil War. In this
sense, War Communism may be viewed as an important political and
military success. It is easy to overlook this basic point and to concentrate
instead on the system's many weaknesses. We seek rather to evaluate War
Communism in terms of the question, Was War Communism a viable
economic system for coping with the long-term problems of economic
growth and development facing the Soviet regime during the 1920s? 16
As one might expect, War Communism's replacement of market ex-
change by administrative resource allocation created several serious prob-
lems. First, there was a sharp decline in both agricultural output and
marketings to the state during the 1918-1921 period, even after adjust-
ment for war devastation. Peasants were holding back grain in storage,
were planting less, and were selling to private traders. The area of Siberia
sown in wheat was halved and in the Volga and Caucasus regions was
reduced to as little as one-quarter of previous levels. Actual sowing con-
cealed from authorities was reported to be as high as 20 percent of sown
area in some regions. 17 Since agricultural surpluses in excess of family
subsistence were requisitioned, there was no incentive to produce a sur-
plus. Instead, the peasants, if they could not conceal their surplus from the
authorities, restricted output to the subsistence needs of their families.
Thus, War Communism's agrarian policy estranged Russian peasants from
the Bolshevik regime and encouraged them to engage in dysfunctional
behavior, such as restricting output and hoarding or concealing surpluses
during a period of agricultural shortages.
Soviet industry was also faced with serious problems. Almost all
enterprises, with the exception of certain small-scale handicraft shops, had
been nationalized without first establishing a suitable administrative struc-
ture to coordinate their activities. The industrial census of 1920 showed
over 5000 nationalized enterprises employing only one worker. 18 The
abolition of private trade, which was to be superseded by state rationing,
removed the existing market link between consumer and producer. Pro-
ducers, except those selling to the black market, therefore, were no longer
directed by the market in their production decisions.
Ostensibly, large-scale industry was to be coordinated by the Supreme
Council of the National Economy (VSNKh), which was broken up into
departments (Glavki), each of which was to direct a particular industry.
The Glavki were usually grouped into trusts. For example, the mining
trust contained six Glavki. By 1920, there were over 50 Glavki charged
with controlling production and distribution. 19 In addition, the provincial
economic councils (Gubsovnarkhozy) were the local organs of VSNKh.
This arrangement bordered on chaos. In 1920, there were over 37,000
nationalized enterprises. The Glavki possessed insufficient information
about local enterprises to direct them effectively-to such a degree that an
investigative committee of 1920 found that many Glavki not only "do not
know what goods and in what amounts are kept in warehouses under their
control, but are actually ignorant even of the numbers of such ware-
houses. " 20 As a result, the directives that the Glavki issued to the local
authorities rarely corresponded to local capacities and requirements, caus-
ing a prolonged struggle between central and local administrations. Often,
local authorities merely gave formal compliance to directives from above
and then countermanded them, knowing they could do so with impunity.
VSNKh was the principal champion of centralized control during War
Communism, and under its influential chairman, Aleksei Rykov, it fought
against the "Left Communist" contingent, which favored workers' control
of factories. Rykov also attacked the concept of trade union control of
enterprises, citing Lenin's opposition to workers' control and Lenin's
support of rational one-man management. Nevertheless, VSNKh's success
in establishing centralized control was modest. Individual industries were
being run independently by the Glavki and local authorities with virtually
no centralized coordination. Various national and local organizations had
overlapping and conflicting responsibilities concerning the distribution of
consumer and producer goods. Primitive plans were drawn up for particu-
lar industries, but these plans were not presented in the form of a national
plan to be approved by government. The first effort at national economic
planning was the general electrification plan (GOELRO), completed in
December 1920.
In sum, War Communism industry operated essentially without direc-

tion, either from the market or from planners. Bottlenecks were eliminated
by employing "shock" (udarny) methods, which meant that whenever
congestion in a particular sector became alarming, it would receive top
priority in the form of adequate supplies of fuels, materials, and rations.
The shock system provided a means of establishing priorities and was
beneficial in this sense. However, while the concentration of resources in
the shock industries allowed them to surge ahead and overcome the
original bottleneck, the nonshock industries had in the process fallen
behind and had created new bottlenecks, which would then be attacked
by additional shock methods. In this manner, some weak sense of general
direction was supplied to the economy to replace total chaos. The shock
system was somewhat effective as long as it remained undiluted, which
meant that the number of shock industries at one time had to be limited.
As time went by, the agitation for widening the shock categories became
so intense that eventually even the manufacture of pens and pencils was
included, thus destroying the whole purpose of the shock method-to set
up a system of priorities.
Finally, the lack of an adequate system of incentive wages led to
industrial labor supply problems. The government controlled the legal
distribution of consumer commodities among members of the industrial
labor force, thereby controlling a significant portion of real industrial
wages. The Bolshevik party never officially subscribed to a utopian view
of income distribution according to need; instead, it was realized that wage
differentials were important in attracting labor in skilled and/or arduous
jobs. For example, the Ninth Congress of the Communist Party in 1920
resolved that the food supply system should give preference to the indus-
trious worker, and the Third Trade Union Conference of the same year
proposed incentive premiums in kind to be paid to diligent workers.
The result, however, contradicted the intention and was one reason
Trotsky referred to War Communism wage policy as the measure of a
"besieged fortress." In fact, wages were rationed out to industrial workers
on a fairly equal basis because, first, shortages were so severe that local
supply authorities were content to keep the working force at subsistence,
and second, it proved too complex to devise a system of incentive wages
to be paid in kind.
The result of this egalitarianism was an insufficient pool of qualified
labor in industry. Instead of being drawn into factories, labor was flowing
out of them during War Communism. The number of townspeople de-
clined from 2.6 million in 1917 to 1.2 million in 1920. 21 Morale was poor,
worker sabotage was rampant, absenteeism was high, and the tenuous
loyalty of specialists was slipping. These developments were especially
ominous in view of the dearth of skilled industrial laborers during this

early period. Strikes became quite common during the latter part of 1920.
The Soviet regime had succeeded in solidifying its position by the end
of 1920. A peace treaty had been signed with Poland, and the White
Russian army had been driven out of the crucial industrial and agricultural
regions that it had occupied earlier. The crisis under which War Commu-
nism had come into existence had been overcome, and the dangers of
continuing that economic policy were growing more apparent. The still
powerful trade unions were revolting against the crippling centralization
of industry and the conscription of labor. The alienated peasant popula-
tion called for abolition of the state grain monopoly. Industrial workers
were restive, the military was in a rebellious mood, and the Soviet regime
was in danger of falling victim to internal discontent. Factory output had
fallen to less than 15 percent of its prewar level. 22 Table 3.1 shows the
extent of the drops in industrial and agricultural output, the decline in
transportation services, and the USSR's virtual withdrawal from export
and import markets. At the end of 1920 and the beginning of 1921, there
were peasant uprisings in the countryside against the continuation of
requisitioning after the end of hostilities. Supplies to Moscow and Petro-
grad collapsed. The final blow was the Kronstadt Uprising of March 1921,
when the sailors of the Kronstadt naval base revolted in support of the
Petrograd workers. The Soviet leadership moved quickly to dispel this
discontent by replacing War Communism with the New Economic Policy
(NEP) in March 1921.
THE NEW ECONOMIC POLICY (1921-1928)

Just as War Communism may have been thrust upon the Soviet regime by
the Civil War in 1918, the New Economic Policy was forced upon the
Table 3.1 PRODUCTION AND TRADE INDEXES, USSR: 1913 AND 1920
1913 = 100
Industry Agriculture Transportation Exports Imports
1913a 100 100 100 100.0 100.0

1920 20 64 22 0.1 2.1
aThe 1913 figures refer to interwar territory of the USSR.

Sources: G. W. Nutter, "The Soviet Economy: Retrospect and Prospect," in D. Abshire and R. V. Allen,
eds., National Security: Political, Military. and Economic Strategies in the Decade Ahead (New York:
Praeger. 1963), p. 165; M. Kaser. "A Volume Index of Soviet Foreign Trade," Soviet Studies, vol. 20,
no. 4 (April 1969), 523-526.
Soviet leadership by the excesses of War Communism. For whatever its

reasons, the Soviet leadership at the time took pains to stress the tempo-
rary nature of both periods. Lenin declared that "War Communism was
thrust upon us by war and ruin. It was not, nor could it be, a policy that
corresponded to the economic tasks of the proletariat. It was a temporary
measure. " 23 In the same vein, Lenin described NEP as a temporary step
backward (away from socialism) in order later to take two steps forward.
From the viewpoint of the Bolshevik leadership, NEP was a transitional
step backward because of the important roles that "antisocialist" institu-
tions, such as private ownership, private initiative, and capitalist markets,
were allowed to play during this period.
The most striking feature of NEP was its attempt to combine market
and socialism: agriculture remained in the hands of the peasant, and the
management of industry (with the exception of the. "commanding
heights") was decentralized. Market links between industry and agricul-
ture and between industry and consumer replaced state control of produc-
tion and distribution. Most industrial enterprises were denationalized. But
many of the largest enterprises-the so-called commanding heights-re-
mained nationalized and encompassed about three-quarters of industrial
output. In this manner, it was thought that the state could provide general
guidance by retaining direct control of the commanding heights of the
economy-heavy industry, transportation, banking, and foreign trade-
while allowing the remainder of the economy to make its own decisions.
The political basis of NEP was the Smychka, or alliance, between the
Soviet regime (supposedly representing the urban proletariat) and the
peasant. An important political objective of NEP was to regain the politi-
cal and economic support of the peasant. Thus, the War Communism
policy of requisitioning agricultural surpluses had to be abandoned, for
the peasants would never ally themselves with a regime that confiscated
their surpluses. Market agriculture had to be reestablished in its place,
freeing the peasant both to sell surpluses freely and to buy industrial
products freely.
The Smychka strategy represented a significant concession from the
Bolshevik leaders, whose freedom of action was accordingly severely re-
stricted because they were limited to policies that would not alienate the
peasant. This at times placed them in the tenuous position of having to
choose between the support of the peasantry and the attainment of basic
party objectives. However, there was even a more fundamental contradic-
tion. The reestablishment of market agriculture would serve to create a
commercially minded peasantry and an environment that would reward
success and penalize failure. The very success of NEP would require
increasing economic differentiation among the agricultural population and
the emergence of a class of relatively prosperous peasants, who would

produce the critical market surpluses. Marx had condemned the wealthy
and middle peasant as adamant opponents of socialism, but NEP would
serve to promote this class. Thus, the ideological concession underlying
NEP was apparently very great. 24
NEP Policies
The cornerstone of NEP was the proportional agricultural tax (the prod-
nalog) introduced in March 1921 to replace the War Communism system
of requisitions. First paid in kind, and by 1924 in money, it was a single
tax, based upon a fixed proportion of each peasant's net produce. The
state now took a fixed proportion of production, and the peasant again
had an incentive to aim for as large a surplus as possible. The prodnalog
was differentiated according to income level (as dictated by the size of the
landholding and farm animals) and by family s_ize. In 1923, for example,
the prodnalog varied from 5 percent (landholdings less than one-quarter
hectare) to 17 percent (more than three hectares) of annual income.
Throughout the NEP period, the burden of the prodnalog was shifted
increasingly to the middle and upper peasants, and it accounted for some
one-quarter of state revenues during NEP. According to studies conducted
in the mid-1920s, this percentage was below 10 percent. More recent
studies by Western historians find that the tax burden during NEP was
about the same as in 1913 when all forms are considered. 25
The agriculture tax was the first step in reestablishing a market econ-
omy; it, in turn, necessitated further measures. Unless the peasants could
dispose profitably of their after-tax surplus, they would have little incen-
tive to produce above subsistence. Therefore, the state granted the peas-
ants commercial autonomy to sell their output to the buyer of their choice,
be it the state, a cooperative, or a private dealer. This measure required the
legalization of private trade, which was again permitted to compete with
state and cooperative trade organizations. Now the peasants could market
their after-tax surplus at terms dictated by market forces, not by a state
monopoly. The resurgence of private trade provided a further incentive for
peasants to market their surplus, for they no longer faced a state supply
monopoly, rationing out industrial products to them. Finally, peasants
were allowed to lease land and hire farm laborers, both of which had been
forbidden under War Communism.
Within one year, private activity dominated Soviet retail trade and
restored the market link between consumer and producer. By the end of
1922, nine-tenths of all retail trading outlets were private, and they han-
dled about three-quarters of the value of all retail trade turnover, with state
and cooperative outlets handling the balance. 26 The private trader, or

Nepman, was less strongly entrenched in wholesale trade, which remained
dominated by state and cooperative organizations.
NEP also brought about significant changes in Soviet industry. The
majority of industrial enterprises were permitted to make their own con-
tracts for the purchase of raw materials and supplies and for the sale
of their output; during War Communism, the state had performed these
functions. Small enterprises employing 20 persons or less were denation-
alized, and a small number of them were returned to their former owners.
Others were leased to new entrepreneurs, thereby re-creating a class of
small-scale capitalists. The Bolsheviks even granted a limited number of
foreign concessions. (The lessee typically signed a contract of six years'
duration obligating the enterprise to sell a prescribed portion of its out-
put to the state.) Denationalization was limited to small-scale enterprises,
and the overwhelming portion of industrial production during NEP was
turned out by nationalized enterprises. The industrial census of 1923
showed that private enterprises accounted for only 12.5 percent of total
employment in "census" establishments.27 In addition, only 2 percent of
the output of large-scale industry was produced by the private sector in
1924-1925. 28
While much of large-scale industry remained nationalized, decision
making throughout industry was decentralized to a great extent. Nation-
alized enterprises were divided into two categories: the commanding
heights of the economy-fuel, metallurgy, war industries, transportation,
banking, and foreign trade-were not separated from the state budget and
remained dependent on centralized allocations of state supplies. The re-
maining nationalized enterprises were granted substantial financial and
commercial autonomy from the state budget. The latter enterprises were
instructed to operate commercially, that is, to maximize profits and sell to
the highest bidder, be it state or private trade. Most important, they were
not obligated to deliver output according to production quotas to the
state, as under War Communism.
The nationalized enterprises of this second category were allowed to
federate into trusts, which soon became the dominant form of industrial
organization during NEP. By 1923, the 478 chartered trusts accounted for
75 percent of all workers employed in nationalized industry. 29 These trusts
were given the legal authority to enter into independent contracts. They
were to be supervised loosely either by VSNKh or by the Sovnarkhozy (the
regional economic councils), but their commercial independence was pro-
tected in that the state was not allowed to acquire the property or products
of a trust except by contractual agreement. The most powerful trusts
remained under the direct administration of VSNKh. About 25 percent of
industrial production (mainly light industry) remained under Sovnarkhoz

supervision. In light industry, the trusts were largely independent of state
control other than the usual forms of fiscal and monetary intervention. In
some key sectors of heavy industry, VSNKh exercised much stricter con-
trols over trusts in the form of specific production and delivery targets.
The profits of trusts were subject to property and income taxation in the
same manner as private enterprises. The monopoly State Bank controlled
trust commercial credit. Although the commanding-heights enterprises
remained within the state budget, they also were instructed to operate as
profitably as possible to eliminate reliance on subsidies. Emphasis on
capitalist-type cost accounting was the order of the day.
NEP was not a command economy. Planning authorities generally
provided trusts with "control figures," which were to be used as forecasts
and guides for investment decisions. Mandatory output plans were drawn
up only in the case of a few key sectors in heavy industry. The limited
physical planning and distribution was carried out through the Committee
of State Orders (representing the commissariats), which placed orders
through VSNKh, which in turn negotiated the orders with the producer
trusts. During the major part of NEP, the most important force of eco-
nomic control and regulation was the People's Commissariat of Finance
(Narkomfin), which exerted its influence through the budget and credit
system (the so-called dictatorship of finance). Planning during the NEP
period was carried out by a variety of organizations-VSNKh, the State
Planning Committee (Gosplan, established in 1921 ), the commissariats,
and local authorities. Until the late 1920s, planners limited themselves
primarily to forecasting trends as dictated by market conditions. Also,
there was a notable lack of coordination among the various planning
agencies until Gosplan established itself as the dominant coordinating
planning body after 1927. 30
One basic notion of a way to guide the economy during NEP was to
amalgamate producing enterprises in order to simplify control and coor-
dination. An important phenomenon was the amalgamation of trusts into
syndicates, initially to coordinate industry sales. In addition to easing the
planning burden, trusts and syndicates were favored by the Soviet leader-
ship's ideological preference for large-scale industry. 31 By the late NEP
period, the syndicates came to dominate the sales of state industry, ac-
counting for 82 percent of state industry sales in 1927-1928 and for all
sales of ferrous metal. 32 The trusts and syndicates acquired considerable
commercial autonomy. Syndicates were allowed to enter directly into
foreign trade agreements (without permission of the state foreign trade
monopoly) and had the right to receive credit from credit institutions in
the Soviet Union and in some instances from foreign banks. The growing
autonomy of trusts and syndicates had its disadvantages for the Soviet
leadership, particularly when the trusts attempted to charge monopoly
prices for their products, as we shall discuss below.
Use of money had been virtually eliminated during War Communism
as a result of hyperinflation and had been replaced by a system of barter
and physical allocation. Such a system, however, would have been too
clumsy for the new market system of NEP. To avoid this obstacle, the
Soviets reintroduced the use of money with the reopening of the State Bank
in 1921 for the expressed purpose of aiding the development of the
economy. Both public and private enterprises were encouraged to deposit
their savings in the State Bank; limitations on private bank deposits were
removed, and safeguards were established to protect such deposits from
state confiscation. A new stabilized currency, the chervonets, was issued
by the State Bank in 1921, a balanced budget was achieved in 1923-1924,
a surplus in 1924-1925, and the old depreciated paper ruble was with-
drawn from circulation in the currency reform of May 1924. Thereby a
relatively stable Soviet currency was created, which for a time was even
quoted on international exchanges. Money transactions between state
enterprises replaced earlier barter transactions.
NEP also witnessed an attempt to reestablish relatively normal trading
relations with the outside world. 33 A state monopoly over foreign trade
had been established shortly after the Bolshevik takeover, and foreign
trade virtually disappeared during the Civil War. During NEP, the Soviet
leadership was reluctant to become dependent on capitalist markets,
which they believed would suffer from increasingly severe crises. Rather,
the NEP strategy of trade was enunciated in Lenin's dictum of "learning
from the enemy as quickly as possible." Thus, the trading monopoly aimed
at the importation of capitalist technology (and foreign experts) and of
equipment that could not be produced at home. With this strategy in mind,
foreign concessions were granted and credits from the capitalist world
were sought. It was thought that in their scramble for Russian markets,
the capitalist countries would mute their political hostility to the Soviet
regime, which had repudiated tsarist Russia's foreign debt.
The volume of foreign trade grew rapidly during NEP, from 8 percent
of the prewar level in 1921 to 44 percent in 1928. 34 Yet unlike the
production figures, which showed a recovery to prewar levels, the volume
of foreign trade throughout NEP remained well below half that of the
prewar level. Credits from the capitalist nations were not forthcoming,
and foreign policy failures made them even less likely. The concessions
program never got off the ground; at the end of NEP, there were only 59
foreign concessions, accounting for less than 1 percent of the output of
state industry.
Table 3.2 SELECTED INDICATORS OF SOVIET OUTPUT LEVELS IN 1928 RELATIVE TO 1913
1913 = 100
National income Selected physical production series

1913 prices 117 Grain production 87
1926/27 prices 119 Pig iron 79
Steel 102
Coal 122
Industrial production Cotton cloth 104
1913 prices 129 Freight turnover 104
1926/27 prices 143-139 Electric power 203
Foreign trade
Agricultural production Exports 38
1926/27 prices 111 Imports 49
Sources: A. I. Vainshtein, Narodny dokhod Rossii i SSSR [National income of Russia and the
USSR] (Moscow: Nauka. 1969). p. 102; Gosplan SSSR, Kontro/'nye tsifry narodnogo khoziaistva
SSSR na 1928129 g. [Control figures of the national economy of the USSR for 1928-291
(Moscow: lzdatel'stvo Planovoe Khoziaistvo, 1929), p. 68; R. W. Davies. "Soviet Industrial
Production, 1928-1937: The Rival Estimates," Centre for Russian and East European Studies
Discussion Papers, no. 18 (University of Birmingham, 1978). p. 63; S. G. Wheatcroft, "Grain
Product on Statistics in the USSR in the 1920s and 1930s," Centre for Russian and East
European Studies Discussion Papers. no. 13 (University of Birmingham, 1977). p. 23; Wheatcroft,
"Soviet Agricultural Production, 1913-1940" (mimeographed, 1979); A. Bergson, The Real
National Income of Soviet Russia Since 1928 (Cambridge: Harvard University Press, 1961), p. 7;
M. Kaser, "A Volume Index of Soviet Foreign Trade," Soviet Studies, vol. 20. no. 4 (April 1969).
523-526.
The Economic Recovery of NEP

Just as War Communism provided the means for waging the Civil War,
NEP provided the means for recovery from the war, and in this sense, it
was an important strategic success for the Soviet leadership. The economic
recovery during the NEP was impressive (see Table 3.2).
In 1920, production statistics (Table 3.1) indicated the low level of
economic activity that existed at the end of War Communism. Industrial
production and transportation were both only one-fifth of the prewar
level. The shortage of fuel threatened to paralyze industry and transporta-
tion, and industry was living on dwindling reserves of pig iron. The food
shortage led to the exhaustion and demoralization of the labor force.
Agricultural production was 64 percent of the prewar level. Foreign trade
had virtually disappeared.
In 1928, on the eve of the first Five Year Plan and at the end of NEP,
the official statistics provide a striking contrast: both industry and agricul-
ture had surpassed their prewar levels. Foreign trade remained well below
prewar levels but had recovered substantially from the negligible War
Communism volumes.
More recent calculations suggest that official Soviet figures may have
overstated the extent of recovery during NEP and that Soviet national
income in 1928 was still below 1913 levels. Surprisingly, this position
appears to be supported by A. L. Vainshtein, the noted Soviet authority on
Soviet national income. 35 Subsequent research may be able to determine
more precisely the extent of the economic recovery during the NEP period.
The recovery from the economic devastation shown by the figures for
1920 was impressive irrespective of which set of statistics one chooses to
use. Although the NEP recovery was impressive, particularly as judged by
official statistics, one should note that high rates of growth during recov-
ery periods are to be expected once a suitable economic environment is
established. NEP policies provided this suitable framework for recovery.
The End of NEP

According to Soviet statistics, the highest level of NEP is usually dated to
1926, when prewar production levels were generally surpassed. The abso-
lute growth of the nonagricultural private sector stopped in 1926. 36 At that
time, all seemed to be going well; yet two years later, NEP was abandoned
in favor of the radically different system of state central planning, collec-
tivization of agriculture, and nationalization of industry and trade. This
radical turn of events seems puzzling in view of the impressive NEP
successes. Why was NEP abandoned? Several considerations stimulated
the decision.
First, a large number of party members viewed NEP as a temporary
and unwelcome compromise with class enemies. Now that the state was
stronger, they argued, the offensive against class enemies could be re-
sumed. 37 Second, the Soviet authorities feared that economic policy might
become dominated by the growing numbers of prosperous peasants and
Nepmen. Increasingly, policies were being dictated to suit the needs of the
peasants, not the objectives of the state. A prime example of this was the
"Scissors Crisis" of 1923, which forced the Soviet regime into the para-
doxical stance of favoring private agriculture over socialist industry. The
Scissors Crisis merits a slight digression at this point.
According to Soviet figures, the total marketed surplus of agriculture
in 1923 was 60 percent of the prewar level, with grain marketings falling
even below this figure. On the other hand, industrial production was only
35 percent of the prewar level. 38 The more rapid recovery of agriculture
placed upward pressure on industrial prices relative to agricultural prices.
The different sectorial recovery rates were not the sole determinants of
relative price movements. A portion of the already limited output of
industry was being withheld from the market by the industrial trust and
syndicates, who were using their monopoly power to restrict trust sales to
raise prices. The net result was an even more rapid rise of industrial prices
relative to agricultural prices. The relative price movements between early

1922 and late 1923 (Figure 3.1) take on the shape of an open pair of
scissors, hence the term Scissors Crisis.
The Soviet authorities viewed the opening price scissors with alarm,
for they expected the peasants to react by refusing to market their sur-
pluses as their terms of trade with the city fell. Moreover, Soviet authorities
were very sensitive to signs of peasant unrest. In 1924, there were a
number of disturbing developments. In August, there was an uprising of
Georgian peasants. There was also a ground swell to form a peasant
association that would represent peasant interests against the party, and
in the elections to the Soviets in the fall of 1924, the peasant turnout was
under 30 percent (despite party efforts to have mass peasant participa-
tion).39 During the prewar period, Russian peasants marketed (outside of
the village) on the average 30 percent of their output. In early 1923, before
the price scissors had opened sharply, they marketed about 25 percent, and
Soviet authorities feared a further drop. It is uncertain what did happen
to peasant marketings as the scissors opened, since statistics for this early
period are difficult to find. A student of the Scissors Crisis, James Millar,
suggests that the Bolsheviks mistakenly expected peasant marketings to
decline as agricultural prices fell in relative terms. 40 In fact, Millar argues,
the peasants had traditionally responded to a decline in the terms of trade
with the city by selling more to the city in order to maintain their standard
Figure 3.1 The Scissors Crisis
150
125
75
Overall price index
50
1921 1922 1923 1924 1925 1926 1927 1928

Source: A. L. Vainshtein, Tseny i tsenoobrazovanie v SSSR v vosstanovitel, 'ny period IPrices and
price formation in the USSR in the transition period) (Moscow: Nauka, 1972), pp. 158-167.
of living. The Millar argument is supported by evidence showing that

prewar grain marketings were not significantly affected by the terms of
trade. 41 Grain marketing statistics for the Ukraine do, however, suggest a
reduction in peasant marketings between 1923 and 1925, but such evi-
dence is quite fragmentary, 42 and fr is difficult to determine whether
Millar's or the Soviets' perception of peasant behavior is correct.
Rightly or wrongly, the Soviet government viewed this development as
a threat to the NEP recovery, for the industrial worker had to be fed and
light industry required agricultural raw materials. The regime's reaction to
a similar problem in 1918 had been to requisition agricultural surpluses,
which resulted in a costly reduction of agricultural output; a return to
requisitioning would jeopardize the progress made by NEP between 1920
and 1923. Further, influential party officials, particularly Nikolai Buk-
harin, feared (probably irrationally) an insufficient aggregate demand if
the Scissors Crisis continued: if the peasants refused to market their
output, peasant demand for industrial commodities would shrink, thereby
causing an eventual glut of industrial commodities, which would also
threaten the industrial recovery.
In essence, the Scissors Crisis forced the Soviet leadership to choose
between two alternatives: to abandon NEP and return to requisitioning,
or to retain NEP and to favor agriculture over industry to preserve the
tenuous peace with the peasantry.
A third source of dissatisfaction with NEP was the conviction at that
time that economic recovery had reached its limits and that further ad-
vances could be achieved only by expanding the capacity of the economy,
that is, by accumulating capital. NEP statistics revealed that much capacity
had been lost as a result of World War I and the Civil War: the capital
stock of heavy industry as of 1924 was estimated to be 23 percent below
its 1917 peak, and this capital equipment was on the whole old and
outmoded. In 1924, the output of steel, a principal component of invest-
ment equipment, was 23 percent of 1913 output. Thus, industrial capacity
had been lost between 1917 and 1924 and little had been done to replace
it, although the building of socialism in the Soviet Union and expansion
of military capacity were priority objectives of the Soviet state. After eight
years of Soviet rule, investment and military commodities accounted for
the same proportion of industrial output as they had prior to the revolu-
tion. For example, 28 percent of manufacturing net output was devoted
to heavy industry in 1912, and this share had only risen to 29 percent
by 1926.43 To a regime already committed to the ideological primacy of
large-scale heavy industry, this was an unacceptable outcome.
In spite of their dissatisfaction with the course of industrial develop-
ment during the 1920s, the Soviet leaders viewed their hands as tied as
long as NEP was retained. They feared that a drive to increase industrial
capacity-that is, to increase the share of heavy industry-would reduce
the availability, and consequently raise the prices, of manufactured goods
in the short run and would further turn the terms of trade against agricul-
ture, thus creating an additional agricultural supply crisis that would
impede industrialization.
Moreover, the NEP period demonstrated to the Soviet leadership its
inability to make policy in a market environment. First, the Soviet authori-
ties failed to understand normal speculative behavior in a world of fluctu-
ating prices. Particularly in agriculture, products will be withheld from the
market when producers believe that prices are temporarily low. Thus,
when Soviet pricing authorities would set low agricultural prices, grain
producers would withhold their products from the market in expectation
that the lower prices would not hold. It was primarily the more affluent
agricultural producers who could afford to withhold grain from the mar-
ket (to wait for better prices); therefore, most speculative grain stockpiling
would naturally be done by the upper peasants. Second, Soviet authorities
failed to appreciate fully the general inflationary pressures of the mid-
1920s. Between 1924 and 1927, the money supply rose by 2665 percent,
which meant that there were strong inflationary pressures both in industry
and agriculture. Many of the Soviet pricing policies (both in agriculture
and in industry) were simply undertaken to hold down the rate of infla-
tion. However, economic history tells us that, whenever price controls are
introduced in tandem with excessive monetary growth, economic distor-
tions of all sorts are bound to emerge. Third, Soviet authorities failed to
understand common notions of opportunity costs. There were several
instances in the mid-1920s when the state prices for grains were set below
the opportunity costs of producing the grains. It was not unexpected that
peasants would reduce their production and marketings of grains with
prices below opportunity cost. Fourth, Soviet authorities appeared to be
much more interested in grain collected by the state than in the total
amount of grain offered to the market. Soviet authorities throughout the
1920s were much more interested in how much grain they were able to
obtain from the peasants than in total grain marketings (both to the state
and to the population). 44
The handling of the Scissors Crisis described above is a classic case of
these points. Although the scissors probably would have closed by them-
selves when (and if) the peasants reduced their marketings, the Soviet
government intervened directly to improve the peasants' terms of trade.
First, maximum selling prices were set for industrial products and price
cuts for selected products were ordered. Second, imports of cheaper indus-
trial commodities were allowed to enter the country. Third, the State Bank
restricted the credit of the industrial trusts to force them to unload excess
stocks. VSNKh even began to use quasi-antitrust measures against the
syndicates, and some were abolished. 45 The substantial closing of the
scissors (Figure 3.1) by mid-1925 indicates the apparent success of these
measures.
However, the setting of maximum industrial selling prices in a period
of rising wage and price inflation had an important side effect: an excess
demand for industrial products was soon created, which could not be
eliminated through price increases, as ceilings had been set. Despite this
excess demand and its resulting shortages, no formal rationing system was
in effect, which meant that lucrative profits could be made by the Nepmen
by selling at prices in excess of ceiling prices. This general shortage of
industrial commodities has been called the "goods famine," and the peas-
ants, because of their isolation from the market, were hit especially hard. 46
Despite the efforts of the People's Commissariat for Trade to sell in the
village at the established ceiling prices, the peasants had to buy primarily
from the Nepman, who sold at much higher prices. Thus the peasants,
despite the nominal closing of the scissors, still lacked incentive to market
their surplus. In fact, there is some evidence to suggest that grain market-
ings were falling as the scissors were closing. 47 The net marketings of grain
in 1926-1927 were between 50 and 57 percent of prewar levels, although
grain output was close to the prewar level. 48
The state's pricing policy had another serious side effect that eventu-
ally destroyed the market orientation of NEP. Initially, two sets of indus-
trial and agricultural prices coexisted side by side: the higher prices of the
Nepmen, who sold to a great extent in the villages, and the official state
ceiling price. In 1927, prices in private stores were 30 percent higher than
in state stores. By the end of 1928, they were 63 percent above official
state prices. 49 The Nepman soon came to be regarded as a black marketeer
and an enemy of the state. Beginning in late 1923, policies were adopted
to systematically drive out the Nepman and widen the state's control over
trade. This objective was pursued through the control of industrial raw
materials and goods produced by state industry, surcharges on the rail
transport of private goods, and taxes on profits of Nepmen. In 1926, it
became a crime punishable by imprisonment and confiscation of property
to make "evil intentioned" increases in prices through speculation. Finally,
in 1930, private trade was declared a crime of'speculation.
Similar phenomena can be noted in agriculture. After 1926-1927, the
state lowered grain procurement prices (which eventually caused peasants
to divert production to higher-priced crops and livestock), and a larger gap
between state procurement prices and private purchase prices developed.
Statistical studies undertaken during this period show that state procure-
ment prices for the four major grains were below production costs in 1926
and 1927. Due to the higher production costs of small and middle peas-
ants, the losses on sales to the state were highest for small and middle
peasants. 50 The peasants responded by refusing to market their grain to
state procurement agencies, creating the "grain procurement crisis" dis-
cussed in Chapter 5. Again, the private purchaser was systematically
forced out of the agricultural market by the state. This trend culminated
in 1929, when compulsory delivery quotas replaced the agricultural mar-
ket system.
Such actions effectively signaled the end of NEP, for the market on
which NEP primarily depended was no longer functioning. Prices were set
by the state, acting through the Glavki, trusts and syndicates, and they no
longer reflected supply and demand. The economy was without direction
from either market or plan-a situation that was not to be tolerated long.
The high unemployment rate of the mid- and late 1920s was yet
another reason for official dissatisfaction with NEP. Rising unemployment
was supposed to be a problem that troubled only capitalist societies; yet
rural underemployment was estimated to be between 8 and 9 million, and
there were well over a million unemployed in the cities. 51 The existence of
such high unemployment was not only ideologically embarrassing to the
Soviet leadership, but the social unrest it engendered represented a real
political threat to the regime.
A final source of dissatisfaction with NEP relates to national security
problems. The fear of imperialist conspiracies, England's breaking off of
diplomatic relations in 1927, and concern over Japanese activities in the
Far East prompted the Soviet leaders to realize that rapid industrialization
would be required to meet the security needs of the Soviet Union and that
NEP was not well suited to generate such rapid industrialization. The
Soviet leadership in 1927 expected a war with the capitalist West, and
panic purchases by the population worsened the supply situation. 52
THE PRECEDENTS OF THE 1920s

During the 1920s, the economic problem of resource allocation was dealt
with by using two radically different economic systems. The first-War
Communism-relied heavily upon command elements, whereas the sec-
ond-NEP-attempted to combine market and command methods. The
experiences of this early period tended to establish precedents that had a
visible and lasting impact upon the eventual organizational structure of
the Soviet planned economy. These precedents are introduced at this point
as recurring themes throughout the ensuing chapters.
First, we emphasize the Soviet experiences with central planning dur-

ing the 1920s. War Communism indicated that the market cannot be
eliminated by fiat, for unless an enforceable plan is introduced in its place,
the economy will be without direction other than that provided by the
"sleepless, leather-jacketed commissars working around the clock in vain
effort to replace the market." 53 To use Trotsky's apt description: "Each
factory resembled a telephone whose wires had been cut. " 54 The "paper"
planning of War Communism was shown to be virtually no plan at all,
and unless planners have detailed and coordinate information from the
enterprise level and up and the political and economic muscle to ensure
compliance, planning will be ineffective. To quote one expert on War
Communism: "War Communism cannot be considered a centrally planned
economy in any meaningful sense. " 55 A further precedent in the area of
planning was the importance of shock tactics in a world of deficient
information and imperfect control. Thus, the concentration of resources
on priority projects to eliminate bottlenecks was seen as a way to guide
the planned economy in accordance with politically determined priorities.
It was also noted that the success of shock tactics depended on their
limited application. This precedent can be seen in the "storming" tactics
and the practice of singling out a few key branches for preferential treat-
ment that persist until today. The 1920s also introduced the issue of
central versus regional direction, which was to become a recurring theme
throughout later periods. The friction between central and regional plan-
ning authorities (the Glavki, the Sovnarkhozy, and local authorities)
throughout the 1920s revealed an imperfect harmony of national and
regional interests that persists to the present. Thus, the vacillation between
ministerial and regional planning, a particularly important issue during the
Khrushchev years, had its roots in the 1920s. The NEP period also wit-
nessed the growing reliance on amalgamations of state enterprises into
trusts and syndicates. These amalgamations, forerunners of the modern
Soviet industrial associations, were a link between the central administra-
tors and the producing enterprises and thus eased the burden on the
administrators.
Second, the Soviet leadership's experiences with peasant agriculture
during the 1920s also set important precedents. It was widely feared that
peasant agriculture could be a thorn in the side of rapid industrialization,
for the success of industrialization was seen as being dependent on peasant
marketing to the state. It was thought that attempts by the state to extract
surpluses from the peasantry without offering economic incentives in
return would be met by reductions in agricultural output and/or market-
ings. The Soviet leaders' apprehension was the impetus for the introduc-
tion of force into the countryside with the collectivization of agriculture
in 1929 and provides an explanation for the continuing reluctance of the

leadership to reinstate individual peasant farming (other than the small
household plot), despite the often disappointing performance of collective
agriculture.
The third important precedent of this early period was the develop-
ment of an ingrained mistrust of the market that persists to the present.
Most of the experiences with the market during the late NEP period were
negative. The predominant trusts used their monopoly power to restrict
output and withhold stocks. The Nepmen sold at high market prices
despite the efforts of state pricing authorities to set limits on industrial
prices. '(he peasants withheld their output whenever they deemed market
incentives insufficient. For these and other reasons, the market was virtu-
ally abolished after 1929, with only such minor exceptions as the collective
farm market, the "second economy," and, in part, the labor market. It is
in this context that one can better understand the Soviet leadership's
inbred opposition to fluctuating prices, output and input decisions based
on profit maximization, and other market phenomena that still persists.
Yet both War Communism and NEP convinced the Soviet leadership of
the inevitability of an uneasy truce between the market and the central
authorities. Throughout the transition period, the bulk of consumer goods
continued to be supplied by private markets, even during periods when
market transactions of this type were proscribed. During War Commu-
nism, the Soviet state continued to print money, whose use was proscribed
in legal transactions, knowing full well that it was destined for illegal
private markets. During NEP, the Nepmen were tolerated because the state
knew that it would be unable to supply populations living in remote areas.
A fourth precedent, which can be related directly to the experiences of
War Communism labor policies, was the evident necessity of freedom to
choose occupations. If workers are to be productive, they must be allowed
to choose their occupation on the basis of economic incentives. The
militarization of labor attempted under War Communism proved to be an
ineffective tool for allocating labor. Not only must wages be differentiated,
but the resultant money income must have meaning in terms of real
purchasing power; that is, a consumer goods market must exist. The labor
experiences of War Communism set an important precedent in favor of
free occupational choice-a precedent followed in subsequent periods
except when temporarily abandoned during the late 1930s and 1940s in
response to the tremendous turnover of the inexperienced factory labor
force and wartime emergency.
A final precedent was the need to establish state control over the trade
unions and other worker groups. During both War Communism and NEP,
powerful forces within the party favored worker or trade union control
over enterprises and trade union protection of worker interests. Oppo-

nents of these positions argued for the "statization" of the trade unions,
for example, that the trade union should be the representative of state
interest and that there should be "one-man management" in the enter-
prise. By the end of NEP, the statization of the trade unions was virtually
complete and the doctrine of one-man management was firmly en-
trenched. The reasons for party distrust of independent trade unions and
worker councils are clear. Immediately after the revolution, the central
authorities had been unable to restrain wildcat nationalizations and
worker takeovers. Moreover, in the absence of a coordinated central
planning system, worker-dominated enterprises were operated in the inter-
est of local workers, not in the interest of the party.
The year 1928 found the Soviet Union on the eve of the Five Year Plan
period, about to embark on an ambitious program of forced industrializa-
tion. It was during this period that the Soviet command system evolved in
large part into its final form. The period that we have just discussed, from
the October Revolution to the first Five Year Plan, is important because
of its impact on this command system. One might in fact argue that War
Communism and NEP represented a practical learning experience for the
Soviet leadership. Chapter 4 describes another (more theoretical) learning
experience that also had a significant impact on the evolution of the Soviet
command system: the Soviet Industrialization Debate.
REFERENCES
1. S. Merl, Der Agrarmarkt und die Neue Okonomische Politik [The agrarian
market and the new economic policy] (Munich: Oldenbourg Verlag, 1981).
2. V. P. Danilov, Rural Russia Under the New Regime, translated and introduced
by Orlando Figes (Bloomington: Indiana University Press, 1988), chap. 7.
3. M. Lewin, Russian Peasants and Soviet Power (London: Allen & Unwin,
1968), pp. 26-28.
4. M. Dobb, Soviet Economic Development Since 1917, 5th ed. (London: Rout-
ledge & Kegan Paul, 1960), p. 98; V. A. Vinogradov et al., eds., Istoriia
sotsialisticheskoi ekonomiki SSSR [History of the socialist economy of the
USSR] (Moscow: Nauka, 1976), vol. 1.
5. L. Szamuely, First Models of the Socialist Economic Systems (Budapest:
Akademiai Kiado, 1974), pp. 34-55.
6. A statement of E. Preobrazhenzy quoted in Zaleski, Planning for Economic
Growth, p. 20.
7. The discussions of War Communism and NEP are largely based on the fol-
lowing sources: A. Nove, An Economic History of the USSR (London: Pen-
guin, 1969), chaps. 3 and 4; E. Zaleski, Planning for Economic Growth in the
Soviet Union, 1918-1932 (Chapel Hill: University of North Carolina Press,

1971), chap. 2; E. H. Carr and R. W. Davies, Foundations of a Planned Econ-
omy, 1926-1929, vol. 1, part 2 (London: Macmillan, 1969), chaps. 33-35.
8. The position that Lenin adopted War Communism for ideological reasons is
supported by the Hungarian authority L. Szamuely, First Models of the So-
cialist Economic Systems, pp. 7-62. This interpretation is bitterly opposed by
Soviet ideology. For a typical attack on "bourgeois falsifications," see Vi-
nogradov et al., Istoriia sotsialisticheskoi ekonomiki SSSR, vol. 1, pp. 251-
252. Also see the discussions in Silvana Malle, The Economic Organization
of War Communism 1918-1921 (Cambridge: Cambridge University Press,
1985), chap. 1.
9. Danilov, Rural Russia Under the New Regime, chap. 7.
10. Nave, An Economic History of the USSR, p. 62. Estimates of the period
suggest that in the large towns only 31 percent of all food came through
official channels (1919). Szamuely, First Models of the Socialist Economic
Systems, p. 18, supplies similar estimates showing that most consumption
requirements were satisfied in the free (black) market.
11. Vinogradov et al., Istoriia sotsialisticheskoi ekonomiki SSSR, vol. 1, p. 374.
12. R. Day, Leon Trotsky and the Politics of Economic Isolation (Cambridge:
Cambridge University Press, 1973), chap. 2.
13. Szamuely, First Models of the Socialist Economic Systems, pp. 12-14.
14. Ibid., pp. 14-17.
15. Ibid.,pp.17-18.
16. Soviet doctrine depicts War Communism as a genial tactical victory by Lenin
to win the Civil War, while conceding that the USSR was not yet prepared for
the elimination of capitalist vestiges. On this, see Vinogradov et al., Istoriia
sotsialisticheskoi ekonomiki SSSR, vol. I, pp. 244-246.
17. Dobb, Soviet Economic Development, p. 117.
18. Nave, An Economic History of the USSR, p. 70.
19. For accounts of the organization of the War Communism economy, see
Zaleski, Planning for Economic Growth, pp. 27-29; S. Oppenheim, "The
Supreme Economic Council, 1917-21," Soviet Studies, vol. 2, no. 1 (July
1973), 3-27; and Malle, The Economic Organization of War Communism,
chaps. 5-6.
20. Dobb, Soviet Economic Development, p. 112.
21. Nove, An Economic History of the USSR, p. 66-67.
22. Ibid., p. 94.
23. Quoted in Dobb, Soviet Economic Development, p. 130. According to P. C.
Roberts, Alienation and the Soviet Economy (Albuquerque: University of
New Mexico Press, 1971), pp. 36-41, this quote is not reflective of Lenin's
true position during War Communism. Instead, Lenin tended to view War
Communism as a basically correct movement in the direction of revolutionary
socialism, which he was forced to back away from by the strikes and civil
unrest of 1920. Roberts points out the pains taken by Lenin during this period
to justify the abandonment of War Communism on ideological grounds,
which would have been unnecessary if War Communism had simply been a
temporary wartime measure.
24. A quote from Stalin on this point (from the late 1920s, after he adopted his
antipeasant stance): "What is meant by not hindering kulak farming? [The
term kulak refers to the prosperous peasant.] It means setting the kulak free.
And what is meant by setting the kulak free? It means giving him power." V. I.
Stalin, Sochinenia [Collected works] (Moscow: 1946-1951), vol. XI, p. 275.
Quoted in A. Erlich, The Soviet Industrialization Debate, 1924-1928 (Cam-
bridge, Mass.: Harvard University Press, 1960), pp. 172-173.
25. Vinogradov et al., Istoriia sotsialisticheskoi ekonomiki SSSR, vol. 2, p. 37-
38; and S. Merl, Der Agrarmarkt und die Neue Okonomische Politik (Mu-
nich: Oldenbourg Verlag, 1981), pp. 303-308.
26. Dobb, Soviet Economic Development, p. 143; and Merl, Der Agrarmarkt,
p. 56.
27. Dobb, Soviet Economic Development, p. 142. Census establishments were
those employing 16 or more persons along with mechanical power or 30 or
more without it; G. W. Nutter, The Growth of Industrial Production in the
Soviet Union (Princeton, N.J.: Princeton University Press, 1962), pp. 187-188.
28. Nove, An Economic History of the USSR, p. 104.
29. Dobb, Soviet Economic Development, p. 135. Also see W. Conyngham, In-
dustrial Management in the Soviet Union (Stanford: Hoover Institution Press,
1973), pp. 17-24.
30. Carr and Davies, Foundations of a Planned Economy, pp. 787-836.
31. Avdakov and Borodin, USSR State Industry, chaps. 3 and 4.
32. Ibid., p. 339.
33. For discussions of NEP trade policy, see M. R. Dohan, Soviet Foreign Trade
in the NEP Economy and Soviet Industrialization Strategy, unpublished doc-
toral dissertation, Massachusetts Institute of Technology, 1969; L. M. Her-
man, "The Promise of Economic Self-Sufficiency Under Soviet Socialism," in
M. Bornstein and D. Fusfeld, The Soviet Economy: A Book of Readings, 3rd
ed. (Homewood, Ill.: Irwin, 1970), pp. 260-290; and W. Beitel and J.
Notzold, Deutsch-Sowjetische Wirtschaftsbeziehungen in der Zeit der Wei-
marer Republik [German-Soviet economic relations in the time of the Weimar
Republic] (Ebenhausen: Stiftung Wissenschaft und Politik, 1977).
34. M. Kaser, "A Volume Index of Soviet Foreign Trade," Soviet Studies, vol. 20,
no. 4 (April 1969), 523-526.
35. See M. E. Falkus, "Russia's National Income, 1913: A Revaluation,"
Economica, vol. 35, no. 137 (February 1968), 61. This position is also
supported in P. R. Gregory, Russian National Income, 1885-1913 (Cam-
bridge: Cambridge University Press, 1982), chap. 5. For Vainshtein's position,
see A. L. Vainshtein, Narodny dokhod Rossii i SSSR [National income of
Russia and the USSR] (Moscow: Nauka, 1969), p. 106.
36. Nove, An Economic History of the USSR, p. 137.
37. Ibid., p. 138.
38. Cited in Dobb, Soviet Economic Development, pp. 161-162.
39. Merl, Der Agrarmarkt, pp. 40-43.
40. J. R. Millar, "A Reformulation of A. V. Chayanov's Theory of Peasant Econ-
omy," Economic Development and Cultural Change, vol. 18, no. 2 (January
1970), 225-227.
41. P.R. Gregory, "Grain Marketings and Peasant Consumption, Russia, 188S-
1913," Explorations in Economic History, vol. 17, no. 2 (April 1980), 13S-164.
42. J. F. Karcz, "Thoughts on the Grain Problem," Soviet Studies, vol. 18, no. 4
(April 1967), 407. Unfortunately, the one effort to test Russian peasant
behavior in response to changing relative prices using modern econometrics
failed to yield decisive answers. On this, see R. M. Harrison, "Soviet Peasants
and Soviet Price Policy in the 1920s," CREES Discussion Papers, SIPS, no.
10, University of Birmingham, 1977.
43. Erlich, The Soviet Industrialization Debate, pp. lOS-106; P. R. Gregory, So-
cialist and Nonsocialist Industrialization Patterns (New York: Praeger, 1970),
p. 28.
44. For an account of the thinking of Soviet authorities on these points see Merl,
Der Agrarmarkt, pp. S0-140. The monetary growth figures cited above are
from Statisticheski spravochnik SSR za 28 1928 [The USSR Statistical Hand-
book 1928) (Moscow: Ts.S. Ul, 1929), p. 600.
4S. Avdakov and Borodin, USSR State Industry, pp. 196-198.
46. Karcz, "Thoughts on the Grain Problem," p. 419.
47. The marketed share of grain for the Ukraine between 1923 and 1926 was:
1923-1924,26o/o; 1924-192S, lSo/o; 192S-1926,21o/o.
48. R. W. Davies, "A Note on Grain Statistics," Soviet Studies, vol. 21, no. 3
(January 1970), 328. The controversy over grain marketings during the late
1920s will be discussed in Chapter 4 of this text.
49. Statisticheski spravochnik SSR za 1928 [The USSR Statistical handbook
1928) (Moscow: Ts.S. U, 1929), p. 727.
SO. These studies are cited by Merl, Der Agrarmarkt, p. 104.
Sl. L. M. Danilov and I. I. Matrozova, "Trudovye resursy i ikh ispol'zovanie"
[Labor resources and their utilization], in A. P. Volkova et al., eds., Trud i
zarabotnaia plata v SSSR [Labor and wages in the USSR] (Moscow: Nauka,
1968), pp. 24S-248.
S2. M. Reiman, Die Geburt des Stalinismus [The birth of Stalinism] (Frank-
furt/Main: EVA, 1979), chap. 2.
S3. Nove, An Economic History of the USSR, p. 74.
S4. Quoted in Szamuely, First Models of the Socialist Economic Systems, p. 97.
SS. Malle, The Economic Organization of War Communism, p. 318.
Western Sources
W. Betel and J. Notzold, Deutsch-Sowjetische Wirtschaftsbeziehungen in der Zeit
der Weimarer Republik [German-Soviet economic relations in the time of
the Weimar Republic] (Ebenhausen: Stiftung Wissenschaft und Politik,
1977).
E. H. Carr and R. W. Davies, Foundations of a Planned Economy, 1926-1929,
vol. 1, parts 1, 2 (London: Macmillan, 1969).
R. W. Davies, ed., From Tsarism to the New Economic Policy (London: Macmil-
lan, 1990).
R. Day, Leon Trotsky and the Politics of Economic Isolation (Cambridge: Cam-
bridge University Press, 1973).
M. Dobb, Soviet Economic Development Since 1917, 5th ed. (London: Routledge
& Kegan Paul, 1960), chaps. 4-9.
A. Erlich, The Soviet Industrialization Debate, 1924-1928 (Cambridge, Mass.:
Harvard University Press, 1969).
M. Harrison, "Why Was NEP Abandoned?" in R. Stuart, ed., The Soviet Rural
Economy (Totowa, N.J.: Rowman & Allanheld, 1984), pp. 63-78.
M. Lewin, Russian Peasants and Soviet Power (London: Allen & Unwin, 1968).
S. Malle, The Economic Organization of War Communism, 1918-1921 (Cam-
bridge: Cambridge University Press, 1985).
S. Merl, Der Agrarmarkt und die neue Okonomische Politik [The agrarian market
and the New Economic Policy] (Munich: Oldenbourg Verlag, 1981).
A. Nove, An Economic History of the USSR (London: Penguin, 1969), chaps. 3-6.
S. Oppenheim, "The Supreme Economic Council, 1917-21," Soviet Studies, vol.
25, no. 1(July1973), 3-27.
M. Reiman, Die Geburt des Stalinismus [The birth of Stalinism] (Frankfurt/Main:
EVA, 1979).
M. Reiman, Lenin, Stalin, Gorbachev: Kontinuitiit und Briiche in der sowjetischen
Geschichte [Lenin, Stalin, Gorbachev: Continuity and change in Soviet
history] (Hamburg: Junius Verlag, 1987).
P. C. Roberts, Alienation and the Soviet Economy (Albuquerque: University of
New Mexico Press, 1971).
L. Szamuely, First Models of the Socialist Economic Systems (Budapest:
Akademiai Kiado, 1974).
S. G. Wheatcroft, "A Reevaluation of Soviet Agricultural Production in the 1920s
and 1930s," in Robert Stuart, ed., The Soviet Rural Economy (Totowa, N.J.:
Rowman Allanheld, 1984), pp. 32-62.
S. G. Wheatcroft and R. W. Davies, eds., Materials for a Balance of the National
Economy, 1928-1930 (New York: Cambridge University Press, 1985).
E. Zaleski, Planning for Economic Growth in the Soviet Union, 1918-1932
(Chapel Hill: University of North Carolina Press, 1971), chaps. 1 and 2.
Soviet Sources
Y. Avdakov and V. Borodin, USSR State Industry During the Transition Period
(Moscow: Progress Publishers, 1977).
V. P. Danilov, Rural Russia Under the New Regime, translated and introduced by
0. Figes (Bloomington: Indiana University Press, 1988).
V. P. Diachenko, lstoriia finansov SSSR [History of USSR finance] (Moscow:

Nauka, 1978).
E. G. Gimpel'son, Veliki Oktiabr i stanovlenie sovetskoi sistemy upravleniia
narodnym khoziastvom [The great October and the creation of the Soviet
system of regulation of the national economy] (Moscow: Nauka, 1977).
S. G. Strumilin, Na planovom fronte [On the planning front] (Moscow: Nauka,
1963).
A. L. Vainshtein, Narodny dokhod Rossii i SSSR [National income of Russia and
the USSR] (Moscow: Nauka, 1969).
V. A. Vinogradov et al., eds., lsotoriia sotsialisticheskoi ekonomiki SSSR [History
of the socialist economy of the USSR], vols. 1-3 (Moscow: Nauka, 1976).
FOUR
The Soviet
Industrialization Debate
(1924-1928)
A n extraordinary debate on economic development took place in the

Soviet Union between 1924 and 1928. 1 Its audience included almost
everyone of political and intellectual importance in the Soviet Union. The
debate raised a multitude of questions concerning development strategy,
many of which are still widely debated. The debate focused on the alter-
native development strategies open to the Soviet economy in the late
1920s. Stalin, who actually made the eventual choices of central planning
and collectivization in 1928 and 1929, respectively, was an observer of and
a participant in this debate.
THE SETTING OF THE SOVIET INDUSTRIALIZATION DEBATE
The economic recovery of NEP probably reached its peak in 1926. The
rapid NEP recovery had brought the economy to its capacity limits. 2 With
the loss of industrial capital stock and the limited net investment of the
1920s, the fact that industrial output had regained prewar levels indicates
75
that industrial capacity was probably already being overtaxed by the

recovery of the mid-1920s. If, in this situation, an investment drive was
undertaken to raise industrial capacity, severe inflationary pressures could
result. This was the Soviet inflationary imbalance in a nutshell: industrial
investment was required to raise industrial capacity, yet the capacity-
creating effect of investment would be felt only after a period of time. The
income-generating effect of investment, however, would be felt almost
immediately, thus creating an inflationary problem.
If this inflation were to occur, the peasant would again be alienated by
the increasing prices of manufactured goods. The terms of trade would
again move against agriculture. An industrialization drive would redistrib-
ute wealth away from the peasant (through declining terms of trade), and
such a redistribution could have disastrous effects on political stability and
grain marketings. The Smychka basis of NEP would be jeopardized, and
some alternative system would have to be substituted to feed the industrial
workers.
The second alternative, a slow rate of capital accumulation, would
avoid excessive inflation and preserve the alliance with the peasant. On
the other hand, the basic problem-the low capacity of the economy-
would not be addressed. The economy would remain on the brink of
inflation without achieving long-run objectives.
The political background of the debate should be outlined as well. 3
After Lenin's death in January 1924, the leadership of the Communist
Party was split by a bitter factional debate. The "united opposition" of the
left, led by Leon Trotsky, Grigory Zinoviev, and Lev Kamenev, opposed
the NEP concessions to the peasant and to private trade and was a
persistent critic of the foreign policies of the party leadership. The left
opposition advocated "superindustrialization" and harsh discriminatory
measures against the more prosperous peasants and resisted the notion of
"building socialism in one country." The party leadership consisted of a
coalition between the Bolshevik "moderates"-Nikolai Bukharin, the edi-
tor of Pravda, who was a recognized Marxist theoretician and a popular
revolutionary figure; Mikhail Tomsky, the trade union leader; and Aleksei
Rykov, the head of the government bureaucracy-and Joseph Stalin, the
general secretary of the Communist Party. This ruling coalition favored the
continuation of NEP, the avoidance of a superindustrialization drive, the
preservation of the Smychka, an.cl efforts toward rapprochement with the
capitalist world.
The leadership coalition had a vested interest in the success of the NEP
experiment and the policy of rapprochement with the West. They hoped
to attract foreign credits to bolster the NEP recovery. Serious setbacks
occurred on both fronts in 1927: voluntary grain marketings fell well
The Soviet Industrialization Debate (1924-1928) 77
below government targets, and the government suffered serious foreign

policy setbacks-the British broke off diplomatic relations, there were
troubles in Poland, and Chiang Kai-shek turned on the Chinese Commu-
nists. The Soviet Union was gripped by a war scare, and it was felt that a
major war with the capitalist West was imminent. Sensing a weakening in
the political base of the ruling coalition, Trotsky and the left opposition
chose to challenge the leadership, a challenge that was successfully re-
pulsed and resulted in the expulsion of Trotsky from the party in Decem-
ber 1927.
THE MARXIST-LENINIST LEGACY
The Soviet Industrialization Debate centered largely on sectorial growth

strategies, that is, on whether industry (the "state sector") or agriculture
(the "private sector") should be favored or whether sectorial growth
should be balanced.
The Soviet Industrialization Debate drew upon the theoretical legacies
of Marx and Lenin. All participants had as their goal the "building of
socialism," all agreed the state (society) should own the means of produc-
tion at least in industry, and all used appropriate quotations from Marx
and Lenin to support their programs.
Marx
The Marxist legacy consists of Marx's (and Friedrich Engel's) limited
instructions concerning the shape of the future socialist society and of
Marx's model of expanded reproduction, a model that states the condi-
tions for a growing economy. 4 Marx's expanded-reproduction scheme is
of direct relevance to the Industrialization Debate, for it provided a con-
ceptual model for determining sectorial priorities. A further Marxist leg-
acy was Marx's notion of primitive capitalist accumulation, the process by
which capital initially came to be controlled by the capitalist class.
Marx's instructions concerning the shape of future socialist societies
were quite brief because he believed that the details of the future commu-
nist society were unforeseeable. The basic contradiction of capitalism, the
class struggle between the worker and the capitalist, would inevitably lead
to the violent overthrow of capitalism and the establishment of a socialist
society. The first phase of the new socialist society would consist of a
transition period that would vary depending upon the legacy of the pre-
ceding stage of capitalism. Only when communism, the final stage of social
evolution, had been reached would differences among societies be elimi-
nated. Marx had remarkably little to say about the critical period of
transition from capitalism to communism.
Marx believed that the socialist revolution would occur in the ad-
vanced capitalist countries. The new socialist government could, therefore,
take charge of this productive apparatus. Thus, the period of transition to
communism would not be too long in duration. The transition period
would be characterized by the distribution of goods to individuals accord-
ing to their contribution to the productive process. Workers would receive
vouchers from society indicating the amount of work they had performed.
The distribution of income would, therefore, remain unequal during the
transition period.
Marx emphasized the chaos of the market and the fact that market
allocation creates economic crises. Planning would allow a socialist society
to avoid the disproportions that plagued capitalist societies. Socialist
societies would have greater foresight, and he advocated central control
over resource allocation. 5
According to Marx, during the transition period, the objective of
socialist planners should be to accelerate the rate of economic growth and
thus shorten the waiting time for the abundant communist society. In his
model of expanded reproduction, Marx described the necessary relation-
ship among economic sectors required to bring about economic growth. It
might be noted that these are physical relationships, independent of the
society's economic system; therefore, they would hold in socialist as well
as capitalist societies. The condition for economic growth (expanded
reproduction) can be illustrated by beginning with a stationary economy
that is not growing (simple reproduction). 6
Marx divided the economy into two broad sectors: Sector I, in which
the means of production are produced, and Sector II, in which consumer
goods are produced. Using Marx's labor theory of value, which states that
the value of output will equal the value of direct and indirect labor inputs
plus surplus value (profits), the value of each sector's output can be written
as
V1 =Ct + V1 + St (4.1)
V2 = C2 + Vi + S2
where
V = value of sector output
c = fixed capital costs or depreciation
v = variable costs, primarily labor costs
s = surplus value (or profits) of each sector
The subscripts 1 and 2 refer to Sector I and Sector II, respectively.
In a stationary economy, the output of Sector I (investment goods)
equals the depreciation requirements of Sectors I and II, or
(4.2)
and this is Marx's condition of simple reproduction. On the other hand,
the economy will grow if the net capital stock of the economy expands,
and this occurs when the output of Sector I exceeds the depreciation
expenses of I and II or
(4.3)
This is Marx's condition of expanded reproduction.
For the economy to be in equilibrium, capital accumulation (saving)
equal to V 1 - c1 - c2 must take place. Marx assumed that, in capitalist
societies, workers (the recipients of v) would be at subsistence and would
thus not be a source of capital accumulation. The capitalists, the recipients
of surplus values, would, therefore, be the source of capital accumulation.
Marx did not expand upon the sources of capital accumulation during the
transition period, but he did describe capital accumulation during the early
phases of capitalism, called primitive capitalist accumulation. 7
In the Marxian schema, primitive capitalist accumulation is used to
explain how capital came to be controlled by a capitalist class in the first
place. Marx rejected the argument that capitalists acquired capital through
their own abstinence from consumption. Instead, this process occurred
primarily through expropriation of the property of the weak (the serfs, the
urban workers, etc.) by the strong (the state, the church, robber barons,
the merchants). The poor were divorced from the means of production and
were forced to offer their labor to the capitalist class.
What directions could the Soviet leadership draw from the Marxist
legacy in preparing their blueprints from the new socialist society? The
first is that during the period of transition, distribution should be accord-
ing to one's contribution to production. The second is that some form of
planning should replace the anarchy of capitalist markets. The third is that
growth can be accelerated by giving priority to the investment goods
sector. Insofar as capitalists initially gained control of capital by expro-
priation (primitive capitalist accumulation), the socialist state may adopt
the same method to expropriate capital from the remaining capitalists
(primitive socialist accumulation).
Lenin
Lenin had to reconcile the socialist revolution in Russia with Marx's clear
prediction that it would occur in the advanced capitalist countries. Lenin
argued that the socialist revolution would occur, for a variety of reasons,
in the "weakest link" in the capitalist chain, Russia. 8
Lenin claimed that the backward nature of the Russian economy

required a transition period between capitalism and socialism, which he
called state capitalism. 9 A strong Soviet state would be required to capture
the commanding heights of the economy. By having the state nationalize
and control banking, transportation, utilities, and heavy industry, the state
would be in a position to exercise control over the nonstate sector (light
industry and agriculture), which would remain temporarily in private
hands. With this strategy, the Soviet government would obtain the many
benefits capitalism had to offer while exercising overall control over
economic affairs. Lenin pointed to the high concentration ratios of Rus-
sia's heavy industries and emphasized the role of foreign capital in promot-
ing this concentration. The Bolshevik state inherited pockets of advanced
capitalism, which would spawn the revolutionary proletariat and would
provide the heavy-industry base for building socialism. The enormous
productive potential of capitalism, admired by Marx, would thus be put
to the benefit of the working classes.
The failure of the Russian socialist revolution to spark a world revo-
lution presented Lenin with further doctrinal difficulties. 10 Was it possible
to "build socialism in one country" (in relatively backward Russia), or
would socialism in Russia have to wait for a successful socialist revolution
in the advanced capitalist countries? This doctrinal issue split the Bolshe-
vik leadership. On the one side, Leon Trotsky argued for a "permanent
revolution," maintaining that Russia could not hope to build socialism
successfully without the assistance of more advanced socialist nations.
Nikolai Bukharin (and later Stalin) argued that the Soviet Union's resource
base was sufficiently strong to build socialism in Russia, isolated from
the outside capitalist world. Lenin argued that "breathing spells" would
be required to allow consolidation before the permanent revolution could
continue. Lenin did not believe that the world socialist revolution would
be a continuous process.
The Soviet Industrialization Debate began in earnest shortly after the
death of Lenin. To a great extent, the debate was about the type of
economic system-NEP or a War Communism-like system-that would
be best suited to building socialism. When NEP was abandoned in 1928,
the outcome of the debate was clear.
PREOBRAZHENSKY-UNBALANCED GROWTH
E. A. Preobrazhensky, the vocal spokesman of the left wing of the Bolshe-

vik party, took up where Marxian expanded reproduction left off and
argued that a discontinuous spurt in the output of investment goods was
required to attain rapid industrialization. 11 Preobrazhensky envisioned
two possible courses of action at the end of the 1920s: the Soviet economy
could either continue to stagnate or even retrogress to lower levels of
capacity, or a "big push" to expand capacity could be undertaken. In
taking this latter step, which he supported, halfway measures would not
be advisable, for a spurt below the crucial minimum effort of investment
would be self-defeating.
Preobrazhensky based this conclusion on several factors. He thought
that the inflationary imbalance had two causes: the low capacity of the
industrial sector, and a loss of saving ability-the latter being a conse-
quence of institutional change in agriculture. Before the October Revolu-
tion, the peasants had been forced to "save" in real terms a substantial
portion of their output, which was delivered either to the state or to the
landlord. This forced saving limited their capacity to purchase industrial
products. The October Revolution, however, established them as free
proprietors. Rent payments were eliminated and agriculture taxes (in
1924-1925) were less than one-third of prewar obligations. 12 The peasants
became accustomed to receiving industrial commodities in return for the
sale of their agricultural surplus. According to Preobrazhensky, this caused
a "drastic disturbance of the equilibrium between the effective demand of
the village and the marketable output of the town. " 13 The effective de-
mand of the peasant had increased substantially without a substantial
increase in industrial capacity, creating an inflationary gap.
Preobrazhensky suggested that net investment in industry must be
raised significantly to close the gap between effective demand and capacity
and that the inflationary effects of this action must be neutralized by
altering the structure of demand significantly away from consumption and
toward saving. Once the new industrial capacity has been created, private
consumption could again be free to approach its previous position.
As far as the sectoral allocation of this net investment was concerned,
Preobrazhensky argued for unbalanced growth to favor industry in general
and heavy industry in particular on the grounds that the short-run benefits
of investment in agriculture and light industry would be well outweighed
by the long-run benefits of investment in capacity-expanding heavy indus-
try. Thus, he emphasized that investment goods and consumer goods
industries must be arranged in "marching combat order," in keeping with
the Marxian theory of economic dynamics.
In arguing in favor of a big push, Preobrazhensky stressed that mod-
erate increases in the capacity of the capital goods sector would be self-
defeating: the technological gap between the USSR and the advanced
capitalist powers had become so wide that it was now impossible to adopt
advanced technology gradually. Second, he echoed a view widely held at
the time that the replacement requirements of the Soviet economy had
become so immense that a significant increase in investment was required

just to keep industrial capacity from falling.
According to Preobrazhensky, foreign trade could, to some extent,
substitute for domestic capital production by importing foreign capital.
However, the Soviets' capacity to import was limited by the lack of foreign
credits (which would probably not be offered by capitalist foes) and by the
small size of the exportable agricultural surplus. A foreign trade monopoly
would be essential to ensure that machinery and not luxuries would be
imported. In any case, considering the massive capital requirements of the
Soviet economy in the 1920s, Preobrazhensky felt that the foreign sector
could only play a limited role in the Soviet capacity buildup.
The long-run payoff of Preobrazhensky's policy of one-sided reinvest-
ment in the capital goods sector would be an enhanced capacity to produce
manufactured consumer goods and industrial farm machinery. Yet he
recognized that it would take years for this to happen:
... a discontinuous reconstruction of fixed capital involves a shift of
so much means of production toward the production of means of
production, which will yield output only after a few years, that thereby
the increase of the consumption funds of the society will be stopped. 14
To dampen the interim inflationary pressures, Preobrazhensky pro-
posed the system of primitive socialist accumulation, which was to replace
the market so as to force the economy to save more for capital investment
than it would have had the market prevailed. Instead of the market, state
trade monopolies would set prices. By purchasing at low delivery prices
and then selling at higher retail prices, the state would be able to generate
a form of profit or forced saving that would reduce inflationary pressures.
Preobrazhensky further suggested that during the period of primitive
socialist accumulation, the main burden of industrialization should be
placed on the peasantry in the form of low state purchase prices and high
manufactured consumer goods prices, thereby extracting forced saving
through a reduced peasant living standard.
In addition to his ideological preference for state industry, Preobra-
zhensky chose to burden the peasants because of the high potential of
their saving capacity as exhibited prior to the revolution and because
of peasant agriculture's ability to be independent of industry. The over-
all purpose of primitive socialist accumulation was to let the state, not
private individuals, decide how much would be saved. In doing so, the
state would try to equate real saving (composed of both voluntary and
involuntary savings) with the output of the capital goods sector (real
investment).
Preobrazhensky's primitive socialist accumulation contained ideologi-
cal motives. On the ideological front, the battle would be waged between
the state sector (nationalized heavy industry) and the private sector (agri-
culture and handicraft manufacturing), and Preobrazhensky believed that
the state must ensure the victory of the socialist sector. Primitive socialist
accumulation would transfer resources otit of the private sector (primarily
agriculture) and into the state sector by imposing "nonequivalent ex-
changes" between the city and countryside. Once the state had eliminated
the private sector as a viable threat, the socialized sector would become
the source of capital accumulation. 15
Preobrazhensky recognized the dangers of primitive socialist accumu-
lation. With a large volume of savings to be extracted from agriculture,
extremely low agricultural purchase prices would have to be set. The
peasant would withdraw from the market, alienated from the Soviet
regime. In Bukharin's words, primitive socialist accumulation would "kill
the goose [agriculture] that laid the golden eggs." This was the weakest
point of his program and proved the focus for strong attacks by his
opponents. How was the industrialization drive to be sustained if agricul-
tural supplies were not available? 16
BUKHARIN-BALANCED GROWTH
Nikolai Bukharin was the official spokesman of the right wing of the
Bolshevik party. A close associate of Lenin with credentials as a leading
Marxist theoretician, Bukharin remained a potent individual force in
Soviet politics until the Stalin purges of the 1930s.17 Prior to NEP, Buk-
harin's ideas were closely attuned to those of the left wing of the party, and
he even coauthored a standard textbook on communism with Preo-
brazhensky. But NEP brought about a significant change in Bukharin's
thinking. Throughout the NEP period, he remained an influential sup-
porter of the NEP economic system.
Whereas Preobrazhensky felt that the victory of socialist ownership
over private property had to be engineered by the state through unequal
exchanges between the city and countryside, Bukharin felt that this out-
come would be ensured by the natural superiority of socialist ownership. 18
Market relations between the city and countryside would ensure that
harmony between the peasant and the industrial worker (the Smychka)
would be maintained. Any effort to introduce nonequivalent exchanges
would destroy the foundation of economic development.
Unlike the left wing, Bukharin and his followers felt that socialized
industry did not require discriminatory government action. Rather, state
industry would naturally grow more rapidly than the rest of the economy,
and its share would inevitably increase. The superiority of socialist own-
ership would be demonstrated to those outside the state sector, and they
would join the state sector voluntarily. The peasants would increasingly
join consumer and producer cooperatives, and the state would encourage
agricultural cooperation through favorable credit terms granted by the
State Bank. It would be counterproductive to impose collectivization on
the peasantry before the peasants themselves were convinced of the supe-
riority of the socialist form.
So much for the political side of the Bukharin program. On economic
grounds, he argued in favor of the balanced growth of industry and
agriculture, granting that socialized industry would grow more rapidly
than the economy as a whole. Any investment policy that one-sidedly
favors agriculture over industry or vice versa, or one branch of indus-
try over another, will fail because of the interdependence of economic
sectors. 19 Industry cannot function without agricultural supplies. Indus-
trial capacity will be reduced if agricultural raw materials are not avail-
able. Industry requires sophisticated capital equipment, which it initially
cannot produce domestically and which cannot be purchased abroad if
agricultural surpluses are not exported. Agricultural producers, on the
other hand, depend on industry for hand tools, agricultural machinery,
and manufactured consumer goods. If these goods are not forthcoming,
the peasants will retaliate by not supplying agricultural products for
industry.
Bukharin recognized the need for capital accumulation but argued that
it should be kept within manageable proportions. The overextension of
one sector or subsector of the economy at the expense of other sectors
would create critical bottlenecks-steel shortages, deficits of vital agricul-
tural raw materials, insufficient foreign exchange earnings-that would
retard overall economic development. Any formula calling for maximum
investment in heavy industry without a corresponding expansion of light
industry would not only aggravate the goods famine, owing to the chan-
neling of investment resources into time-consuming capital goods indus-
tries, but would also threaten to undermine the NEP recovery.
Bukharin's program called for the gradual expansion of all sectors
simultaneously. The critical link between agriculture and industry would
be maintained by creating a favorable atmosphere for peasant agriculture.
Instead of setting low agricultural delivery prices and high industrial
prices, the state should do the opposite: first, to provide an incentive for
the peasant to produce and market a larger output, and second, to pressure
state enterprises to lower costs. It would not be necessary to force saving
from agriculture as Preobrazhensky proposed; instead, only a stable eco-
nomic environment free of the uncertainties of War Communism and NEP
would be needed. In such a situation, the peasants would return to their
traditional frugality, creating the savings to finance further expansion of
capacity. Bukharin's advice to the peasant was to "get rich," a slogan from
which Stalin carefully disassociated himself. 20
To resolve the incongruence between limited industrial capacity and
his call for moderate capital investment to be spread evenly among eco-
nomic sectors, Bukharin proposed a series of measures to economize and
utilize the available capital more fully. Small-scale manufacturing and
handicrafts were to undergo a technological "rationalization" and be
transformed into supposedly more efficient producers' cooperatives.
Large-scale investment projects were to be made more cost-effective by
better planning and more efficient construction work. Maximum attention
was to be accorded to the speedy completion of investment projects. The
available capital equipment was to be used more exhaustively by employ-
ing multiple shifts. Attention was to be given to appropriate factor pro-
portions; that is, capital was not to be invested in areas where labor could
do the job as efficiently. The state pricing policy was to stimulate cost
economies and more efficient use of available resources by eliminating
monopoly profits. 21 Nevertheless, Bukharin was forced to admit that
balanced growth meant steady but slow progress toward socialism. His
own expression was "progress at a snail's pace," a phrase that was used
against him in his struggles against the left wing and then later with
Stalin. 22
Although Trotsky had criticized the foreign trade strategy of the right
wing as too autarkic, the trade policies advocated by Bukharin and his
associates recognized the Soviet Union's initial dependence on the ad-
vanced capitalist powers. 23 Bukharin argued that during the early stages of
industrialization, the USSR must import large quantities of industrial
equipment from abroad and pay for those commodities with agricultural
exports. Yet the long-term goal must be independence from the capitalist
world and the "building of socialism in one country." Thus, the Soviet
Union's dependence on foreign imports should be of limited duration,
lasting only until domestic industry would be capable of producing the
necessary capital equipment at home.
STALIN'S CONSOLIDATION OF POWER
In a series of adroit political maneuvers, Stalin consolidated his power

within four years after Lenin's death in 1924. First, he allied himself with
the right wing of the party (Bukharin, Rykov, and Tomsky) to purge the
leftist opposition led by Trotsky from positions of power-a phase com-
pleted in late 1927. Then, Stalin turned his attention to the "right devia-
tionist" Bukharinites, who were denounced by the Central Committee of
the Communist Party in November of 1928. This occurred just one month
after Stalin's adoption of the more ambitious alternative draft of the first
Five Year Plan, which supported the original left-wing industrialization
program. 24
The variant of the first Five Year Plan adopted in 1928 and formally
approved in April 1929 staggered the imagination of even the superindus-
trialists. The low capacity of the Soviet industrial sector was to be sub-
jected to an all-out attack: the Soviet fixed capital stock was to double
within five years to provide the industrial base for building socialism. The
first Five Year Plan also called for a 70 percent expansion of light industry,
which was quite unrealistic in view of the limited industrial capacity in
1928. 25
During the Industrialization Debate, Stalin was clearly aligned with
the Bukharin position. Stalin emphasized the achievements of NEP and
ridiculed the left's superindustrialization proposals and demand that "trib-
ute" (primitive socialist accumulation) be paid by the peasants. 26 Although
Stalin underscored the advantage of large-scale farming, he made it clear
that any movement in the direction of collective farming would be gradual
and voluntary.
The foreign policy setbacks and the grain collection problem of 1927
emboldened Trotsky and the left opposition to challenge the ruling coali-
tion. Stalin, allied with the moderates, was able to repulse the attack, but
he came to believe that the left had correctly foreseen the crises encoun-
tered in 1927, in particular the problem of state grain collections from a
reluctant peasantry. To increase grain collections, Stalin came to rely more
and more on coercion and emergency measures, personally directing state
grain collections in Siberia. The coalition with Bukharin was kept intact
by carefully timed concessions to the right wing concerning the lifting of
force in the countryside. Stalin came away from his experiences in 192 7
with the conviction that force was the answer to the agrarian problem, for
primitive socialist accumulation without the power to force peasant deliv-
eries would not work. From this point on, Stalin ceased to serve as
defender of the NEP system and began instead to criticize lagging NEP
performance and to call for a superindustrialization drive. Moreover, he
began to reiterate Trotsky's call for tribute from the peasants and to warn
of kulak sabotage of grain collections. Encouraged by Stalin's move to the
left, former Trotskyites such as Preobrazhensky returned to the party fold,
only to perish later in the purges.
The first Five Year Plan was adopted in October 1928, amidst a new
grain collection crisis. According to Stalin, the success of the industrializa-
tion program was clearly jeopardized. As long as the peasants refused to
turn over such deliveries to the city, they held the power to halt the entire
industrialization program. 27 The peasants' reluctance to sell their output

to the state was understandable in light of the low purchase prices paid by
the state and the increasing use of coercion to collect grain.
Stalin's answer to the crisis he perceived was to mount a counteroffen-
sive designed to break once and for all the peasants' hold over the pace of
industrialization. In the autumn of 1929, he ordered the wholesale collec-
tivization of agriculture. Peasant landholdings and livestock were forcibly
amalgamated into collective farms, which were obligated to deliver to the
state planned quotas of farm products at terms dictated by the state.
The ensuing turmoil was great not only in the countryside, which burst
into open rebellion, but also in Soviet cities, which received a vast influx
of workers from the countryside and saw a significant redistribution of
labor among industrial branches as enterprises attempted to fulfill their
taut production targets.
THE OUTCOME OF THE SOVIET INDUSTRIALIZATION DEBATE
The actual Soviet industrialization pattern that emerged after 1928 (Ta-
ble 4.1) bears a close resemblance to Preobrazhensky's industrialization
program: Soviet economic growth between 1928 and 1940 was heavily
biased in favor of industry in general and of heavy industry in particular.
Industrial production grew at an annual rate of 11 percent, whereas
agricultural production grew at an annual rate of only 1 percent between
1928 and 1937. The negative rate of growth of livestock graphically
indicates the impact of collectivization upon agricultural performance.
The same trends are apparent in the differential rates of growth of the
agricultural and nonagricultural labor forces between 1928 and 1937: the
former declined, while the latter expanded rapidly at an annual rate of
almost 9 percent.
The structural transformations resulting from these differential sector
growth rates are impressive. Agriculture's shares of net national product
and labor force declined from 49 percent and 71 percent, respectively, in
1928 to 29 and 51 percent, respectively, in 1940, whereas the increase in
industry's product and labor force shares was from 28 and 18 percent,
respectively, to 45 and 29 percent, respectively, during the same period.
The most remarkable feature of the 1930s was the extent to which the
pro-heavy industry bias asserted itself (as Preobrazhensky said it should).
Between 1928 and 1937, heavy manufacturing's net product share of total
manufacturing more than doubled, from 31 percent to 63 percent,
whereas light manufacturing's product share fell from 68 percent to 36
percent.
Table 4.1 OUTCOME OF THE SOVIET INDUSTRIALIZATION DEBATE
The Industrialization Drive of 1928-1940
1928 1933 1937 1940
A. Changes in manufacturing
1. Heavy manufacturing + overall manufacturing
Net product share (1928 prices) 31 51 63
Labor force share 28 43
2. Light manufacturing + overall manufacturing
Net product share (1928 prices) 68 47 36
Labor force share 71 56
B. Changes in major economic sectors, structure of output
1. Share in net national product (1937 prices)
Agriculture 49 31 29
Industry 28 45 45
Services 23 24 26
2. Share in labor force
Agriculture 71 51
Industry 18 29
Services 12 20
C. Rates of growth (1928-1937)
1. GNP (1937 prices) (%) 4.8
2. Labor force
Nonagriculture (%) 8.7
Agricultural (%) -2.5
3. Industrial production (1937 prices) (%) 11.3
4. Agricultural production (1958 prices) (%) 1.1
Livestock (%) 1.2
5. Gross Industrial capital stock (1937 prices)
(billion rubies) 34.8 75.7 119 170
D. Changes in the structure of GNP by end use (1937 prices)
1. Household consumption + GNP 80 53 49
Annual growth rate (1928-1937) (%) 0.8
2. Communal services + GNP 5 11 10
3. Government administration and defense + GNP 3 26 21
4. Gross capital investment + GNP 13 26 19
E. Foreign trade proportions
1. Export + imports + GNP (%) 5a 4
F. Shares of the socialist sector in
1. Capital stock (%) 65.7 99.6
2. Gross production of industry (%) 82.4 99.8
3. Gross production of agriculture (%) 3.3 98.5
4. Value of trade turnover (%) 76.4 100.0
G. Prices
1. Consumer goods prices (state and cooperative stores, 1928 = 100) 100 400 700 1000
2. Average realized prices of farm products (1928 = 100) 100 539
8 1929.
Sources: A: P. R. Gregory, Socialist and Nonsocialist Industrialization Patterns (New York: Praeger, 1970), pp. 28-29, 36. Heavy
manufacturing is defined according to the International System of Industrial Classification as ISIC 30-38. Light manufacturing is
defined as ISIC 20-29. B: S. Kuznets. "A Comparative Appraisal," in A. Bergson and S. Kuznets, eds., Economic Trends in the
Soviet Union (Cambridge, Mass.: Harvard University Press, 1963), pp. 342--360. C: Bergson and Kuznets, Economic Trends, pp. 36,
77, 187, 190, 209. D: A. Bergson, Real Soviet National Income and Product Since 1928 (Cambridge, Mass.: Harvard University
Press, 1961), pp. 217, 237. E: Bergson and Kuznets, Economic Trends, pp. 288-290. F: Narodnoe khoziaistvo SSSR v 1958g.1The
national economy of the USSR in 19581. p. 57. G: F. D. Holzman, "Inflationary Pressures, 1928-1957: Causes and Cures," Quarterly
Journal of Economics, vol. 74, no. 2(May1960), 168-169.
88
The impact of this production program on real consumption levels in

the absence of significant foreign trade (the ratio of imports plus exports
to GNP sank to 1 percent by 1937) had already been foreseen by Preo-
brazhensky. Between 1928 and 1937, household consumption scarcely
grew (at an annual rate of 0.8 percent), and the share of consumption in
GNP (in 1937 prices) declined markedly, from 80 percent to 53 percent.
During the same period, gross capital investment grew at an annual rate
of 14 percent, and the ratio of gross investment to GNP doubled, from 13
percent to 26 percent. If we define total consumption expenditures to
include both private consumption and communal services, and noncon-
sumption expenditures to include investment, government administration,
and defense, then total consumption fell between 1928 and 1937 from
85 percent of GNP to 64 percent of GNP.
The changing institutional setting within which these transformations
were occurring should also be noted: between 1928 and 1937, the socialist
sector share of total capital stock, industry, agriculture, and trade ex-
panded sharply, so that by 1937 the socialist sector totally dominated all
economic activity.
Consumer prices rose by 700 percent between 1928 and 1937 and
probably would have risen even faster without the extensive rationing of
the period. Average realized prices of farm products, which are weighted
averages of the extremely low state procurement prices, the above-quota
state delivery prices, and collective farm market prices, on the other hand,
rose by 539 percent, which indicates a reopening of the price scissors
against agriculture between 1928 and 1937. An examination of some
partial data (Figure 4.1) suggests that, in fact, the scissors did reopen and
were not closed again until the mid-1950s, with a resultant squeeze on the
agricultural sector in terms of low procurement prices.
REHABILITATIONS AND REEVALUATIONS
The Soviet industrialization debate was about two interrelated issues:

sectorial priorities, and the economic system. The party's right wing of-
fered one view of the future; the left wing offered an alternate view. Stalin
followed the program of the left wing-only in a form more extreme than
that envisioned by its designers-and instituted the Stalinist economic
model, later called the administrative-command system. The sacrifices that
the Stalinist model extracted from the Soviet population were immense.
Living standards stagnated at a time when real economic growth was
rapid. Although there have been endless debates over magnitude, the loss
of life associated with the catastrophes of Stalinism-forced collectiviza-
tion, famine, purges-was in the millions.
Figure 4.1 STATE WHOLESALE PRICES FOR OBJECTS OF MASS CONSUMPTION AND
PURCHASE PRICE OF WHEAT
(USSR 1929 = 100). (These figures are not directly comparable to those in
Figure 3.1, which relate an index of agricultural prices to an index of all
prices, because of the vast change in agricultural prices after 1929, when
procurement prices began to diverge significantly from the retail prices
of agricultural commodities, and because this figure refers only to wheat
prices, not to a more general farm price index.)
190
160
130
', ,, .
,~, ~
70 ,,',,,, I 'v
' I
' , Procurement price index, wheat /
40
'~ I
', I
' ,, ,
' .... -
_ .... JI
Source: A. N. Malafeev, lstoriia tsenoobrazovaniia v SSSR (The history of price formation in

the USSR] (Moscow: Nauka, 1964). p. 286.
The rehabilitations of some of the major figures in the industrializa-

tion debate, such as Bukharin, Tomsky, and Rykov, prior to the end of the
Soviet Union refocused attention on the losing side. This attention forc;ed
the Soviet leadership in its waning years to deal with the thorny question
of whether Stalin was really necessary. Would the right-wing program of
balanced growth, continuation of NEP, and a more gradual transforma-
tion of property relations have resulted in a viable socialist economy in the
late 1980s?
The late Soviet leadership was not willing to dismiss the accomplish-
ments of the Stalinist model out of hand. They noted the incredibly rapid
transformation of the Soviet industry and of property relations. But they
also spoke more openly about the immense costs of Stalinism and strictly
differentiated Stalinism from socialism. 28
The official Soviet reevaluation of the industrialization debate credited
Bukharin with a better sense of the appropriate pace of transformation.
Bukharin's emphasis on allowing the natural cooperative tendencies of the
peasantry to develop without being forced by "extraordinary measures"
also found a sympathetic response, as did Bukharin's point that resource
allocation cannot be permanently based on commands, administrative
interference, and extraordinary measures.
On the other hand, current Soviet ideology was not prepared to say
that collectivization was a mistake. 29 Rather collectivization was carried
out prematurely and Stalin's extraordinary measures were costly, extreme,
and antidemocratic. Soviet ideology held to the belief that private peasant
agriculture was incompatible with rapid industrialization and that the
emergencies perceived by Stalin were real, not imagined. In this sense,
Bukharin's faith in peasant agriculture was viewed as misguided, even
though Bukharin's long-run solution called for socialization of property
rights in agriculture.
REFERENCES
1. Our discussion of the Soviet Industrialization Debate is drawn primarily from
the following sources: A. Erlich, The Soviet Industrialization Debate, 1924-
1928 (Cambridge, Mass.: Harvard University Press, 1960); N. Spulber, Soviet
Strategy for Economic Growth (Bloomington: Indiana University Press,
1964); N. Spulber, ed., Foundations of Soviet Strategy for Economic Growth
(Bloomington: Indiana University Press, 1964); A. Erlich, "Stalin's Views on
Economic Development" in E. Simmons, ed., Continuity and Change in
Russian and Soviet Thought (Cambridge, Mass.: Harvard University Press,
1955), pp. 81-99; M. Lewin, Russian Peasants and Soviet Power (London:
Allen & Unwin, 1968), chaps. 6-9; S. F. Cohen, Bukharin and the Bolshevik
Revolution (New York: Knopf, 1973); M. Reiman, Die Geburt des Stalinis-
mus [The birth of Stalinism] (Frankfurt/Main: EVA, 1979); A. Nove, "A Note
on Trotsky and the 'Left Opposition,' 1929-31," Soviet Studies, vol. 29, no.
4 (October 1977), 576-589; ]. R. Millar, "A Note on Primitive Accumulation
in Marx and Preobrazhensky," Soviet Studies, vol. 30, no. 3 (July 1978),
384-393; and R. Day, "Preobrazhensky and the Theory of the Transition
Period," Soviet Studies, vol. 27, no. 2 (April 1975), 196-219.
2. P.R. Gregory, Russian National Income, 1885-1913 (Cambridge: Cambridge
University Press, 1982), pp. 185-186.
3. The growth models developed during this period by V. A. Bazarov and V. G.

Groman predicted a declining growth rate as the Soviet economy approached
its prewar equilibrium. For a discussion of these models, see L. Smolinski,
"The Origins of Soviet Mathematical Economics," in H. Raupach et al., eds.,
Yearbook of East-European Economics, Band 2 (Munich: Gunter Olzog
Verlag, 1971), p. 144.
4. For discussions of the political setting, see Cohen, Bukharin and the Bolshevik
Revolution, chaps. 7-9; Reiman, Die Geburt des Stalinismus, chaps. 1-6; and
Lewin, Russian Peasants and Soviet Power, chaps. 6-12.
5. This discussion is based on P. M. Sweezy, The Theory of Capitalist Develop-
ment (New York: Modern Reader Paperbacks, 1968), chaps. 5 and 10; Day,
"Preobrazhensky and the Theory of the Transition Period," pp. 196-199; and
F. Engels, Anti-Duhring (Moscow: Progress Publishers, 1975).
6. S. Malle, The Economic Organization of War Communism 1918-1921 (Cam-
bridge: Cambridge University Press, 1985), chap. 6; and K. Marx, Critique of
the Gotha Program (Moscow: Progress Publishers, 1971), pp. 9-21.
7. Sweezy, The Theory of Capitalist Development, pp. 75-95, 162-169.
8. This discussion of primitive capitalist accumulation is based primarily upon
Millar, "A Note on Primitive Accumulation," pp. 384-392.
9. For a discussion of Lenin's revision of Marx in light of the Russian experience,
see P. R. Gregory and R. C. Stuart, Comparative Economic Systems, 3rd ed.
(Boston: Houghton Mifflin, 1989), chap. 4.
10. In addition to the references already cited in this chapter, see H. Ray Bucha-
nan, "Lenin and Bukharin on the Transition from Capitalism to Socialism:
The Meshchersky Controversy, 1918," Soviet Studies, vol. 28, no. 1 (January
1976), 66-82. For a Soviet author's modern study of industrial concentration
in Russia prior to the revolution, see V. I. Bovykin, Formirovanie finansovogo
kapitala v Rossii [Formation of financial capital in Russia] (Moscow: Nauka,
1984).
11. For a detailed discussion of this controversy, see R. Day, Leon Trotsky and
the Politics of Economic Isolation (Cambridge: Cambridge University Press,
1973).
12. Preobrazhensky's views are outlined in his famous work, Novaia ekonomika
[The new economics], which is available in English translation. See E. A.
Preobrazhensky, The New Economics, translated by B. Pierce, (Oxford: Ox-
ford University Press, 1964).
13. Erlich, The Soviet Industrialization Debate, p. 35.
14. It is noteworthy that the Preobrazhensky model has attracted the attention of
economic theorists in recent years. R. K. Sah and J.E. Stiglitz, "The Econom-
ics of Price Scissors," American Economic Review, vol. 74, no. 1 (March
1984), 125-138, have examined the nonequivalent exchange propositions
carefully. They conclude that the rate of accumulation can be raised by
imposing a price squeeze on peasants (p. 135). However, they conclude that
the hope of the left wing that the burden would be borne exclusively by the
peasants was not valid.
15. Quoted in Erlich, The Soviet Industrialization Debate, pp. 56-57.

16. Lewin, Russian Peasants and Soviet Power, pp. 146-152; and Millar, "A Note
on Primitive Accumulation," pp. 387-393.
17. Stalin's solution to this dilemma-collectivization of the peasantry, which
eliminated the peasant's freedom to dispose of surpluses-did not occur to
Preobrazhensky. Several years after the collectivization decision, Preobrazhen-
sky declared in a speech: "Collectivization-this is the crux of the matter! Did
I have this prognosis of the collectivization? I did not." (Quoted in Erlich, The
Soviet Industrialization Debate, p. 177.) Erlich adds to this: "He [Preo-
brazhensky] was careful not to add that neither did Stalin at the time when
the industrialization debate was in full swing. And he was wise not to point
out that the decision to collectivize hinged not on superior intellectual perspi-
cacity but on the incomparably higher degree of resolve to crush the oppo-
nent ... "
18. Cohen, Bukharin and the Bolshevik Revolution.
19. Lewin, Russian Peasants and Soviet Power, pp. 132-142.
20. Erlich, The Soviet Industrialization Debate, pp. 82-83.
21. Ibid., pp. 86-87.
22. Ibid., pp. 84-86.
23. Lewin, Russian Peasants and Soviet Power, p. 139.
24. Day, Leon Trotsky and the Politics of Economic Isolation, chap. 7.
25. Ibid., chap. 9. It was not until the Stalin purges in the late 1930s that this
political process was complete. Preobrazhensky, Shanin, and Bukharin all lost
their lives in the purges.
26. Ibid., p. 166.
27. Accounts of Stalin's move to the left are found in Erlich, "Stalin's Views on
Economic Development," pp. 81-99; Reiman, Die Geburt des Stalinismus,
chaps. 5-8; and Lewin, Russian Peasants and Soviet Power, chaps. 9-17.
28. According to Jerzy Karcz, there was no real agricultural crisis during this
period. The grain collection "crisis" was precipitated by the lowering of state
grain procurement prices in 1926-1927, while procurement prices for animal
products were raised. Peasants shifted their attention to animal products, fed
grain to livestock, and held grain in stock, waiting for grain prices to be
increased. Total agricultural sales did not fall during this period. Thus the
"crisis" was caused not by the weakness of peasant agriculture but by the
ineptitude of state pricing policy. In addition, Karcz raises the question of
deliberate falsification of grain statistics by Stalin to gain support for collec-
tivization. J. F. Karcz, "Thoughts on the Grain Problem," Soviet Studies, vol.
18, no. 4 (April 1967), 399-434. For a different view, see R. W. Davies, "A
Note on Grain Statistics," Soviet Studies, vol. 21, no. 3 (January 1970),
314-329. This controversy will be discussed in detail in Chapter 5.
29. G. L. Smirnov, ed., "Vremiia trudnykh voprosov, lstoriia 20-30-x godov i
sovremennaia obshchestvennaia mysl" [A time of difficult questions, history
of the 20s and 30s and contemporary social thought], Pravda, September 30,
1988; October 3, 1988.
N. Bukharin, in K. Tarbuck, ed. The Politics and Economics of the Transition

Period (London: Routledge & Kegan Paul, 1979).
S. F. Cohen, Bukharin and the Bolshevik Revolution (New York: Knopf, 1973).
R. Day, Leon Trotsky and the Politics of Economic Isolation (Cambridge: Cam-
& Kegan Paul, 1960), chap. 8.
F. Engels, Anti-Duhring (Moscow: Progress Publishers, 1975).
A. Erlich, "Stalin's Views on Soviet Economic Development," in E. Simmons, ed.,
Continuity and Change in Russian and Soviet Thought (Cambridge, Mass.:
Harvard University Press, 1955), pp. 81-99.
- - - , The Soviet Industrialization Debate, 1924-1928 (Cambridge, Mass.:
N. Jasny, Soviet Economists of the Twenties: Names to Be Remembered (Cam-
V. I. Lenin, Imperialism, the Highest Stage of Capitalism (Moscow: Progress
Publishers, 1970).
M. Lewin, Russian Peasants and Soviet Power (London: Allen & Unwin, 1968),
chaps. 6-9.
K. Marx, Critique of the Gotha Program (Moscow: Progress Publishers, 1971).
J. R. Millar, "A Note on Primitive Accumulation in Marx and Preobrazhensky,"
Soviet Studies, vol. 30, no. 3 (July 1978), 384-393.
A. Nove, "A Note on Trotsky and the 'Left Opposition,' 1929-31," Soviet
Studies, vol. 29, no. 4 (October 1977), 576-589.
---,An Economic History of the USSR (London: Penguin, 1969), chap. 5.
M. Reiman, Die Geburt des Stalinismus [The birth of Stalinism] (Frankfurt/Main:
EVA, 1979), chaps. 3-9.
R. K. Sah and J. E. Stiglitz, "The Economics of Price Scissors," American Eco-
nomic Review, vol. 74, no. 1 (March 1984), pp. 125-138.
N. Spulber, ed., Foundations of Soviet Strategy for Economic Growth (Bloom-
ington: Indiana University Press, 1964).
- - - , Soviet Strategy for Economic Growth (Bloomington: Indiana University
Press, 1964), chaps. 1-4.
P. M. Sweezy, The Theory of Capitalist Development (New York: Modern Reader
Paperbacks, 1968).
R. C. Tucker, ed., The Lenin Anthology (New York: Norton, 1975).
FIVE
••
Creating the
System: Planning,
Collectivization, and War
(1928-1945)
B y the end of the 1920s, the Soviet Union was prepared to embark on
its "great experiment," creating and administering the world's first
planned socialist economy. The Soviet leadership had no models to emu-
late. They had only the vague guidance of Marx and Lenin and the
experiences of the period 1918-1928. Our attention now turns in this
chapter to the creation of the Soviet administrative-command system,
specifically to the development of a central planning apparatus and the
introduction of forced collectivization into the countryside. World War II
provided a stern test of the command economy put in place in the 1930s.
The war imposed enormous costs on the Soviet Union and also caused
changes in the resource allocation system.
95
WHAT SHOULD PLANNERS Do?

Granted that the Soviet economy would be a planned economy, the ques-
tion still remained. What should be the goal of planning? 1
In the 1920s, the debate focused on whether planning was to be
directed (and limited) by market forces or molded by the will of planners,
unconstrained by market forces and limited only by the physical con-
straints of the economy. The first approach was advocated by the geneti-
cists, the most notable being N. D. Kondratiev (the prominent Russian
authority on business cycles), V. A. Bazarov, and V. G. Groman. The geneti-
cists argued that economic planning should be directed by consumer de-
mand, which would dictate to planners the needed direction of the economy.
The planner would forecast and project market trends to aid central
and local administrators; the geneticists envisioned a form of indicative
planning. In drawing up plans, authorities should always make sure of
their internal consistency, for the geneticists viewed the economy as a vast
complex of interrelated sectors, the balance of which would be disturbed
if planners neglected sectorial interrelationships. The geneticists advocated
a form of planning that was consistent with NEP, in view of the dominant
role that market forces would play in planning. The advocates of genetic
planning, therefore, were supportive of NEP and were associated with the
party's right wing.
The teleological approach to planning, as advocated by S. Strumilin,
G. L. Pyatakov, V. V. Kuibyshev, and P. A. Fel'dman, stated that the eco-
nomic plan should be consciously formulated by social engineers and
shaped by national goals. Such planning should seek to overcome market
forces rather than be directed by them as the geneticists argued. The
market and finance, according to the teleologists, should follow the plan
rather than dictate the plan. Planning should begin only after national
economic goals have been set by the political authorities. Then, the plan-
ners should form economic strategy, largely in terms of binding targets for
basic industries, limited only by the availability of investment, and such
investment should be allocated to meet the needs of industry inde-
pendently of market forces.
In drawing up output and investment plans, the teleologists argued
that planners need not be constrained by the need to preserve the general
equilibrium of the economy, for to do so would be to subject the growth
of the economy to the spontaneous forces of the market. Instead, the
concept of equilibrium should be denounced as an unnecessarily severe
constraint on the flexibility of planners. As stated by one teleologist, to
accept the direction of the market meant acceptance of the "genetic
inheritance" of 300 years of tsarism. 2
The late 1920s witnessed the conclusive victory of the teleological
viewpoint. As the NEP system was gradually abandoned, the advocates of
Creating the Administrative-Command System: Planning, Collectivization, and War 97
the genetic approach, tied as it was to a market-directed system of plan-

ning, saw their support within the party deteriorate. From the summer of
1927, actual planning paid little attention to market equilibrium and
financial stability as advocated by the geneticists. Instead, attention turned
to physical planning involving a "ferocious straining of effort," the out-
come of which would be "decided by struggle. " 3 The teleological approach
to planning was consistent with the superindustrialization notions of the
left adopted by Stalin in 1928. Eventually, the geneticists came to be
accused of counterrevolution and right-wing Menshevism. The advocates
of the teleological approach played a guiding role in the planning for rapid
industrialization.
The Evolution of the Planning Structure 4

A variety of agencies dealt with planning problems throughout the
1920s-VSNKh (the Supreme Council of the National Economy), the
People's Commissariat of Finance, the People's Commissariat of Transpor-
tation, Gosplan USSR (State Planning Committee of the USSR), the re-
gional Gosplans, the Sovnarkhozy, local authorities, and many others.
However, of these many agencies, only Gosplan was explicitly and exclu-
sively concerned with economic planning. Gosplan's duties (according to
a 1922 decree) were "the preparation not only of a long-range plan but
also of an operational plan for the current year. " 5
From modest beginnings in February 1921 (in 1925, it employed only
around 50 economists and statisticians 6 ), Gosplan gradually came to be
accepted by the late 1920s as the planning agency in charge of coordinat-
ing economic planning for the entire economy. Much of this recognition
emerged as a consequence of Gosplan's work on the annual control
figures, or tentative output targets, for the various branches of the econ-
omy. The first control figures were prepared covering the year 1925-1926,
and while they did not initially prove important in directing economic
activity, the figures were used to establish the principle that economic
policy should be guided on an annual basis by control figures prepared by
Gosplan. In this manner, Gosplan came to play a supervisory role in the
preparation of plans by other administrative bodies. The early control
figures had a definite geneticist flavor, as they were designed to forecast
rather than manipulate. The growing importance of Gosplan's control
figures is clear: by 1926, the control figures were the first order of business
of the Central Committee meeting of the party. In 1927, the party gave
full compulsory status to the 1927-1928 control figures, which had taken
on a strong teleological character.
While Gosplan's role as the coordinator of all planning was develop-
ing, it had little to do with the actual operational planning of the economy,
especially at the enterprise and trust levels. Such work was primarily
performed by the central planning staff of VSNKh and by the Glavki
planning offices of VSNKh. Annual plans, including production and finan-
cial targets known as promfinplans, were drawn up. Promfinplans tended
to be compiled on a sector-by-sector basis, with little attention given to the
overall result. Gosplan complained that it received the promfinplans too
late to coordinate them with the overall control figures. Gradually, the
promfinplans were merged into Gosplan's control figures. Beginning in
1925, VSNKh was instructed to prepare its promfinplans on the basis of
Gosplan's 1925-1926 control figures. By 1926-1927, it was established
that the promfinplan was clearly dependent on the control figures.
During this period, the machinery for physical planning-the system
of material balances-was also being developed. As certain basic industrial
commodities came to be in short supp1y and the administrative allocation
of commodities increased, planning bodies began compiling balances for
critical industrial materials. In 1925, a balance for iron and steel was
compiled; and in 1927, an energy balance of fuel and power consumption
was drawn up. The balance system was extended to building materials in
1928. 7 In charge of coordinating these balances through the promfinplan
and control figure system were VSNKh and Gosplan.
The plan period began with the adoption of the first Five Year Plan in
1928, with the following planning principles established: First, Gosplan
was to be the central coordinating planning body to which all other
planning bodies were to submit their proposals. Second, the control figures
were to provide the general direction for the economy. Third, the actual
detailed operational plans for industries and for enterprises (the promfin-
plans) were to conform to the control figures. Fourth, materials were to
be allocated through a system of balances, which would elaborate the
supplies and uses of basic industrial materials.
Gosplan's elevation to full planning authority came in 1932 with the
development of the ministerial system. Between 1928 and 1932, the func-
tions of VSNKh had grown increasingly complex and confused; and in
1932, VSNKh was, in effect, dissolved as a central coordinating agency for
industry. Its chief departments, the Glavki, which later became ministries,
were allowed to take direct power over planning and administering their
enterprises. Earlier, VSNKh had served to coordinate the activities of the
industrial departments-a role that Gosplan now inherited. VSNKh itself
became three separate ministries (Commissariats): heavy industry, light
industry, and woodworking.
The ministries became the operational links between Gosplan and the
actual production units. The ministries became coplanners with Gosplan.
Input plans were also compiled on a ministerial basis with general allot-
ments of materials apportioned to the ministries. The ministries then made

the actual distributions of industrial materials to the enterprises.
During the late 1920s and early 1930s, party control over economic
affairs was solidified. Major economic powers resided in the Politburo
under Stalin. Direct central committee control was applied to major con-
struction and industrial projects. Stalin immersed himself in overseeing
even minor economic details. The party cadres department handled the
nominations for important positions in the economy. The party served, at
all levels, as a general troubleshooter to deal with bottlenecks. Local party
officials were charged with mobilizing the masses to plan fulfillment.
Gosplan assumed responsibility in 1925 for drawing up Five Year
Plans. 8 The five-year period was chosen because major construction pro-
jects were felt to have a five-year gestation period. Gosplan initiated the
practice of developing the long-range plan in two variants: a minimum
variant based on cautious assumptions, and a bold maximum variant.
The maximal variant of the plan for 1928-1933 (the first Five Year
Plan) was formally adopted by the party in April 1929 and reflected the
teleological thinking of Stalin. It was a 2000-page document, authored
by the leading proponents of the teleological approach, G. M.
Krzhizhanovsky and S. Strumlin, and it called for the industrialization of
the country at a maximum pace.
Extensive centralized price setting and regulation, introduced during
the early plan era, proved to be a complex task involving issues well
beyond the setting of prices per se and requiring the expansion of admin-
istrative arrangements. 9 Although the setting of prices was largely decen-
tralized during the NEP period, toward the end, the Commission for
Internal Trade and VSNKh gained increasing authority. This tendency
toward the centralization of price formation was greatly enhanced after
·the introduction of comprehensive central planning. Not only were inter-
nal prices subsequently shielded from world prices through the creation of
a state monopoly in foreign trade, but also a series of decrees in the late
1920s and early 1930s harnessed the price system toward the achievement
of state goals.
The early 1930s witnessed the significant expansion of the number of
administrative organs concerned directly or indirectly with price forma-
tion, although during the 1930s there was a measure of consolidation with
VSNKh and later with the ministries that became the main price-setting
bodies. 10 This period also witnessed the tightening of financial controls
over enterprises. Commercial credits between enterprises were forbidden,
and Gosbank (the State Bank) and various specialized banks controlled all
credit operations. Direct grants from the state budget became a major
source of investment finance.
Centralized Management vs. Central Planning

Five Year plans were never neatly divided into five annual plans. Instead,
the Five Year Plan had to be constantly revised, so that the end result often
bore little resemblance to the original targets. As Eugene Zaleski describes
it, the Five Year Plan represented "a vision of growth, itself at the service
of development strategy." 11 As the objectives of the long-range and annual
plans were not necessarily compatible, it was decided that the state agen-
cies controlling material supplies and credits were the ones to determine
what parts of the "vision" were to be realized. The first Five Year Plan
(maximum variant) called for a quadrupling of investment in state indus-
try, an 85 percent increase in consumption expenditures, a 70 percent
increase in real wages, and a 30 percent increase in peasant incomes. These
targets represented the planners' vision, but it was the responsibility of the
economic administrators in charge of material allocations to ensure that
priority targets (industrial investment) were fulfilled.
Table 5.1 shows the record of fulfillment of Five Year plans. It shows
that the Five Year plans were clearly unrealistic and beyond the capacity
of the economy. The second Five Year Plan came closer to being fulfilled
than the first.
These figures suggest that the Soviet economy was more a "managed"
than a "planned" economy. Decisions made after the plan was completed
played a greater role than the plan itself.
THE DECISION TO COLLECTIVIZE
Developments in agriculture during the late 1920s were as significant in

the evolution of the administrative-command economy as was the forma-
tion of the centralized planning structure. War Communism and NEP
pointed to the crucial nature of the relationship between the peasant and
the state. This relationship, the subject of continuing discussion in the
1920s, was abruptly formalized by the Communist Party under Stalin's
leadership when the historic collectivization movement (the forcing of the
collective farm, the kolkhoz, on the countryside) was begun in 1929.
Underpinnings of the Collectivization Decision

The Soviet Industrialization Debate of the 1920s focused on alternate
development strategies for agriculture. 12
Preobrazhensky had argued that the peasant should bear the burden
of the increase in the savings rate through primitive socialist accumulation,
whereby savings would be extracted by setting low agricultural prices.
How to ensure peasant marketings under such a system was a question
Table 5.1 SOVIET PLAN FULFILLMENT IN THE 1930s

Percent Fulfillment
First Five Year Plan Second Five Year Plan

Objective (1928-1932) (1933-1937)
National income
Official estimate 92 96
Western estimate 70 67
Industrial output
Western estimate 60-70 76-93
Producer goods
Consumer goods
Agricultural production
Official estimate 58 63-77
Western estimate 50-52 66-78
Labor productivity
Official estimate 65
Western estimate 36-42 86
Retail trade
Western estimates 39 54
Sources: N. Jasny, Essays on the Soviet Economy(New York: Praeger, 1962), p. 266; E.
Zaleski, Stalinist Planning for Economic Growth: 1933-1952 (Chapel Hill: University of
North Carolina Press, 1980), p. 503; A. Nove. An Economic History of the USSR (London:
Penguin, 1969), p. 353.
that Preobrazhensky was unable to answer. Bukharin, on the other hand,

argued that any system designed to extract involuntary savings from the
peasants would destroy the relationship between peasant and state and
lead to reduced peasant marketings. Bukharin argued that it would be
better to adopt a slower rate of growth and set prices to favor the peasant.
Lenin had long stressed the need to take advantage of economies of
scale in agricultural production. Experimentation with agricultural collec-
tives had been unsuccessful in the 1920s. 13 Peasants would not join collec-
tive farms voluntarily in the short run. Voluntary collectivization would
be at best a slow and evolutionary process. The left wing of the party was
alarmed by the growing reliance on peasant farming, especially on the
prosperous kulak, who was regarded as a dangerous counterrevolutionary
threat. 14 In 1928, collectivization was regarded by the different party
factions as a desirable long-term solution, but few could have foreseen (or
would have supported) the forced collectivization drive that was to follow
shortly.
Stalin used as a major justification for instigating collectivization the

grain procurement crisis of 1928. 15 According to the best evidence avail-
able (see Table 5.2), the output of key agricultural products was signifi-
cantly below the 1913 levels in the early 1920s. 16 However, the indexes of
both gross agricultural production and livestock production were higher
(though not by much) in 1928 than in 1913.
Stalin, in May of 1928, put forward data to suggest that 1926-1927
grain output was slightly below 1913 but that the marketed share of grain
had declined substantially.17 According to Stalin, between 1913 and 1926-
1927, gross output of grain declined slightly, but the marketed share
declined by roughly 50 percent. In addition, while grain production and
marketings by the kulaks fell sharply (both had declined to less than
Table 5.2 SOVIET AGRICULTURAL PRODUCTION

1913-1938*
(1)
Gross (2)
ag ricu ltu ra I Grain variants* Livestock
production Sugar production
·Year (1928 =100) High Low Cotton beets Potatoes Meat Milk Eggs (1928 =100)
1913 96 92.7 79 0.5 10.8 29.9 4.0 25.1 10.2 87

1924 51.4 44 n.a. 3.5 35.3 3.3 26.3 n.a
1925 72.5 62 0.6 9.1 38.4 3.7 28.2 9.6
1926 76.6 66 0.6 6.4 42.8 4.1 30.5 10.5
1927 71.7 62 0.7 10.4 42.5 4.3 30.6 10.5
1928 100 73.3 63 0.8 10.1 45.2 4.9 31.0 10.8 100
1929 93 71.7 62 0.9 6.3 45.1 5.8 29.8 10.1 87
1930 88 78.0 67 1.1 14.0 44.6 4.3 27.0 8.0 65
1931 84 68.0 62 1.3 12.1 40.6 3.9 23.4 6.7 57
1932 76 68.0 62 1.3 6.6 37.2 2.8 20.6 4.4 48
1933 82 74.0 68 1.3 9.0 44.0 2.3 19.2 3.5 51
1934 86 75.0 68 1.2 11.4 44.2 2.0 20.8 4.2 52
1935 99 80.0 75 1.7 16.2 53.8 2.3 21.4 5.8 74
1936 93 66.0 60 2.4 16.8 44.7 3.7 23.5 7.4 76
1937 116 100.0 95 2.6 21.9 58.8 3.0 26.1 8.2 83
1938 107 76.0 70 2.6 16.7 37.5 4.5 29.0 10.5 100
*All data are million tons, except eggs, which are billion tons, and agricultural production and livestock
production, which are constant price indexes.
*The grain variants are based on differing views in the comparability of pre- and postcollectivization series. The
high variant has been adjusted; the low variant has not been adjusted.
Source: From S. G. Wheatcroft, "A Reevaluation of Soviet Agricultural Production in the 1920s and 1930s," in R.
C. Stuart, ed., The Soviet Rural Economy (Totowa, N.J.: Rowman & Allenheld, 1984), 11, 42-43, 49.
one-third of pre-war levels), output and marketings of the middle and

poor peasants had expanded. For Stalin, this was evidence of the need to
move against the kulaks. The talk of moving against the kulaks made for
good window dressing, but the bulk of grain supplies was in the hands of
the middle peasants. In the turmoil that followed, it was necessary to blur
the distinction between the kulak and the middle peasant (the seredniak).
In fac;t, in the heat of the collectivization campaign, a kulak became any
peasant who resisted collectivization.
There are, however, two important reservations to Stalin's data. First,
as Jerzy Karcz has pointed out, Stalin's grain information was " ... com-
pletely misleading and presents an exceedingly distorted picture of the
relation between 1913 and 1926-1927 grain l:narketings. 18 According to
Karcz, these data, when appropriately reconstructed as grain balances for
these years, show that, in fact, gross grain output had, by 1928, all but
recovered to prewar levels and that the problem was the definition of
marketings. Thus, in Stalin's data, gross marketings for 1913 were com-
pared with net marketings for 1926-192 7. 19 Stalin's case for collectiviza-
tion was based on incomparable data.
A second factor, according to Karcz, was the role of government policy
in bringing about the grain procurement "crisis." In years immediately
preceding collectivization, net grain marketings did decline precisely be-
cause the state lowered grain procurement prices in 1926-1927, naturally
encouraging peasants to market their grain through other than state
channels where prices were more attractive and to hold back their grain
in anticipation of higher prices. The lower grain prices encouraged peas-
ants to shift into the production of meat and related products, the prices
of which were generally rising. Although peasant marketings of grain were
falling, the output and marketings of other farm products were rising and
were offsetting the declining grain marketings.
The immediate justification for collectivization may, therefore, have
been based on inadequate statistical information and Stalin's will to im-
pose state power on the peasants. 2° Comparisons of output and market-
ings of the twenties with prewar figures are subject to wide margins of
error; so the controversy over Stalin's statistics will probably never be
resolved. However, from the vantage point of the state, the grain crisis was
real. State grain collections from the peasants (zagotovki) were alarmingly
low (the peasants were selling on the private market), and the government
had to undergo the humiliating experience of importing grain. 21 Even
Bukharin became convinced that harsher methods were necessary. At thi.s
time, Stalin unleashed an emergency campaign to increase state grain
collections, dispatching trusted party officials to supervise the campaign.
Grain supplies were confiscated, roadblocks were set up, and peasants
holding grain were charged as speculators. Stalin suspended these emer-
gency measures in 1928 to quiet down the alarmed Bukharinites, but he
came away from the experience convinced that force and coercion could
be applied successfully in the countryside once the Bukharinites were
destroyed.
The Collectivization Process

It was not until mid-1929 that central control over existing cooperatives
was substantially strengthened and the system of grain procurements
changed-in short, the beginning of the process of mass collectivization. 22
By the latter part of 1929, an all-out drive for collectivization had been
initiated by the Communist Party, becoming in large measure an organized
movement against the kulaks and the middle peasants. Lacking strength
in the countryside (less than 1 percent of the farm population belonged to
the party or komsomol), the party sent 25,000 representatives, drawn
largely from the ranks of industrial workers, to oversee collectivization.
The most burning issue, once the all-out collectivization decision had been
made, was whether or not to admit kulaks to the collectives. In a speech
before the November party plenum, Stalin spoke for the first time of
eliminating the kulak.
Table 5.3 shows the speed of collectivization. Between July 1, 1929,
and March 1, 1930, the proportion of peasant households in collective
Table 5.3 EXPANSION OF THE COLLECTIVE FARM SECTOR, 1918-1938

Selected Years
Peasant
Collective Households households
farms in collectives collectivized
Year (in thousands) (in thousands) (percentage)
1918 1.6 16.4 0.1

1928 33.3 416.7 1.7
1929 57.0 1,007.7 3.9
1930 85.9 5,998.1 23.6
1931 211.1 12,033.2 52.7
1932 211.1 14,918.7 61.5
1935 245.4 17,334.9 83.2
1938 242.4 18,847.6 93.5
Source: L. Volin, A Century of Russian Agriculture (Cambridge, Mass.:

Harvard University Press, 1970), p. 211.
farms increased from 4 percent to 56 percent. 23 In effect, within a year's

time, the collective farm had supplanted the centuries-old mir form of
village government.
Although the fiction was maintained that collectivization was a spon-
taneous action on the part of the peasantry, resisted only by the "kulak
saboteurs," there can be little doubt that collectivization was imposed on
an unwilling peasantry by brutal force. Vague definitions of what consti-
tuted a kulak household were employed to justify the arrest and deporta-
tion of peasants resisting collectivization. Militia and the secret police
(then called the GPU) were sent into the countryside to force peasants into
collectives along with thousands of armed party faithful from the city. The
"dekulakization" drive resulted in the flight, execution, deportation, and
resettlement of millions of peasants and provided the initial manpower for
a vast army of penal labor. According to one estimate, 3.5 million peasants
became a part of the gulag penal labor force, 3.5 million were resettled,
and another 3.5 million died during forced collectivization. 24 There is
considerable controversy over the number of victims of collectivization,
but there is little doubt that it was in the millions.
Although Stalin, in a famous speech in March 1930, warned against
proceeding too rapidly and blamed local party leaders for the excesses that
had occurred, in fact, the pace of collectivization remained rapid, and by
the mid-1930s the process was basically completed. 25 The role of the
Communist Party in the countryside was formally strengthened when in
1933 political departments (Politotdely) were established in the machine
tractor stations (MTS). The MTS had themselves been established in 1930;
and, in addition to supplying machinery and equipment to the collective
farms (for which payment in kind would be made to the state), they were
to play a significant role in the management of collective farms. 26 Informal
party control in the countryside had also been strengthened considerably
by collectivization, through the party's placing of "reliable" people in the
posts of collective farm chairmen.
The Immediate Impact of Collectivization

The most immediate result of collectivization was a decline in agricultural
output. Although there were year-to-year fluctuations, the general decline
is unmistakable (see Table 5.2). The index of gross agricultural production
(1928 = 100) declined from a precollectivization high in 1928 to an
immediate postcollectivization low of 76 in 1932. 27 In large part this can
be accounted for by a sharp decline in gross production of livestock
products to 48 in 1933.28 In general, the decline in meat, dairy, and egg
production was more severe than the decline in cultivated crops. Although
grain output declined in the initial years of collectivization (1928 through
1932, with the exception of 1930), both gross and net marketings of
grain increased between 1928-1929 and 1931-1932, due to some extent
to a sharp decline in the number of cattle for which grains for fodder were
now not necessary. 29 The worsening of agricultural performance during
the first Five Year Plan (1928-1932) plus the losses from state reserves
were major factors contributing to the famine that reached a peak in
1932-1933.
The loss of lives (especially severe in grain-producing regions) from
both the collectivization process per se and the famine thereafter (the
famine being the major factor) has been the subject of considerable discus-
sion, but very little hard data are available by which to assess its severity.
The most frequently quoted estimate of lives lost is five million, although
the estimates vary from one to ten million. 30
In addition to the loss of life and the decline in agricultural production,
there was a sharp decline in agricultural capital stock, most notably caused
by the mass destruction of animal herds as the peasants vented their
hostility toward the collectivization process by slaughtering their livestock
rather than bringing them into the collective farms. The impact of this
development can be observed in Table 5.4. In addition, Naum Jasny, one
of the research pioneers in this area, has indicated that other forms of
capital stock, notably buildings and machinery, simply disappeared during
the turmoil of collectivization. The impact of collectivization upon per
capita incomes of the farm population was predictable: they fell sharply
to perhaps one-half the 1928 level. 31
Table 5.4 NUMBERS OF LIVESTOCK IN THE SOVIET UNION, 1928-1935

In Millions of Head
Cattle
Year (total) Cows Pigs Sheep Goats Horses
19288 60.1 29.3 22.0 97.3 9.7 32.1

1929 58.2 29.2 19.4 97.4 9.7 32.6
1930 50.6 28.5 14.2 85.5 7.8 31.0
1931 42.5 24.5 11.7 62.5 5.6 27.0
1932 38.3 22.3 10.9 43.8 3.8 21.7
1933 33.5 19.4 9.9 34.0 3.3 17.3
1934 33.5 19.0 11.5 32.9 3.6 15.4
1935 38.9 19.0 17.1 36.4 4.4 14.9
a Borders of the Soviet Union as of 1939.

Source: E. Strauss, Soviet Agriculture in Perspective (London: Allen & Unwin, 1969),
p. 307.
WAS COLLECTIVIZATION NECESSARY?
Collectivization rightly can be called the second socialist revolution. Its

impact on Soviet life ranked in importance with the October Revolution
and World War II. More than 60 years have passed since collectivization,
and agriculture remains in state hands in the former Soviet Union-an
enduring legacy of a way of thinking born in the late 1920s.
Soviet ideology made some attempts to disentangle collectivization,
socialism, and Stalinism in the late 1980s. With glasnost came the inev-
itable question of whether Stalin and collectivization had really been
necessary.
Stalin's decision to abandon NEP was dictated by several considera-
tions. First, NEP was viewed as a transitional system to promote recovery
from civil war; now that its task was complete, it was time to turn to a
new economic system. Second, the counterrevolutionary threats of NEP
were perceived as serious, especially the threat of a prosperous peasant-
and merchant-class. Communist force remained weak in the countryside.
For the Soviet leadership, collectivization offered a way to enhance its
presence in the countryside. Third, private agriculture was perceived as an
unreliable supplier of food products and agricultural raw materials. As
long as agricultural marketing decisions remained in the hands of private
individuals, any state industrialization effort would be subject to veto by
private citizens.
Soviet ideology under glasnost emphasized that collectivization was
motivated by Stalin's lust for power. Stalin prematurely forced collectivi-
zation, ignoring the advice of calmer voices like Lenin and Bukharin, who
argued for a slower voluntary pace. However, the ultimate need for collec-
tivization was not questioned-only its pace and its use of force.
To reject collectivization as an integral part of the struggle to overcome
industrial backwardness raised questions that remained too sensitive: If
rapid industrialization could have been achieved without collectivization,
why not return to private agriculture? Moreover, the sensitivities of the
Stalin generation had to be considered. If collectivization was not neces-
sary, how could one justify its enormous material and human costs? The
admission of such a disastrous mistake would be harmful to the continued
existence of the party. Such thoughts must have tortured the party leader-
ship prior to the demise of central party authority in 1991.
Throughout the glasnost era, Soviet writers continued to argue, often
for bizarre reasons, that collectivization was inevitable. The official argu-
ment was that the Bolshevik leadership could not have survived in an
environment of private peasant agriculture. The Bolshevik state had to
amass political power in the countryside, which required some form of
collectivization. NEP's combination of market and plan meant that the
state was bound to make pncmg blunders that would threaten grain
collections and hence industrialization. Private NEP peasant agriculture
was not evolving in the appropriate direction of larger-scale production
units required to raise agricultural efficiency.
Soviet writers continued to make two economic arguments for collec-
tivization. First, only through collectivization could economically scaled
farm units be created. Second, NEP agriculture was incapable of coexisting
with and supporting industrialization as was evidenced by the various
crises of NEP agriculture. Collectivization was a forced response to the
failure of NEP agriculture.
The Scale of NEP Agriculture

Although NEP agriculture has been loosely described as private agricul-
ture, Russian peasants reverted to the repartitional commune after the
Land Decree of 1917. 32 Throughout NEP, the repartitional commune
accounted for over 9 5 percent of peasant families. NEP had more restric-
tive communal arrangements than did the mir on the eve of the October
Revolution. Bolshevik decrees outlawed rental agreements, the hiring of
labor, and the selling of land. Land distributions from the remaining
estates, larger peasant holdings, and state land were based upon the
number of each family's adult members. There was close monitoring of
land holdings to prevent them from exceeding one family's ability to
cultivate; violators were regularly reported by disgruntled neighbors.
Land redistributions were carried out on a regular basis throughout
NEP-unlike the late tsarist period when they were rare. 33 In fact, the
Bolshevik government was forced to pass decrees resisting too frequent
land redistributions because of their disincentive effects.
These NEP restrictions created an agriculture of smaller average farm
sizes than prior to the Revolution. If NEP farming was of an uneconomical
scale, it was due more to legal restrictions imposed by the Soviet state than
to the natural tendencies of Russian peasant agriculture.
The Soviet emphasis on large-scale farming was influenced by Lenin's
admiration for large-scale farms. Empirical studies fail to establish a
significant and systematic link between farm size and productivity. 34
Hence, the Soviet policy of forcing gigantism in agriculture for technologi-
cal reasons did not have a firm footing in world agricultural practice.
Collectivization and Economic Development

A second argument for collectivization is that it accelerated the Soviet
industrial transformation. With the eventual collapse of the Soviet Union,
Creating the Administrative-Command System: Planning, Collectivization. and War 109
it has become apparent that Soviet economic development was not suc-
cessful; hence, to assess collectivization's contribution may not be appro-
priate.
In the course of economic development, agriculture contributes labor,
capital, and raw materials to the rest of the economy; moreover, agricul-
ture often is called on to earn foreign exchange at the start of industriali-
zation. 35
Soviet agriculture did without a doubt provide a vast amount of
manpower to industry within a relatively brief amount of time. Between
1926 and 1939 alone, the urban population increased from 26.3 million
to 56.1 million-a net gain of some 30 million-and by 1959, this figure
had increased to 100 million-a net overall increase of over 73 million, of
which 43.4 million (well over one-half) can be accounted for by migration
from rural to urban areas. 36 This internal migration, along with the in-
creasing participation rates of the urban population, sustained an average
Table 5.5 SOVIET GRAIN PRODUCTION AND PROCUREMENT, 1929-1938a

Grainb Grain
production procurementc Procurement/
Year (million metric tons) (million metric tons) production (%)
1929 66.8 10.8 16.2

1930 71.0 16.0 22.5
1931 65.0 22.1 34.0
1932 65.0 23.7 36.5
1933 71.0 23.3 32.8
1934 71.5 26.0 36.4
1935 77.5 28.4 36.6
1936 63.0 25.7 40.8
1937 97.5 31.8 32.6
1938 73.0 31.5 43.1
8 Thesedata should be interpreted with caution as representing general trends. There are
important and controversial issues of definition and measurement.
bSimple average of the high and low variants from Table 5.2.
cProcurements (actually grain collections) 1929-1931 are for the agricultural year (i.e.,
1929 = 1928 - 1929), while procurements for 1932-1938 are for plan (calendar) years.
Sources: Grain production data from S. G. Wheatcroft, "A Reevaluation of Soviet
Agricultural Production in the 1920s and 1930s," in R. C. Stuart, Ed., The Rural
Soviet Economy (Totowa. N.J.: Rowman and Allanheld, 1984). pp. 42-43;
procurement data 1929-1932 from R. W. Davies, The Industrialization of Soviet Russia
(Cambridge, Mass.: Harvard University Press. 1980). vol. 1, Table 8;·procurement data
1932 from J. F. Karcz, "Khrushchev's Agricultural Policies," in M. Bornstein and D. F.
Fusfeld, eds., The Soviet Economy: A Book of Readings, 3rd ed. (Homewood, Ill. Irwin,
1970), p. 44; procurement data 1933-1938 from E. Zaleski, Stalinist Planning for
Economic Growth, 1932-1952 (Chapel Hill: University of North Carolina Press, 1980),
statistical appendix.
annual rate of growth of the nonagricultural labor force of 8.7 percent

between 1928 and 1937, while the agricultural labor force declined at an
annual rate of 2.5 percent during the same period. This vast transforma-
tion was effected by both market and nonmarket forces: First, a substan-
tial gap between urban and rural incomes was created, thereby promoting
movement out of agriculture. Second, massive recruitment campaigns
were carried on in the countryside to facilitate the transfer.
Collectivization "pushed" labor out of agriculture, rather than the
more common case of industrial prosperity "pulling" labor from the
countryside. Was collectivization necessary to promote this outflow or, if
not necessary, was it the most efficient mechanism to facilitate the labor
outflow from the rural areas?
Michael Ellman has argued that collectivization was necessary to
generate sufficient supplies of urban (industrial) labor. Given the vast
manpower needs of Soviet industry, sufficient labor would not have been
available without collectivization. James Millar, on the other hand, main-
tains that collectivization was both unnecessary and undesirable. Flows of
labor from rural to urban areas have always been adequate (in fact,
frequently more than adequate) in countries experiencing development.
Moreover, the urban unemployed or underemployed could have been
mobilized to meet additional industrial manpower needs if the influx from
agriculture had not been sufficient. 37
How well collectivized agriculture provided agricultural raw materials
during the crucial early years of industrialization is also the subject of
controversy. The figures on grain marketings (Table 5.5) provide valuable
insights.
The evidence presented in Table 5.5 supports the view that from the
late 1920s through the late 1930s, grain procurements generally increased
more rapidly than grain production. Grain procurements increased from
a low of roughly 16 percent in 1929 to a high of roughly 43 percent in
1938.
Jerzy Karcz has attempted to show that the entire increase in gross
grain marketings between 1928 and 1933 can be accounted for not by the
ability of the state to gather additional grain per se from kolkhozy, but by
the reduction in animal herds, which would otherwise consume grains,
that took place during collectivization. 38 However, one may question this
conclusion in the light of the large state exactions during poor harvest
years that exacerbated the famine of 1932-1934. Also, the drastic decline
in peasant living standards during the 1930s might be cited as counterevi-
dence to Karcz's conclusions.
Soviet agriculture did earn crucial foreign exchange to pay for machin-
ery imports during the first Five Year Plan. Between 1929 and 1931, Soviet
imports increased by over 60 percent in volume despite the worsening

terms of trade resulting from the collapse of agricultural prices in the
world market. In fact, Soviet imports were severely limited by balance-of-
payments constraints given the Western countries' unwillingness to grant
long-term credits to the fledgling Communist regime. The Soviet govern-
ment's sole recourse, therefore, was to continue to market abroad the
traditional Soviet export commodities-grain and wheat, timber, and pe-
troleum. Between 1929 and 1931, Soviet exports expanded about 50 per-
cent, and this expansion was spearheaded by an increase in the proportion
of the total domestic output of agricultural products exported. Thus,
agricultural exports were used to finance machinery and ferrous metals
imports, which rose from one-third of total Soviet imports in 1928 to
almost three-quarters by the end of the first Five Year Plan. 39 The costs of
maintaining agricultural exports were considerable, for they worsened the
famine of 1932-1934. As one student of this famine writes:
The immediate cause was not poor harvests but the requisitioning of
grain from moderate harvests in such quantities that not enough was
left for the peasants themselves. The main reasons for this drastic
policy appear to have been, first the attempt to maintain exports of
agricultural produce and hence imports of machinery... 40
Did collectivized agriculture transfer savings from the countryside to

the city? It would appear that the Preobrazhensky model of primitive
socialist accumulation was used to force savings from the rural population
during the early years of industrialization. Na um Jasny estimated that per
capita income of the farm population had fallen to 53 percent of the 1928
level by 1932-1933.41 The burden of industrialization was also borne by
the urban sector. Mindful of the significant decline in urban living stand-
ards during the 1930s, Abram Bergson notes the following:
Contrary to a common supposition, the industrial worker fared no

better than the peasants under Stalin's five year plans. Indeed, he
seemingly fared worse, although I believe he was able to maintain in
some degree the margin he enjoyed initially in respect to consump-
tion per capita. 42
However, the fundamental issue is not living standards, but the role of
collectivization in the extraction of a surplus from the countryside to form
the basis of the industrial expansion of the Soviet economy in the 1930s
and thereafter. That savings were forced is not at issue, for investment
rates did explode during the early 1930s as a consequence of transferring
income from individuals to the state. The issue instead is whether or not
the collectivization was responsible. 43
Although it has proved difficult to achieve precision in defining and

measuring an agricultural surplus, evidence provided by the Soviet econo-
mist A. A. Barsov and by James Millar appears to demonstrate that during
the crucial period of the first Five Year Plan, Soviet agriculture was a net
recipient of resources. 44 For surpluses to be transferred from agriculture to
industry, the flow of deliveries from agriculture to industry must exceed
the flow of deliveries from industry to agriculture (grain for tractors, if
you will). As these are flows of physical commodities, the outcome will de-
pend on the prices applied. Millar uses the prices of 1928 (which place a
low relative valuation on agriculture) and finds an inflow to agriculture
on a net basis. Michael Ellman uses modified 1913 prices (which place a
higher relative valuation on agriculture prices) and obtains a net outflow.
But the crucial point is that both Millar and Ellman find that the advent
of collectivization failed to alter the magnitude of the surplus, however it
is measured. Thus, one cannot argue that collectivization was responsible
for any significant change in the surplus. Millar summarizes his view as
follows:
Ultimately, therefore, although the state did succeed in raising real

resources from the peasantry for investment purposes, the destruc-
tion occasioned by resistance to collectivization obliged it to turn
around and use those resources for replacement investment in agri-
culture. This inflow, together with the net inflow to the private sector
that was financed by the favorable change in the terms of trade with
the nonrural population, caused the agricultural sector taken as a
whole to become a net recipient of resources during the first Five Year
Plan. Whatever its merits may have been on other grounds, mass
collectivization of Soviet agriculture must be reckoned as an unmiti-
gated economic policy disaster. 45
Collectivization: An Assessment
Collectivization ranks among the most controversial events in history.
From an economic viewpoint, the Western literature on collectivization
focuses on two major themes. First, collectivization is viewed as a major
disaster, inflicting major costs, both short-term and long-term, on the
Soviet peasant population and the economy as a whole.
Second, collectivization is viewed as introducing a unique if brutal
mechanism for harnessing the agricultural surplus (and the rural popula-
tion) to the service of the industrial sector. Doubt has been cast upon
collectivization's contribution to capital formation by the Millar-Barsov
hypothesis, which claims that agriculture at best provided a very small net
positive flow. If we accept this proposition, it must change the traditional
view of collectivization, specifically the view of agriculture as a contribu-

tor of a large net surplus to the industrialization drive. There is little
dispute that collectivization lowered Soviet agricultural productivity in
both the short and long run. Moreover, if sufficient labor had migrated
voluntarily to the cities anyway, collectivization would not have been
necessary to meet the manpower needs of industry. The major lasting
benefit the Soviet regime obtained from collectivization would have been
the imposition of political control over the countryside and the changes in
property relations. The political benefits to a Stalin of bringing a poten-
tially unruly and unfriendly segment of the population under control were
considerable.
The Soviet industrial transformation of the 1930s was costly in both
economic and human terms. No one disputes this conclusion. The most
convincing case for collectivization remains the political argument that the
private peasantry represented a threat to the Bolshevik regime and that
collectivization was the most efficient way to destroy the peasantry's
power. It is likely that the circuitous economic arguments cited to support
collectivization (efficient scale, creation of surpluses, and the like) were
only window dressing for the underlying political goal of collectivization.
Collectivization did not free hidden reserves. The precipitous rise in
the Soviet investment rate was purchased at the expense of both urban and
rural real wages-a result intensified by the stagnation of agricultural
output. The slaughter of livestock ensured that the net transfer of re-
sources to industry did not occur. Industrial resources had to be devoted
to avoiding further calamities in agriculture. Forced deliveries did serve to
shift more of the burden to agriculture, but there is agreement that the
industrial worker's burden was heavy as well.
If collectivization did speed up the Soviet industrial transformation,
the long-term benefits of acceleration cannot be demonstrated, especially
in view of the long-run deterioration in Soviet economic performance.
Could NEP Agriculture Have Supported Sustained Growth?

What would have happened in the absence of collectivization? Holland
Hunter has constructed the most serious counterfactual model of eco-
nomic performance without collectivization. He demonstrates what others
long suspected: Soviet agriculture would have been much better off with-
out collectivization. According to Hunter's calculations, at the high point
of collectivization, crop output was 25 percent below and livestock herds
were 50 percent below what they would have been without collectiviza-
tion. The most striking statistic is that in 1940 the Soviet population was
15 million below expected population. 46
The traditional economic argument for collectivization was that NEP

agriculture could not have sustained industrialization. The various indexes
of agricultural output show that the NEP economy had regained prewar
output levels by the mid- or late 1920s. Although there is some argument
on the exact magnitude, there is little disagreement that NEP, despite its
limitations, demonstrated its ability to support a rapid agricultural recov-
ery. What it did not demonstrate was its ability to support long-run
sustained industrial growth. By the late 1920s, therefore, the discussion
had turned to NEP's potential for growth after the recovery had been
completed. Stalin concluded that NEP agriculture was incompatible with
rapid industrial growth and ordered collectivization.
For centuries, Russian agricultural growth had been extensive, with
new cultivation on the periphery explaining most agricultural growth.47
The Soviet Union did not suddenly lose its agricultural frontier in 1917.
In economies with significant unexploited frontiers, it is likely that labor
would be a limiting factor, especially after a lengthy experience of frontier
expansion.
Elsewhere, countries with a frontier to exploit have managed rapid
population growth either through high rates of natural increase or through
immigration. In the case of Russia, continued movement to the frontier
likely would have produced the necessary natural growth of the labor
force.
NEP agriculture retained communal features that, if continued, would
have limited expansion opportunities. Soviet authorities reestablished the
repartitional commune, limited the hiring of labor and the renting of land,
and acted against the differentiation of the peasantry.
One has to consider how quickly these institutional restrictions would
have disappeared if NEP agriculture had not been replaced by collective
agriculture. The tsarist period shows that the opening of agricultural
markets caused feudal institutions to adapt. Repartitions occurred with
less frequency; private deals allowed entrepreneurial peasants to accumu-
late large land holdings. We suspect that NEP agriculture would have
adapted in the same manner to maturing experience with market agricul-
ture, particularly without Soviet force in the countryside to enforce restric-
tions that lowered farm agricultural productivity.
WAR AND THE ADMINISTRATIVE-COMMAND ECONOMY
By the end of the 1930s, the Soviet administrative-command system was

in place. Its ability to survive the extreme challenges of World War II was
a major test. In fact, for many years, the Soviet Union's performance in its
"great patriotic war" was used to demonstrate the viability and even
superiority of the Soviet command system.
Four events shaped the lives of citizens of the former Soviet Union: the
Revolution of 1917, collectivization, the Stalin purges, and, most of all,
World War II. For many years, the most cohesive force in Soviet life was
the shared experience of the great patriotic war.
Our interest in World War II centers not only on the costs of the war,
but also on the short- and long-term adjustments that resulted and the
resiliency of the planned socialist economy under new and very different
conditions. 48
The impact of World War II on the Soviet economy was immense.
Soviet authors frequently cite a loss-of-life figure of 20 million, or approxi-
mately 10 percent of the 1940 Soviet population, of which roughly one-
half was from military action. However, if one were to count indirect
losses-for example, early deaths from war-related injuries, prisoners of
war who chose not to be repatriated, and those entering the gulag camps-
the figures for loss of life would undoubtedly be much higher. James Millar
has suggested a figure of 30 million, or approximately 15 percent of the
Soviet population as of 1940.49
In addition to immense population loss, the war losses imposed major
and long-standing demographic changes on the Soviet population. Specifi-
cally, war losses resulted in a substantial male deficit (much greater than
would be anticipated under more normal conditions), leading to other
important changes, for example, in marriage rates and birthrates and
hence population growth. Moreover, as Barbara Anderson and Brian
Silver find, the war-related male deficit resulted in a substantial increase
in russification through intermarriage. 50 These and related demographic
trends would persist long after the end of the war.
Germany invaded the Soviet Union in June 1941. Soviet territorial
losses resulting from this invasion were sudden and large. In a recent study
of the economic impact of World War II on the Soviet economy, Susan Linz
indicates that between July and November 1981, 1523 major industrial
enterprises were moved eastward along with 6 million people. While this
eastward movement facilitated later production, it resulted in immediate
disruption. The Soviet economy, after the German invasion, did not re-
cover production levels of 1940 until 1942; by the end of the war, output
levels were 20 percent below those of the prewar period, not to mention
an estimated 30 percent destruction of the Soviet capital stock. 51
The aggregate cost of the war to the Soviet economy has been esti-
mated in a number of different ways. The official Soviet claim is that the
war cost the USSR "two Five Year Plans," not including the loss of life
noted above. Western estimates confirm this sort of magnitude. Susan Linz
and James Millar find that losses range from four to ten years of effort by
the labor force available in 1940 or 1945. Summarizing the issue of war
losses, Millar notes: "Put differently, the economic cost of the war was
equal to, and possibly even greater than, the total wealth created during
the industrialization drive of the 1930s." 52
How was this war effort financed by the Soviet Union? Millar notes
that " ... the population as a whole increased its work effort and reduced
its claim on current output during the war years. " 53 Specifically, a number
of important changes were made. First, resource allocation priorities were
obviously changed. The share of national income devoted to the war effort
increased from about 10 percent in 1940 to slightly under 50 percent by
1943.54 This change was in part facilitated by the nature of the Soviet
economic system and the extraordinary mechanisms (about which more
later) put in place during the war years. In general, there was a major shift
of resources away from traditional uses (especially consumption and in-
vestment) toward war uses.
Second, consumer demand was effectively constrained in a number of
ways, although not all efforts in this area worked smoothly and effectively.
Rationing of consumer goods was introduced in July 1941 in successive
stages. In addition, the distribution of key consumer goods was central-
ized. However, Soviet efforts to control wages were not always effective.
This fact, in combination with the existence of various retail markets
under differing degrees of control, meant that, in fact, multiple prices
existed for the same goods. For example, the prices in collective farm
markets in 1943 were higher than state ration prices by a factor of 14. 55
Third, labor allocation procedures were changed. The importance of
administrative controls in the labor allocation process increased signifi-
cantly. Direct mobilization of labor was introduced in December 1941,
with strong disciplinary measures enforced. These measures were in large
part a response to severe labor shortages imposed by the war effort. For
example, the Soviet civilian labor force decreased from 31 million in 1941
to 18 million in 1942. 56 This labor shortage had serious repercussions on
the economy, not the least of which was wage inflation, which necessitated
offsetting tax increases.
How was the Soviet economy administered during World War II?
Western observers have noted that, while there were important wartime
changes in the administrative structure of the Soviet economy, these
changes were for the most part superimposed on top of existing arrange-
ments and were derived from previous experience, for example, the Civil
War period. 57 A series of new agencies was created, effectively centralizing
power and facilitating rapid shifts of resources. The overall war effort was
directed by the State Committee for Defense headed by Stalin. Regional
shifts were directed by the Evacuation Committee. Moreover, while the

planning and materials allocation system put together in the 1930s re-
mained intact, Eugene Zaleski has pointed out that, in fact, much less
attention was paid to national plans, and much more attention was paid
to specific plans for war-related activities. The more limited number of
specific, defense-related plans allowed the planners to control defense
production more closely. The remainder of the economy was guided by
general plans but was also regulated by the state budget and the use of
newly imposed rationing powers.
Gosplan and the war-related ministries and commissions gained
power through the increased importance of the material balances. Thus,
at the height of the war effort, central plans were being drawn up for
30,000 materials and supplies to be allocated to 120 large users.
The administrative response to the war was quick and effective, using
previously demonstrated strengths (for example, the priority principle) to
shift resources into the war effort.
How were the costs of war borne by the Soviet people? Soviet leaders
resorted to strict administrative methods to enforce labor discipline. 58 At
the same time, taxes were increased to restrict consumer demand and
finance the war effort. Both direct and indirect taxes were increased. New
taxes (notably the war tax) were introduced along with other exactions
through bond purchases, multiple levels of distribution in retail trade, and
the like. Deficit financing was used, as the government printed money to
pay for the war effort. In a sense, Soviet financing of the war effort was
based on familiar tools, though possibly with greater emphasis on direct
taxation than that generally found in market systems.
World War II imposed a tremendous burden on the Soviet Union. The
economic system was effectively transposed to handle that burden by
shifting resources into the successful war effort. All sectors of Soviet
society, whether the ministries, the Communist Party, or transportation,
were geared to the war effort.
While controls were relaxed after the war, other controls were imple-
mented, and the Stalinist mode of operation remained in effect until the
Khrushchev era of the 1950s. The problem of pent-up demand, which
stimulated the postwar growth of consumption (and hence consumer
goods production) in market systems, was effectively curtailed in the
Soviet Union. While rationing and other such direct controls were relaxed
and removed, the currency reform of 194 7 proved to be a more direct
means to extract currency from the population. 59 One new ruble was given
for each old ruble in a generally complicated currency reform. In addition,
the prewar priorities were generally reasserted, such that the Soviet con-
sumer would have to wait for the anticipated postwar relaxation.
THE SOVIET ECONOMY THROUGH WORLD WAR II: A SUMMARY
The Soviet administrative-command economy dates from the very end of

the 1920s. As the NEP system came to an abrupt end, Stalin, firmly in
command, introduced two major changes into the Soviet economy: na-
tional economic planning and collectivization. Both would be cornerstones
of an economic system vastly different from that prevailing earlier, a
system that, with changes over the years, exists to the present day in the
former Soviet Union.
In this chapter, we have examined the underpinnings of both the
planning decision and the collectivization decision. We have emphasized
that planning was introduced as a means to control both the pace
and the direction of economic development. At the same time, collecti-
vization was introduced as a means to harness the peasants to the in-
dustrialization drive. As we have seen, collectivization and its use as a
mechanism to finance the development process have been called into
serious question.
In addition to these two major decisions, we have examined the Soviet
economic system in its formative years, the 1930s and in the tumultuous
years of World War II. By most standards, the 1930s well earned their
reputation as a period of unprecedented economic growth and structural
change in the Soviet Union.
A severe test of these achievements came when the Germans invaded
the Soviet Union in 1941. This event, which would foreshadow a conflict
of immense proportions, placed a large burden on the Soviet Union and
the Soviet economic system; and yet, as we have seen, the system proved
capable of meeting the challenge. Although the losses were great and the
postwar conversion slow, the 1950s ushered in a new era, particularly
after the death of Joseph Stalin in 1953. We now turn our attention to the
development of the Soviet economy in the postwar era.
REFERENCES
1. Our discussion of the planning debate of the 1920s is based on the following
sources: E. H. Carr and R. W. Davies, Foundations of a Planned Economy,
1926-1929, vol. 1, part 2 (London: Macmillan, 1969), pp. 787-801; and N.
Spulber, Soviet Strategy for Economic Growth (Bloomington: Indiana Univer-
sity Press, 1964), pp. 101-111.
2. Statement of P. Vaisburg in Planovoe khoziastvo [The planned economy], no.
4 (1928), 167. Quoted in Carr and Davies, Foundations of a Planned Econ-
omy, p. 793.
3. Pravda, September 14, 1927. Quoted in Carr and Davies, Foundations of a
Planned Economy, p. 818.
4. Our discussion is based on the following sources: Carr and Davies, Founda-
tions of a Planned Economy, chaps. 33-35; A. Nove, An Economic History
of the USSR (London: Penguin, 1969), pp. 212-215, 263-267; M. Dobb,
Soviet Economic Development Since 1917, 5th ed. (London: Routledge &
Kegan Paul, 1960), chap. 13; E. Zaleski, Planning for Economic Growth in
the Soviet Union, 1918-1932 (Chapel Hill: University of North Carolina
Press, 1971), pp. 40-73; Y. Avdakov and V. Borodin, USSR State Industry
During the Transition Period (Moscow: Progress Publishers, 1977); and W.
Conyngham, Industrial Management in the Soviet Union (Stanford, Calif.:
Hoover Institution Press, 1973), pp. 34-42.
5. Zaleski, Planning for Economic Growth, p. 41.
6. Carr and Davies, Foundations of a Planned Economy, p. 802.
7. Ibid., pp. 830-831. Also see Z. K. Zvezdin, Ot Goelro k planu pervoi pia-
tiletki [From Goelro the first Five Year Plan] (Moscow: Nauka, 1979).
8. Zaleski, Planning for Economic Growth, pp. 29-73.
9. The discussion here is based on R. Hutchings, "The Origin of the Soviet
Industrial Price System," Soviet Studies, vol. 13, no. 1 (July 1961), 1-22.
10. E. Zaleski, Stalinist Planning for Economic Growth, 1933-1952 (Chapel
Hill: University of North Carolina Press, 1980), p. 483.
11. In this section, we rely on Zaleski, Planning for Economic Growth; and Nove,
An Economic History of the USSR.
12. In this section, we rely heavily on the following sources: J. F. Karcz, "From
Stalin to Brezhnev: Soviet Agricultural Policy in Historical Perspective," in
J. R. Millar, ed., The Soviet Rural Community (Urbana: University of Illinois
Press, 1971 ), pp. 36-70; J. F. Karcz, "Thoughts on the Grain Problem," Soviet
Studies, vol. 18, no. 4 (April 1967), 399-434; M. Lewin, Russian Peasants
and Soviet Power (London: Allen & Unwin, 1968); J. R. Millar and C. A.
Guntzel, "The Economics and Politics of Mass Collectivization Reconsidered:
A Review Article," Explorations in Economic History, vol. 8, no. 1 (Fall
1970), 103-116; A. Nove, "The Decision to Collective," in W. A. D. Jackson,
ed., Agrarian Policies and Problems in Communist and Non-Communist
Countries (Seattle: University of Washington Press, 1971), pp. 69-97; E.
Strauss, Soviet Agriculture in Perspective (London: Allen & Unwin, 1969),
chaps. 5-6; L. Volin, A Century of Russian Agriculture (Cambridge, Mass.:
Harvard University Press, 1970), chaps. 10-11; R. W. Davies, "A Note on
Grain Statistics," Soviet Studies, vol. 21, no. 3 (January 1970), 314-329; S. G.
Wheatcroft, "The Reliability of Russian Prewar Grain Output Statistics,"
Soviet Studies, vol. 26, no. 2 (April 1974), 157-180; A. Vyas, "Primary
Accumulation in the USSR Revisited," Cambridge journal of Economics, vol.
3 (1979), 119-130; and R. W. Davies, The Industrialization of Soviet Russia,
vols. I and 2 (Cambridge, Mass.: Harvard University Press, 1980).
13. The reader interested in the agricultural collectives of the 1920s should
consult D. J. Male, Russian Peasant Organization Before Collectivization
(Cambridge: Cambridge University Press, 1971); R. F. Miller, "Soviet Agricul-
tural Policy in The Twenties: The Failure of Cooperation," Soviet Studies, vol.
27, no. 2 (April 1975), 220-244; S. Merl, Der Agrarmarkt und die Neue
Okonomische Politik [The agrarian market and the New Economic Policy]
(Munich: Oldenbourg Verlag, 1981), chap. 5; and R. G. Wesson, Soviet
Communes (New Brunswick, N.J.: Rutgers University Press, 1963).
14. Class stratification played an important role in the thinking about collectivi-
zation and its actual implementation. Although census data from the 1920s
suggest that the wealthy peasants (kulaks) were a very small proportion of the
total peasant population, they were nevertheless seen as politically unreliable
at best and enemies of the Soviet industrialization program at worst. For a
detailed discussion of the problems of class stratification in this case, see
Lewin, Russian Peasants and Soviet Power, chaps. 2 and 3.
15. Millar and Guntzel, "Economics and Politics of Mass Collectivization," 112.
16. For a discussion of various output series, see S. G. Wheatcroft, "A Reevalu-
ation of Soviet Agricultural Production in the 1920s and 1930s," in R. C.
Stuart, ed., The Soviet Rural Economy (Totowa, N.J.: Rowman Allanheld,
1984), pp. 32-62.
17. For details of Stalin's argument and related data, see Karcz, "Thoughts on the
Grain Problem," pp. 399-402.
18. Karcz, "Thoughts on the Grain Problem," p. 403.
19. Ibid., pp. 403-409. Gross marketings include sales to other peasants within
the village. Net marketings include only sales outside of agriculture.
20. Karcz's analysis of grain marketings and agricultural performance during the
late 1920s has been disputed by R. W. Davies. Thus, we cannot know for sure
whether Stalin's analysis of the agricultural "crisis" was erroneous. For exam-
ple, Davies estimates that the 1926-1927 net grain marketings were slightly
more than half of prewar marketings-a figure close to Stalin's. See Davies,
"A Note on Grain Statistics," p. 328; also S. G. Wheatcroft, "A Reevaluation
of Soviet Agricultural Production in the 1920s and 1930s."
21. Lewin, Russian Peasants and Soviet Power, pp. 214-244.
22. Ibid., p. 409.
23. Volin, A Century of Russian Agriculture, p. 222.
24. S. Swianiewicz, Forced Labor and Economic Development (London: Oxford
University Press), p. 123.
25. Volin, A Century of Russian Agriculture, pp. 228-229.
26. For a detailed account of the history and functions of the MTS, see R. F.
Miller, One Hundred Thousand Tractors (Cambridge, Mass.: Harvard Uni-
versity Press, 1970), especially chap. 2.
27. Wheatcroft gives a high and low variant calculation. The difference between
the two is minimal. Wheatcroft, "A Reevaluation of Soviet Agricultural
Production in the 1920s and 1930s."
28. For an alternate livestock index, see Strauss, Soviet Agriculture, p. 303.
29. Karcz, "From Stalin to Brezhnev," p. 42.
30. For detailed discussion of various estimates, see D. G. Dalrymple, "The Soviet
Famine of 1932-1934," Soviet Studies, vol. 15, no. 3 (January 1964), 250-
284.
31. N. Jasny, The Socialized Agriculture of the USSR (Stanford, Calif.: Food
Research Institute, 1949), p. 323; Jasny, Essays on the Soviet Economy (New
York: Praeger, 1962), p. 107. Jasny's figures on per capita income of the
Soviet farm population in constant prices reveal the following picture: 1928,
100; 1932-1933,53; 1936,60; 1937, 81; 1938,63.
32. G. L. Smirnov, ed., "Vremiia trudnykh voprosov, Istoriia 20-30-x godov i
sovremennaia obshchestvennaia mysl" [Times of difficult questions, history
of the 20s and 30s in contemporary social thought], Pravda, September 30,
1988; October 3, 1988.
33. V. P. Danilov, Rural Russia Under the New Regime (Bloomington: Indiana
University Press, 1988), chaps. 1-2.
34. For a survey of this literature, see Frederic Pryor, "The Plantation Economy
As an Economic System," Journal of Comparative Economics, vol. 6, no. 3
(September 1982), pp. 301-307.
35. For a detailed discussion of the role of agriculture in economic development,
the reader is referred to J. W. Mellor, The Economics of Agricultural Produc-
tion (Ithaca, N.Y.: Cornell University Press, 1966).
36. W. Eason, "Labor Force," in A. Bergson and S. Kuznets, eds., Economic
Trends in the Soviet Union (Cambridge, Mass.: Harvard University Press,
1963), pp. 72-73.
37. See J. R. Millar, "Views on the Economics of Soviet Collectivization: The
State of the Revisionist Debate," in R. C. Stuart, ed., The Soviet Rural Econ-
omy, pp. 109-117.
38. J. F. Karcz, "From Stalin to Brezhnev: Soviet Agricultural Policy in Historical
Perspective," in J. R. Millar, ed., The Soviet Rural Community (Urbana:
University of Illinois Press, 1971), p. 42.
39. F. D. Holzman, "Foreign Trade," in A. Bergson and S. Kuznets, eds., Eco-
nomic Trends in the Soviet Union (Cambridge, Mass.: Harvard University
Press, 1963), pp. 294-295.
40. P. Hanson, The Consumer Sector in the Soviet Economy (Evanston, Ill.:
Northwestern University Press, 1968), p. 36.
41. N. Jasny, The Soviet Economy During the Plan Era (Stanford, Calif.: Food
Research Institute, 1951), p. 107.
42. A. Bergson, The Real National Income of Soviet Russia Since 1928 (Cam-
bridge, Mass.: Harvard University Press, 1961), p. 257.
43. In addition to earlier writings by Maurice Dobb, another exposition of this
viewpoint is: M. Ellman, "Did the Agricultural Surplus Provide the Resources
for the Increase in Investment in the USSR During the First Five Year Plan?"
Economic Journal, vol. 85, no. 4 (December 1975).
44. For a summary of the evidence and appropriate references, see J. R. Millar,
"Mass Collectivization and the Contribution of Soviet Agriculture to the First
Five Year Plan: A Review Article," Slavic Review, vol. 33, no. 4 (December
1974), 750-766; J. R. Millar, "Soviet Rapid Development and the Agricul-
tural Surplus Hypothesis," Soviet Studies, vol. 22, no. 1 (July 1970). For the
original data and discussion, see A. A. Barsov, Ba/ans stoimostnykh obmenov
mezhdu gorodom i derevnei [Balance of the value of the exchange between
the city and the country] (Moscow: Nauka, 1969); A. Vyas, "Primary Accu-
mulation in the USSR Revisited," Cambridge Journal of Economics, vol. 3,
no. 3 (1979), 119-130; and J. R. Millar, "Views on the Economics of Soviet

Collectivization of Agriculture: The State of the Revisionist Debate," in R. C.
Stuart, ed., The Soviet Rural Economy, pp. 109-117.
45. Millar, "Mass Collectivization," p. 764. For a contrary view, see David Mor-
rison, "A Critical Examination of A. A. Barsov's Empirical Work on the
Balance of Value Exchanges Between the Town and the Country," Soviet
. Studies, vol. 34, no. 4 (October, 1982), 570-584.
46. H. Hunter, "Soviet Collectivization with and without Collectivization," Slavic
Review, vol. 47, no. 2 (Summer 1988), 210-211; H. Hunter and J. M.
Szyrmer, Faulty Foundations: Soviet Economic Policies 1928-1940 (Prince-
ton, N.J.: Princeton University Press, 1992).
47. C. White, Russia and America: The Roots of Economic Divergence (New
York: Croom Helm, 1987), chaps. 3-5; A. Kahan, The Plow, the Hammer,
and the Knout (Chicago: University of Chicago Press, 1985), chap. 2.
48. This discussion of World War II is based largely on the following sources:
Nove, An Economic History of the USSR, chap. 10; Zaleski, Stalinist Plan-
ning for Economic Growth, chaps. 14 and 15; ]. R. Millar, "Financing the
Soviet Effort in World War II," Soviet Studies, vol. 32, no. 1 (January 1980);
]. R. Millar and S. ]. Linz, "The Cost of World War II to the Soviet People,"
Journal of Economic History, vol. 38, no. 4 (December 1978), 959-962;
N. A. Voznesensky, Soviet Economy During the Second World War (New
York: International Publishers, 1949), translated from the Russian; S.]. Linz,
ed., The Impact of World War II on the Soviet Union (Totowa, N.J.: Rowman
& Allanheld, 1985); and T. Dunmore, The Stalinist Command Economy
(New York: St. Martin's Press, 1980).
49. ]. R. Millar, "Conclusion: Impact and Aftermath of World War II," in S.].
Linz, ed., The Impact of World War II on the Soviet Union, p. 292.
50. B. A. Anderson and B. D. Silver, "Demographic Consequences of World War
II on the Non-Russian Nationalities of the USSR," in S. ]. Linz, ed., The
Impact of World War II, pp. 211-249.
51. S. ]. Linz, "World War II and Soviet Economic Growth, 1940-1953," in S.].
Linz, ed., The Impact of World War II, pp. 11-34.
52. Millar, "Conclusion: Impact and Aftermath of World War II," p. 291.
53. Ibid., p. 292.
54. Millar, "Financing the Soviet Effort."
55. Zaleski, Stalinist Planning for Economic Growth, p. 326.
56. Ibid., p. 311.
57. Ibid., chap. 14; Millar, "Conclusion: Impact and Aftermath of World War II,"
pp. 282-291; S. R. Lieberman, "Crisis Management in the USSR: The War-
time System of Administration and Control," in S. ]. Linz, ed., The Impact of
World War II, pp. 61-78.
58. Zaleski, Stalinist Planning for Economic Growth, p. 287.
59. For a discussion of the relaxation of controls and the currency reform in
particular, see Zaleski, Stalinist Planing for Economic Growth, chap. 18; also
S. Fitzpatrick, "Postwar Soviet Society: The 'Return to Normalcy'" in S. ].
Linz, ed., The Impact of World War II, pp. 131-158.
Y. Avdakov and V Borodin, USSR State Industry During the Transition Period
(Moscow: Progress Publishers, 1977).
E. H. Carr and R. W. Davies, Foundation of a Planned Economy, 1926-1929
vol. 1, parts 1 and 2, (London: Macmillan, 1969).
R. W. Davies, The Industrialization of Soviet Russia, vols. 1 and 2 (Cambridge,
Mass.: Harvard University Press, 1980).
& Kegan Paul, 1960).
T. Dunmore, The Stalinist Command Economy (New York: St. Martin's Press,
1980).
A. Erlich, The Soviet Industrialization Debate, 1924-1928 (Cambridge, Mass.:
M. Harrison, Soviet Planning in Peace and War: 1938-1945 (Cambridge: Cam-
H. Hunter and ]. M. Szyrmer, Faulty Foundations: Soviet Economic Policies
1928-1940 (Princeton, N.].: Princeton University Press, 1992).
N. Jasny, Soviet Industrialization 1928-1952 (Chicago: University of Chicago
Press, 1961).
- - - , The Socialized Agriculture of the USSR (Stanford, Calif.: Food Research
Institute, 1949).
]. F. Karcz, "From Stalin to Brezhnev: Soviet Agricultural Policy in Historical
Perspective," in J. R. Millar, ed., The Soviet Rural Community (Urbana:
University of Illinois Press, 1971), pp. 36-70.
- - - "Thoughts on the Grain Problem," Soviet Studies, vol. 18, no. 4 (April
1967), 399-434.
M. Lewin, Russian Peasants and Soviet Power (London: Allen & Unwin, 1968).
- - - , "The Immediate Background of Soviet Collectivization," Soviet Studies,
vol. 17, no. 2 (October 1965), 162-197.
S.]. Linz, ed., The Impact of World War II on the Soviet Union (Totowa, N.J.:
Rowman & Allanheld, 1985).
]. R. Millar, "Financing the Soviet Effort in World War II," Soviet Studies, vol. 32,
no. 1 (January 1980).
A. Nove, An Economic History of the USSR (London: Penguin, 1969), chaps.
7-10.
- - - , Economic Rationality and Soviet Politics (New York: Praeger, 1964),
pp. 17-40.
L. Smolinski, "Planning Without Theory, 1917-1967," Survey, no. 64 (July 1968),
108-128.
- - - , "Soviet Planning: How It Really Began," Survey, no. 64 (April 1968),
100-115.
N. Spulber, ed., Foundations of Soviet Strategy for Economic Growth (Bloom-

ington: Indiana University Press, 1964).
- - - , Soviet Strategy for Economic Growth (Bloomington: Indiana University
Press, 1964).
V. A. Vinogradov et al., eds., lsotoriia sotsialisticheskoi ekonomiki SSSR [History
of the socialist economy of the USSR], vols. 1-5 (Moscow: Nauka, 1976).
L. Volin, A Century of Russian Agriculture (Cambridge, Mass.: Harvard Univer-
sity Press, 1970), chaps. 9 and 10.
N. A. Voznesensky, Soviet Economy During the Second World War, translated
from the Russian edition (New York: International Publishers, 1949).
E. Zaleski, Planning for Economic Growth in the Soviet Union, 1918-1932
(Chapel Hill: University of North Carolina Press, 1971).
---,Stalinist Planning for Economic Growth, 1933-1952 (Chapel Hill: Uni-
versity of North Carolina Press, 1980).
SIX
••
The Soviet Economy in

the Postwar Era
W have examined the momentous organizational changes of the

1930s and the crushing impact of World War II. Before we turn to an
analysis of the administrative-command system, it is appropriate that we
bring the story of Soviet economic history up to date.
The period between the 1950s and the end of the 1980s is of obvious
importance. This was the era in which the Soviet Union came to enjoy
world status as a superpower. Moreover, it is as close as we can come to
a period of "normal" operation for the Soviet system.
This period represents a gradual end to the forced-draft industrializa-
tion of the 1930s and an attempt to achieve maturity for the administra-
tive-command system.
The Soviet Union entered the postwar era with its command system in
place. Prior to Stalin's death, it was not possible to criticize the economic
system. Failures were attributed to human error or even malice; the eco-
nomic system itself was sound. Yet from its very inception, the inherent
weaknesses of the command system were apparent. As these weaknesses
resulted in performance downturns, the Soviet leadership began to permit
125
and even encourage consideration of how the command system might be

changed. In its search for maturity, the Soviet Union allowed tinkering
with the Stalinist economic system. This tinkering, or reform process, must
be tied to postwar economic performance and to the events leading up to
Gorbachev's perestroika.
It has been customary to periodize economic history with prevailing
political leaders. This approach may be somewhat artificial, since, in fact,
there has been a good deal of continuity of basic economic policies from
one Soviet leader to the next. However, we will follow this practice,
beginning with the post-Stalin transition (Malenkov and Khrushchev), the
long tenure of Brezhnev, the short tenures of Andropov and Chernenko,
and finally the era of Gorbachev from the mid-1980s to the collapse of the
Soviet Union in August of 1991.
The Soviet Union broke up as a political entity after the abortive coup
attempt of August 1991. The new nations that arose from this breakup
have all declared their intent to move away from the administrative-com-
mand system. Yet the administrative-command system remains a formida-
ble force for the status quo as the new republics attempt the transition to
a market economy.
THE EARLY YEARS-POSTWAR TRANSITION
After the end of World War II, a trans1t10n period saw much of the
war-related administrative structure dismantled. The State Committee of
Defense was abolished in late 1945. The fourth Five Year Plan for 1946-
1950 was a plan of reconstruction. The postwar recovery was rapid. As
Table 6.1 suggests, by 1950, most prewar indexes had been exceeded
except for grain. Grain production in 1950 was well below 1940. This
resulted from the depressed conditions in rural areas and from the low
priority of agriculture during the war years. 1 The share of investment
devoted to agriculture declined steadily from 15.5 percent between the
first Five Year Plan and the war years. 2 According to the official Soviet
capital stock series, the share of agricultural capital stock declined from
31 percent in 1929 to 16 percent in 1941 and remained at 14 percent
throughout the 1950s. 3
The early postwar years saw a continuation of the priorities estab-
lished in the 1930s. The difference in performance between heavy industry
and light industry was striking. 4 The issue of sectorial priorities was
complex, involving such issues as a weakening of Stalin's personal author-
ity, changing distribution of power among Soviet administrative agencies,
and economic problems such as materials allocation. 5 The issue of indus-
The Soviet Economy in the Postwar Era 127
Table 6.1 THE SOVIET ECONOMY: SELECTED INDICATORS, 1940-1950

1940 1945 1946 1950
National income (1940 = 100) 100 83 161

Industrial production 100 91 76 172
Heavy industry (Group A) 100 112 82 204
Light industry (Group B) 100 59 67 122
Gross agricultural product 100 60 99
Steel (million tons) 18,317 12,252 13,346 27,329
Oil (million tons) 31,121 19.436 21,746 37,878
Electricity (million kWh) 48,562 43,257 48,571 91,226
Transport (billion tons km) 494.4 374.8 395.5 713.3
Fertilizer (standard units) 3,290 1.121 1,711 5.497
Grain (million tons) 95.6 47.3 39.6 81.2
Meat (tons slaughter wt.) 4,695 2,559 4,867
Money wage (avg. monthly) 33.1 48.1 64.2
Source: Official Soviet series from Narodone khoziaistvo SSSR za 60 let !The national economy of the
USSR over 60 years! (Moscow: Statistika, 1977). Data on meat production from Se/'skoe khoziaistvo SSSR
!Agriculture of the USSR) (Moscow: Statistika. 1971).
trial priont1es did not disappear with Stalin's death. Prior to Nikita
Khrushchev's final ascendancy to power in the mid-1950s, he would vie
for power with Georgi Malenkov, a major issue being the appropriate roles
for the light and heavy industrial sectors in the Soviet economy.
The postwar transition of the Soviet economy was, in a number of
respects, different from other countries. The impact of shortages of labor,
destruction of capital, and the general disruption of economic activity
continued to be felt long after the cessation of hostilities. The wartime
economic system that had been successful in winning the war was gradu-
ally dismantled. The Communist Party was once again established as an
overseer of economic activity, budget allocations changed, and the labor
force was gradually shifted back to civilian employment.
The transition was not easy. It was a time of rising consumer expecta-
tions, a sense of uncertainty as to whether Stalin would return to the
policies of the 1930s. Stalin died in March 1953. His last major program
was the 1948 program for the transformation of nature. These programs
reflected the Stalinist thinking of the 1930s; they were grandiose projects
calling for major alterations to the Soviet countryside in the form of
irrigation projects, shelter belts, and the like. While they were criticized in
subsequent years, substantial portions of these programs were carried out
in a far less grandiose framework, such as the expansion of irrigated
farmlands.
THE KHRUSHCHEV YEARS
Nikita Khrushchev rose to power in the early and mid-1950s and was
ousted in October 1964, being labeled a "hare-brained schemer" in an
era of "subjectivism." However history may judge the Khrushchev years,
many features make it distinctive.
From the standpoint of economic performance, the 1950s were
years of rapid growth, judged by international standards. In fact, eco-
nomic growth would never again be as good. The 1950s were a golden
era for Soviet economic performance. Table 6.2 indicates that the early
years were very good years, the latter years markedly less so. Khrush-
chev's downfall in 1964 was at least in part based on declining economic
growth.
During the 1950s, per capita consumption grew rapidly; housing,
education, and medical services were expanded. The Soviet Union's for-
eign trade also began to expand. At the peak of Soviet economic per-
formance, a confident Khrushchev boasted that the Soviet Union would
overtake the United States well before the turn of the century. The 1950s
were definitely a heady period for the Soviet Union. 6
Khrushchev left his mark on the Soviet Union in several ways. First,
he began the de-Stalinization process. Khrushchev denounced Stalin's
"personality cult" in a secret speech to the Twentieth Congress of the
Communist Party in 1956. Although complete de-Stalinization has yet to
be achieved, Khrushchev initiated the first step. Second, Khrushchev began
the reform process. He allowed open discussion of the defects of the Soviet
economic system, and he permitted a limited amount of tinkering with the
system. It was Khrushchev's penchant for reform and experimentation that
Table 6.2 AGGREGATE ECONOMIC PERFORMANCE: THE KHRUSHCHEV YEARS
Average annual growth
1951-1955 1956-1960 1961-1965
Gross national product 5.5 5.9 5.0

Industry 10.2 8.3 6.6
Agriculture 3.5 4.2 2.8
Services 1.9 3.5 4.4
Consumption 4.9 5.7 3.7
Investment 12.4 10.5 7.6
Source: U.S. Congress, Joint Economic Committee, USSR: Measures of Economic

Growth artd Development. 1950-80 (Washington, D.C.: U.S. Government Printing
Office, 1982). pp. 1-401.
contributed to his downfall. Many of his reform ideas were ill prepared
and ill conceived. Alarmed party colleagues worried that eventually his
hare-brained schemes would lead to economic disaster. Third, the Khrush-
chev years saw a rise in Soviet living standards and real wages after two
decades of stagnation or decline.
In the agricultural sphere, Khrushchev rose to power as an outspoken
critic of Soviet agricultural performance at the Twentieth Congress of the
Communist Party. 7 As a self-proclaimed agricultural specialist, Khrush-
chev would stake his career on his ability to solve the Soviet Union's
agricultural problems.
Agricultural Campaigns
Khrushchev's most famous agricultural program was the v1rgm lands
campaign. 8 Begun in 1954, the goal was initially quite modest, namely, to
reclaim 13 million hectares (1 hectare is 2.47 acres) by 1955 in Siberia
and Kazakhstan, using state farms as the mode of organization. State
farms are farms owned and operated directly by the state, using state
employees paid a guaranteed wage. However, by 1960, 42 million hec-
tares, representing some 20 percent of all sown area, had been seeded. 9
The vision was grandiose, but the results were less so. Although these new
lands received substantial capital investment, the marginal soil and the
variable climate resulted in modest yields and a fluctuating (and gradually
declining) output. However, the program did contribute roughly 25 mil-
lion tons of grain annually between 1958 and 1963, though performance
in the early years of the program was generally better than in the later
years. 10 This program continued the eastward shift of agricultural activity
begun much earlier and, in addition, replacement of sown area lost during
the war years. 11 It was also representative of the extensive strategy of
agricultural development that would persist through the 1950s into the
1960s.
A second major program initiated by Khrushchev was the corn pro-
gram. Begun in 1955, it was intended to imitate practice in the United
States, where corn has been a major source of animal fodder. This program
also expanded rapidly. In 1954, 4.3 million hectares were sown to corn,
while corn so wings would reach 3 7 million hectares by 1962. 12 Corn
became an important element in Soviet fodder supplies. These programs
altered the nature of Soviet agriculture and became the focus of contro-
versy. They were overly grandiose and, in some cases, lacked a sound
scientific basis, not to mention readily available complementary inputs.
On the other hand, they did represent a strategy of long-term standing,
namely, an extensive strategy of development.
Organizational Changes in Agriculture

While the flamboyance of the campaigns caught the spotlight, Khrush-
chev's far-reaching organizational changes were no less important. 13 One
change that would continue (though at a much reduced pace) in the
post-Khrushchev era was the amalgamation of collective farms and the
conversion of collective farms to state farms. For example, between 1940
and 1969, the number of collective farms declined from 236,900 to
34,700, while the sown area per farm increased from approximately 500
hectares to 2,800 hectares. 14 Several collectives would be combined to
form a new larger collective farm, with the original collective farms
becoming brigades in the new larger units.
Khrushchev placed great emphasis on the quality of farm manage-
ment. Moreover, the abolition of the machine tractor stations in 1958 and
the placement of agricultural specialists directly on the farms improved the
technical inputs available to collective farms. 15
Economic Adjustments in Agriculture

Khrushchev undertook major economic adjustments within Soviet agricul-
ture. Improved collective farm management became a major focus. Cost-
accounting methods were introduced on a major scale in an effort to
improve farm decision making. The discovery that, in many cases, pro-
curement prices did not cover production costs led to substantial increases
in farm prices. Peasant rewards were changed. Rewards to collective
farmers had generally been paid in kind and on a very uncertain schedule.
Increasingly, these rewards came to be paid in money and on a more
regular and frequent basis. During the decade after 1953, peasant incomes
increased more rapidly than industrial incomes, which substantially re-
duced the rural/urban difference. 16 This policy was part of a more general
strategy of making rural life more attractive to stem the rapid flow of the
labor force (especially the young labor force) out of rural areas and
strengthen rural production incentives.
Khrushchev also acted to increase agricultural inputs, such as chemical
fertilizers. Prior to the 1950s, the Soviet chemical industry was neglected,
especially its ability to bring much-needed chemical fertilizers to agricul-
ture. Growth of output of chemicals and petrochemicals increased from
an average annual rate of 9.8 percent in 1951 to a high of 14.9 percent in
1955.17 Investment in chemicals and petrochemicals increased rapidly
between 1951 and 1960. 18
Khrushchev's agricultural policies represented a clear reversal of the
Stalinist policy of "uneven exchange"- between the countryside and the
city. During the 1930s, agriculture was viewed as a source of resources to

be extracted and transferred into industry. Khrushchev's farm policies
recognized that the deprivation of farmers depressed output and market-
ings. Khrushchev reinjected economic incentives into agriculture-a policy
that was continued by his successors.
Organizational Change: The Sovnarkhoz Reform

Khrushchev's major planning reform was his Sovnarkhoz Reform of 1957.
The Sovnarkhoz Reform, subsequently abolished, was an attempt to
change Soviet planning from a ministerial to a regional basis. 19 Khrush-
chev argued that the industrial ministries had created planning problems:
empire building within ministries, lack of attention to regional coordina-
tion, and bureaucratic delays. Khrushchev sought to correct these deficien-
cies by revamping the planning system along regional lines. Accordingly,
in 1957, the ministries were abolished (except the ministries supervising
the nuclear sector and electricity), and a system of 105 Sovnarkhozy
(regional economic councils) was introduced. Enterprises were subordi-
nated to a regional council rather than a ministry.
After Khrushchev's ouster, the Sovnarkhozy were replaced by the
former ministries. While the ministries had been blamed for empire build-
ing and bureaucratic inefficiencies, the Sovnarkhozy were criticized for
favoring regional interests, for "localism." Khrushchev's Sovnarkhozy
experiment reflected a long-standing conflict. With a ministerial system,
ministries preferred to look after the affairs of their enterprises; "foreign"
enterprises outside the ministry tended to be ignored. Yet parochial ten-
dencies plagued regional planning organizations, which tended to give the
interests of the territory top priority.
Economic Reform Under Khrushchev

The Stalinist administrative-command system, put in place in the 1930s,
had weaknesses that were apparent by the early 1930s. The highly central-
ized system required that higher bodies exercise "petty tutelage" (opeka)
over enterprises. Faced with a large number of targets sent down by
authorities who did not know the local circumstances, enterprise managers
found that they could satisfy their superiors by engaging in actions that
were actually contrary to their superiors' interest. Managers found it in
their interest to produce low-quality goods, to shun innovation, and to
combine resources in an inefficient manner. Moreover, the Stalinist system
judged enterprises primarily in terms of quantity targets (such as tons of
steel produced), not in terms of efficiency or profitability.
Khrushchev was the first Soviet leader to allow open discussion of the
deficiencies of the Stalinist system. In 1962, a paper by the then-obscure
Kharkov economist, Evsei Liberman, entitled "The Plan, Profits, and
Bonuses," was published in Pravda. Its publication signaled an official
sanctioning of reform discussion by the party leadership. 20
Although a lively discussion of reform alternatives ensued between
1962 and Khrushchev's ouster in 1964, very little in the way of real reform
occurred during Khrushchev's tenure. The official government reform, the
response to the reform discussion initiated under Khrushchev, was an-
nounced in September 1965, about one year after Khrushchev's fall from
power. The 1962-1964 reform discussion, however, set the agenda for
later reform discussion.
THE BREZHNEV YEARS
Leonid Brezhnev came to power after Khrushchev's ouster in October

1964. He remained as general secretary of the Communist Party until his
death in November 1982. Brezhnev was succeeded by the ailing Yuri
Andropov, the former head of the KGB, who died in February 1984.
Konstantin Chernenko succeeded Andropov, only to die in March 1985
after only 13 months in office. The 54-year-old Mikhail Gorbachev was
chosen to replace Chernenko in March 1985. Although Brezhnev died in
1982, it is appropriate to call the entire period from 1964 to 1985 the
Brezhnev era. By the time of Brezhnev's death, the Soviet Union had
established a form of collective leadership, which became increasingly
evident as the Communist Party continued to conduct its business despite
the obvious incapacitation of three general secretaries. The Andropov and
Chernenko years were far too short to alter the basic policies and strategies
put in place during Brezhnev's 18-year tenure.
Declining Economic Performance

The most important feature of the Brezhnev era was the declining eco-
nomic performance of the Soviet Union. Table 6.3 compares economic
growth during the Khrushchev years (1955-1965) with those of the Brezh-
nev era and early Gorbachev years (1966-1987). The pattern of decline is
obvious. From an annual GNP growth rate of over 5 percent, GNP
growth dropped close to 2 percent during the 1980s. Industrial growth
declined from near 8 percent in the 1950s to mid-1960s to around
2 percent in the 1980s. The agricultural growth rate showed extreme
volatility, even declining at over 2 percent per year from the beginning to
the middle of the 1970s. Both investment and consumption growth rates
Table 6.3 AGGREGATE ECONOMIC PERFORMANCE: 1955-1965 VERSUS 1966-1987

1955-1965 1966-1970 1971-1975 1976-1980 1981-1983 1984-1987
Gross national
product 5.4 5.2 3.7 2.7 2.3 1.6
Industry 7.5 6.3 5.9 3.4 1.5 2.1
Agriculture 3.5 3.5 -2.3 0.3 4.2 0.8
Services 4.0 4.2 3.4 2.8 2.1
Consumption 4.7 5.3 3.6 2.6 1.7 2.4
Investment 9.1 6.0 5.4 4.3 4.2 3.0
Source: U.S. Congress, Joint Economic Committee, USSR: Measures of Economic Growth and Development, 1950-80
(Washington, D.C.: U.S. Government Printing Office, 1982); Handbook of Economic Statistics (Washington, D.C.: Directorate of
Intelligence, 1983 and 1988 editions).
faltered, with investment falling from 9 percent annual growth to 3-4

percent in the 1980s.
The decline in growth rates was due to deteriorating productivity
growth after 1970. From 1970 to 1987, productivity growth was actually
negative in most years. Output per unit of labor and capital input was
actually declining; for the period 1970-1987 as a whole, output per unit
of input declined at a rate of more than 1 percent per year.
The pattern of decline so characterized the Brezhnev era that his
successor came to refer to the 1970s and early 1980s as "the period of
stagnation."
Economic Reform During the Brezhnev Years

Khrushchev initiated the reform discussion by encouraging open discus-
sion of change in the Soviet economic system between 1962 and his ouster
in 1964. It was the task of the Brezhnev team to decide the issue of
economic reform. In September 1965, the Soviet leadership announced the
official government reform, often called the Kosygin Reform after Alexei
Kosygin, Brezhnev's chief economic official. 21
Kosygin announced a general reform to be implemented over the next
five years. In light of the high expectations raised by the debates of the
preceding years, the official response must have been disappointing to the
proponents of significant reform.
The basic thrust of the 1965 reform was a reduction in the number of
enterprise targets and, most important, replacement of gross output by
"realized output" (sales) as the primary indicator of success for an enter-
prise. In addition, the number of indicators for labor planning was to be
reduced to a single indicator: the magnitude of the wage fund. An enter-

prise manager was now to face the eight targets established within the
central plan, compared to the earlier system of 20 to 30 targets. Enter-
prises were to be allowed to keep more of their profits for incentive
payments and investment. One-fifth of investment was to be determined
by the enterprises themselves.
The 1965 reform recentralized the Soviet economic bureaucracy.
Power was returned to the ministries, and the regional economic councils
(the Sovnarkhozy) created by Khrushchev in 1957 were abolished. Deci-
sion-making authority shifted from regional authorities to national
authorities.
Movement away from Reform

The 1965 reform revealed the areas most resistant to change. The idea was
to create a system whereby managers would be encouraged to respond
spontaneously to various economic "levers" -profits, bonuses, increased
authority over investment, and so on-so as to make enterprises more
efficient and release "hidden reserves."
Between 1965 and 1971, there was evidence of greater managerial
spontaneity. As managers began to exercise their newfound authority,
planners and bureaucrats began to react against "undesirable" spontane-
ous enterprise actions and to press for amendments to the 1965 rules.
Changes were introduced that significantly modified the spirit of the
reform. Rigid regulations governing enterprise incentive funds replaced
the more flexible system. The ministry was to determine the size of
enterprise incentive funds. The ministry again had the authority to deter-
mine the conditions under which incentive funds would be accumulated
and disbursed.
The number of enterprise targets was expanded. New targets were
reinstated. Many of the administrative changes proposed by the 1965
reform were thwarted. In practice, the formation of industrial associations
meant little more than "changing the names on doors" in Moscow; super-
visory power remained in the hands of the ministries. There was a 60
percent expansion in the bureaucracy between 1966 and 1977. The min-
istries continued to be the centers of economic power, allocating materials
and equipment, dictating the incentive systems of enterprises, and control-
ling investment.
Strengthening Central Planning

With the reform abandoned and economic growth continuing to decline
(see Table 6.3 ), the Brezhnev team sought to improve economic per-
Table 6.4 PLAN FULFILLMENT: PLANNED VERSUS ACTUAL GROWTH
1966-1970 1971-1975 1976-1980 1981-1985
Gross national product

Plan 6.5-7.0 5.8 5.0 4.0
Actual 5.0 3.1 2.2 1.8
Industry
Plan 8.2 8.0 6.5 4.9
Actual 6.3 5.4 2.6 1.8
Agriculture
Plan 5.5 3.7 5.0 5.0
Actual 3.7 -.6 0.8 2.1
Source: Handbook of Economic Statistics 1988, CPAS 88-10001 (September 1988), 62.
formance through other means. From the mid-1970s to Brezhnev's death

in 1982, scarcely a year would pass without the announcement of
some "reform" or "experiment" that would solve the nation's economic
problems.
It is not worthwhile to review these reforms or experiments. The
reforms and experiments of the Brezhnev years did not change the Soviet
resource allocation system in any material way. Their common ground was
the desire to make centralized planning work better. Rather than seeking
to reduce the role of planning from above, efforts were directed toward
improving Soviet planning. Considerable emphasis was placed on devising
"scientific" input norms, computerizing planning systems, and finding
qualitative indicators. The culmination of this effort was the July 1979
decree entitled "On Improving Planning and Strengthening the Economic
Mechanism's Influence on Raising the Effectiveness of Production and the
Quality of Work. " 22 Systems for gathering better information were to be
created; scientific norms were to replace directive indicators; enterprises
were to be encouraged to take on more difficult "counterplans"; greater
emphasis was to be placed on long-term plans; and the material supply
system was to be improved through the greater use of contracting between
enterprises. New plan indicators of enterprise success were to be based
more on net outputs than on gross outputs, and greater emphasis was to
be placed on quality.
The ambitiousness of Soviet economic plans also declined during the
Brezhnev era. Table 6.4 shows that Soviet planners aimed for higher
growth rates in the late 1960s and early 1970s than in the late 1970s and
mid-1980s. As growth targets became less ambitious, plan fulfillment
performance deteriorated. Whereas actual growth was three-quarters of
planned growth in the second half of the 1960s, it fell to less than
50 percent of planned growth in the mid-1970s and early 1980s.
Why did the Brezhnev team not mount a serious reform program in
light of the Soviet Union's deteriorating economic condition? Brezhnev's
critics maintain that he was a captive of status quo forces. He led a corrupt
and listless regime. A more benevolent interpretation would be that eco-
nomic reform was extremely difficult to impose on the Soviet bureaucracy.
Significant reform cannot be carried through without an imposing man-
date that significant reform cannot be avoided. Brezhnev's choice was
"muddling through" in the hope that the prevailing system would generate
sufficiently good performance to allow the Soviet Union to continue its
existence.
THE GORBACHEV YEARS
When Mikhail Gorbachev assumed power in March 1985, he was faced

with a deteriorating economy and no ongoing reform to stem this decline.
He quickly moved to consolidate his personal power and to devise a
reform program that would halt the economy's precipitous slide. In em-
barking upon a "radical" reform program, Gorbachev, wittingly or unwit-
tingly, set into motion forces that ended Soviet control over Eastern
Europe, the monopoly of the Communist Party, and even the Soviet Union
itself. 23
Perestroika
Gorbachev took pains to emphasize the need for "radical" reform to
distinguish his reform program-dubbed perestroika, or restructuring-
from the earlier halfhearted reform attempts. Gorbachev realized that
economic revival depended not only on reform of the economy but also
on changes in politics and social life. Hence, he sought to combine bold
political and social reforms-glasnost (openness) and democratization-
with economic reform.
Perestroika can be divided into three phases. The first phase-dated
from 1985 to 1987-was characterized by a naive belief that the transition
to a more effective economic system could be accomplished rather easily
without undue sacrifice. In fact, it was felt that economic growth could
even accelerate during the course of reform. The second phase-1987 to
1990-brought about the realization that radical reform would be a
difficult process requiring fundamental changes in the economic system
and that output would likely decline and macroeconomic problems wors-
en during the transition. Nevertheless, this second period was charac-
terized by the belief that fundamental features of planning and socialism

could be a part of successful reform. The third phase, which was just
beginning when the Soviet Union collapsed, illustrated the growing under-
standing that the old system had to be replaced almost in its entirety.
The first phase of perestroika involved the warming over of ideas from
the 1965 reform. It was felt that by giving enterprises more freedom but
allowing political and workplace democracy, economic performance
would improve and growth rates would accelerate. It also was thought
that with relatively minor tinkering, the Soviet planning and enterprise
system could work more effectively. The key to perestroika was the belief
that if enterprises were placed on a self-financing basis, where losses would
no longer be covered automatically, productivity would improve as enter-
prises were subjected-many for the first time-to the discipline of the
market.
Although the reform measures enacted during this first phase were
modest, monumental changes were occurring in the economic bureauc-
racy. Gorbachev had concluded that the economic bureaucracy-as the
class most resistant to reform-must be weakened. The power of the
ministries and state committees was decimated by personnel cuts, negative
campaigns, and real reductions in authority. By allowing the reduction of
ministry power, Gorbachev removed the heart of the administrative-com-
mand system without transplanting a new heart in the form of market
discipline.
The combination of timid economic reform with the weakening of the
economic bureaucracy created the worst of all worlds. As central decision-
making authority collapsed, enterprises began to operate in a vacuum.
There was no organized mechanism to allocate resources. Soviet growth,
which was already suffering, collapsed. The loss of central authority
impacted particularly on control of the money supply and state budget
discipline. Inflation began to heat up, and the state budget deficit went out
of control.
The second phase of perestroika saw mostly halfhearted attempts to
create the institutions of a new economic system. The centerpiece law, the
1987 Law on Enterprise, was primarily a rehash of the 1965 reform. It set
out the rights and obligations of state enterprises, giving them more
freedom over prices, wages, outputs, and bonuses while keeping central-
ized controls over obligatory deliveries, prices, and foreign economic
relations.
During the second phase of perestroika, the various political camps
appeared to reach some agreement that market resource allocation should
be the ultimate goal of radical reform. One deputy prime minister declared
the market to be the most "democratic" mechanism of resource allocation.
There was agreement that more private ownership was required, that
subsidies to failing enterprises should be stopped, and that prices should
reflect opportunity costs.
The debate between radical reformers and moderates focused on the
speed of transition. Radical reformers-as represented in the late 1980s by
the 500 Day Program prepared by leading radical reformers-espoused a
quick transition, or shock-therapy treatment. The 500 Day Program called
for the creation of the institutions of a market economy and for the freeing
of prices and the elimination of subsidies according to a predetermined
accelerated schedule.
The "moderates," represented in the late 1980s by Prime Minister
Ryzhkov and others, argued that the transition must be slow and that it
would take considerable time to create the necessary institutions for a
market economy. The moderates argued that price controls should be
lifted only gradually and that noncompetitive enterprises should be
shielded by subsidies to protect against wide-scale unemployment.
The War of Laws

The disintegration of the Soviet Union began well before the failed coup
of August 1991. As central authority contracted and party control weak-
ened, the various republics-most notably the Russian Republic headed
by the democratically elected Boris Yeltsin-began to flex their muscles.
Troubled by the slow pace of reform at the center and anxious to stake
their claim to natural resources and capital resources, the republics began
passing their own laws and embarking on their own reform programs.
The Yeltsin government embraced and put into effect on Russian soil
reform programs much bolder than those of the center. It also put into
effect provisions banning Communist Party activities in the workplace.
The various republics and autonomous regions claimed the mineral re-
sources located on their territory, most notably oil and diamonds, and
questioned the authority of central political and economic organizations
to dispose of these resources. With the collapse of central authority, the
republics stopped paying taxes to the center.
The Failed Coup

Conservative forces, troubled by the challenges to the Communist Party,
to the central bureaucracy, and to the principle of the Soviet Union,
launched an ill-planned coup against Gorbachev in August 1991. The
plotters had a poorly organized coup; it was also clear that they had no
program to offer to solve the nation's economic problems.
With the failure of the coup, the central committee of the party was
abolished, the Union had for all practical purposes disappeared, and each
republic was free to pursue its own reform course. The Commonwealth of
Independent States, created out of the ashes of the Soviet Union, was a
hollow shell.
Just as the Revolution of 1917 had ushered in the Soviet economic and
political system, the failed August 1991 coup ended the Soviet Union as a
political entity. The political dissolution of the Soviet Union has proven
easier to accomplish than the dissolution of the administrative-command
system. Despite the best of intentions, the administrative-command system
continues to allocate resources in the former Soviet Union, albeit in modi-
fied and weakened form.
Why Perestroika Failed

Postmortems on the failure of Gorbachev's economic policy will not be
completed for many years to come. How was it that a forceful and
well-connected Soviet leader operating from the pinnacle of party power
failed to reform the administrative-command system?
In our opinion, Gorbachev's major error was in thinking that reform
could be accomplished by straddling the middle ground between the
conservatives and radical reformers. Gorbachev, as a consensus politician,
attempted to apply a similar approach to economic policy. When con-
fronted with the necessity of choosing between moderate and radical
programs, Gorbachev invariably attempted to find a middle ground.
Acceptance of the conservative program, with its failure to offer real
change, meant indefinite continuation of the administrative-command
system at a time when its control center had been destroyed. Acceptance
of the radical program meant that Gorbachev would have to take respon-
sibility for the costs of a shock-therapy program. As a politician, Gor-
bachev obviously feared the consequences of shock therapy. As a
committed communist, he probably lacked the ideological will to accept a
system he had been taught to deplore.
REFERENCES
1. For a discussion of the impact of the war in rural areas, see A. Nove, "Soviet
Peasantry in World War II," in S. J. Linz, ed., The Impact of World War II on
the Soviet Union (Totowa, N.J.: Rowman & Allanheld, 1985), pp. 79-92.
2. F. A. Durgin, Jr., "The Relationship of the Death of Stalin to the Economic
Changes of the Post-Stalin Era," in R. C. Stuart, ed., The Soviet Rural Econ-
omy (Totowa, N.J.: Rowman & Allanheld, 1984), pp. 119-123.
3. R. Moorsteen and R. P. Powell, The Soviet Capital Stock, 1928-1962 (Home-

wood, Ill.: Irwin, 1966), p. 615.
4. It is important to note two major issues relating to plan fulfillment in this era.
First, the plans were changed so frequently that assessment of fulfillment is a
difficult task. Second, Soviet official series are based on 1926 prices. For a
host of reasons, these prices are suspect. For a detailed discussion of these
issues and citation of the various estimates, see E. Zaleski, Stalinist Planning
for Economic Growth, 1933-1952 (Chapel Hill: University of North Caro-
lina Press, 1980), pp. 396-402.
5. T. Dunmore, The Stalinist Command Economy (London and Basingstoke:
Macmillan, 1980).
6. H. Schwartz, The Soviet Economy Since Stalin (Philadelphia: Lippincott,
1965).
7. For Khrushchev's own views, see N. S. Khrushchev, Stroitel'stvo kommu-
nizma v SSSR i razvitie sel'skogo khoziaistva [The construction of commu-
nism in the USSR and the development of agriculture] (Moscow:
Gospolitizdat, 1962), 8 vols. For a survey, see J. F. Karcz, "Khrushchev's
Agricultural Policies," in M. Bornstein and D. Fusfeld, eds., The Soviet
Economy: A Book of Readings, 3rd ed. (Homewood, Ill.: Irwin, 1970), pp.
223-259. For a discussion of agricultural policy making, see S. I. Ploss,
Confiict and Decision-Making in Soviet Russia: A Case Study of Agricultural
Policy, 1953-1963 (Princeton, N.J.: Princeton University Press, 1965); and
W. G. Hahn, The Politics of Soviet Agriculture, 1960-1970 (Baltimore: Johns
Hopkins Press, 1973). For a survey of agricultural campaigns, see J. W.
Willett, "The Recent Record in Agricultural Production," in U.S. Congress,
Joint Economic Committee, Dimensions of Soviet Economic Power (Wash-
ington, D.C.: U.S. Government Printing Office, 1962), pp. 91-113. For a
discussion of organizational changes, see R. C. Stuart, The Collective Farm in
Soviet Agriculture (Lexington, Mass.: Heath, 1972). For a discussion of
monetary incentives, see F. A. Durgin, Jr., "Monetization and Policy in Soviet
Agriculture Since 1952," Soviet Studies, vol. 15, no. 4 (April 1964), 381-407;
and D. W. Bronson and C. B. Krueger, "The Revolution in Soviet Farm
Household Income, 1952-1967," in J. R. Millar, ed., The Soviet Rural Com-
munity (Urbana: University of Illinois Press, 1971), pp. 214-258. The virgin
lands campaign is discussed in detail in M. McCauley, Khrushchev and the
Development of Soviet Agriculture (New York: Holmes & Meier, 1976).
8. McCauley, Khrushchev and the Development of Soviet Agriculture.
9. Ibid., pp. 79-83.
10. Ibid., Tables 4.5 and 4.6.
1 L Ibid.
12. J. Anderson, "A Historical-Geographical Perspective on Khrushchev's Corn
Program," in J. F. Karcz, ed., Soviet and East European Agriculture (Berkeley
and Los Angeles: University of California Press, 1967), Table 2. The data
include corn for all uses.
13. For a discussion of organizational changes, see Stuart, The Collective Farm,
and R. D. Laird, "Khrushchev's Administrative Reforms in Agriculture: An
Appraisal," in J. F. Karcz, ed., Soviet and East European Agriculture, pp.

29-56.
14. Strana Sovetov za 50 let [Country of the Soviets during 50 years] (Moscow:
Statistika, 1967), p. 121; Narodnoe Khoziaistvo SSSR v 1969 g [The national
economy of the USSR in 1969] (Moscow: Statistika, 1970), pp. 404 and 405.
15. For a detailed discussion of the evolution of the machine tractor stations, see
R. F. Miller, One Hundred Thousand Tractors (Cambridge, Mass.: Harvard
16. For a discussion of rural/urban income differences during this period, see
Bronson and Krueger, "The Revolution in Soviet Farm Household Income,
1952-1967."
17. U.S. Congress, Joint Economic Committee, USSR: Measures of Economic
Growth and Development, 1950-80 (Washington, D.C.: U.S. Government
Printing Office, 1982), p. 193.
18. S. Butler, "The Soviet Capital Investment Program," in U.S. Congress, Joint
Economic Committee, Economic Performance and the Military Burden in the
Soviet Union (Washington, D.C.: U.S. Government Printing Office, 1970),
p. 53.
19. For a discussion of the Sovnarkhoz Reform, see 0. Hoeffding, "The Soviet
Industrial Reorganization of 1957," American Economic Review: Papers and
Proceedings, vol. 49, no. 2 (May 1959), 65-77.
20. Evsei Liberman's reform proposals had been made in the journal Voprosy
ekonomiki [Problems of economics] as early as 1955. The original Liberman
paper and the debate it generated are given in M. E. Sharpe, ed., Planning,
Profit and Incentives in the USSR, vols. 1 and 2 (White Plains, N.Y.: Interna-
tional Arts and Sciences Press, 1966). For succinct statements of the Liberman
proposal, see A. Zauberman, "Liberman's Rules of the Game for Soviet
Industry," Slavic Review, vol. 22, no. 4 (December 1963), 734-744; G. R.
Feiwel, The Soviet Quest for Economic Efficiency (New York: Praeger, 1972),
chap. 5; Sharpe, Planning, Profit and Incentives, vols. 1-2.
21. Our discussion of the 1965 reform is based on the following sources: F. I.
Kushnirsky, Soviet Economic Planning 1965-1980 (Boulder, Colo.: Westview
Press, 1982); M. Kaser, "Kosygin, Liberman, and the Pace of Soviet Industrial
Reform," in G. R. Feiwel, ed., New Currents in Soviet-Type Economies: A
Reader (Scranton, Pa.: International Textbook, 1968); A. Kosygin, "On Im-
proving Management of Industry, Perfecting Planning, and Enhancing Eco-
nomic Incentives in Industrial Production," in Bornstein and Fusfeld, eds.,
The Soviet Economy: A Book of Readings, pp. 387-396; National Foreign
Assessment Center, Organization and Management in the Soviet Economy:
The Ceaseless Search for Panaceas (Washington, D.C.: CIA, 1977); G. E.
Schroeder, "Recent Developments in Soviet Planning and Managerial Incen-
tives," in U.S. Congress, Joint Economic Committee, Soviet Economic Pros-
pects for the Seventies (Washington, D.C.: U.S. Government Printing Office,
1973); G. E. Schroeder, "Post-Khrushchev Reforms and Public Financial
Goals," in Z. M. Fallenbuchl, ed., Economic Development in the Soviet
Union and Eastern Europe (New York: Praeger, 1976), pp. 348-367; Na-
tional Foreign Assessment Center, Organization and Management in the

Soviet Economy, pp. 1-22; A. C. Godin, "Industrial Reorganization: The
Associations," in U.S. Congress, Joint Economic Committee, Soviet Economy
in a New Perspective (Washington, D.C.: U.S. Government Printing Office,
1976); G. E. Schroeder, "The Soviet Economy on a Treadmill of 'Reforms,"'
in U.S. Congress, Joint Economic Committee, Soviet Economy in a Time of
Change (Washington, D.C.: U.S. Government Printing Office, 1979), vol. 1,
pp. 312-340; E. Zaleski, Planning Reforms in the Soviet Union, 1962-1966
(Chapel Hill: University of North Carolina Press, 1967); and M. E. Sharpe,
ed., Planning, Profit and Incentives in the USSR, vols. 1 and 2 (White Plains,
N.Y.: International Arts and Sciences Press, 1966).
22. This discussion is based on M. Bornstein, "Improving the Soviet Economic
Mechanism," Soviet Studies, vol. 37, no. 1 (January 1985), 1-30; P. Hanson,
"Success Indicators Revisited: The July 1979 Soviet Decree on Planning and
Management," Soviet Studies, vol. 35, no. 1 (January 1983), 1-13; and N.
Nimitz, "Reform and Technological Innovation in the 1 lth Five Year Plan,"
in S. Bialer and T. Gustafson, eds., Russia at the Crossroads (London: Allen
& Unwin, 1982), chap. 7.
23. This section is based on the following sources: D. Dyker, ed., The Soviet
Union Under Gorbachev (London: Croom Helm, 1987); USSR in a Time of
Change (Moscow: Progress Publishers, 1987); J. Berliner, "Organizational
Restructuring of the Soviet Economy," Joint Economic Committee, Gor-
bachev's Economic Plans, vol. 1 (Washington, D.C.: U.S. Government Print-
ing Office, 1987), pp. 70-83; J. P. Hardt and R. Kaufman, "Gorbachev's
Economic Plans: Prospects and Risks," in Gorbachev's Economic Plans,
vol. 1, pp. vii-xix; J. L. Felker, "Gorbachev's Economic Reform: A Soviet
Economy Roundtable," Soviet Economy, vol. 3, no. 1(January-March1987),
40-53; Gertrude E. Schroeder, "Anatomy of Gorbachev's Economic Reform,"
Soviet Economy, vol. 3, no. 3 (July-September 1987), 219-241, with com-
ment by H. Levine, pp. 242-245; Timothy J. Colton, "Approaches to the
Politics of Systemic Economic Reform in the Soviet Union," Soviet Economy,
vol. 3, no. 2 (April-June 1987); Blair Ruble, "The Social Dimension of
Perestroyka," same volume, pp. 171-183; E. A. Hewett, "Gorbachev at Two
Years: Perspectives on Economic Reforms," Soviet Economy, vol. 2, no. 4
(October-December 1986), 283-288; W. Kern, ed., From Socialism to Market
Economy: The Transition Problem (Kalamazoo, Mich.: W. E. Upjohn Insti-
tute, 1992); J. Noren, "The Soviet Economic Crisis: Another Perspective,"
Soviet Economy, vol. 6 (January-March, 1990); P. Desai, Perestroika in
Perspective (Princeton: Princeton University Press, 1989).
A. Balinky et al., Planning and the Market in the USSR: The 1960s (New
Brunswick, N.J.: Rutgers University Press, 1967).
J. S. Berliner, The Innovation Decision in Soviet Industry (Cambridge, Mass.: MIT
Press, 1976).
- - - , "Planning and Management" in A. Bergson and H. S. Levin, eds., The

Soviet Economy: Towards the Year 2000 (London: Allen & Unwin, 1983),
pp. 350-359.
- - - , "Organizational Restructuring of the Soviet Economy," Joint Economic
Committee, Gorbachev's Economic Plans, vol. 1 (Washington, D.C.: U.S.
Government Printing Office, 1987), pp. 70-83.
M. Bornstein, "Improving the Soviet Economic Mechanism," Soviet Studies,
vol. 37, no. 1 (January 1985), 1-30.
K. Bush, "The Implementation of the Soviet Economic Reform," Osteuropa
Wirtschaft, nos. 2 and 3 (1970).
S. F. Cohen, "The Friends and Foes of Change: Reformism and Conservatism in
the Soviet Union," Slavic Review, vol. 38, no. 2 (June 1979), 187-202.
T. J. Colton, "Approaches to the Politics of Systemic Economic Reform in the
Soviet Union," Soviet Economy, vol. 3, no. 2 (April-June 1987).
P. Desai, Perestroika in Perspective (Princeton: Princeton University Press, 1989).
D. Dyker, ed., The Soviet Union under Gorbachev (London: Croom Helm,
1987).
N. Fedoryenko et al., Soviet Economic Reform: Progress and Problems, translated
from the Russian (Moscow: Progress Publishers, 1972).
J. L. Felker, Soviet Economic Controversies (Cambridge, Mass.: MIT Press, 1966).
"Gorbachev's Economic Reform: A Soviet Economy Roundtable," Soviet Econ-
omy, vol. 3, no. 1 (January-March 1987), 40-53.
A. C. Godin, "Industrial Reorganization: The Associations," in Joint Economic
Committee, Soviet Economy in a New Perspective (Washington, D.C.: U.S.
P. Hanson, "Success Indicators Revisited: The July 1979 Decree on Planning and
Management," Soviet Studies, vol. 35, no. 1 (January 1983).
J.P. Hardt and R. Kaufman, "Gorbachev's Economic Plans: Prospects and Risks,"
in Gorbachev's Economic Plans, vol. 1 (Washington, D.C.: U.S. Government
Printing Office), pp. vii-xix.
A. Hewett, "Gorbachev at Two Years: Perspectives on Economic Reforms," Soviet
Economy, vol. 2, no. 4 (October-December 1986), 283-288.
A. Katsenelinboigen, Studies in Soviet Economic Planning (White Plains, N.Y.:
M. E. Sharpe, 1978).
W. Keizer, The Soviet Quest for Economic Rationality (Rotterdam: Rotterdam
W. Kern, ed., From Socialism to Market Economy: The Transition Problem
(Kalamazoo, Mich.: W. E. Upjohn Institute, 1992).
E. G. Liberman, Economic Methods and the Effectiveness of Production (White
Plains, N.Y.: International Arts and Sciences Press, 1971).
S. J. Linz and W. Moskoff, eds., Reorganization and Reform in the Soviet Econ-
omy (Armonk, N.Y.: M. E. Sharpe, 1988).
National Foreign Assessment Center, Organization and Management in the Soviet

Economy: The Ceaseless Search for Panaceas, ER77-10769, Washington,
D.C., December 1977.
P. Rutland, "The Shchekino Method and the Struggle to Raise Labor's Productiv-
ity in Soviet Industry," Soviet Studies, vol. 36, no. 3 (July 1984), 345-365.
G. E. Schroeder, "Anatomy of Gorbachev's Economic Reform," Soviet Economy,
vol. 3, no. 3 (July-September 1987), 219-241..
---,"The 1966-67 Soviet Industrial Price Reform: A Study in Complications,"
Soviet Studies, vol. 20, no. 4 (April 1969), 462-477.
---,"Recent Developments in Soviet Planning and Managerial Incentives," in
U.S. Congress, Joint Economic Committee, Soviet Economic Prospects for
the Seventies (Washington, D.C.: U.S. Government Printing Office, 1973),
pp. 11-38.
- - - , "Soviet Economic 'Reform' Decrees: More Steps on the Treadmill," in
U.S. Congress, Joint Economic Committee, Soviet Economy in the 1980s:
Problems and Prospects, part 1 (Washington, D.C.: U.S. Government Print-
ing Office, 1982), pp. 65-88.
- - - , "The 'Reform' of the Supply System in Soviet Industry," Soviet Studies,
vol. 24, no. 1 (July 1972), 97-119.
M. Yanowitch, ed., A Voice of Reform: Essays by Tatiana I. Zaslavskaia (Armonk,
N.Y.: M. E. Sharpe, 1988).
TWO
••
HOW THE
ADMINISTRATIVE-
COMMAND
ECONOMY OPERATED
145
SEVEN
••
Bureaucracy, Planning,
Money, and Investment
Study of the Soviet administrative-command economy serves two pur-

poses. First, it is important to know how it works in order to assess its
performance. The collapse of the Soviet system has revealed that the
administrative-command system did not perform well. We must know the
workings of the system before we can explain its performance. Second, the
leadership of the former Soviet Union wishes to create a market-oriented
system in place of the old system. We cannot understand the obstacles to
transition without a clear understanding of the system that is being re-
placed.
In this chapter we turn from the history of the Soviet economy to its
operation. Although arrangements for allocating resources in the Soviet
Union have changed over time, we concentrate on how the Soviet economy
operated in the 1980s.
The Soviet Union collapsed in August of 1991. Even prior to its
breakup, the Soviet administrative-command system was in the process
of disintegration. To obtain a picture of how the Soviet administrative-
147
148 How the Administrative-Command Economy Operated
command system functioned in its heyday, we must go back to the mid-

1980s, prior to Gorbachev's ascent to power.
In Part Two, we seek to describe the theoretical workings of the
administrative-command economy. This chapter focuses on planning;
Chapter 8 looks at management, labor, and pricing. Trade in the adminis-
trative-command economy is the topic of Chapter 9. In Chapter 10 we
take a hard look at how well the administrative-command economy
worked in the former Soviet Union; that is, we look at the practice of the
Soviet economy.
THE SOVIET ECONOMIC 8UREAUCRACY 1
The Soviet administrative-command economy was administered by a bu-

reaucracy. The Soviet economic bureaucracy included the economic de-
partments of the Communist Party, the state bureaucracy including the
state planning apparatus, the industrial ministries, the trusts intermediate
between the industrial ministries and the enterprises, and the enterprises
at the lowest level.
The Party
The Communist Party of the Soviet Union (CPSU) was the dominant
ruling force in the Soviet Union. The CPSU dealt with a multitude of
matters-propaganda, media control, foreign policy-in addition to eco-
nomics. Its economic functions ranged from devising overall economic
policy, controlling key appointments, and monitoring economic activity
from the highest to the lowest level. The CPSU played a vital and ongoing
role in the area of economics. At the highest level, the Department of
Planning and Finance Organs (Otdel planovykh i finansovykh organov) of
the Central Committee of the CPSU was responsible for issuing instruc-
tions to the highest state planning organs and for coordinating overall plan
activity. The Central Committee had industrial departments that super-
vised and monitored specific branches. These party industrial departments
paralleled the industrial departments of planning organs and the minis-
tries.
The CPSU exercised control not only from Moscow. Regional and
local party organs-the oblast' party committees (obkoms), the city party
committees (gorkoms), and the regional party committees (raikoms) were
also involved in economic affairs. The first party secretary of a particular
obkom oversaw the economic affairs of the oblast' and was held respon-
sible for its economic failures. The first party secretary of a particular city
(say, Moscow) was judged according to the performance of enterprises in
Moscow. Whereas the Central Committee was concerned with overall
Bureaucracy, Planning, Money, and Investment 149
economic performance, regional and local party authorities were con-

cerned about the economic performance in the area of their jurisdiction.
The primary party organizations (PPOs) of the enterprises represented
party authority at the microeconomic level. Each enterprise had a PPO. In
large enterprises, the PPO was headed by a full-time professional who was
freed from other work responsibilities. In small enterprises, the PPO was
headed by a party member who worked on a part-time basis. Most
political scientists agree that the power of the PPO was limited and did not
strongly influence the operation of enterprises.
THE STATE BUREAUCRACY
Whereas the CPSU involved itself in the making of economic policy and
controlling key appointments, the state economic bureaucracy was
charged with the implementation of party policy. Although there was an
elected government, the Supreme Soviet Council of Ministers conducted
the business of government. The Council of Ministers was the government
bureaucracy of the Soviet Union. Each of the 15 union republics had its
own state apparatus, which paralleled the USSR state apparatus. The
Council of Ministers was comprised of industrial ministers, chairmen of
various state committees, and the chairmen of agencies with ministerial
status. The chairman of the Council of Ministers occupied the most
powerful position in the state apparatus, in effect, that of prime minister.
Of the more than 20 state committees, the most important were
Gosplan (the State Planning Commission), Gosbank (the State Bank),
Gossnab (the State Committee for Material Technical Supply), Gosstroi
(the State Committee for Construction), Gostsen (the State Committee for
Prices), Minfin (the Ministry of Finance), and the Central Statistical Ad-
ministration. Although nominally responsible to the USSR Council of
Ministers, Gosplan was by far the most important agency of the state
economic bureaucracy. It maintained close ties with the Central Commit-
tee and represented the Central Committee. Gosplan was organized in
branch departments that paralleled the branches of the economy. Gosplan
had branch departments of coal, ferrous n:i.etals, machine building, and the
like. Gosplan also had summary departments (finance, capital investment)
which dealt with issues that crossed functional boundaries.
Ministries, Industrial Associations, and Enterprises

The ministries supervised the enterprises that fell within their domain. The
Ministry of Ferrous Metals, for example, supervised the enterprises that
produced ferrous metals. The ministries broke down the aggregated plan
activities handed down by Gosplan into targets for enterprises. The min-
istries were charged with allocating supplies and materials among their
enterprises. In the Soviet jargon, ministries were "fund holders" (fondo-
derzhateli). They carried the responsibility for the orderly allocation of
inputs.
Each ministry was divided into chief administrations (or glavks) that
were responsible for the different activities of the ministry. The ministry
of construction materials, for example, was broken down into chief ad-
ministrations that handled the different types of construction materials.
The routine business of the ministry was handled by its collegium, which
was staffed by the minister, the deputy ministers, the heads of the chief
administrations, and the directors of major enterprises. The minister was
held responsible for the "final results" of the ministry. The Collegium
could only advise; the minister made the final decisions.
Ministries were of three types. The all-union ministries managed di-
rectly from Moscow all the enterprises in that branch. All-union ministries
tended to be key industrial branches (such as machine building, electron-
ics, defense, and communication equipment). The second type of ministry
was the union-republican ministry, whose enterprises were subordinated
to Moscow and the republic. Branches that were organized on the union-
republican basis were those in which production was concentrated in one
or several republics (such as coal production and agriculture) or where
activities were carried out broadly among the republics (such as construc-
tion). The third type of ministry was the republican ministry, which
managed enterprises producing for the local economy.
The productive enterprises (predpriiatiia) formed the microeconomic
core of the economy. Enterprises were headed by a professional manager
(director), aided by a management staff of accountants, engineers, design-
ers, technologists, and economists. The enterprise ran on an independent
accounting system; it was supposed to cover its costs and to earn a profit.
The enterprise operated according to instructions from the ministry and
from the industrial association but retained considerable independent
decision-making authority.
Figure 7.1 outlines relationships within the economic bureaucracy.
Planning proceeded from a series of basic balances. In market econo-
mies, market forces achieve balances for particular goods, services, and
resources through the price system. The supply and demand for loanable
funds are equalized through interest rates. The aggregate supply and
demand for goods and services are balanced by income adjustments and
price level changes.
The administrative-command economy must likewise achieve bal-
ances. Resources are wasted if trained labor is standing idle. If capital
Figure 7 .1 RELATIONSHIPS WITHIN THE SOVIET BUREAUCRACY
Party
1----------,
apparatus
Central committee The Council of Ministers
of the CPSU I
...._. Gosplan
USSR .....
Other state committees
for economic affairs
Gosbank, Gossnab,
--------,I
~---,
'
Gosstroi, etc.
I
I ! I
The industrial
I i ministries, all
I i union
I
- Republic
I
I t
----·
...
·-_...
Gosplans
Oblast'.
Regional and ---- ---...a.-
I Republican
City Party
Committees ----1--t----- ----~- ---- ministries
I L----- --, I
I I I I
: t
I
I Industrial
associations
I
I
Primary party
organization -------
I
L---- with more
'
Enterprise
than local
significance
Enterprises
of local
significance
only
I
~-------------------------- •
goods are not used properly, society has wasted its resources. If the
quantity of a good demanded exceeds the quantity supplied, some means
must be found to ration the available supply in an orderly manner.
Balancing Availability and Usage of Materials2

Planning authorities must balance the supplies and demands for the basic
raw materials and commodities that are used either in the production
process or by final consumers such as households or foreign exporters. In
any economy, there are millions of such goods (thousands of types of steel
products, hundreds of different building materials, thousands of chemical
products, a few grades of coal, and so on). In market economies, supplies
and demands are brought into balance by relative prices. If the quantity
of coal demanded exceeds the quantity supplied, the relative price of coal
will rise until the quantity demanded equals the quantity supplied. Users
of materials in market economies do not have to stand in line to obtain
materials; the price system allows buyers who are prepared to pay the
going market price to buy the product.
In the administrative-command economy, the supply and demand for
materials are brought into balance by administrative procedures. One of
the principal tasks of the planning apparatus is to achieve balances of
materials. Gosplan played a key role in this activity-called material
balance planning-and was assisted by the ministries and by the state
supply committee.
The key to dealing with the enormous complexities of administrative
planning is that only a limited number of commodities were centrally
planned and distributed. Even then, industrial supply and distribution
plans compiled by Gosplan totaled 70 volumes of almost 12,000 pages
and dealt with well over 30,000 commodities. 3
A simplified version of material balances is as follows:
1. The party establishes its priorities for the forthcoming planning
period. The party expresses its priorities by setting output targets
(generally in the form of desired rates of growth) for a number of
key commodities.
2. Output targets are sent down through the state apparatus to
Gosplan, which has gathered data on plan fulfillment. Gosplan
formulates control figures for 200 to 300 product groups. Gos-
plan also estimates the inputs required to produce the control
figures. The ministries are informed of their projected material
"limits." The planning departments of the ministries then aid
Gosplan in the formulation of the full set of control figures and
input requirements, a process that involves considerable negotia-
tion as the ministries bargain for resources.
3. The ministries send down control figures to the enterprises. The
control figures are disaggregated into specific tasks. The ministry
receives its control targets, which are then disaggregated by
branches within the ministry, until each enterprise receives its own
control figures. At this stage, the planning office of the ministry
prepares a list of tentative input requirements, based on the min-
istry's control figures, for internal use by each enterprise.
4. Information begins to flow up the planning hierarchy from the
enterprise to Gosplan. The enterprise relates its input require-
ments to its immediate superior, which in turn aggregates the
requirements of all enterprises under its control. At each stage, the
requested inputs are compared with estimated input needs. If
ministries propose higher material limits than those calculated by
Gosplan, the ministers must "defend" their requests before Gos-

p/an. Similarly, enterprises must "defend" requests for deviations
from output and input targets before their ministries.
5. After bargaining has been completed, the consistency of the con-
trol figures must be checked. An equilibrium is achieved when the
planned supplies of each commodity equal its targeted material
input requirements and final uses. Assuming a total of 2000
commodities to be balanced, a material balance is achieved when
the planned supplies and demands of each of the 2000 commodi-
ties are equal as shown in Table 7.1.
If the demand exceeds the supply of a particular good, planners
must either raise the supply or reduce the demand through the
issuance of administrative orders. Planners would be reluctant to
raise supply because ordering more output in one sector would
Table 7.1 (al ALGEBRAIC EXPRESSION OF A BALANCE
Sources Distribution
X1 + V1 + M1 X11 + X12 + + X1.2000 + Y1

X2 + V2 + M2 X21 + X22 + + X2.2000 + Y2
X2000 + V2000 + M2000 X2000.1 + X2000.2 + + X2000.2000 + Y2000
The planned supply of the first commodity (51), for example, is the sum of its planned output
(the control figure), denoted as X1; available stocks !V1); and planned imports (M1). The total
demand for the first commodity !01) is the sum of its intermediate (interindustry) demands
!X11. X12. X13 •... X1.2000) and its final demand (investment, household demand, and exports),
which is denoted as Y1.
Table 7.1 (bi A SAMPLE BALANCE OF MATERIALS
Intermediate inputs required by:

Final Use
Sources Consumer
Coal Steel Machinery goods Domestic
Output Stocks In ports industry industry industry industry Exports uses
1. Coal (tons) 1000 10 0 100 500 50 50 100 210

2. Steel (tons) 2000 0 20 200 400 1000 300 100 20
3. Machinery
(units) 100 5 5 20 40 10 20 10 10
4. Consumer
goods
(units) 400 10 20 0 0 0 100 100 230
Note: Demonstration that a balance exists: Sources of coal: 1010 tons = uses of coal: 1010 tons. Sources of steel: 2020 tons =
uses of steel: 2020 tons. Sources of machinery: 110 units = uses of machinery: 110 units. Sources of consumer goods: 430
units = uses of consumer goods: 430 units.
require more inputs from other sectors and could throw off bal-
ances elsewhere. The simpler approach would be to cut the de-
mand, preferably of a lower-priority sector to leave other balances
untouched.
Soviet experience has shown a clear preference for cutting the
demand of low-priority sectors to achieve balances. This caused
low-priority sectors, such as clothing or textiles, to be treated as
buffer sectors. Table 7.2 provides historical data to illustrate this
point.
6. After a balance is achieved, the final version of the plan is submit-
ted for approval, after which the finalized targets are sent to the
individual firm. In its final form, the enterprise plan, called the
technical-industrial-financial plan, establishes enterprise output
targets as well as input allocations, supply plans, delivery plans,
financial flows, wage bills, and many other targets.
PLANNING VERSUS RESOURCE MANAGEMENT
The administrative-command economy does not complete the process of

resource allocation with the approval of the plan. Rather, important shifts
of resources occur during plan fulfillment as the planning agencies respond
pragmatically to crises and bottlenecks. The national economic plan is
only the first stage of Soviet resource allocation. The real process of
resource allocation commences with plan fulfillment. As bottlenecks de-
velop, it becomes evident that certain targets must be sacrificed, and it is
at this stage that centralized management supersedes centralized planning.
As Table 7.2 indicates, plan fulfillment can vary dramatically by sector.
Those who control the flow of resources during plan implementation play
a crucial role in determining economic outcomes.
The administrative-command economy may be better described as a
centrally managed rather than a centrally planned economy. 4 The con-
struction of the plan is only the first step in the resource allocation process.
The decisions made during the implementation stage are just as important.
Moreover, much economic activity remains out of the purview of planners
and is controlled by local officials, enterprises, and even private markets.
The extent of economic activity not controlled by planners has caused
observers to question whether the Soviet economy is "planned" after all. 5
The degree to which the administrative-command economy is really a
planned economy depends upon whether the plan affects final outcomes
in a significant way. It there are no firm plans at any level-if plans are
there simply to disregard-it would not be appropriate to term this a
planned economy.
In actual practice, the plan tends to get firmer as one moves up the
administrative ladder. Enterprise plans may be changed frequently, but
Table 7.2 FULFILLMENT OF PRINCIPAL GOALS OF SOVIET FIVE YEAR PLANS (5YPs): 1928-1980
Percent Fulfillment
1st 5YP 2nd 5YP 4th 5YP 5th 5YP 7th 5YP 8th 5YP 9th 5YP 10th 5YP
(1928- (1933- (1946- (1950- (1959- (1966- (1971- (1976-
1932) 1937) 1950) 1955) 1965) 1970) 1975) 1980)
National income
Official estimate 92 96 119 98 101 95 95
Western estimate 70 67 84-90 94
Industrial output
Official estimate 101 103 117 102 101 97 93
Western estimate 60-70 76-93 84-95 97
Producer goods
Official estimate 128 121 128 106 100 100
Western estimate 72 97 97 94
Consumer goods
Official estimate 81 85 96 99
Western estimate 46 68 81 103 103 92
Agricultural production
Official estimate 58 63-77 90 77 97 92 98
Western estimate 50-52 66-78 76-79 80
Labor productivity
Western estimate 36-42 86 81 85 96
Retail trade
Official estimate 86 109 106 96 91
Source: N. Jasny, Essays on the Soviet Economy (New York: Praeger, 1962), p. 266; E. Zaleski, Stalinist Planning for Economic
Growth: 1933-1952 (Chapel Hill: University of North Carolina Press, 1980), p. 503; A. Nove, An Economic History of the USSR
(London: Penguin, 1969). p. 353; Department of Commerce, State Five Year Plan for the Development of the USSR National
Economy for the Period 1971-1975, JPRS 56970-1, Washington, D.C., September 1972, part 1, p. 65, part 2. pp. 356-358; D.
Green et al., "An Evaluation of the 10th Five-Year Plan Using the SRl-WEFA Econometric Model of the Soviet Union," in Joint
Economic Committee, Soviet Economy in a New Perspective (Washington, D.C.: U.S. Government Printing Office, 1976),
p. 305; Narodnoe khoziaistvo SSSR v 1979 g [The national economy of the USSR in 19791 (Moscow: Statistika, 1980).
Note: Table 7 .2 shows that the consumer sector was neglected for the sake of achieving balances, so much so that it has
been called the "buffer" sector of the Soviet economy. This neglect can be seen from Table 7.2. Soviet estimates for plan
achievement in producer and consumer goods for the period 1928-1980 show that the achievement in producer goods was
substantially greater than in consumer goods. Although in later years there was emphasis on the need to improve both the
quantity and the quality of consumer goods. plan adjustments and shortfalls still predominated in the consumer goods sector.
mm1stry plans are relatively firm. In effect, the mm1stry shuffles plan
fulfillment among its enterprises, giving the impression that plans do not
count; whereas in reality the ministry is attempting to fulfill a firm plan. 6
INVESTMENT
In market economies, decentralized investment decisions determine the

course of development of the economy. Companies select investment proj-
ects based upon projected rates of return. If returns in computers are high,
investment will flow in that direction.
The administrative-command economy makes its investment decisions
administratively. Planners choose the investments that will be undertaken. 7
Investment Planning
By designating the physical outputs of the economy in the process of
material balance planning, authorities must plan at the same time the
expansion of enterprise capacity, that is, capital investment in plant and
equipment. To meet the expansion of output called for by either current
or prospective plan, the capacity of the enterprise must be expanded
accordingly to ensure the consistency of the output plan. Output plans are
based on past performance plus projected increases from additional plant
and equipment. Hence, output plans determine investment plans.
Most of the research and development (R&D) work in the adminis-
trative-command economy is conducted outside of the enterprise, al-
though large enterprises do have R&D facilities.
R&D organizations are attached to ministries. Unlike capitalist enter-
prises, in which routine investment decisions and technological innovation
are taken within the enterprise, in the administrative-command economy,
such matters are handled by external R&D establishments whose respon-
sibility ends when the project design is completed. This explains, in part,
the reluctance of managers to risk introducing new technology.
The investment plan, formulated by Gosplan, the ministries, and
various state committees, is submitted to the Council of Ministers. Once
approved, the various R&D organizations, Gosplan, and the ministries
supervise its implementation by the project-making organizations. Just as
the material balance plan has its financial counterpart, so does the invest-
ment plan. The Ministry of Finance provides a portion of the funds
required to finance the various projects directly from the state budget; the
financial institution directly in charge of disbursing such investment funds
is the Investment Bank (Stroibank), with Gosbank providing the funds for
general repairs. The financial counterpart of the investment plan is used
to identify deviations from the investment plan in much the same manner
as it is used to monitor other enterprise operations. An overcommitment
of investment resources will result in financial authorities providing insuf-
ficient financial resources to complete the project as scheduled. This
practice tends to bring investment supplies and demands into balance but
builds costly delays into underfinanced investment projects. One impor-
tant source of this tendency to overcommit investment resources is the
ministries' desire to get as many projects started as early as possible so as
to establish a priority claim on investment.
Problems of Investment Choice in the Soviet Economy

Investment choice is complicated by a number of factors in the adminis-
trative-command economy.
First, the administrative-command system has failed to recognize the
importance of the time factor in capital investment decisions-a conse-
quence of the absence of a recognized time discount factor, or interest rate.
In market economies, investment projects that promise to yield large
returns in the distant future will be ranked against projects yielding
smaller but quicker returns by computing the present discounted value of
each project using the interest rate as a common discount factor. A high
interest rate (that supposedly reflects both society's time preferences and
the scarcity of capital) will discourage long-term projects with delayed
returns.
Second, industrial prices do not reflect relative scarcities. If prices fail
to reflect relative scarcities, then the "wrong" investment choice can be
made. Because of the inconsistencies of the Soviet price system, one can
understand the reluctance of planners to rely exclusively on value criteria
in making investment decisions. Instead, most guidelines suggest that
value criteria be combined with physical indicators such as labor produc-
tivity and savings of specific material inputs, rather than relying exclu-
sively on single value indicators.
Third, ideology required that users of capital pay no (or minimal}
interest. Investment funds came from the state budget as an interest-free
grant. Enterprises therefore came to regard capital as a free factor of
production, to be sought as long as its marginal productivity remained
positive. The only legitimate capital cost was depreciation, which was low
because of the omission of charges for obsolescence.
Investment Rules
Planners have devoted a great deal of effort to creating rules that improve
the choice of investment projects in the administrative-command econ-
omy. As these rules evolved, it became clear that the rules simply mimicked
the rate-of-return calculations used in market economies. Most of them
were oriented toward selecting among competing projects (all of which
yielded the same increase in output) on the basis of cost savings, such as:
C; + EnK; = minimum
where C; = the current expenditures of the ith investment variant
K; = the cost of the investment project
En = the uniform normative coefficient of effectiveness of
capital investments, which is the same for all branches
These formulas allowed planners to select from among investment

projects (that all yielded the desired growth of output) the project that had
the lowest cost. The project's capital cost was considered by imputing a
capital charge using an interestlike coefficient.
The effect of these rate-of-return-like formulas on actual investment
choice has been minimal. In the administrative-command system, the
principle that the center should decide upon investment projects is deep-
rooted. Moreover, the results of these rate-of-return calculations could be
questioned in that they had to use prevailing industrial prices that failed
to reflect opportunity costs.
MONEY AND CREDIT IN THE ADMINISTRATIVE-COMMAND ECONOMY
In some ways, money in the administrative-command economy plays a

role similar to that in market systems, namely, as a store of value, a
medium of exchange, and a unit of account. There is, however, a very basic
difference. Money influences real economic activity in market systems;
monetary policy influences real economic variables through interest rates,
unanticipated inflation, and changes in relative prices. In the administra-
tive-command economy, there is little or no connection between monetary
and real phenomena; money is neutral in terms of economic activity.
Janos Kornai has argued that in the administrative-command econ-
omy money acts as a soft budget constraint. 8 Financial outcomes, such as
profits or credits, do not affect real economic variables, such as output or
employment. If an enterprise fails to cover its costs, automatic subsidies
prop it up. The absence of profits does not alter enterprise output or
employment. The availability of credit does not ensure that an enterprise
will obtain real capital equipment. Who will get the real capital is decided
by administrative decree, not according to the availability of credits.
The enterprise plan includes a pervasive financial plan as well as
physical input and output indicators, which parallels the physical section
of the industrial plan. The financial plan consists of a wage bill, planned
cost reductions, and credit plans along with many other targets. Financial
targets are the monetary counterparts of enterprise output and input
targets.
Managers regard the fulfillment of financial plans (cost reduction
targets, wage bills, credit plans, etc.) as less important than output plans.
Despite this, financial targets enhance the planners' ruble control over
enterprises. Because the financial plan is the monetary counterpart of a
firm's input and output plans, deviations from the financial plan signal
deviations from the physical plan. If a firm's labor input plan calls for 500
workers, the enterprise can draw only enough cash from its bank account
Bureaucracy. Planning, Money. and Investment 159
to pay that number. If the input plan calls for 10 tons of steel, the
enterprise can draw upon its funded input account only enough for that
particular transaction and nothing in excess. If the firm is in need of
working capital, short-term credit will be granted only if the transaction
is called for in the plan. Reinforcing the system of ruble control is the fact
that all (legal) interfirm transactions are handled by the State Bank, which
supervises all such transactions and is the sole center for the settling of
accounts.
The manager, in response to this system of financial supervision,
develops informal sources of supply that do not require bank clearing
operations and other informal devices to circumvent many financial con-
trols.9 Also, successful firms often are not held to their financial plans.
Financial controls are used primarily to detect deviations from planned
activities, and desired corrections normally are made administratively. The
wage fund tends to be a binding constraint.
The Credit Balance and Banking 10

Planners must balance the demand and supply of credit. In capitalist
economies, this balance is achieved primarily through interest rates, while
in the administrative-command economy, the State Bank supplies credit in
accordance with credit requirements planned by the Ministry of Finance.
The credit balance, like most other macrobalances, is achieved administra-
tively, without adjustments in the opportunity costs of credit. One set of
planners determines the credit needs of enterprises, while another set of
planners (theoretically working in tandem with the first group) supplies
their credit needs.
A macrobalance is achieved in credit markets when:
nc = sc
where nc = the aggregate demand for credit
sc = the aggregate supply of credit
Banking services in the administrative-command economy are pro-
vided by a monopoly bank known as the State Bank, or Gosbank. As a
monopoly bank, Gosbank combines the functions of central and commer-
cial banking, but owing to the absence of money and capital markets,
some traditional banking functions (open-market operations, commercial-
paper transactions, etc.) are not performed by Gosbank.
Gosbank has three functions: first, to make short-term loans for
working capital; second, to oversee enterprise-plan fulfillment and to
monitor payments to the population by acting as the center of all accounts;
and third, to create money.
Each enterprise deals directly with a local Gosbank branch. It is

dependent on Gosbank for short-term credit to finance inventories and
working capital. Its receipts are automatically deposited at Gosbank, and
it draws cash for wage payments at the discretion of the branch bank. In
addition, retained profits remain on deposit at, and under the supervision
of, Gosbank. Gosbank is the sole legal grantor of short-term credit.
lnterfirm credit is forbidden, and a strict discipline on payments is en-
forced to prevent spontaneous interfirm lending. In addition, all interfirm
transactions (except small payments) involving funds in enterprise ac-
counts are handled by, and are subject to the supervision of, Gosbank.
As the single clearing agent and the sole source of short-term credit,
Gosbank is in a unique position to monitor enterprises. In drawing up
short-term credit plans and in controlling enterprise accounts, Gosbank
plays a largely passive role by providing the credit required to implement
the physical plan. In making short-term loans, Gosbank grants production
credit for specific purposes: if a particular transaction is called for in the
input plan, the firm is automatically granted credit for this specific pur-
pose. All interfirm transactions are cleared by Gosbank, and Gosbank
must receive evidence of the transaction, such as a lading bill. Even if an
enterprise builds up excess balances at Gosbank, this liquidity still does
not represent a command over producer goods unless they are specifically
called for in the plan.
The monopoly powers of Gosbank are seldom used to influence the
flow of production. Instead, Gosbank's audit operations serve primarily
to reveal to planning authorities deviations from planned tasks, which are
then corrected by the planners. Gosbank automatically meets the credit
needs of the economy instead of regulating the flow of credit on a discre-
tionary basis in order to direct the level of economic activity.
Thus, the credit balance (De= Sc) is achieved by administrative
means. The demand for credit is determined as a by-product of physical
planning. The banking system automatically supplies the credit called for
in the credit plan.
The Money Balance

Planners must balance the demand for money (Md) and the supply of
money (M'):
Md= M'
Gosbank, in conjunction with the Ministry of Finance, formally con-
trols the supply of money. How central banks control the money supply
in the West is well known. How Gosbank determines the Soviet money
supply is less well understood. The money supply consists of cash and
currency outside the banking system. Gosbank creates new money by

authorizing enterprises to pay additional wage funds. Republican Gos-
bank branches have sufficient cash funds to meet wage payments of
republican enterprises if cash inflows into the bank (as a result of con-
sumer goods purchases, insurance payments, etc.) equal the outflow of
cash funds to meet enterprise wage bills. If cash inflows fall short of
current wage bills for the economy as a whole, Gosbank must release fresh
cash into the economy. Shortfalls in consumer goods sales can result in an
increase in the money supply as money must be issued to meet wage bills.
Budget deficits can also result in monetary expansion. If government
expenditures exceed government revenues (and the deficit is not offset by
increases in household savings), Gosbank must release new cash into the
economy, in effect, to pay the wages of those working on state budget
accounts. In Western economies, budget deficits result in monetary expan-
sion when the central bank monetizes the debt. Soviet state budgets lead
as well to monetary expansion when Gosbank monetizes the debt by
releasing additional cash funds.
Planners can control the supply of money. The demand for money is
determined by the population. People demand money primarily for trans-
action purposes. In market economies, people who have cash balances
need not worry about being able to use these cash balances on transac-
tions. If they want to buy a car, they can buy a car.
Monetary authorities in the administrative-command economy have
had to worry about cash balances that accumulate due to the population's
inability to buy goods and services. If an economywide disequilibrium is
present in consumer markets, households may involuntarily accumulate
excess cash holdings, which they cannot convert into the goods and
services they wish to purchase.
These accumulated cash reserves, called the monetary overhang by
monetary authorities in the administrative-command economy, are viewed
as a threat to the macroeconomic stability of consumer markets. With a
monetary overhang, the economy is perceived to be constantly under the
threat of inflation.
Accordingly, monetary authorities are not in a position to equate the
demand and supply of money by administrative means. The demand for
money is not determined administratively and therefore is not under the
control of monetary authorities.
The Consumer Goods Balance

In the consumer goods market, planners must aim to achieve a balance
between the supplies and demands for individual goods and services at the
micro level and between the aggregate supply and the aggregate demand
for consumer goods at the macro level. If there were excess demand,
disappointed consumers might lose interest in monetary rewards. House-
holds might respond by working less or accumulating forced saving.
Planners therefore seek a balance between the desired money outlays for
goods and services and the money value of consumer goods and services.
If planners wish to have stable prices and a general clearing of markets,
then the two major means of bringing about this equality are to control
the flow of income to the population or to control the output of consumer
goods and services.
A macrobalance is achieved in the consumer goods market (at estab-
lished prices) when
PQ = WL + 0 - T- R
where P = the prevailing price level
Q = the real output of consumer goods
W = the average annual wage rate
L = average annual employment
0 = earnings other than wage earnings
T = tax payments
R = personal savings
the WL + 0 - T term equals personal disposable income. When personal
savings are subtracted from this term, we get the demand for consumer
goods.
A macrobalance does not mean that each consumer market is in
equilibrium. It simply means that, on average, the aggregate supply of
consumer goods equals the aggregate demand at prevailing price levels.
The objective is to balance the aggregate demand for consumer goods
with the aggregate supply at established prices. Planning authorities must
ensure the compatibility of the output of consumer goods at established
prices with employment levels and wage rates. The smaller the planned
output of consumer goods and the larger the number employed and the
higher the wage, the more likely that aggregate money demand will exceed
available supply at established prices.
An algebraic example illustrates this relationship. This example is the
same as the consumer goods balance given above, but it is now broken
down into consumer and producer goods. Assume that the output plan
calls for enterprises to produce Qi units of consumer goods and Qi units
of producer goods. The planners determine, through the use of labor input
coefficients, that Li worker-years of labor are required to produce Qi and
that Li worker-years are required to produce Qi, and these employment
levels are accordingly targeted. The workers are paid the prevailing wage
rates in the consumer and producer goods sectors, respectively, and aver-
age annual wages are denoted in the two sectors as W1 and W2, respec-
tively. An annual wage income of W1L 1 + W2L2 from public-sector
employment is created.
The total demand for consumer goods is that portion of total in-
come that is not taxed away or saved. If personal taxes are denoted by T
and personal savings by R, the total money demand (D) for consumer
goods is
D = W1L1 + W2L2 + 0 - T - R
where 0 denotes other earnings (from interest or private-economy earn-
ings). The total supply of consumer goods at established prices (S) is the
total value of all consumer goods (denoted as P 1Q 1 ):
S= P1Q1
where P 1 denotes the existing consumer price level.
The task of the financial authorities is to strike an appropriate balance
between consumer demand and supply at prevailing prices, that is, be-
·tween W1L1 + W2L2 + 0 - T- Rand P1Q1.
We shall examine the Soviet-period record of achieving this balance in
Chapter 10.
THE STATE BUDGET
The major allocation decisions in the Soviet Union were reflected in the
annual budget of the USSR, which determined the allocation of total
output among private consumption, investment, public consumption,
defense, and administration. 11 The annual budget of the USSR was a
consolidated budget, which encompassed the all-union budget, the bud-
gets of the republics, and the local budgets of provinces, regions, and
districts. It was a much more comprehensive system of accounts than the
budget of the United States, which encompasses only federal receipts and
expenditures.
A much larger portion of the Soviet GNP flowed through its state
budget than is the case with American GNP. Between 1929 and the
present, 10 to 30 percent of American GNP has been channeled through
government budgets (including state and local government). In the Soviet
Union, the cumulative average for the postwar period was about 45
percent. The relatively greater importance of the state budget in the
Soviet economy derived from the financing of most investment directly
from the state budget and because communal consumption (public health,
education, and welfare) represented a larger share of total consumption.
The budget of the USSR directed resources into consumption, invest-

ment, defense, and administration in the following manner: The state
collected revenues from sales taxes (the so-called turnover tax), deductions
from enterprise profits, direct taxes on the population, and social insur-
ance contributions (see Table 7.3 ). These revenues were then directed
through the national budget, the republican budgets, and provincial and
local budgets to finance investment in the form of grants (the "national
economy" category); to finance communal consumption ("social and cul-
tural undertakings"); and to finance defense and administration.
Although Soviet officials claimed that the State budget was balanced,
budget deficits were between 2 and 8 percent of the GNP in the 1980s.12
Large deficits were acknowledged by the Ministry of Finance in 1988. The
budget deficits of the 1980s were due both to falling revenues and rising
expenditures. Declining growth meant less revenue from profit taxes,
falling oil prices meant less revenue from foreign trade, and subsidies cut
into turnover tax collections. More than half of this deficit was financed
by monetary creation, the long-run effects of which were inflationary.
Table 7.3 THE BUDGET OF THE USSR, 1931-1988

1931 1934 1937 1940 1950 1960 1970 1978 1984 1988
Receipts (percent of total)
Turnover tax 46 64 69 59 56 41 32 32 30 24
Deductions from
profits 8 5 9 12 10 24 35 30 30 37
Social insurance 9 10 6 5 5 5 5 5 7 8
Taxes on
population 4 7 4 5 9 7 8 8 8 9
Other revenue 33 14 12 19 20 23 20 25 25 22
Expenditures (percent of total)
National economy 64 56 41 33 38 47 48 54 56 53
Social and cultural
undertakings 14 15 24 24 28 34 36 34 33 33
Defense 5 9 17 33 20 13 12 7 5 4
Administration and
justice 4 4 4 4 3 2 1 1 1
Other expenditures 13 16 14 6 11 4 3 4 5 5
Sources: Narodnoe khoziaistvo SSSR v 1970 g (The national economy of the USSR in 1970) (Moscow: Statistika, 1971). p. 731;
The Soviet Financial System (Columbus: Bureau of Business Research of Ohio State University, 1951), pp. 84--87; Narodnoe
khoziaistvo SSSR v 1978 g (The national economy of the USSR in 1978) (Moscow, Statistika, 1979), p. 534; SSSR v tsifrakh v
1984 godu (USSR in figures in 1984) (Moscow: Finansyi Statistika, 1985), pp. 50-51; Directorate of Intelligence, USSR: Sharply
Higher Budget Deficits Threaten Perestroyka, Washington, D.C., SOV 88-10043U, September 1988, p. 18. As will be explained
in a later chapter. the defense share is grossly understated by Soviet budget figures.
How WELL DOES ADMINISTRATIVE-COMMAND PLANNING WORK?
This chapter has presented the conceptual framework of physical and

financial planning in the administrative-command economy. Insofar as
this system was practiced in the Soviet Union, Eastern Europe, and parts
of Asia, for a long period of time, we have a reasonably extensive record
of its performance. Chapter 10 deals with how well this system worked in
practice in the Soviet Union. We conclude Chapter 7 with a more theoreti-
cal assessment of administrative-command planning.
The early critics of the administrative-command economy, Ludwig von
Mises and Frederic von Hayek, pointed out the immense problems of
planning an economy from the center. 13 The center would have to gather
and process too much information. With public ownership, it would be
difficult to motivate the participants to allocate resources efficiently. With-
out markets, even the best-intentioned official would not know what
things were worth.
Practical experience with administrative-command planning has
proven the validity of these criticisms. Material balance planning did
indeed prove to be a cumbersome and time-consuming process. The center.
could only balance a limited number of commodities (at best 2000 or so);
the rest had to be dealt with at lower levels or not at all. Despite numerous
efforts to computerize and mathematize planning, material balance plan-
ning continued to work slowly and employ primitive calculation methods.
Because of its slowness, the goal of planning became to find a balance, not
to find an optimal balance.
As the inefficiency of administrative-command planning became evi-
dent, planners permitted more and more activity to be carried on outside
the planning system. The inefficient supply system prompted managers to
set up their informal sources of supply. Ministries, as well, set up their own
informal sources of supply. To keep the system going, political authorities
had to tolerate an unofficial black market in materials.
We have described the process of resource allocation without one
mention of relative prices. Administrative-command planning does not use
relative prices in its resource allocation decisions. Going back to the
comments of Hayek and Mises, this means that planning decisions are
basically engineering decisions and not economic ones. In such a system,
the growing scarcity of one resource would escape notice. Planners would
make no automatic effort to ensure better use of a resource that is growing
scarce.
Our discussion of administrative-command planning clearly showed
the system's intent to relegate financial variables (money, credit, and prices)
to a secondary role. Financial decisions follow from physical planning
decisions. Our discussion, however, also pointed out that there are limits
to which financial variables can be ignored. If excess cash accumulates in
the hands of the population, people may decide to work less and disrupt
the physical output targets. If a macroeconomic financial balance is not
realized, the resulting disregard for the currency may cause a demonetiza-
tion of the economy, which adversely affects physical productivity.
Centralized choices of investment projects cannot be touted as a
strength of the administrative-command economy. Enterprises treat capital
as a free good, and investment choices are not made to maximize the rate
of return on scarce capital. Enterprises have little incentive to innovate,
and much of the research and development apparatus is located in superior
organizations.
REFERENCES
1. This section is based on the following sources: F. Kushnirsky, Soviet Economic

Planning, 1965-1980 (Boulder, Colo.: Westview Press, 1982); A. Nove, The
Soviet Economic System (London: Allen & Unwin, 1977), chaps. 1-4; W. J.
Conyngham, Industrial Management in the Soviet Union (Stanford: Hoover
Institution Press, 1973); W. J. Conyngham, The Modernization of Soviet
Industrial Management (Cambridge: Cambridge University Press, 1982);
A. C. Gorlin, "The Soviet Economic Associations," Soviet Studies, vol. 26,
no. 1 (January 1974), 3-27; G. Grossman, "The Party as Manager and
Entrepreneur," in G. Guroff and F. Carstensen, eds., Entrepreneurship in
Russia and the Soviet Union (Princeton, N.J.: Princeton University Press,
1983), pp. 284-305; P. R. Gregory, Restructuring the Soviet Economic Bu-
reaucracy (Cambridge: Cambridge University Press, 1989); P. R. Gregory,
"The Stalinist Command Economy," in Jan Prybla, ed., Privatizing and Mar-
ketizing Socialism, The Annals of the American Academy of Political and
Social Sciences, January 1990, pp. 18-25.
2. The material presented here is largely based on the following sources: A.
Bergson, The Economics of Soviet Planning (New Haven, Conn.: Yale Uni-
versity Press, 1964), chap. 7; Nove, The Soviet Economic System, pp. 87-96;
R. W. Davies, "Soviet Planning for Rapid Industrialization," Economics of
Planning, vol. 6, no. 1 (1966); R. W. Davies, "Planning a Mature Economy
in the USSR," Economics of Planning, vol. 6, no. 2 (1966), 138-153; and M.
Ellman, "The Consistency of Soviet Plans," Scottish journal of Political
Economy, vol. 16, no. 1 (February 1969), 50-74. The last three are reprinted
in M. Bornstein and D. Fusfeld, eds., The Soviet Economy: A Book of
Readings, 3rd ed. (Homewood, Ill.: Irwin, 1970). See also H. Levine, "The
Centralized Planning of Supply in Soviet Industry," in Joint Economic Com-
mittee, Comparisons of the United States and Soviet Economies (Washington,
D.C.: U.S. Government Printing Office, 1959), pp. 151-176; M. Ellman,
Soviet Planning Today: Proposals for an Optimally Functioning Economic
System (Cambridge: Cambridge University Press, 1971); G. E. Schroeder,
"The 'Reform' of the Supply System in Soviet Industry," Soviet Studies, vol.
24, no. 1 (July 1972), 97-119; G. E. Schroeder, "Recent Developments in
Bureaucracy. Planning, Money. and Investment 167
Soviet Planning and Managerial Incentives," in Joint Economic Committee,

Soviet Economic Prospects for the Seventies (Washington, D.C.: U.S. Govern-
ment Printing Office, 1973), pp. 11-38; M. Ellman, Socialist Planning (Cam-
bridge: Cambridge University Press, 1979); Nove, The Soviet Economic
System; G. E. Schroeder, "The Soviet Economy on a Treadmill of 'Reforms',"
in Joint Economic Committee, Soviet Economy in a Time of Change (Wash-
ington, D.C.: U.S. Government Printing Office, 1979), vol. 1, pp. 312-340;
E. Zaleski, Stalinist Planning for Economic Growth, 1933-1952 (Chapel Hill:
University of North Carolina Press, 1980).
3. The most important industrial products-such as steel, cement, machinery,
and building materials-were called funded commodities. Gosplan was in
charge of drawing up output and distribution plans for these funded com-
modities, which were specifically approved by the USSR Council of Ministers.
Between 1928 and the late 1980s, Gosplan developed annual balances for
between 277 and 2390 separately funded product groups. In the mid-1980s,
Gosplan prepared some 2000 balances. Output and distribution plans were
also drawn up for two other categories of industrial products. Planned com-
modities were those industrial products jointly planned and distributed by
Gosplan, Gossnab (State Committee for Material-Technical Supply), and the
All-Union Main Supply and Sales Administration. Twenty-five thousand or
more commodities were planned according to this system. Decentrally
planned commodities were planned and distributed by the territorial admin-
istrations of Gossnab and by the ministries without the explicit approval of
higher organs. Over 50,000 industrial products were planned according to
this system.
Ministries also plan and allocate "non-planned" industrial commodities,
largely for internal use. In the 1970s, for example, the ministries allocated
26,000 products in this category.
4. Zaleski, Stalinist Planning for Economic Growth.
5. J. Wilhelm, "Does the Soviet Union Have a Planned Economy?" Soviet
Studies, vol. 31, no. 2 (April 1979), 268-274; J. Wilhelm, "The Soviet Union
Has an Administered, Not a Planned Economy," Soviet Studies, vol. 37, no.
1 (January 1985), 118-130.
6. D. Granick, "The Ministry as the Maximizing Unit in Soviet Industry,"
Journal of Comparative Economics, vol. 4, no. 3 (September 1980), 255-273;
A. C. Gorlin and D. P. Doane, "Plan Fulfillment and Growth in Soviet Min-
istries," Journal of Comparative Economics, vol. 7, no. 4 (December 1983),
415-431; and M. Keren, "The Ministry, Plan Changes, and the Ratchet Effect
in Planning," Journal of Comparative Economics, vol. 6, no. 4 (December
1982), 327-342.
Granick maintains that ministerial output plans are firm binding plans
even if enterprise plans are not. Granick argues that the Soviet economy does
operate ultimately on the basis of economic plans. Soviet planners do not
subject the ministries to the ratchet effect because of counterproductive ef-
fects. If plans are not firm, in the sense that plans depend on actual perform-
ance, agents will manipulate their performance to change the plan to better
suit the agent's interests. With changing plans that depend on ongoing per-
formance, the agent will engage in a gaming exercise to elicit more favorable
plans from the principal. Granick's empirical analysis covering Soviet data
for 1966-1977 suggests that Soviet ministries do fulfill their plans and that
the next period's plan is not affected by plan fulfillment in the current
period. Granick's conclusion is supported by the empirical research for the
same time period of A. Gorlin and D. Doane. Michael Keren maintains, using
alternate econometric methods, that ministerial plan targets are indeed af-
fected by ministerial plan fulfillment during the previous plan period. Keren
also presents theoretical arguments as to why Soviet planners might be willing
to base current plan targets on previous plan fulfillment, especially if they
have a short time horizon. Presumably, further study of this issue will eventu-
ally resolve the controversy over the firmness of ministry plans, but it does
appear that, relatively speaking, ministry plans are firmer than enterprise
plans.
7. Investment choice in the Soviet Union has been discussed in a number of
articles and books: Bergson, The Economics of Soviet Planning, chap. 11; G.
Grossman, "Scarce Capital and Soviet Doctrine," Quarterly Journal of Eco-
nomics, vol. 67, no. 3(August1953); A. Zauberman, Aspects of Planometrics
(New Haven, Conn.: Yale University Press, 1967), chaps. 13 and 14; A.
Abouchar, "The New Soviet Standard Methodology for Investment Alloca-
tion," Soviet Studies, vol. 24, no. 3 (January 1973), 402-410; J. S. Berliner,
The Innovation Decision in Soviet Industry (New Haven, Conn.: Yale Univer-
sity Press, 1976), chap. 21; S. H. Cohn, "Deficiencies in Soviet Investment
Policies and the Technological Imperative," in U.S. Congress, Joint Economic
Government Printing Office, 1979), pp. 447-459; S. H. Cohn, "Soviet Re-
placement Investment: A Rising Policy Imperative," in U.S. Congress, Joint
Economic Committee, Soviet Economy in a Time of Change, pp. 230-245;
M. Ellman, Socialist Planning (Cambridge, Mass.: Cambridge University
Press, 1979), chap. 5; D. A. Dyker, The Process of Investment in the Soviet
Union (New York: Cambridge University Press, 1981); J. Giffen, "The Allo-
cation of Investment in the Soviet Union: Criteria for the Efficiency of Invest-
ment," Soviet Studies, vol. 32, no. 4 (October 1981), 593-609; R. E. Leggett,
"Soviet Investment Policy in the 1 lth Five-Year Plan," in U.S. Congress, Joint
Economic Committee, Soviet Economy in the 1980s: Problems and Prospects,
part 1, pp. 129-152; S. H. Cohn, "Sources of Low Productivity in Soviet
Capital Investment," in Soviet Economy in the 1980's, pp. 1969-1994; R. E.
Leggett, "Soviet Investment Policy: The Key to Gorbachev's Program for
Revitalizing the Soviet Economy," in U.S. Congress, Joint Economic Commit-
tee, Gorbachev's Economic Plans, vol. 1 (Washington, D.C.: U.S. Government
Printing Office, 1987), pp. 236-256; D. Dyker, The Future of the Soviet
Economic Planning System (London: Croom Helm, 1985), chap. 5; P. Gold-
berg, "Consistency in Soviet Investment Rules," Journal of Comparative
Economics, vol. 12, no. 2 (June 1988), 244-247; A. Abouchar, "Western
Project-Investment Theory and Soviet Investment Rules," Journal of Com-

parative Economics, vol. 9, no. 4 (December 1985), 345-62; A. Abouchar,
"The Time Factor and Soviet Investment Methodology," Soviet Studies, vol.
37, no. 3 (July 1985), 417-427; R. C. Harmstone, "Background to Gor-
bachev's Investment Strategy," Comparative Economic Studies, vol. 30, no. 4
(Winter 1988), 58-91; B. Rumer, Investment and Reindustrialization of the
Soviet Economy (Boulder, Colo.: Westview Press, 1984).
8. J. Kornai, Economics of Shortage (New York: North Holland, 1980).
9. For an analysis of informal sources of supply, see A. Katsenelinboigen, "Col-
oured Markets in the Soviet Union," Soviet Studies, vol. 29, no. 2 (January
1977), 62-85.
10. Our discussion of the role of money in the Soviet economy is based on G.
Garvy, Money, Financial Flows, and Credit in the Soviet Union (Cambridge,
Mass.: Ballinger, 1977); and A. Zwass, Money, Banking, and Credit in the
Soviet Union and Eastern Europe (White Plains, N.Y.: M. E. Sharpe, 1979).
For a history of money in the Soviet Union, see, for example, Z. V. Atlas,
Sotsialisticheskaia denezhnaia sistema [Socialist monetary system] (Moscow:
Finansy, 1969).
11. M. V. Condoide, The Soviet Financial System (Columbus: Bureau of Business
Research of Ohio State University, 1951), pp. 78-79; Nove, The Soviet
Economic System, chap. 9. For a Soviet textbook on the subject, see M. K.
Shermenov, ed., Finansy SSSR [Finances of the USSR] (Moscow: Finansy,
1977); R. Hutchings, The Soviet Budget (Albany: State University of New
York Press, 1983); and I. Birman, Secret Incomes of the Soviet State Budget
(Boston: Martinus Nighoff, 1981).
12. Directorate of Intelligence, USSR: Sharply Higher Budget Deficits Threaten
Perestroyka (Washington, D.C., SOV 88-10043U, September 1988).
13. L. von Mises, "Economic Calculation in the Socialist Commonwealth," in
F. A. Hayek, ed., Collectivist Economic Planning, 6th ed. (London: Routledge
& Kegan Paul, 1963), pp. 87-130; F. A. Hayek, "The Competitive Solution,"
Economica, new series, vol. 7 (May 1940), 125-149.
Political Institutions and Control of the Economy

W. Conyngham, The Modernization of Soviet Industrial Management (Cam-
P.R. Gregory, Restructuring the Soviet Economic Bureaucracy (Cambridge: Cam-
J. F. Hough and M. Fainsod, How the Soviet Union ls Governed (Cambridge,
A. Nove, The Soviet Economic System (London: Allen & Unwin, 1977).
L. Shapiro, The Government and Politics of the Soviet Union (Essex: Hutchison
Publishing Group, 1978).
Supply and Output Planning

A. Bergson, The Economics of Soviet Planning (New Haven, Conn.: Yale Univer-
sity Press, 1964), chap. 7.
P. Bernard, Planning in the Soviet Union (Oxford: Pergamon Press, 1966).
M. Bor, Aims and Methods of Soviet Planning (New York: International Publish-
ers, 1967).
R. W. Davies, "Planning a Mature Economy," Economics of Planning, vol. 6, no.
2 (1966), 138-153.
- - - , "Soviet Planning for Rapid Industrialization," Economics of Planning,
vol. 6, no. 1 (1966), 53-67.
D. Dyker, The Future of the Soviet Economic Planning System (Beckenham-Kent:
Croom Helm, 1984).
M. Ellman, "The Consistency of Soviet Plans," Scottish Journal of Political
Economy, vol. 16, no. 1 (February 1969), 50-74.
---,Socialist Planning (Cambridge: Cambridge University Press, 1979).
F. Kushnirsky, Soviet Economic Planning, 1965-1980 (Boulder, Colo.: Westview
Press, 1982).
H. Levine, "The Centralized Planning of Supply in Soviet Industry," Comparisons
of the United States and Soviet Economies (Washington, D.C.: U.S. Govern-
ment Printing Office, 1959).
M. Manove, "A Model of Soviet-Type Economic Planning," American Economic
Review, vol. 61, no. 3, part 1(June1971), 390-406.
J. Marczewski, Crisis in Socialist Planning, Eastern Europe and the USSR (New
York: Praeger, 1974).
J. M. Montias, "Planning with Material Balances in Soviet-Type Economies,"
American Economic Review, vol. 49, no. 5 (December 1959), 963-985.
P. Rutland, The Myth of the Plan (LaSalle, Ill.: Open Court, 1985).
G. E. Schroeder, "Recent Developments in Soviet Planning and Managerial Incen-
tives," in U.S. Congress, Joint Economic Committee, Soviet Economic Pros-
pects for the Seventies (Washington, D.C.: U.S. Government Printing Office,
1973), pp. 11-38.
vol. 24, no. 1(July1972), 97-119.
- - - , "Soviet Economic 'Reform' Decrees: More Steps on the Treadmill"
in U.S. Congress, Joint Economic Committee, Soviet Economy in the
1980s (Washington, D.C.: U.S. Government Printing Office, 1982), vol. 1,
pp. 312-340.
J. Wilhelm, "The Soviet Union Has an Administered, not a Planned Economy,"

Soviet Studies, vol. 37, no. 1 (January 1985), 118-130.
E. Zaleski, Stalinist Planning for Economic Growth (Chapel Hill: University of
North Carolina Press, 1980).
Investment
A. Abouchar, "The New Soviet Standard Methodology for Investment Alloca-
tion," Soviet Studies, vol. 24, no. 3 (January 1973).
- - - , "The Time Factor and Soviet Investment Methodology," Soviet Studies,
vol. 37, no. 3 (July 1985), 417-427.
---,"Western Project-Investment Theory and Soviet Investment Rules," Jour-
nal of Comparative Economics, vol. 9, no. 4 (December 1985), 345-362.
F. A. Durgin, "The Soviet 1969 Standard Methodology for Investment Allocation
Versus 'Universally Correct' Methods," ACES Bulletin, vol. 19, no. 2 (Sum-
mer 1977), 29-54.
D. A. Dyker, The Process of Investment in the Soviet Union (New York: Cam-
- - - , The Future of the Soviet Economic Planning System (London: Croom
Helm, 1985), chap. 5.
J. Giffen, "The Allocation of Investment in the Soviet Union: Criteria for the
Efficiency of Investment," Soviet Studies, vol. 32, no. 4 (October 1981),
593-609.
P. Goldberg, "Consistency in Soviet Investment Rules," Journal of Comparative
Economics, vol. 12, no. 2 (June 1988), 244-247.
G. Grossman, "Scarce Capital and Soviet Doctrine," Quarterly Journal of Eco-
nomics, vol. 67, no. 3 (August 1953), 311-343.
R. C. Harmstone, "A Note on Soviet Fixed Asset Replacement in the 1970s and
1980s," Soviet Studies, vol. 38, no. 3 (July 1986), 416-429.
- - - , "Background to Gorbachev's Investment Strategy," Comparative Eco-
nomic Studies, vol. 30, no. 4 (Winter 1988), 58-91.
M. J. Kohn and R. E. Leggett, "A Look at Soviet Capital Retirement Statistics:
Unraveling Some Mysteries," Comparative Economic Studies, vol. 28, no. 2
(1986), 29-31.
- - - , "Soviet Investment Policy: The Key to Gorbachev's Program for Revital-
izing the Soviet Economy," in U.S. Congress, Joint Economic Committee,
Gorbachev's Economic Plans, vol. 1 (Washington, D.C.: U.S. Government
Printing Office, 1987), 236-256.
B. Rumer, Investment and Reindustrialization of the Soviet Economy !Boulder,
Colo.: Westview Press, 1984).
- - - , "Some Investment Patterns Engendered by the Renovation of Soviet

Industry," Soviet Studies, vol. 36, no. 2 (April 1984), 257-266.
Financial Planning
V. P. Diachenko, Istoriia finansov SSSR [History of USSR finance] (Moscow:
Nauka, 1978).
Directorate of Intelligence, USSR: Sharply Higher Deficits Threaten Perestroyka
(Washington, D.C., SOV 88-10043V, September 1988).
G. Garvy, Money, Financial Flows, and Credit in the Soviet Union (Cambridge,
Mass.: Ballinger, 1977).
G. Grossman, "A Note on Soviet Inflation," in U.S. Congress, Joint Economic
Committee, Soviet Economy in the 1980s (Washington, D.C.: U.S. Govern-
ment Printing Office, 1982), pp. 267-286.
F. D. Holzman, "Financing Soviet Economic Development," in M. Abramovitz,
ed., Capital Formation and Economic Growth (Princeton, N.J.: Princeton
---,"Soviet Inflationary Pressures, 1928-1957: Causes and Cures," Quarterly
Journal of Economics, vol. 74, no. 2 (May 1960), 167-188.
- - - , Soviet Taxation: The Fiscal and Monetary Problems of a Planned Econ-
omy (Cambridge, Mass.: Harvard University Press, 1955).
R. Hutchings, The Soviet Budget (Albany: State University of New York Press,
1983).
M. Y. Laulan, ed., Banking, Money and Credit in the Soviet Union and Eastern
Europe (Brussels: NATO Directorate of Economic Affairs, 1975).
F. L. Pryor, Public Expenditures in Communist and Capitalist Nations (Home-
wood, Ill.: Irwin, 1968).
A. Zwass, Money, Banking, and Credit in the Soviet Union and Eastern Europe
(White Plains, N.Y.: M. E. Sharpe, 1979).
EIGHT
••
The Administrative-
Command Economy:
Management, Labor,
and Pricing
ENTERPRISE MANAGERS
The Western manager's job is to make profits for the company under
changing market conditions. A good manager knows the pulse of the
market: how to sell, how to anticipate change, and how to organize
production.
In the administrative-command economy, the manager's job is to fulfill
the plan. Products are not hard to sell. What is hard is the organization of
production to meet the plan in a world of uncertain supply.
In the West, the top manager knows how to produce products that can
sell. In the administrative-command economy, the top manager can orga-
nize production.
The Soviet Firm 1

The enterprise is the basic unit of production in the administrative-com-
mand economy. The enterprise is headed by a director (manager), who has
173
17 4 How the Administrative-Command Economy Operated
a professional management staff. The management staff consists of a

deputy director and a chief engineer, chief accountant, chief economist,
and chief technologist. Managers receive directives from the planning
apparatus. Directives come from the responsible chief administration
(glavk) of the ministry, from the production association, and from Gos-
plan. It is the responsibility of the manager to achieve plan directives.
Rewards are designed to induce the appropriate managerial response to
plan directives.
Although emphasis on the collective prevails, the principle of one-per-
son management means that the enterprise manager is, in fact, responsible
for the operations of the enterprise. The manager has the authority to
direct the labor and capital resources of the enterprise (within the con-
straints imposed by the plan). The manager's staff is obliged to obey the
manager's directives. The principle of one-man management clearly estab-
lishes the responsibility and authority of the Soviet manager over the
collective of workers. 2
Enterprise Planning and the Soviet Manager

The operation of the Soviet industrial enterprise is governed in most
respects by the technical-industrial-financial plan. This plan is the annual
(semiannual, quarterly, monthly) subplan of long-term (five- to seven-
year) "perspective" plans (although we have noted that the link between
the two is often difficult to find) and is itself composed of subplans, each
comprising a number of appropriate indicators or targets pertaining to the
operation of the enterprise. The enterprise plan specifies output levels (in
quantity and value terms), output assortment, labor and other inputs,
productivity indexes, and profit norms.
The most important component of the plan has been the pro-
duction plan. Based on the capacity of the enterprise (normally defined
as past performance plus some increment to incorporate planned capac-
ity expansion), expected resource utilization, and estimated productiv-
ity increases, the production plan has typically specified the value of
output, the commodity assortment, and the delivery schedule of this
output.
One might conclude that the managers' freedom to make decisions is
severely restricted. The plan governs choice of enterprise inputs and out-
puts, and they are morally and legally obligated to implement the plan.
Looking beneath the surface, however, one unearths a significant area of
managerial flexibility, due to the inability of central organs to specify and
control all details of enterprise operation. The factory manager must
The Administrative-Command Economy: Management, Labor. and Pricing 175
translate state goals into daily tasks. The manager is confronted with both
multiple targets (outputs, cost reduction, innovation, deliveries, etc.) and
multiple constraints. The plan does not tell the manager which goals are
more important than others, except informally-through party cam-
paigns, bonuses, word of mouth, and other means. If all plan indicators
cannot be simultaneously achieved, the manager must decide which ones
should be met and which sacrificed. 3 This question is resolved in the
capitalist enterprise by the use of profit as an enterprise goal and a set of
scarcity prices such that the trade-offs among various objectives are read-
ily apparent.
While profits have always formally been a part of the economic
calculus of the enterprise, their maximization has generally not been an
important enterprise goal. In fact, quite apart from the meaning of profit
in the light of Soviet prices, profits have tended to be of minimal impor-
tance in the operation of an enterprise. The plan and the managerial
incentive structure have made gross output-and later refinements-the
most important indicator of enterprise performance. In short, managers
are rewarded primarily for the achievement of output targets, and accord-
ingly, those targets not directly related to output have tended to be of
secondary importance.
The Success Indicator Problem

The choice of gross output as the crucial "success indicator" of managerial
performance creates a series of problems. Output (whether in value or
quantity terms) usually cannot be defined in perfect detail. Where the
weight of the output has been the success indicator, for example, castings
tend to be made heavier than necessary. Where size has been the indicator,
in the production of cloth, for example, managers favor large sizes and
largely ignore assortment goals. 4
Planners estimate plant capacity-a crucial aspect of plan formula-
tion-as a direct function of past performance plus allowances for produc-
tivity improvements. At the enterprise level, however, managers face a
dilemma: if they significantly overfulfill output targets in the current year,
they may receive a sizable bonus, but in subsequent years, targets will be
substantially increased (the "ratchet effect").
As a result, managers tend to be cautious about overfulfilling plan
targets even if overfulfillment is well within their grasp. Another problem
arises from the stress on the expansion of output in combination with a
bonus system that reinforces this narrow production-oriented conception
of performance. A rapid expansion of physical output in a particular year
is unambiguously "good" according to the success indicator, irrespective

of poor performance in other areas. Thus, technological change, cost
reduction, quality improvements, and on-time deliveries tend to be secon-
dary considerations for managers.
The uncertain supply system imposes risk and uncertainty on manag-
ers, who face continual pressure in the form of taut production targets.
Therefore, management must rely heavily on the material and technical
supply system, a system over which management has little control. Yet
enterprise output depends to a great extent on the availability of appro-
priate inputs in the proper quantity and quality and at the appropriate
time. The enterprise must rely on all supplier enterprises to meet their plan
obligations, and a failure by a single enterprise can cause continuing
reverberations throughout the system. 5 The supply system is crucial to
enterprise plan fulfillment; yet its manifold weaknesses impede enterprise
target fulfillment. 6
Principal/Agent Problems
The basic problems of management are not peculiar to the administrative-
command economy; their counterparts can be found for the most part in
capitalist industrial enterprises. Given a set of goals (whether from a board
of directors or a central planner), and given that appropriate information
for both plan formulation and execution is held largely at local levels, how
is a managerial environment and incentive structure to be constructed such
that managers are motivated to carry out the directives of their superiors
in the true spirit of the directive?
The relationship between managers and their planning superiors is a
classic principal/agent problem. The planning authorities want the man-
ager (the agent) to implement a number of goals. If the principal had
perfect information and could perfectly monitor the agent, there would be
no principal/agent problem. In fact, under these circumstances, there
would be no need for a manager because the principal could directly
manage the enterprise from above. Because the principal's information is
not perfect and because the principal cannot perfectly monitor the agent,
the agent must be given the flexibility to make certain decisions concerning
the output and inputs of the enterprise. With the agent able to exercise
decision-making authority, the principal must devise a monitoring and
incentive scheme to cause the agent to act in the best interests of the
principal.
If the principal and agent have identical goals, there is no princi-
pal/agent problem because the agent will automatically act in the interests
of the principal. However, if the agent has different goals, then the princi-
The Administrative-Command Economy: Management, Labor, and Pricing 177
pal's monitoring and incentive scheme must ensure that the agent does not
act contrary to the interests of the principal. If the main goal of managers
is to achieve a quiet, secure life, the manager may wish to bargain for easy
output targets and liberal input allocations, and may supply misleading
information to the principal. The principal, however, wants the agent to
produce the maximum output with minimum expenditure of resources.
The administrative-command answer to the principal/agent problem is
a managerial framework that combines a relatively high degree of central-
ization with a significant degree of managerial freedom through informal
decentralization. Hierarchical planning requires that managers respond to
"rules" while, at the same time, managers have a degree of local freedom
and initiative in the operation of the enterprise.
It must be recognized that in almost any organization, there will exist
both a formal and an informal sphere of managerial decision authority. In
a sense, the latter oils the operation of the former. In the Soviet case, to
the degree that the latter does not smooth the operation of the former,
there exists a myriad of internal and external enterprise controls to reori-
ent enterprise behavior along desirable paths.
Managerial Rewards
Virtually all managers in the administrative-command economy are on
managerial bonus systems. Bonuses constitute a significant portion of
earnings. 7 The managerial bonus system changes with the changing con-
cerns of planners.
During periods when labor productivity is of great concern, labor
productivity performance is an important determinant of bonuses. During
periods when concern about supply is high, fulfillment of the supply plan
becomes more important. When planners are concerned with raising prod-
uct quality, quality indicators become an important ingredient in manage-
rial bonuses. In this sense, managers are aware of the importance placed
by the planners on the achievement of various plan indicators. The inclu-
sion of a number of indicators in the managerial bonus formula means that
planning authorities wish managers to turn in a good performance for
each indicator. It also means that managers can trade off one performance
indicator for another. The weights attached to each indicator help deter-
mine the nature of this trade-off.
Executive bonuses in the United States tend to be paid for achievement
of both short-run and long-run objectives. For example, the American
manager is expected to strike a proper balance between short-run and
long-run profitability. Insofar as stock prices tend to reflect investor per-
ceptions of long-run profitability, American corporate managers must pay
attention to the effect of current actions on long-run profitability. In

addition, bonus arrangements in the United States are more likely to be
based on subjective evaluations of performance. 8 In the administrative-
command economy, however, bonus payments tend to be for short-run,
rather clearly defined tasks, such as the quantitative fulfillment of a
specific output target or specific cost reductions. The short-run nature of
bonuses creates an environment of pressure, and this becomes a mecha-
nism through which short-run priorities can be identified by managers.
Longer-run targets, such as quality, innovation, and new technology are
set aside in favor of more rewarding short-run achievements.
Monetary bonuses are normally awarded on a short-run basis (i.e.,
monthly), while the nonmonetary rewards are in greater measure long-run
rewards. Enterprises may, for example, provide the manager with living
quarters and an automobile. Both are significant amenities in a society of
shortage. The enterprise manager can anticipate participation in local,
state, and party organs, adulation in the press for particularly good
performance, and also upward mobility to positions of greater prestige
and reward.
While the Soviet manager's position is one of potentially significant
monetary rewards, it is also one of significant risk. First, in an environ-
ment of uncertainty where the manager lacks decisive control over all
inputs (for example, the delivery of material supplies to the enterprise
on time), the manager is in danger of not being able to meet priority
targets. There are two possible consequences of such failure: loss of bonus,
which represents a substantial portion of total income, or loss of job. 9
The administrative-command system requires that scapegoats be
found when things go wrong. The enterprise manager can be a convenient
scapegoat.
External Relations
The planning and administrative bodies external to the firm also have to
meet targets, which depend on the performance of subordinate enterprises.
Regional and ministerial authorities are therefore interested in forcing
enterprises under their control to exert themselves to the maximum. The
ministry practice of holding back enterprise supply allotments ("reserv-
ing") and of planning enterprise targets to exceed the aggregate ministry
target are part of this pressure. The ruble control of the banking sys-
tem (discussed in the previous chapter) is another way of monitoring
the enterprise. Local party officials, who themselves are held responsible
for local economic performance, constantly meddle in the affairs of the
enterprise.
The Administrative-Command Economy: Management. Labor, and Pricing 179
External forces are not necessarily negative. The regional or local

party or state organization tends to be judged on the basis of the success
or failure of enterprises under its jurisdiction. The local party is often
prepared to represent the interests of local enterprise managers in disputes
over input allocations or the lowering of plan targets. Enterprises that
experience plan fulfillment difficulties are able to get plan reductions and
the influence of the party can be helpful in this regard. The ministry is
ultimately judged by the success or failure of the enterprises it supervises,
so it would want to avoid the appearance of wide-scale failure. Ministries
would want to help out struggling enterprises. On the other hand, the
ministry itself has targets that it must meet. If it is too easy on its own
enterprises, then the ministry target will be jeopardized. Enterprises can
"fool" their superiors only at the margin. 10 Ministry staff personnel have
considerable production experience and are able to detect gross misreport-
ing on the part of their enterprises.
Unions and Managers

Trade unions are organized on the production principle, meaning that
workers in a given sector of the economy will belong to a particular
union. 11 Within the enterprise, a union chairperson is elected. This election
is subject to a number of important constraints such as approval by
appropriate state or party officials. Once elected, it is the union chairper-
son's responsibility to work within the confines of party and managerial
authority. The manager, union chairperson, and local party work together,
but it is the manager who makes and is held responsible for decisions.
The union and the manager negotiate a collective agreement operating
under the general principle of democratic centralism. This agreement
governs the conditions of labor in the enterprise and sets forth a formal
grievance procedure. There is little or no uniformity in collective agree-
ments. The nature of the union function is complicated. On the one hand,
with regard to important issues such as wages, trade union power is
limited. It is also true that much of trade union activity is devoted to broad
cultural issues, recreation facilities, and the like. But in terms of the
take-home pay, the trade union can have an impact not only at upper levels
as pay scales are established, but also at local levels in terms of interpreting
those pay scales and the many supplements (for example, bonus arrange-
ments) that can and do vary locally. Unions also appear to play a role in
the development and enforcement of safety rules.
Although not everything is known, it is clear that unions play quite
different roles in market and administrative-command economies. While
interested in working conditions, the administrative-command union is
more of a cheerleader for state and party policy. The job of the union is
to ensure the fulfillment of plans by the enterprise.
LABOR ALLOCATION IN THE ADMINISTRATIVE-COMMAND ECONOMY
The allocation of labor in the Soviet administrative-command economy is

accomplished through a combination of administrative controls and mar-
ket forces. Wage differentials affect the supply of labor to various occupa-
tions and regions; administrative controls affect both the supply and
demand.
Labor Planning
In the administrative-command economy, the labor required by the enter-
prise is decided largely outside of the firm by superior authorities. The
determination of enterprise labor staffing is an integral part of the plan-
ning process. The enterprise plan contains not only output and input
targets but also plans for labor inputs. Labor staffing instructions can be
quite detailed, specifying the enterprise wage bill, the distribution of
enterprise labor force by wage classes, average wages, planned increases
in labor productivity, and so on. The manager exercises some discretion;
nevertheless, enterprise labor staffing is basically a decision made by
planning authorities.
Gosplan determines a balance for the labor force just as it balances
material inputs. A balance of available human resources is prepared by
Gosplan with the help of regional and local governments and planning
authorities. The reserve labor force in agriculture must be estimated along
with the potential reserves among the female population, in addition to
existing urban labor resources. Also, demographic factors such as birth
and death rates and migration rates between regions and between the
countryside and towns must be considered.
Once the available supply of labor resources has been estimated,
planners must estimate the demands for labor resources. The labor re-
quirements of the various economic branches are determined in much the
same manner as material input requirements. The planning authorities
estimate in detail (after considerable bargaining and consultation with
lower echelons)-on the basis of coefficients (norms) relating labor inputs
to outputs-the labor staffing required to produce the given output tar-
gets. As in the case of material inputs, enterprises and lower plan-
ning echelons tend to exaggerate their labor needs for the purpose of
adding to their safety factor, and planning authorities have to allocate
labor resources below enterprise requests to balance supplies and de-
mands. Labor productivity projections add another variable to the prob-

lem of estimating required labor inputs. 12
Once planning authorities draw up the balance of labor resources, a
second problem arises: How are they to bring the appropriate amount of
labor into the various enterprises, or, to use the planning terminology, how
are they to "guarantee the labor requirements of the national economy"? 13
Differential Wages in the Soviet Union

There are a number of ways planners allocate labor. First, administrative
means could be used. In an extreme form, the state could conscript labor
and assign it to particular regions and particular jobs. A second alternative
would be the use of material and moral rewards to attract labor to those
regions and jobs where it is needed most. A third possibility is to influence
the supply of labor through training, education, and organized recruit-
ment.
In the Soviet case, all of these mechanisms have been used. In times
other than collectivization or war, market-type mechanisms-wages, edu-
cation, and training-have been used to influence household decision
making. Relative wages have been the most important factor influencing
labor force allocation. At the same time, market forces have been con-
strained in a number of ways-such as closed cities, the passport system,
and labor mobilization. 14
Wage-setting authorities recognize the allocative function of wages;
wage determination should be governed by the needs of labor allocation
rather than by considerations of equality. 15 Poverty or income inequality
should not be corrected through differentials. Inadequate wage differen-
tials reduce labor productivity and promote labor turnover. Ideologically,
wage differentials are justified by the socialist principle of "equal pay for
equal work" and by Lenin's admonition against "equality mongering"
In the administrative-command system, in each industrial branch, base
rates specifying the absolute wage of the lowest paid occupation are
established. For each branch, a schedule is designated, which gives the
wages of higher-grade occupations as percentages of the lowest-grade
rate. 16 By altering the base rate, labor authorities can direct labor into and
out of branches according to the plan. High average wages in priority
sectors such as machinery, metallurgy, electricity, and coal were used to
effect the dramatic shifts of labor out of agriculture and light industry into
heavy industry during the early plan era. During NEP, average wages in
the consumer goods sector exceeded those in heavy industry. Beginning
with the first Five Year Plan, average wages in heavy industry grew more
rapidly than in light industry.17 In the postwar period, a positive correla-
tion existed between average branch wages and the national importance
of the branch. 18
By manipulating the tariff wage schedule, the state can encourage
workers to acquire the skills that it requires. Stalin established schedules
in the 1930s that heavily favored skilled workers, to encourage the then-
untrained labor force to acquire industrial skills. Soviet industrial wage
differentials during the 1930s were larger than in the United States. 19 With
the growing level of education, the extreme differentials of the 1930s were
gradually reduced after World War II. Two other factors contributed to
the leveling of industrial wages. Minimum wage rates increased dramati-
cally, and the numbers (and percentage) of workers making low wages
declined markedly. In the 1980s, industrial workers were divided into six
tariff schedules. 20
Industrial wages were differentiated by region to encourage labor
mobility into such rapidly growing areas as Siberia, Kazakhstan, Central
Asia, and the Far North, which have harsh climates and lack cultural
amenities. Such regional differentials were computed by means of a uni-
form system of coefficients, which were multiplied by the standard wage
rates to yield regionally differentiated wages. For example, the coefficients
used to compute wages in the Far North ranged from 1.5 to 1.721 ; that is,
wages between 50 and 70 percent higher than the standard rates were paid
to workers in the Far North for performing the same basic tasks as
workers in European Russia. In addition to regional differentiation, higher
rates were provided in cases of dangerous work and work performed
under arduous conditions. Underground mining occupations received
higher wages than those for above-ground occupations. In the chemicals
industry, work performed under especially hot, heavy, and unhealthy
conditions receive higher pay. 22
Workers also receive supplementary bonus and incentive payments.
These supplementary payments are in the form of bonuses for overfulfill-
ment of plan norms, of premiums paid from the wage fund or material
incentive fund of the enterprise, and of supplements for special working
conditions.
Wages and Managerial Discretion

The administrative-command system of wage setting seeks to achieve the
industrial and regional distribution of labor called for in the plan. This is
basically an impossible task because of local differences in employment
conditions.
In practice, the equation of labor supply and demand has been accom-
plished by combining centralized wage setting with enterprise flexibility in
the area of incentive payments. 23 If the basic wage rates established by
central authorities create labor shortages or surpluses at the enterprise

level, managers make needed adjustments at the local level by raising or
lowering incentive payments.
Managers operate with some flexibility. They can reclassify workers
to higher occupation ratings. They can build up special bonus funds by
placing bogus workers on their payrolls. They can give workers fringe
benefits such as housing or goods.
The Education System

In the administrative-command economy, the educational system provides
an important centralized mechanism for control over the labor force. 24
Educational training is planned by central authorities, such as Gosplan,
the ministries (most of which maintain the educational establishment), and
the Ministry of Education.
First, the completion of secondary education (through eighth grade
since 1973) in general education schools is compulsory. 25 Beyond and in
addition to this basic preparation, the Soviet Union developed a complex
net of specialized educational institutions under differing jurisdictions
devoted to technical training and training in specialized subjects. At the
highest level, universities and research institutes train higher-degree candi-
dates. The rapid expansion of the Soviet educational establishment is an
indicator of its priority.
Second, education reflects the official view that the educational system
must serve both the economy and society within a Marxist-Leninist frame-
work. Accordingly, there is little equivalent of what in the West would be
described as a "liberal arts" education. Education was devoted to the
development of the new Soviet person, Communist morality, and, above
all, skills useful to the economy. Soviet education emphasized science,
engineering, and technical specialties and restricted entry into the study of
arts and humanities. In keeping with the emphasis on scientific and tech-
nical training, the educational establishment relies heavily on specialized
secondary schools that provide professional vocational training to medical
assistants, draftspersons, and skilled mechanics at a level between univer-
·sity and high school training.
Third, attempts are made from Gosplan down through the local
districts to plan labor requirements and, on this basis, to provide the
educational capacity necessary to meet these planned needs. The different
education ministries take their orders from Gosplan. Unlike the West,
where students are typically free to select their majors, the administrative-
command system places students into career tracks according to long-term
planning goals.
Finally, Soviet authorities use a variety of control mechanisms to

allocate labor, especially highly trained human resources. The most impor-
tant of these is the work placement of graduates of higher and secondary
specialized educational institutions. Graduates of vocational technical
schools were required to complete two years of work assignment at a
specified location. 26 Similar types of required assignments have been used
for more highly skilled graduates and have been employed to offset labor
shortages in areas such as Siberia.
In theory, state control of the educational system should be a powerful
mechanism of guaranteeing the labor needs of the economy. The task of
actually meeting these needs is, however, exceedingly difficult. The system
does not always work smoothly. University graduates find that their
specialties are no longer required by the ministry that ordered those
specialties four years earlier. Trained specialists find themselves working
in areas outside their specialty. There are also reports of too many trained
engmeers.
Organized Recruitment
Another means of administrative allocation of labor is organized recruit-
ment. 27 During the 1930s, the All-Union Resettlement Committee and the
Administration for Organized Recruitment (Orgnabor) transferred labor
from countryside to the cities by recruiting labor for industrial enterprises
from collective and private farms. Some 3 million peasants were trans-
ferred from the village to the city through Orgnabor contracts. After
World War II, Orgnabor transferred workers among industrial enterprises
rather than from agriculture to industry; and by the late 1950s,
Orgnabor's role became the recruiting of labor for vast construction
projects and new industries located in the east and the north. 28
The task of worker placement, especially in less desirable areas, has
always been supplemented by general appeals of the Communist Party and
the Komsomol.
Legal Controls
The competitive bidding for industrial workers, many of whom were
untrained peasants from the countryside, created excessive job turnover
during the 1930s.29 Excessive turnover forced the state to adopt additional
extramarket controls over labor mobility.
During the 1930s, measures were adopted to reduce excessive turn-
over. Absenteeism was punished by severe penalties (eviction from factory
housing and loss of social insurance benefits), "closed shops" were used
to reward reliable workers, and enterprise control over housing was used
as leverage to promote labor stability. After 1938, controls became even
more severe. Labor books (in which a person's work record would be
recorded) were issued to all employed persons, an internal passport system
was used to monitor the movements of the population, and permission
was required to change jobs (failure to comply being a criminal offense).
Administrative controls over labor increased during the war with the
mobilization of specialists, the lengthening of the workday, the criminal-
izing of absenteeism, and the establishment of labor reserve schools. Most
of the laws pertaining to labor control during the war were passed in 1940.
They were quite severe and resulted in numerous instances of criminal
prosecution and imprisonment. 30 They remained on the books until their
repeal in 1956, although they had actually fallen into disuse during the
early 1950s.
The problem of "rolling stones" (workers who change jobs too fre-
quently) remained a source of official concern, especially in the outlying
republics where labor was quite scarce. The state introduced a series of
measures-special bonuses for uninterrupted employment (1965), a labor
code giving reliable workers special privileges and priority in job advance-
ment, and experimental programs in various urban areas to reduce job
turnover-to combat excessive job turnover. 31
Penal Labor32
The most glaring deviation from the principle of a free labor market was
the creation of a large penal labor force in the Soviet Union beginning in
1929. The number of prisoners in Soviet concentration camps (the gulag
population) cannot be estimated with precision, but disparate sources-an
occasional official reference, comparisons of official labor force figures
with the able-bodied population, accounts of ex-prisoners, the materials
published by Alexander Solzhenitsyn-all point to astonishing numbers of
forced laborers. The gulag population received its first large influx with
the collectivization drive, reaching 1 to 2 million in the early 1930s. The
second large influx came with the Stalin purges of the mid- and late 1930s.
Estimates for 1939 vary from 2 to 11 million. The camp population
reached its peak size during World War II and its immediate aftermath.
The figures for the 1945-1950 period range from 4 to 15 million. Ex-pris-
oners of war, resettled minorities, citizens of occupied territories, and
many other groups were incarcerated during the war years. The official
abolition of the gulag by Khrushchev in 1956 did not immediately spell
the end of the large gulag population, the size of which was between 2 and
4 million in 1959. The proportion of the labor force in concentration
camps was probably 5 percent in the mid-1930s and rose to over 10

percent during the war years. 33
The legal foundation for mass political internments was provided by
Article 58 of the 1926 Soviet criminal code, which declared actions di-
rected toward weakening state power a crime against the state. Falling
under this classification were a wide variety of offenses, including sabo-
tage, propaganda, agitation, conscious failure to carry out one's duties,
subversion of industry, and suspicion of espionage.
The internment of large percentages of the population in forced labor
camps cannot be justified on moral and economic grounds. One may
classify the gulags as the product of an irrational Stalin and his associates
and not regard them as being consciously designed for economic purposes.
The gulag population was put to work principally in mining and on
construction projects in harsh climates to which free labor could not be
attracted. Apparently, the state did seek to derive economic benefit from
forced labor. However, the costs of this penal labor were immense. The
high death rates in the concentration camps caused a substantial loss of
population. 34
Nomenklatura Controls
Another source of extramarket control over labor was the nomenklatura
system. Under the nomenklatura procedure, the most important appoint-
ments in the economic system are filled from a party-nominated list of
candidates. This list, maintained by the various cadres and departments of
the Communist Party, allowed the party to maintain direct control over
most important administrative appointments. This control is important
insofar as it can cover all aspects of the appointment process, whether it
be technical skills required for the job or more general issues of party
loyalty. The nomenklatura system required that those individuals who
desire high-level appointments demonstrate their acceptability to the
party. This meant following party directives, cultivating the favors of
influential party officials, and avoiding behavior that would be frowned
upon by the party.
THE PRICE 5YSTEM 3 5
Most prices in the Soviet administrative-command economy were fixed by

central authorities rather than by supply and demand. Price-setting re-
sponsibilities were shared by the Price Bureau of Gosplan, the Ministry of
Trade, the Ministry of Finance, the State Committee on Prices, the Coun-
The Administrative-Command Economy: Management, Labor; and Pricing 187
cils of Ministers, and various republican and oblast authorities. It is useful

to discuss price setting in the Soviet Union in terms of five different types
of prices, for the principles observed in each case are quite different:
(1) industrial wholesale prices, (2) retail prices, (3) agricultural procure-
ment prices, (4) collective farm market prices, and (5) prices in the second
economy.
Industrial Wholesale Prices

Industrial wholesale prices perform less of an allocative function than
other prices. Industrial wholesale prices are primarily accounting prices,
used to add together inputs and outputs. That industrial wholesale prices
play no real allocative role is no surprise, in view of the earlier discussion
of industrial planning.
At the wholesale level, there are two types of prices. First, the factory
wholesale price is the price at which the industrial enterprise sells to the
wholesale trade network. Second, the industry wholesale price is the price
at which goods are sold to buyers outside the industry. In the latter case,
a small turnover tax is included. Wholesale prices are set on the basis of
average branch cost of production plus a small profit markup (generally 5
to 10 percent). Included in enterpr:ise costs are wage payments, costs of
intermediate materials, depreciation, insurance, and payments to over-
head. Interest and rental charges were not normally included in costs, and
depreciation charges did not include charges for obsolescence. While mar-
ket prices in a competitive market system tend toward marginal costs,
they are, in the administrative-command case, average cost prices. Using
average branch costs means that many enterprises, in fact, make losses
at established prices because costs are averages of low- and high-cost
producers.
During the early years of planning, the prices of industrial inputs were
purposely kept low, and many industrial enterprises operated under state
subsidies. Since enterprise survival is not based on the profits or losses, as
in a market system, losses are of little particular importance, since subsi-
dies are granted almost automatically to cover operating losses. In these
cases, minimization of losses (which might be a short-run objective for a
capitalist firm) becomes a long-run criterion of operation and price setting
in the Soviet Union.
Profit calculations have always existed; they simply have not been a
dominant criterion of enterprise performance, and the presence or absence
of profits has therefore not been the basis for action by Soviet planning
authorities. Pricing authorities are unable to establish "fair" prices under
which profits serve as a true indication of enterprise performance.
In some cases, especially the extractive industries, in which marked

cost variations among producers occur, so-called accounting prices are
used. Producers receive different prices (depending on cost differences)
while all buyers pay the same price, with the state providing the interme-
diate cushion. Low-cost producers are, in effect, paying a differential rent
to the state.
In rare cases, pricing authorities adjust the prices of close substitutes
for differences in "use values," the most notable cases being the pricing of
fuel oil and coal, and nonferrous and ferrous metals. The "use values" of
fuel oil and nonferrous metals were perceived as higher than those of coal
and ferrous metals, respectively; therefore, prices in excess of average
branch costs were set for fuel oil and nonferrous metals (the difference
between average branch costs and the wholesale prices being a turnover
tax). Such instances are rare because it is difficult to distinguish among
industrial commodities according to their "use values."
Further problems are created by the treatment of "new" products and
of products bought and sold in Western markets. 36 If the labor theory of
value is to be observed, "new" products produced by a new technology
that results in labor savings should be priced relatively low. Enterprise
directors who risk introducing labor-saving technology have what would
have been increased profits passed on to the users as price reductions. Such
a pricing formula is not conducive to technological innovation, and pricing
authorities have sought ways to exempt such "new" products from the
labor theory of value formula. Cases of large differentials between domes-
tic wholesale prices and world market prices are also troublesome. In the
case of imports, planners may have to pass on to the enterprise at a low
domestic price equipment purchased at a high price in the world market.
In the case of exports (oil, for example), the products would sell for a
much higher price in the world market than the producing enterprise
receives at home.
A major problem of industrial price setting is that, owing to the
administrative complexities of price reform, industrial prices seldom con-
form to average branch costs. Prices cannot be changed regularly along
with costs. Instead, industrial prices remain rigid over long periods. As a
result, general subsidies have been required as the wholesale prices of
many commodities have fallen gradually below rising costs.37
Retail Prices
At the retail level, most prices are formed by state planning authorities.
They are designed to clear the market (to equate supply and demand),
although this standard is often not met. This basic policy is in line with
the policy of market distribution of consumer goods to preserve the

incentive to work. Retail prices have tended to be below market-clearing
levels, and thus queues have served, in part, as a rationing device.
The retail price is simply the industry wholesale price, plus the retail
margin plus the turnover tax. Unlike Western sales taxes, where consumers
are aware of the tax rate they are paying, the turnover tax is included in
the retail price without the purchaser knowing how large it is. The level
of the tax is a function of supply-and-demand conditions in the given
market and of the industry wholesale price. Where the price without
turnover tax is below the market-clearing level, a tax sufficient to raise the
retail price to the clearing level is added. In Figure 8.1, if the industry
wholesale price is OP and the resulting equilibrium price is OP', the
turnover tax will be PP' (or slightly below if the price is set below clearing
levels).* Thus, the level of taxation is price-determined rather than price-
determining.
If the industry wholesale price is greater than OP there will be no
turnover tax, and unless the retail price is below the wholesale price,
unsold stocks will result. Throughout much of the period, a sellers' market
prevailed-obviating the subsidy problem at the retail level. Second, un-
sold stocks are more fundamental than simply the question of price setting.
Figure 8.1 THE SOVIET TURNOVER TAX
p --------
D
0 Quantity
•The supply schedule in Figure 8.1 is drawn to be perfectly inelastic, under the assumption that
the quantity of output is determined by the state plan, irrespective of price. This would apply
largely to enterprises producing a single homogeneous product. For a multiproduct firm
attempting to fulfill a gross output target, the supply schedule would likely be less than perfectly
inelastic, that is, would have a positive slope.
As economic development proceeds and greater attention is given to

consumer goods, sellers' markets should subside. Such indeed was the
case-for example, in clothing and in consumer durables. 38 The adminis-
trative-command system must learn to match output to consumer tastes
and set appropriate prices. There are financial implications to price mis-
takes: If stocks are unsold, the state does not collect the turnover tax-an
important source of revenue.
If retail prices are to transmit consumer preferences to producers,
fundamental changes are necessary. In this regard, the two-tiered price
system shown in Figure 8.1 is an obstacle. Because retail prices reflect
demand and wholesale prices are cost-determined, relative retail prices can
diverge from relative factory wholesale prices. Yet producers respond to
the relative wholesale price, not to the retail price. Thus, the signal sent by
the consumer through the retail price is not received by the producer.
Agricultural Procurement Prices

In its early years, the administrative-command economy used a two-level
pricing system for state purchases of agricultural products from collective
farms. For compulsory deliveries, a low fixed price was paid, while for
sales to the state above the compulsory level, a higher fixed price was
established. Unlike pricing in the industrial sector, these prices bore little
relation to the production costs of the collective farm. There was no cost
accounting whatsoever on collective farms, and cost studies revealed that
production costs were substantially above even the above-quota prices.
State pricing policy placed the collective farms in a difficult financial
position by purchasing output at less than cost. At the same time, the state
farms, operating essentially as industrial enterprises, were receiving subsi-
dies from the state to compensate them for the low procurement prices and
were not financing their own capital investment, as were the collective
farms.
The two-level system was later abandoned. Purchase prices were raised
substantially, so that average purchase prices would cover production
costs. This pricing policy was in line with the agricultural policy that
collective farm production should be "profitable" in the general sense of
revenues covering costs.
Collective Farm Market Prices

The most significant example of a true market price in the Soviet admin-
istrative-command economy is the collective farm market price. In these
markets, the collective farmers could sell their produce (from private plots
The Administrative-Command Economy: Management, Labor. and Pricing 191
and after meeting state targets) at prices determined by demand and

supply. Such prices were above the level of state food prices, a phenome-
non explained in part by quality differentials and by the maintenance of
state prices at artificially low levels. 39
Second-Economy Prices
The second economy is common in planned socialist systems. 40 Second-
economy activities must fulfill at least two of the following tests: (1) the
activity is for private gain; (2) the activity knowingly contravenes existing
law. A physician may treat private patients for higher fees. A salesperson
may set aside high-quality merchandise for customers who offer large tips
(bribes). The manager of a manufacturing firm may divert the highest-
quality production for sale to the black market. In many cases, official and
second-economy transactions are intertwined. A manager may divert some
production into second-economy transactions to raise cash to purchase
unofficially supplies needed to meet the plan. An entire enterprise may
serve as a front for a prospering second-economy undertaking. Workers
may engage in private production on the job (repairing private automo-
biles in state garages). Private construction teams may build structures for
private individuals. An important area of se'-;ond-economy activity is brib-
ery and corruption-influence buying, purchasing favors that only state
and party officials can provide. 41
By their very nature, the prices at which second-economy goods trade
are market prices. They are outside of the control of authorities. The
second economy makes life more tolerable in a world of shortage and
low-quality state goods.
The administrative-command system pays a price for the second econ-
omy. State goods are diverted from planned tasks. The growing climate of
lawlessness detracts from discipline and attention to planned tasks.
The Functions of Soviet Prices

The administrative-command economy allocates resources through ad-
ministrative means. In this system, prices were not intended to play much
of an allocative role. This does not mean that prices have nothing to do
with allocation, just that the allocative function is not very important.
Allocation In any economic system, prices can reflect relative scarcities

on the basis of which economic decisions are made. The profit-maximizing
producer employs inputs so as to equate marginal factor outlays and
marginal -revenue products. The consumer purchases goods and services to
equate marginal utilities per dollar. Supply-and-demand schedules arise,

and prices that reflect relative scarcities are determined. Under ideal con-
ditions, such an arrangement will result in a maximum output produced
at a minimum cost irrespective of the economic system. It is only necessary
for the consumer and producer to be aware of relative prices to respond
correctly in such a system; no planner is required to tell either one how to
behave.
Such perfect price allocation is scarcely to be found in either planned
or market economies in the real world, since imperfect competition,
price ontrols, public goods, government regulations, and so on, generally
prevail.
The real world is a mixture of price allocation and administrative
allocation. In the United States, resource allocation is accomplished pri-
marily through the price mechanism. In the Soviet Union, administrative
planning bore the primary responsibility for allocation, although prices
did play a limited role. While both systems have scarce resources to be
marshaled-for which the price system might be utilized-the price system
plays only a secondary role in the administrative-command case.
Soviet industrial wholesale prices, being centrally determined and
based on the ideological definition of average branch costs, did not repre-
sent relative scarcities-as Soviet planners were well aware. This is one
reason why the administrative planning structure remains so much in
charge of resource allocation. Like any generalization, there are excep-
tions. In the labor sector, differential wages are used largely to allocate
labor. Also, retail prices are used largely to distribute available consumer
goods, although such prices generally play an unimportant role in the
decision to produce such goods. The most striking feature of the system
remains the minor role that prices play in the allocative process.
Control Even in a centralized economy, delegation of authority and re-

sponsibility is required. Delegation necessitates a mechanism for control
of subordinates. In market economies, the profit mechanism acts as a
control device as well as an allocative device. In the administrative-com-
mand economy, however, profits play a limited allocative role in the
industrial enterprise. Nevertheless, many of the directives of planning
authorities must be stated and verified in value terms-for example, rubies
of steel output rather than tons. Thus, the extensive use of value categories
in administrative planning means that prices are used in a control function
to evaluate and assess performance at all levels.
Measurement Prices are required to measure the results of economic

activity. The measurement of economic activity reqnires the aggregation of
dissimilar products, and aggregation requires valuation. Without prices,

one cannot determine at what rate the economy is growing, whether the
capital/output ratio is falling, all-important variables in the planning
process.
Control and measurement are more easily carried out when prices are
not changed. If prices remain unchanged, after a while they will not reflect
current cost relationships and therefore will be even less useful as a guide
to allocation. Soviet authorities were reluctant to change prices for two
basic reasons. First, it is administratively difficult to gather the mass of
wage and cost data required for a reform of prices. Second, it proved a
complex task to plan and evaluate when prices are in the process of
change. In such a case, value targets must be stated in two variants-one
for the old, the other for the new prices-and general confusion tends to
reign until the new prices are firmly established.
Income Distribution Prices play an important role in the distribution of

income in the administrative-command economy. Pricing authorities influ-
ence the distribution of real income through retail prices. In fact, some
pricing policies can be partially explained in terms of their impact on
income distribution. Low housing rents are charged (despite a severe
housing shortage); below-equilibrium prices are charged in state and co-
operative shops for basic food products. In line with these price-setting
policies has been the practice of charging nothing or only nominal prices
for health care and education.
The policy of setting low prices for necessities such as basic food
products and health and education is an attempt to improve the distribu-
tion of real income. It is noteworthy that the most direct method of
equalizing the distribution of income-the leveling of wage income-has
not been used on the grounds that this would weaken the incentive system.
PLANNING WITHOUT RELATIVE SCARCITIES
The major problem of the Soviet administrative price system is its inability
to communicate relative scarcities. Enterprise managers and ministry offi-
cials are not informed by prices of the true opportunity costs of their
various inputs and outputs. Without such information, resources cannot
be combined in an efficient manner. There is general agreement that prices
do not provide accurate information on opportunity costs, but is there
some substitute mechanism?
The early critics of socialism (Mises, Hayek) had claimed that an
economy cannot function without knowledge of relative scarcities. Ray-
mond Powell has argued that economic planners (in ministries, Gosplan,
Gossnab, and the party industrial departments) may be in a position to

gather and analyze information on relative scarcities. 42 Planners will be
confronted with various kinds of information concerning relative scarci-
ties: Enterprises will clamor more for one resource than another; long-time
associates will informally tell their planning superiors that a particular
goods shortage is more acute than others. Through a variety of signals, an
experienced economic planner will learn how to detect true signals of high
opportunity costs from false signals. Planners can, therefore, to a degree,
substitute their own information for the opportunity cost information not
provided by the price system. Accordingly, planners will be able, albeit
imperfectly, to correct for gross misallocations of resources. It is Powell's
claim that this ability to detect relative scarcities has prevented the Soviet
economy from performing as poorly as might be expected in an economy
in which relative scarcities are not known.
CONCLUSIONS
This chapter has described the principles by which the administrative-

command system deals with the allocation of labor, motivates managers,
and sets prices. Chapter 10 looks at the consequences of these actions by
linking the performance of the Soviet administrative-command economy
to these allocation practices.
This chapter has focused on what is perceived to be a weakness of the
administrative-command system since its inception: the problem of moti-
vating enterprise managers to "do the right thing." The planned economy
can only specify and monitor a limited number of the enterprise manager's
actions; the system lacks a unifying goal, such as profit maximization.
Accordingly, the manager is left with a considerable amount of decision-
making authority and is in a position to abuse this authority by taking
actions that are contrary to broader interests. For the economic system to
be successful, managers must not only produce certain production targets;
they must also use resources efficiently and find new ways of doing things
through innovation.
Although the administrative-command system must look the other
way with respect to a number of prices (collective farm markets, second
economy, informal enterprise barter), it still insists that the key industrial
prices be set administratively. This chapter has shown that administrative
price setting has not yielded prices that reflect relative scarcities. More
often than not, industrial prices have not even reflected average costs as
determined by narrow definitions of what constitutes costs of production.
Prices and management are interrelated topics. The further prices
deviate from opportunity costs, the less possible it is to expect rational
decision making from enterprise managers. Tight controls over enterprise

managers must be maintained in a system that does not provide indicators
of relative scarcity.
Although the administrative-command economy uses an arsenal of
administrative controls over labor, labor resources are most often allo-
cated by relative wages. The administrative-command system can admin-
istratively determine the uses of materials and capital. It cannot do so with
labor; nor can it do so with the distribution of consumer goods. People do
have preferences about where they work and live and what goods they buy.
The administrative-command system has had to bow to this fact and allow
an approximation of market allocation to prevail in these areas.
REFERENCES
1. The discussion of Soviet management is based primarily on the following
works: J. S. Berliner, Factory and Manager in the USSR (Cambridge, Mass.:
Harvard University Press, 1957)-a study of the early years of Soviet manage-
ment experience based primarily upon emigre interviews; D. Granick, Man-
agement of the Industrial Firm in the USSR (New York: Columbia University
Press, 1954)-an in-depth study of industrial management of the 1930s,
based primarily on a detailed reading of the Soviet local and specialized press;
B. M. Richman, Soviet Industrial Management (Englewood Cliffs, N.J.: Pren-
tice-Hall, 1965)-a general survey of material similar to that discussed by
Berliner and Granick. More material on the Soviet as compared with other
industrial managers can be found in D. Granick, Managerial Comparisons of
Four Developed Countries: France, Britain, United States, and Russia (Cam-
bridge, Mass.: MIT Press, 1972). For treatment of the Soviet managerial
system in the language of organization theory, see D. Granick, Soviet Metal
Fabricating and Economic Development (Madison: University of Wisconsin
Press, 1967), chap. 7. The Soviet manager and innovation are treated in J. S.
Berliner, The Innovation Decision in Soviet Industry (Cambridge, Mass.: MIT
Press, 1976), part 3; G. Guroff and F. V. Carstensen, eds., Entrepreneurship
in Imperial Russia and the Soviet Union (Princeton, N.J.: Princeton University
Press, 1983 ); W. J. Conyngham, The Modernization of Soviet Industrial Man-
agement (New York: Cambridge University Press, 1982); J.C. Thompson and
R. F. Vidmer, Administrative Science and Politics in the USSR and the United
States (New York: Praeger, 1983); H. Bherer, Management Sovietique (Paris:
Presses de la Fondation Nationale des Sciences Politiques, 1982); S. J. Linz,
"Management's Response to Tautness in Soviet Planning: Evidence from the
Soviet Interview Project," Comparative Economic Studies, vol. 30, no. 1
(Spring 1988), 65-103; and A. Freris, The Soviet Industrial Enterprise (New
York: St. Martin's Press, 1984).
2. H. Kuromiya, "Edinonachalie and the Soviet Industrial Manager, 1928-
1937," Soviet Studies, vol. 36, no. 2 (April 1984), 185-204.
3. The phrase success indicators is a traditional reference to a wide array of

problems pertaining to the assessment of Soviet managerial performance. For
an early view, see A. Nove, "The Problem of Success Indicators in Soviet
Industry," in Economic Rationality and Soviet Politics (New York: Praeger,
1964), pp. 83-98; for a different view, see P. Hanson, "Success Indicators
Revisited: The July 1979 Soviet Decree on Planning and Management," Soviet
Studies, vol. 25, no. 1 (January 1983), 1-13; and M. Bornstein, "Improving
the Soviet Economic Mechanism," Soviet Studies, vol. 37, no. 1 (January
1985), 1-30.
4. Nove, "The Problem of Success Indicators," p. 88. A striking example of the
possible distortion as pictured by the Soviet humor magazine Krokodil and
cited by Nove is the nail factory whose gross output target is specified in
weight. The month's output is one gigantic nail being hauled away with a
crane. See A. Nove, The Soviet Economy, rev. ed. (New York: Praeger, 1969),
p. 174.
5. Enterprise failures to meet delivery targets are generally not severely pun-
ished. Fines tend to be nominal and difficult to collect, and generally enter-
prises do not bother to pursue those who break contracts. Because of the lack
of coordination of supply plans between the State Committee for Material-
Technical Supply (Gossnab), Gosplan, and the ministries, no particular
agency has been willing to take the responsibility for contract violations. For
Soviet discussions of these problems, see Planovoe khoziaistvo [The planned
economy], no. 6, 1978, pp. 101-109, and Pravda, February 18, 1978.
6. For a discussion of the problems imposed by the supply system, see G. E.
Schroeder, "The 'Reform' of the Supply System in Soviet Industry," Soviet
Studies, vol. 24, no. 1 (July 1972), 105-107; G. E. Schroeder, "The Soviet
Economy on a Treadmill of 'Reforms,"' in U.S. Congress, Joint Economic
Committee, Soviet Economy in a Time of Change (Washington, D.C.: U.S.
Government Printing Office, 1979), vol. 1, pp. 323-324; G. E. Schroeder,
"Soviet Economic 'Reform' Decrees: More Steps on the Treadmill," in U.S.
Congress, Joint Economic Committee, Soviet Economy in the 1980s: Prob-
lems and Prospects, part I (Washington, D.C.: U.S. Government Printing
Office, 1982), pp. 65-88.
7. In the 1970s, the basic wage accounted for 59 percent; bonuses for 20
percent; premiums for norm overfulfillment, for 11 percent; and regional and
special working conditions differentials for 10 percent of average monthly
earnings in industry. Prior to the general reform of wages that began in 1956,
bonuses and incentive payments made up a larger share of industrial wages
owing to the greater importance of piece rates and incentive schemes. During
the early 1950s, such payments accounted for slightly more than 40 percent
of average industrial incomes. By the late 1970s, bonuses and supplements
accounted for around 30 percent of industrial wage income, This decrease
was a consequence of the substantial decline in the percentage of workers paid
according to piece rates, which dropped from two-thirds to one-third of all
industrial workers between 1957 and 1961. According to more recent statis-
tics, the proportion of industrial workers working according to some form of
piece rates was slightly above 50 percent in both 1972 and the early 1980s.
Apparently, there has been a resurgence in piece-rate work since the early
1960s. In construction, the percentage of workers on piece rates was much
higher-80 percent in the early 1980s.
8. Granick, Managerial Comparisons of Four Developed Countries, chap. 9.
9. A third consequence, execution or imprisonment, was widespread during the
1930s, when failures to fulfill targets were seen to be the work of saboteurs.
Fortunately, Soviet managers no longer work under this threat. Executive
turnover was very high in the 1930s, although it is clear that this pattern has
changed significantly in recent years. Thus, for the postwar years, turnover of
Soviet managerial personnel at both the middle and upper levels has been
substantially less than that of comparable managerial personnel in American
corporations. This represents significantly increased job security for Soviet
managers of the 1960s, 1970s, and 1980s as opposed to the 1930s. At the
same time, it may suggest a degree of stagnation in the management system
and the aging of managers, deemed an important factor in more recent years.
On this, see W. J. Conyngham, The Modernization of Soviet Industrial Man-
agement (New York: Cambridge University Press, 1982), p. 13; Granick,
Managerial Comparisons of Four Developed Countries, chap. 8.
10. S. J. Linz, "Managerial Autonomy in Soviet Firms," Soviet Studies, vol. 40,
no. 2 (April 1988), 175-195.
11. B. A. Ruble, "Soviet Trade Unions and Labor Relations After 'Solidarity"' in
Problems and Prospects, part 2, pp. 349-366. There is a large body of
literature pertaining to Soviet labor unions. See, for example, B. A. Ruble,
Soviet Trade Unions (New York: Cambridge University Press, 1981); A.
Broadersen, The Soviet Worker (New York: Random House, 1966); E. Clark
Brown, Soviet Trade Unions and Labor Relations (Cambridge, Mass.: Har-
vard University Press, 1966); D. C. Heldman, Trade Unions and Labor Rela-
tions in the USSR (Washington, D.C.: Council on American Affairs, 1977); P.
Barton, "Trade Unions in the USSR," AFL-CIO Free Trade Union News 26
(September 1979), pp. 1-16; A. Kahan and B. R. Ruble, eds., Industrial Labor
in the USSR; D. Slider, "Reforming the Workplace. The 1983 Soviet Law on
Labour Collectives," Soviet Studies, vol. 37, no. 2 (April 1985), 173-183; and
E. Teague, "The USSR Law on Work Collectives: Workers' Control or Work-
ers Controlled?" in D. Lane, ed., Labour and Employment in the USSR (New
York: New York University Press, 1986), pp. 239-255.
12. Detailed discussions of Gosplan's labor balances can be found in Metodi-
cheskie ukazaniia k razrabotke gosudarstuennykh planov ekonomichiskogo i
sotsialnogo razvitiia SSSR [Methods for elaborating the state plan for the
economic and social development of the USSR] (Moscow: Ekonomika, 1980),
chap. 19; A. N. Efimov et al., Ekonomicheskoe planirovanie v. SSSR [Eco-
nomic planning in the USSR], (Moscow: 1967), chap. 6; and in Y. Dubrovsky,
ed., Planning of Manpower in the Soviet Union, translated from the Russian
(Moscow: Progress Publishers, 1975). For discussions of the construction of
the labor balance for the 1971-1975 plan, see M. Feshbach and S. Rapawy,
"Labor Constraints in the Five-Year Plan," in U.S. Congress, Joint Economic

Committee, Soviet Economic Prospects for the Seventies (Washington, D.C.:
U.S. Government Printing Office, 1973), pp. 485-507; and M. Feshback and
S. Rapawy, "Soviet Population and Manpower Trends and Policies," in U.S.
Congress, Joint Economic Committee, Soviet Economy in a New Perspective
(Washington, D.C.: U.S. Government Printing Office, 1976), pp. 113-154;
for an update, see S. Rapawy, "Labor Force and Employment in the U.S.S.R.,"
in U.S. Congress, Joint Economic Committee, Gorbachev's Economic Plans,
vol. I (Washington, D.C.: U.S. Government Printing Office, 1987), pp.
187-212.
13. Efimov et al., Ekonomicheskoe planirovanie, p. 171.
14. V. Zaslavsky and Y. Luryi, "The Passport System in the USSR and Changes
in Soviet Society," Soviet Union, vol. 6, no. 2 (1979), 137-153.
15. This discussion is based on A. McCauley, Economic Welfare in the Soviet
Union (Madison: University of Wisconsin Press, 1979), pp. 174-186.
16. L. J. Kirsch, Soviet Wages: Changes in Structure and Administration Since
1956 (Cambridge, Mass.: MIT Press, 1972), pp. 1-8; J. G. Chapman, "Labor
Mobility and Labor Allocation in the USSR," paper presented at the joint
meeting of the Association for the Study of Soviet-Type Economics and the
Association for Comparative Economics, Detroit, Mich., December 1970,
p. 3; J. G. Chapman, "Soviet Wages Under Socialism," in A. Abouchar, ed.,
The Socialist Price Mechanism (Durham, N.C.: Duke University Press, 1977),
pp. 246-281; and McCauley, Economic Welfare in the Soviet Union, chap. 8;
B. M. Sukharevsky, "Zarabotnaia plata i material'naia zainteresovannost"
[The wage and material incentives], in A. P. Volkova et al., eds., Trud i
zarabotnaia plata v SSSR [Labor and wages in the USSR] (Moscow: 1968),
p. 302.
17. E. C. Brown, "The Soviet Labor Market," in Soviet Trade Unions and Labor
Relations (Cambridge, Mass.: Harvard University Press, 1966), pp. 11-37,
reprinted in M. Bornstein and D. Fusfeld, eds., The Soviet Economy: A Book
of Readings, 3rd ed. (Homewood, Ill.: Irwin, 1970), pp. 217-220.
18. A. Bergson, The Economics of Soviet Planning (New Haven, Conn.: Yale
University Press, 1964), p. 115. Soviet labor experts have noted that this
system tends to create excessive turnover problems in branches having low
base rates. In the eastern regions during the 1960s, turnover was highest in
the food industry, where wages were lowest, and lowest in ferrous metals,
where wages were highest. Attempts were made to reduce the turnover prob-
lem in consumer branches by raising the minimum wage in 1968 and 1971.
On this, see Chapman, "Labor Mobility," p. 13; and McCauley, Economic
Welfare in the Soviet Union, pp. 200-207.
19. A. Bergson, The Structure of Soviet Wages (Cambridge, Mass.: Harvard
University Press, 1944), chap. 8; and Sukharevsky, "Zarabotnaia plata,"
p. 291.
20. McCauley, Economic Welfare in the Soviet Union, p. 201; Kirsch, Soviet
Wages, chap. 4; and M. Yanowitch, "The Soviet Income Revolution," Slavic
Review, vol. 22, no. 4 (December 1963), reprinted in M. Bornstein and
D. Fusfeld, eds., The Soviet Economy, 2nd ed. (Homewood, Ill.: Irwin, 1966),
pp. 228-241. See also Sukharevsky, "Zarabotnaia plata," p. 196; and Vestnik
Statistiki [Herald of Statistics], no. 6 (1983), 61- 62.
21. Chapman, "Labor Mobility," p. 23. Even these differentials have not proven
sufficient to maintain an adequate labor force in the Far North and Siberia.
Recent Soviet studies suggested that the established regional differentials were
not sufficient to compensate for cost-of-living differentials, not to mention the
low level of services (child care, health, education) available in these regions.
On this, see Chapman, "Labor Mobility," pp. 13-16.
22. Sukharevsky, "Zarabotnaia plata," p. 292; and Kirsch, Soviet Wages, Table
6-1, p. 125.
23. Kirsch, Soviet Wages, chap. 8.
24. There is a large body of literature devoted to Soviet education. See, for
example, M. Matthews, Education in the Soviet Union: Policies and Institu-
tions Since Stalin (Boston: Allen & Unwin, 1982); R. B. Dobson, "Education
and Opportunity," in J. Pankhurst and M. P. Sacks, eds., Contemporary
Soviet Society: Sociological Perspectives (New York: Praeger, 1980); R. B.
Dobson, "Soviet Education: Problems and Policies in the Urban Context," in
H. W. Morton and R. C. Stuart, eds., The Contemporary Soviet City (Ar-
monk, N.Y.: M. E. Sharpe, 1984), pp. 156-179; and National Foreign Assess-
ment Center, USSR: Trends and Prospects in Educational Attainment
1959-85 ER79-10344 (Washington, D.C.: June 1979).
25. Dobson, "Soviet Education," p. 156.
26. For a discussion of recent changes, see Goodman and Schleifer, "The Soviet
Labor Market in the 1980s," pp. 336-339.
27. For a discussion of controls, see E. Nash, "Recent Changes in Labor Controls
in the Soviet Union," in U.S. Congress, Joint Economic Committee, New
Directions in the Soviet Economy, part 3 (Washington, D.C.: U.S. Govern-
ment Printing Office, 1966), pp. 849-871; for recent evidence, see Goodman
and Schleifer, "The Soviet Labor Market in the 1980s." For a discussion of
controls from differing perspectives, see B. Arnot, Controlling Soviet Labour
(London: Macmillan, 1988); and Teague, "The USSR Law on the Work
Collectives: Workers' Control or Workers Controlled?"
28. Goodman and Schleifer, "The Soviet Labor Market in the 1980s," p. 338.
29. J. G. Chapman, "Labor Mobility and Labor Allocation in the USSR," paper
presented at the ACES meeting, Detroit, Mich., December 1970, p. 8.
30. For a detailed discussion of labor controls from the mid-1930s to 1956, see
A. Nove, An Economic History of the USSR (London: Penguin, 1969), pp.
195-198, 260-263.
31. D. Granick, Job Rights in the Soviet Union: Their Consequences (New York:
Cambridge University Press, 1987). In 1956, criminal liability for leaving
work without permission and for absenteeism was abandoned, and social
benefits were raised. Turnover in industry rose to 38 percent in 1956, after
which it declined to a fairly steady 20 to 22 percent, which was below
comparable turnover rates in manufacturing in the United States. The turn-
over rate of approximately one-fifth of the labor force annually held for the
1980s. Soviet turnover rates in the 1980s were similar to those of the United
States.
32. This discussion is based on the following references: S. Rosefielde, "How
Reliable Are Available Estimates of Forced Concentration Camp Labor in the
Soviet Union?" Soviet Studies, vol. 32, no. 4 (October 1981); D. Dallin and
B. Nicolevsky, Forced Labor in Soviet Russia (New Haven, Conn.: Yale
University Press, 1947); N. Jasny, "Labor and Output in Soviet Concentration
Camps," Journal of Political Economy, vol. 59, no. 5 (October 1951), 405-
419; A. Solzhenitsyn, The Gulag Archipelago (New York: Harper & Row,
1973 and 1974), vols. 1 and 2; S. Swianiewicz, Forced Labor and Eco-
nomic Development (London: Oxford University Press, 1965); S. Rosefielde,
"An Assessment of the Sources and Uses of Gulag Forced Labor," Soviet
Studies, vol. 32, no. 1(January1981), 51-87; S. G. Wheatcroft, "On Assess-
ing the Size of Forced Concentration Camp Labour in the Soviet Union,
1929-56," Soviet Studies, vol. 32, no. 2 (April 1981), 265-295; R. Conquest,
"Forced Labour Statistics: Some Comments," Soviet Studies, vol. 34, no. 3
(July 1982), 434-439; S. G. Wheatcroft, "Towards a Thorough Analysis of
Soviet Forced Labour Statistics," Soviet Studies, vol. 35 (April 1983), 223-
237; and J. Barber, "The Development of Soviet Employment and Labour
Policy, 1930-41," in D. Lane, ed., Labour and Employment in the USSR,
pp. 50-65.
33. For a summary of estimates, see Rosefielde, "How Reliable Are Available
Estimates?" Tables 1 and 4; and Wheatcroft, "On Assessing the Size of Forced
Concentration Camp Labor," pp. 267-268.
34. S. Rosefielde, "Excess Mortality in the Soviet Union: A Reconsideration of
the Consequences of Forced Industrialization 1929-1949," Soviet Studies,
vol. 35, no. 3 (July 1983), 385-409; and B. Anderson and B. Silver, "Demo-
graphic Analysis and Population Catastrophes in the USSR," Slavic Review,
vol. 44, no. 3 (Fall 1985), 517-536. It is difficult to estimate the loss of life
in the camps because of conceptual and data problems. One measure, how-
ever, is excess mortality between 1926 and 1939. "Excess mortality" meas-
ures the number of people alive in 1926 who died between 1926 and 1939
in excess of the number that would have died under normal circumstances.
Excess mortality between 1926 and 1939 was likely in the range of 3 to 6
million. Excess mortality is only one cost of the camps. The sense of aliena-
tion of former prisoners and their families (along with deteriorated health)
would not render them enthusiastic "builders of socialism" after their release.
Furthermore, it is likely that forced labor is less productive than free labor.
The diversion of labor from the labor market into concentration camps more
than likely caused a loss of output due to a general lowering of labor
productivity.
35. For general treatments of Soviet pricing policies, the reader is referred to the
following sources: M. Bornstein, "Soviet Price Theory and Policy," in M.
Bornstein and D. Fusfeld, eds., The Soviet Economy: A Book of Readings, 3rd
ed. (Homewood, Ill.: Irwin, 1970), pp. 106-137; P. Hanson, The Consumer
Sector in the Soviet Economy (Evanston, Ill.: Northwestern University Press,
1968), chap. 8; M. Bornstein, "The Soviet Price Reform Discussion," Quar-

terly Journal of Economics, vol. 78, no. 1 (February 1964), 15-48; A.
Bergson, The Economics of Soviet Planning (New Haven, Conn.: Yale Uni-
versity Press, 1964), chap. 8; M. Bornstein, "The Soviet Debate on Agri-
cultural Prices and Procurement Reforms," Soviet Studies, vol. 21, no. 1
(July 1969), 1-20; M. Bornstein, "The Administration of the Soviet Price
System," Soviet Studies, vol. 30, no. 4 (October 1978), 466-490; M. Born-
stein, "Soviet Price Policy in the 1970s," in U.S. Congress, Joint Economic
Government Printing Office, 1976), pp. 17-66; M. Bornstein, "The Soviet
Industrial Price Revision," in G. Fink, ed., Socialist Economy and Economic
Policy: Essays in Honour of Friedrich Levcik (New York: Springer-Verlag,
1985), M. Bornstein, "Soviet Price Policies," Soviet Economy, vol. 3, no. 2
(1987), 96-134.
36. The problems of pricing "new" products and the impact of world prices on
Soviet prices are discussed in J. S. Berliner, The Innovation Decision in Soviet
Industry (Cambridge, Mass.: MIT Press, 1976), part 2; M. Bornstein, "The
Administration of the Soviet Price System"; and V. G. Treml, "Foreign Trade
and the Soviet .Economy: Changing Parameters and Interrelationships," in
E. Neuberger and L. Tyson, eds., Transmission and Response: The Impact of
International Disturbances on the Soviet Union and Eastern Europe (New
York: Pergamon Press, 1980).
37. Wholesale prices remained roughly constant between 1929 and 1936, despite
rapidly rising wage costs, and by 1936, subsidies were the rule rather than the
exception. A price reform in spring of 1936 sharply increased prices to cover
costs, while in 1949, another large general price increase was required to
eliminate subsidies. Despite the general rule that prices should cover costs,
industrial prices remained virtually unchanged from the 1955 price reform to
the 1966-1967 price reform despite changing wage costs and changing tech-
nology. After the reform of 1966-1967, the next major price reform took
place in 1982.
Official Soviet industrial wholesale-price indexes indicate a very modest
degree of inflation throughout the postwar era, but there is reason to suspect
that the official indexes suffer from the same deficiencies as the retail-price
indexes. Yet Western recalculations also fail to reveal significant inflation in
the industrial wholesale-price sphere. A. Bergson and L. Turgeon, "Basic
Industrial Prices in the USSR, 1928-1950," The Rand Corporation, Research
Memorandum RM-1522, August 1, 1955; for a discussion of the 1982
reform, see Bornstein, "The Soviet Industrial Price Revision"; for Western
recalculations of industrial prices, see A. Becker, "The Price Level of Soviet
Machinery in the 1960s," Soviet Studies, vol. 26, no. 3 (July 1974), 363-380;
and J. E. Steiner, Inflation in Soviet Industry and Machine Building and
Metalworking, SRM78-10142, Office of Strategic Research, Washington,
D.C., 1978.
38. For example, sales of clothing and leather footwear grew at an annual rate of
around 8 percent between 1968 and 1971. During the same period, clothing
and footwear stocks grew at an annual rate of around 19 percent, largely

because the types of goods produced failed to correspond to the wishes of the
consumer. See Planovoe khoziaistvo [The planned economy], no. 10 (1972),
pp. 5-7. This growing selectivity also applies to consumer durables. For
example, the "Baku" refrigerator proved to be of such low quality that
Azerbaijan SSR consumers refused to buy it. The quick-witted manager in
charge of its production then changed the name and appearance and released
it as a new model. For an account of this see Sotsialisticheskaia industria
[Socialist industry], no. 14 (1969), p. 2.
39. For example, collective farm market prices were on the average more than
double state retail prices in 1940. After considerable variation throughout the
postwar period, collective farm market prices were 63 percent greater than
state retail prices in 1972. The collective farm markets have been especially
important in large cities, where standard sources of supply have been inade-
quate. How important are these markets? Although measurement is rather
complex, collective-farm markets accounted for 13.9 percent of aggregate
food sales in 1960 and for 8.8 percent in 1978. However, for certain products,
these markets are of much greater significance. In 1957, for example, when
the aggregate collective farm market share of food sales was 18.2 percent,
they accounted for 63 percent of potato sales, 48 percent of egg sales, and 35
percent of meat sales. In 1970, they accounted for 67, 54, and 35 percent,
respectively, of sales of these products. In terms of production, in 1987, the
private sector accounted for 26 percent of meat, 27 percent of milk,
29 percent of vegetables, and 58 -percent of potatoes. On this, see D. W.
Bronson and B. S. Severin, "Consumer Welfare," in U.S. Congress, Joint
Economic Committee, Economic Performance and the Military Burden in the
Soviet Union (Washington, D.C.: U.S. Government Printing Office, 1970), p.
381; J. F. Karcz, "Quantitative Analysis of the Collective Farm Market,"
American Economic Review, vol. 54, no. 4, part 1 (June 1964), 315-333;
E. C. Cook, "Household Plot Production and Contract Sales," in U.S. Depart-
ment of Agriculture, CDE Agriculture Report, vol. 1, no. 6 (November-
December 1988), 6-7.
40. See A. Katsenelinboigen, "Coloured Markets in the Soviet Union," Soviet
Studies, vol. 29, no. 1 (January 1977), pp. 62-85; D. K. Simes, "The Soviet
Parallel Market," Economic Aspects of Life in the USSR (Brussels: NATO
Directorate of Economic Affairs, 1975), pp. 91-100; G. Grossman, "The
'Second Economy' of the USSR," Problems of Communism, vol. 26 (Septem-
ber-October 1977), pp. 25-40; G. Grossman, "Notes on the Illegal Private
Economy and Corruption," in U.S. Congress Joint Economic Committee,
Soviet Economy in a Time of Change, vol. 1, pp. 834-855; V. G. Treml,
"Production and Consumption of Alcoholic Beverages in the USSR:
A Statistical Study," Journal of Studies on Alcohol, vol. 36 (March 1975), pp.
285-320; G. E. Schroeder and R. Greenslade, "On the Measurement of the
Second Economy in the USSR," ACES Bulletin, vol. 21, no. 1 (Spring 1979),
3-22; D. O'Hearn, "The Consumer Second Economy: Size and Effects,"
Soviet Studies, vol. 32, no. 2 (April 1980), 218-234; F. J. M. Feldbrugge,
"Government and the Shadow Economy in the Soviet Union," Soviet Studies,
vol. 36, no. 4 (October 1984), 528-543; B. Rumer, "The 'Second' Agriculture
in the USSR," Soviet Studies, vol. 33, no. 4 (October 1981), 560-572; R. E.
Erickson, "The 'Second Economy' and Resource Allocation Under Central
Planning," Journal of Comparative Economics, vol. 8, no. 1 (March 1984),
1-24; and R. E. Erickson, "An Allocative Role of the Soviet Second Econ-
omy," in P. Desai, ed., Marxism, Central Planning and the Soviet Economy
(Cambridge, Mass.: MIT Press, 1983), pp. 110-132; G. Ofer and A. Vinokur,
Family Budget Survey of Soviet Immigrants in the Soviet Union (Jerusalem:
Soviet and East European Research Center, Hebrew University, June 1977);
and G. Ofer and A. Vinokur, Private Sources of Income of the Soviet Urban
Household (Santa Monica, Calif.: Rand Corporation, R-2359-NA, August
1980).
41. We cannot establish how important the second economy is, say, as a percent
of retail sales or GNP, but those who have studied the second economy argue
that it is quite significant. Exact estimation of the importance of the second
economy will never be possible, for measurement of an illegal activity is a
virtually impossible task. To take one isolated example where estimates are
available: In 1970, one-fourth of all alcohol consumed in the Soviet Union
was produced and supplied through the second economy. In 1972, 500
million liters of stolen gasoline are estimated to have been sold by the second
economy. Some 80 percent of the USSR fur market and 25 percent of fish
sales are handled by the second economy. House repairs and decoration are
dominated by the second economy. The most reliable information on the
scope of the second economy comes from the emigre surveys conducted by
Gur Ofer and Aaron Vinokur in Israel, which show that earnings derived
from an activity other than that in the main place of employment account
for some 10 percent of earnings. The magnitude of the second economy
would come as no surprise, for the official planning system has assigned
low priority to "nonessential" services (beauty shops, appliance repairs, and
so on), and expenditures on these items typically rise with rising income.
Moreover, the official supply system has failed to offer the Soviet consumer
sufficient supplies of quality merchandise, and the second economy would
serve as a means of channeling available quality merchandise to the highest
bidder. In addition, the Soviet taxation system imposes almost confiscatory
marginal tax rates on professionals who are legally licensed to carry out
private professional activity. As in many Western countries, the tax system of
the Soviet Union drives pro.fessionals into the second economy. Another
primary reason for the existence of the second economy is the immense power
over resources placed in the hands of officials. Officials, rather than the
market, allocate many of the scarce commodities treasured by the Soviet
consumer-automobiles and auto licenses, apartments, building permits, and
so on. This situation opens up the possibility of bribery and corruption, much
as it does in the West.
42. R. P. Powell, "Plan Execution and the Workability of Soviet Planning," Jour-
nal of Comparative Economics, vol. 1, no. 1 (March 1977), 69-73.
Enterprise Management
J. S. Berliner, Factory and Manager in the USSR (Cambridge, Mass.: Harvard
- - - , The Innovation Decision in Soviet Industry (Cambridge, Mass.: MIT
Press, 1976).
- - - , "Managerial Incentives and Decision-making: A Comparison of the
United States and the Soviet Union," in M. Bornstein and D. Fusfeld,
eds., The Soviet Economy, 3rd ed. (Homewood, Ill.: Irwin, 1970), pp.
165-195.
M. Bornstein, "Improving the Soviet Economic Mechanism," Soviet Studies, vol.
37, no. 1 (January 1985), 1-30.
W. J. Conyngham, The Modernization of Soviet Industrial Management (New
York: Cambridge University Press, 1982).
A. Freris, The Soviet Industrial Enterprise (New York: St. Martin's Press,
1984).
D. Granick, Management of the Industrial Firm in the USSR (New York: Colum-
bia University Press, 1954).
- - - , Managerial Comparisons of Four Developed Countries: France, Britain,
United States, and Russia (Cambridge, Mass.: MIT Press, 1972).
- - , The Red Executive (Garden City, N.Y.: Doubleday, 1960).
- - - , Soviet Metal Fabricating and Economic Development (Madison: Univer-
sity of Wisconsin Press, 1967), chap. 7.
G. Guroff and F. V. Carstensen, eds., Entrepreneurship in Imperial Russia and the
Soviet Union (Princeton, N.J.: Princeton University Press, 1983).
P. Hanson, "Success Indicators Revisited: The July 1979 Soviet Decree on
Planning and Management," Soviet Studies, vol. 25, no. 1 (January 1983),
1-13.
H. Kroll, "The Role of Contracts in the Soviet Economy," Soviet Studies, vol. 40,
no. 3 (July 1988), 349-366.
S. J. Linz, "Management's Response to Tautness in Soviet Planning: Evidence from
the Soviet Interview Project," Comparative Economic Studies, vol. 30, no. 1
(Spring 1988), 65-103.
A. Nove, Economic Rationality and Soviet Politics (New York: Praeger, 1964),
chap. 5.
B. M. Richman, Management Development and Education in the Soviet Union
(East Lansing: Michigan State University Press, 1967).
- - - , Soviet Industrial Management (Englewood Cliffs, N.J.: Prentice-Hall,
1965).
Labor
J. Adam, Employment Policies in the Soviet Union and Eastern Europe, 2nd rev.
ed. (London: Macmillan, 1987).
B. Arnot, Controlling Soviet Labour (London: Macmillan, 1988).
- - - , The Structure of Soviet Wages (Cambridge, Mass.: Harvard University
Press, 1944).
M. McCauley, Labor Disputes in Soviet Russia 1957-1965 (Oxford: Oxford
S. Rapawy, "Labor Force and Employment in the U.S.S.R.," in U.S. Congress,
Joint Economic Committee, Gorbachev's Economic Plans, vol. I (Washing-
toi:i, D.C.: U.S. Government Printing Office, 1987), pp. 187-212.
- - , "Regional Employment Trends in the U.S.S.R.: 1950 to 1975," in U.S.
Congress, Joint Economic Committee, Soviet Economy in a Time of Change,
vol. 1 (Washington, D.C.: U.S. Government Printing Office, 1979), pp. 600-
617.
S. Rapawy and G. Baldwin, "Demographic Trends in the Soviet Union: 1950-
2000," in U.S. Congress, Joint Economic Committee, Soviet Economy in the
1980s: Problems and Prospects, part 2 (Washington, D.C.: U.S. Government
Printing Office, 1982).
B. A. Ruble, Soviet Trade Unions (New York: Cambridge University Press, 1981).
D. Slider, "Reforming the Workplace: The 1983 Soviet Law on Labour Collec-
tives," Soviet Studies, vol. 37, no. 2 (1985), 173-183.
M. Yanowitch, Work in the Soviet Union (New York: Sharper, 1985).
The Price System

A. Abouchar, ed., The Socialist Price Mechanism (Durham, N.C.: Duke University
Press, 1977).
A. Becker, "The Price Level of Soviet Machinery in the 1960s," Soviet Studies, vol.
26, no. 3 (July 1974), 363-380.
M. Bornstein, "The Administration of the Soviet Price System," Soviet Studies,
vol. 30, no. 4 (October 1978), 466-490.
---,"The 1963 Soviet Industrial Price Revision," Soviet Studies, vol. 15, no. 1
(July 1963), 43-52.
- - - , "The Soviet Debate on Agricultural Prices and Procurement Reforms,"
Soviet Studies, vol. 21, no. 1 (July 1969), 1-20.
- - - , "Soviet Price Policy in the 1970s," in U.S. Congress, Joint Economic

---,"The Soviet Price Reform Discussion," Quarterly Journal of Economics,
vol. 78, no. 1 (February 1964), 15-48.
- - - , "Soviet Price Theory and Policy," in M. Bornstein and D. Fusfeld, eds.,
The Soviet Economy: A Book of Readings, 3rd ed. (Homewood, ill.: Irwin,
1970), pp. 106-137.
---,"The Soviet Industrial Price Revision," in G. Fink, ed., Socialist Economy
and Economic Policy: Essays in Honour of Friedrich Levcik (New York:
Springer-Verlag, 1985).
---,"Soviet Price Policies," Soviet Economy, vol. 3, no. 2 (1987), 96-134.
R. W. Campbell, "Marx, Kantrovich and Novozhilov: Stoimost' Versus Reality,"
Slavic Review, vol. 20, no. 3 (October 1961), 402-418.
P. Hanson, The Consumer Sector in the Soviet Economy (Evanston, Ill.: North-
western University Press, 1968), chaps. 7 and 8.
R. Hutchings, "The Origins of the Soviet Industrial Price System," Soviet Studies,
vol. 13, no. 1 (July 1961), 1-22.
A. Nove, The Soviet Economic System (London: Allen & Unwin, 1977), chaps. 2
and 3.
J. Pickersgill, "Soviet Household Savings Behavior," Review of Economics and
Statistics, vol. 58, no. 2 (May 1976), 139-147.
G. E. Schroeder, "The 1966-67 Soviet Industrial Price Reform: A Study in Com-
plications," Soviet Studies, vol. 20, no. 4 (April 1969), 462-477.
J. E. Steiner, "Disguised Inflation in Soviet Industry," Journal of Comparative
Economics, vol. 6, no. 3 (September 1982), 278-287.
NINE
••
Foreign Trade
in the Soviet
Economy
L e Soviet administrative-command economy developed its own meth-

ods for conducting trade with other countries. Foreign trade activities were
administered by the planning system. Special trading organizations were
placed between the exporting or importing domestic enterprise and the
foreign enterprise. A trading bloc of the administrative-command econo-
mies of Eastern Europe and Asia was created.
Perestroika and the end of the Soviet Union dramatically changed the
foreign trade system created by the Soviet administrative-command econ-
omy. The Council for Mutual Economic Assistance, or COMECOM,
formed by the Soviet Union and Eastern Europe at the end of World
War II, went out of existence on January 1, 1992. Enterprises received
newfound freedom in dealing with foreign buyers and sellers.
This chapter reviews the principles of foreign trade in the administra-
tive-command economy prior to its collapse in the late 1980s and early
1990s.
207
TRADE IN THE ADMINISTRATIVE-COMMAND ECONOMY 1
In the administrative-command economy, a foreign trade monopoly man-

ages foreign trade. The organization responsible for foreign trade is the
Ministry of Foreign Trade, which is subordinate to Gosplan, and the
Council of Ministers (see Figure 9.1 ). The organizations that actually do
the buying and selling in foreign markets are Foreign Trade Organizations
(FTOs). These foreign trade organizations are subordinated to the Minis-
try of Foreign Trade and are financially independent. Most of the FTOs
are organized by product. Thus, the FTO Auto Export deals in automo-
biles, and the FTO International Book deals in books. These organizations
may handle imports, exports, or both. In addition to those FTOs dealing
with specific products, others exist for the servicing of foreign trade and
conducting trade on a regional basis. An example of the former would be
Foreign Trade Advertising, which handles advertising in foreign trade. An
example of the latter would be the Eastern Trade Association.
The FTOs conduct foreign trade, and they provide necessary technical
and financial services. Their revenue is calculated as a percentage of their
foreign trade turnover (exports plus imports). In addition to the individual
Figure 9.1 THE ORGANIZATION OF SOVIET FOREIGN TRADE
CPSU
Commission of the
USSR Council of Ministers Praesidium for
COMECON Affairs
Other
Gosbank
Ministries
Foreign
Gosplan
Economic
Relations
Ministry of Foreign Trade
Main Administrations
FTOs Attached
to Ministries .___ __. Vneshtorgbank
Foreign Trade
Organizations (FTOs)
Source: Compiled from V. P. Gruzinov, The USSR's Management of Foreign Trade (White Plains, N.Y.:
M. E. Sharpe, 1979), pp. 26, 75, 79; E. A. Hewett. "Most-Favored Nation Treatment in Trade Under
Central Planning," Slavic Review. vol. 37, no. 1 (March 1978). 28; Paul K. Cook, "The Political Setting,"
in Joint Economic Committee, Soviet Economy in a 7ime of Change (Washington, D.C.: U.S.
Government Printing Office, 1979). vol. 1, no. 2, face p. 50.
Foreign Trade in the Soviet Administrative-Command Economy 209
FTOs, the Ministry of Foreign Trade is divided into main administrations

that are concerned with a wide range of issues relating to foreign trade.
These administrations provide technical and financial services, including
research on foreign trade.
The financial arrangements for foreign trade are handled by a special
bank, Vneshekonbank. 2 Though traditionally under the jurisdiction of Gos-
bank, the Vneshekonbank operates under policy guidance from Gosbank,
but in close cooperation with the main foreign exchange administration of
the Ministry of Foreign Trade. In addition to a large number of correspon-
dent banks in foreign countries, Vneshekonbank also operates through
Soviet-owned banks abroad, for example, the Moscow Narodny Bank of
London. Prior to the mid-1980s, Vneshekonbank was called Vneshtorgbank.
The Planning of Foreign Trade

Foreign trade, like other sectors of the administrative-command economy,
has been managed as an integral part of the system of material balance
planning. 3 Soviet foreign trade planners used imports and exports as
balancing items in the national economic plan (imports where there were
shortages and exports where there were surpluses). Planners sought to
avoid heavy reliance on trade to balance the plan. With COMECON
countries, Soviet authorities planned for trade to promote the economic
integration of the socialist economies.
Trade objectives are expressed in three plans: (1) an import-export
plan, (2) a plan for support materials and services for foreign projects, and
(3) a balance-of-payments plan. These plans are segregated according to
region, and in the case of trade with COMECON, they are supposed to
be coordinated with the general (and trade) plans of each member country.
The foreign trade plans contain detailed plan targets. The import-ex-
port plan indicates the regional distribution of exports and imports, the
tasks of each organization involved (the foreign trade and other ministries,
the FTOs), and the schedule of deliveries. The balance-of-payments plan
is developed by the Ministry of Foreign Trade in conjunction with the
Ministry of Finance and shows both payments and receipts (on both a
current and a credit basis) for various categories of goods and services
distinguished by currency type-for example, by specific convertible cur-
rencies and transferable rubies. The transferable ruble (or valuta ruble) is
used as an accounting tool having little relationship with internal ruble
prices. In addition to the balance-of-payments plan, a capital plan pre-
pared by the Ministry of Finance, Gosplan, and the Vneshekonbank
summarizes claims and credits on an annual basis.
The integration of the foreign trade plans and the national economic
plan is incomplete. There is no comprehensive plan that translates foreign
trade flows into domestic prices. The trade plans are expressed in foreign
trade rubies, whose relationship to domestic prices is unclear.
Foreign trade is conducted in a fundamentally different manner from
a market economy. The most basic difference is that the foreign trade
monopoly serves to isolate internal producers and consumers of export
and import items, respectively, from direct contact with the outside world.
The operative unit for carrying out the foreign trade plan is the FTO.
The FTO connects the internal producer or consumer with the external
world. The FTO purchases authorized export items from the domestic
producer at internal ruble prices and sells them in foreign markets at
agreed-upon (typically, world market) prices. Within COMECON, the
sale will be transacted in transferable rubies. Likewise, an FTO will
purchase authorized items in foreign markets at negotiated or world
market prices, and the domestic consuming firm will be charged the
internal ruble price for the imported item. The financial side of these
transactions is the responsibility of the various financial organs involved
with foreign trade, along with the Ministry of Foreign Trade. If the
imported item is sold internally at a higher price than that paid by the
FTO, a surplus is paid into the state budget. In the late 1970s, surplus
earnings accounted for some 10 percent of state revenues. 4
Trade Policy
The volume of Soviet foreign trade was significantly less than one would
find in market economies at similar levels of economic development. 5 This
pattern demonstrates a Soviet bias against trade or a "policy of trade
aversion." A number of factors explain this bias against trade.
First, Marxist-Leninist ideology rejected traditional Western argu-
ments concerning the benefits of international trade-the thesis of com-
parative advantage-just as it rejected other Western "economic laws."
Western markets were viewed as subject to chaotic fluctuations that could
jeopardize the planned economy.
A second major factor explaining trade aversion was the perception
(and, in large part, reality) of a "hostile capitalist encirclement." Events
tended to bolster distrust of Western markets. For political reasons, West-
ern foes periodically imposed trade embargoes or credit restrictions.
Too heavy reliance on foreign trade could endanger the planning
process by introducing outside forces not directly controlled by planners
and increasing the degree of plan uncertainty. One can find the tendency
to avoid reliance on outsiders at all levels of the Soviet economy, and this
reluctance is intensified when foreign suppliers are involved. It is notewor-
thy that trade potential within COMECON remained "underutilized,"
although there were no ideological objections to such trade.
It is important to note that in the early 1930s, the Great Depression

was an important though uncontrollable factor influencing the terms of
trade facing Soviet planners. 6 The terms of trade turned against the Soviet
Union as world market prices of Soviet exports fell more rapidly than
world market prices of Soviet imports. This development had an impact
on Soviet attitudes toward foreign trade.
The mechanisms for the conduct of foreign trade have themselves
limited trade participation. Administrative-command planning imposes
inherent restrictions on the volume of trade.
Internal Barriers to Foreign Trade

The administrative-command system, as noted above, isolates domestic
enterprises from foreign enterprises. This isolation of the domestic enter-
prise both as a producer and as a consumer sets it apart from capitalist
enterprises, which enter directly into foreign trade arrangements and can
respond more readily to foreign markets. The isolation of domestic enter-
prises makes it difficult for them to be competitive in world markets by
not knowing what the changing world market requires. The inability to
compete in capitalist markets in manufactured goods and services is, in
part, accounted for by this isolation. 7 The weak Western market for Soviet
manufacturers limited Soviet foreign exchange earnings over the years,
which restricted Soviet imports from the West. 8 Accordingly, resource-rich
administrative-command economies had to rely primarily on raw material
exports to earn foreign exchange. See Table 9.1.
The Soviet ruble was an inconvertible currency, not listed on world
currency markets and not accepted by (or available to) trading partners.
Ruble inconvertibility, along with an arbitrary system of price setting,
meant that the prices used in foreign transactions (valuta rubies) bore little
relation either to relative scarcities in the domestic economy or to world
market prices. There was, therefore, no common scale of value through
which the potential advantages or disadvantages of trade could be meas-
ured. In the absence of an effective way to assess the costs and benefits of
trade, bilateral agreements had to be negotiated with trading partners,
balanced usually in terms of some approximation of world market prices.
Balanced bilateral agreements limit the volume of trade. If trade be-
tween any two countries must be balanced, trade volume is dictated by the
demand of the country desiring to trade the lesser amount of goods.
Unlike capitalist economies, where the gains from trade are obvious
from comparisons of domestic and foreign prices, what goods should be
traded and with what countries is not clear in the administrative-command
economy. Internal prices themselves may not reflect domestic relative
scarcities, and internal prices are difficult to compare with foreign prices
Table 9.1 THE PATTERN OF SOVIET TRADE
(a) THE COMMODITY COMPOSITION OF SOVIET EXPORTS

Percentages of Total Exports
1950 1955 1960 1965 1970 1975 1977 1982 1986
Machinery 11.8 17.5 20.5 20.0 21.3 18.5 18.7 12.9 15.0
Fuels and energy 3.9 9.6 16.2 17.2 15.6 31.4 35.0 52.1 47.3
Metal, ores, minerals 12.3 18.6 21.6 23.2 21.5 17.0 13.1 5.5 8.4
Chemicals, fertilizer, rubber 4.0 2.7 2.9 2.8 3.5 3.5 2.8 2.5 3.5
Construction products 0.2 0.5 0.3 0.5 0.6 0.6 0.5 0.1
Forest products, paper 3.0 5.0 5.5 7.2 6.5 5.7 5.0 2.4 3.4
Fibers
Agricultural raw materials
Grain and oilseed
Sugar
Other foodstuffs
11.2
3.8
12.9
0.9
3.3
10.1
1.9
8.6
0.7
2.5
6.4
2.0
8.6
0.5
3.8
5.1
1.3
3.4
0.6
4.3
3.4
1.0
3.3
0.8
4.1
3.0
0.5
1.6
0.07
2.0
3.2
05
1.1
0.05
1.4
l 2.8
1.7
1.4
Cloth, clothing, shoes

Small consumer durables
Other consumer manufacturing
Unclassified
2.2
0.2
2.4
27.7
1.5
0.2
1.4
19.0
1.2
0.8
0.8
8.8
0.8
0.7
0.8
11.8
0.7
0.9
1.1
15.5
0.5
1.1
1.5
12.9
0.4
0.9
1.4
15.7
ro 21.0
(b) THE COMMODITY COMPOSITION OF SOVIET EXPORTS

Percentages of Total Exports
1950 1955 1960 1965 1970 1975 1977 1982 1986
Machinery 21.5 30.2 29.7 33.4 35.1 33.2 37.5 34.4 40.7
Fuels and energy 11.5 8.1 4.2 2.5 2.0 3.9 3.6 4.6 4.6
Metal, ores, minerals 15.1 16.6 17.0 10.0 10.7 12.5 10.2 9.9 8.3
Chemicals, fertilizer, rubber 6.9 3.4 6.0 6.2 5.7 4.7 4.4 4.4 5.1
Construction products 1.4 0.6 0.8 0.7 0.4 0.3 0.4 n.a. n.a.
Forest products, paper 3.9 3.0 1.8 1.9 2.2 2.1 1.8 1.5 1.3
Fibers 7.8 5.4 6.4 4.4 4.8 2.4 2.7 1.5 1.3
Agricultural raw materials 0.4 2.2 2.2 1.0 2.0 1.4 1.7 1.6
l
Grain and oilseed 1.0 0.8 1.0 5.0 1.1 7.4 3.4
Sugar 3.1 2.8 2.3 3.8 3.4 5.9 6.1
Other foodstuffs 11.9 16.3 9.7 12.0 11.1 9.1 10.2
]"'
Cloth, clothing, shoes 5.6 3.8 13.8 9.3 12.3 8.9 8.6 39.0
Small consumer durables 0.07 0.2 0.5 0.2 0.3 0.1 1.4
Other consumer manufacturing 1.7 0.8 3.0 4.7 5.7 3.9 4.2
Unclassified 6.5 5.5 1.5 5.0 3.0 4.0 5.0
Sources: Computed from M. R. Dohan, "Export Specialization and Import Dependence in the Soviet Economy, 1970-77,"
in U.S. Congress, Joint Economic Committee, Soviet Economy in a 7ime of Change (Washington, D.C.: U.S. Government
Printing Office, 1979), vol. 2, pp. 370-371; Vneshnaia torgovlia SSSR v 7982 g !Foreign trade of the USSR in 1982). p. 18;
and Goskomstat, Narodnoe khoziaistvo SSSR za 70 let IThe national economy of the USSR over 70 yearsl (Moscow:
Finansy i Statistika, 1987). p. 647.
212
due to the lack of appropriate rates of exchange. Even if there were

substantial gains to specialization of production and exchange (say, trad-
ing Soviet machines for Bulgarian consumer goods) due to large differ-
ences in costs of production, this would not be evident to foreign trade
planners. An important pressure in favor of trade expansion is absent,
namely, a clear appreciation of the fact that certain products can be
obtained abroad with less sacrifice of resources than if produced domesti-
cally.
Administrative-command trade authorities sought to remedy this situ-
ation by developing criteria-Foreign Trade Efficiency Indices (FTEI)-for
evaluating on a rational basis exports and imports. 9 The FTEI were used
within COMECON after the mid-1960s to provide rules for calculating
the ratios of domestic to foreign costs of potential export and import
items.
The difficulty of devising appropriate financial arrangements to han-
dle deficits is a second internal impediment to trade in the administrative-
command economy. Since a nonconvertible currency cannot be used in
payment for goods and services, trade with each partner must balance. If
not, the buyer must pay in gold or convertible Western currencies or
arrange credit. In contrast, if the United States were to purchase more from
Canada than Canada buys from the United States, Canada would be
willing to accept U.S. dollars either for purchases in the United States or
for use in other countries where dollars are readily acceptable at the
establishi:!d rate of exchange. Thus, the U.S. trade deficit with Canada is
automatically financed, and a trade imbalance is possible. For example, if
the Soviet Union had a trade deficit with Poland, the Soviet Union could
not automatically finance the deficit by paying in rubies. Insofar as Poland
could not use rubies to freely purchase what it wanted from the Soviet
Union or another country, they were of no value to the Polish trade
authorities. The tendency, therefore, was to balance transactions with all
countries, even though a "rational" trading plan would call for surpluses
or deficits vis-a-vis individual trading partners. In this manner, trade was
restricted to the amount that one trading partner was willing to accept
from the other in the form of barter transactions.
PROBLEMS OF ECONOMIC INTEGRATION
Economic integration is a major factor behind the expansion of trade in

the West. The postwar period saw a dramatic reduction in tariff barriers,
the creation of common markets, and the removal of nontariff-barriers.
The administrative-command economies, under the leadership of the
Soviet Union, made some attempts at parallel economic integration within
the Eastern bloc, but these efforts were a notable failure. The inability to
achieve economic integration provides yet another explanation for the
administrative-command system's underutilization of trade potential.
The Council for Mutual Economic Assistance, COMECON, was es-
tablished in 1949 on the initiative of the Soviet Union for the purpose of
integrating the socialist planned economies of Eastern Europe with the
Soviet Union through the specialization of trade and production among
member countries. 10 Trade with COMECON members accounted for
more than 50 percent of Soviet foreign trade throughout the postwar era
(see Table 9.2). For a number of reasons, only a relatively limited degree
of integration among those countries was achieved. 11
First, in spite of economic and political pressure for integration, the
countries of Eastern Europe focused on developing their own diversified
industrial economies, including an adequate base of heavy industry. 12
During the postwar era, the COMECON countries were not content to
specialize in specific product lines, for fear of loss of national economic
independence. COMECON possessed no supranational authority over its
members. Each member had veto power, and various efforts to give
COMECON supranational powers were opposed by other members.
Second, although some coordination developed, there was no effective
development of integrated planning arrangements, and only preliminary
steps were taken to develop common yardsticks (such as common costs
and prices, and a convertible COMECON trading currency). 13
Since the economic mechanisms and pricing arrangements were similar
among the bloc countries, the trading partners conducted trade largely on
a bilateral basis, with five-year and one-year planning horizons. To facili-
tate multilateral clearing, the Bank for International Cooperation was
created in 1964. Most COMECON trade was conducted in transferable
rubles, a nonconvertible currency used basically in bilateral arrangements.
Trade in hard currencies was small, and multilateral clearing was min-
iscule.14 Where there was a bilateral deficit, it was normally settled by
adjusting future plan targets or by the shipment of "soft goods."
Bloc members determined their trade with little or no cost-benefit
frame of reference. The pricing of traded commodities was complicated by
the absence of internal prices suitable for valuing transactions among
member countries. As a general rule, the pricing principle for intrabloc
trade was to determine what the commodity would have cost in the world
market. Such calculations were not easy to make in the case of machinery
and equipment, since authorities could only guess at the price the com-
modity would command in world markets. This ambiguity led to contro-
versy between the Soviet Union and its COMECON partners over whether
the terms of trade were "fair" and to claims that the USSR paid too little
for manufactured imports from other COMECON countries. 15
TRADE WITH THE WEST
Soviet trade with capitalist countries increased significantly after World

War II. Soviet trade with capitalist countries increased from 19 percent in
1950 to 33 percent in 1988 (see Table 9.2). For several decades there was
a tendency for the share of Soviet foreign trade with socialist countries to
decline, and the share with capitalist countries to increase. This trend came
to an end in the early 1980s. The share of Soviet trade with capitalist
countries peaked in 1982 at 45 percent, declining thereafter to 33 percent
in 1986. 16 This trend was in part explained by a slackening of world oil
prices, caution on hard-currency debt, and a lack of willingness to become
heavily dependent on technology imports.
By the mid-1980s, the Soviet Union had a trade volume in hard
currency of roughly $50 billion.17The bulk of this hard-currency trade was
with developed countries. The most important trading partners were West
Germany, France, Italy, and Japan.
In the 1980s, Soviet hard-currency exports were dominated by oil and
oil-related products, natural gas, and military hardware. Of lesser magni-
tude were machinery and equipment and chemicals. On the import side,
agricultural products accounted for roughly one-third of hard-currency
imports, with machinery and equipment, chemicals, metals, and fuels
accounting for the remainder. Soviet trade with Western industrialized
Table 9.2 SOVIET FOREIGN TRADE TURNOVER-GEOGRAPHIC DISTRIBUTION IN SELECTED POSTWAR

YEARS
Percentages
1946 1950 1953 1956 1959 1962 1965 1970 1975 1982 1987
1. Socialist
countriesa 54.5 81 .1 83.2 75.7 75.3 70.2 68.8 65.2 56.3 54.3 66.9
COMECON
member
countries 40.6 57.4 59.3 49.6 52.0 57.5 58.0 55.6 51.7 49.1 61.7
2. Capitalist
countries 45.5 18.9 16.8 24.3 24.7 29.8 31.2 34.7 43.6 45.7 33.0
Industrial 38.4 15.1 14.5 16.8 15.9 18.1 19.3 21.2 31.2 31.6 21.8
Less developed
countries
(LDCs) 7.1 3.8 2.3 7.5 8.8 11.7 11.9 13.5 12.4 14.1 11.2
8 1ncludes China, Cuba, Vietnam, North Korea, and Yugoslavia.

Sources: Compiled from official Soviet foreign trade handbooks; in particular from annual editions of Vneshnaia torgovlia SSSR
(Foreign trade of the USSR( and Statisticheski ezhegodnik Stran-ch/enov S.E. II. (Statistical yearbook of the member countries
of S.E.V.(; Goskomstat, Narodnoe khoziaistvo SSSR v 1987 g (The national economy of the USSR in 1987) (Moscow: Finansy i
Statistika, 1988). pp. 610--611.
countries focused on growing Soviet demand for industrial technology and

grain and a Soviet drive to expand exports to pay for these imports.
Soviet trade with LDCs expanded from the very low levels of the
1950s, and varied from 11 to 14 percent with a decline to around 11 per-
cent in the 1980s. Asia was the dominant region, with India serving as the
dominant partner in the region. Of secondary importance was Africa, with
Latin America third. While Middle Eastern countries have been important
(the Soviet Union imports oil from OPEC for reexport), Argentina was
an important Latin American trading partner primarily for agricultural
products.
The Soviet Union exported primarily machinery and fuels to the LDCs,
while primary products and food products were the important imports.
BALANCE-OF-PAYMENTS PROBLEMS WITH THE WEST
On a formal level, the administrative-command economies did not suffer

from a balance-of-payments problem. Exports and imports were planned
by the state trade monopoly, and the foreign trade plan included a plan to
balance international payments. If the projected receipts of foreign (con-
vertible) currencies fall short of requirements, projected imports (or ex-
ports) are reduced (or increased) and a trade balance is thereby achieved.
In the case of intrabloc trade, there is usually no balance-of-payments
problem because exchange of commodities are balanced via bilateral
agreements. The balance-of-payments problem concerns supplies and de-
mands for convertible currencies.
On a more substantive level, the balance-of-payments problem is
related to the fact that (in the absence of credits) purchases from the West
are limited to the value of sales to the West. Unlike the Western countries,
the administrative-command economies cannot pay for the excess of pur-
chases over sales with their own currencies. But the East-bloc countries
have been unable to compete in Western markets because of quality and
service problems. The burgeoning demand for Western technology since
1960 meant that the Eastern countries had to purchase less from the West
than they desired.
The normalization of East-West trade relations beginning in the 1970s
served to ease (but not solve) balance-of-payments problems. The West
European countries were willing to grant government-guaranteed credits
to gain Eastern markets. Moreover, increases in the price of raw materials
raised the Soviet Union's earnings of convertible currencies in the 1970s
and early 1990s. 18 Eastern Europe's hard-currency debt grew by a factor
of almost 3 between 1975 and 1980, spurred by derente and Western
recessions. Much of this lending failed to yield hard-currency returns,
resulting in severe debt service problems; moreover, the recessions of the

late 1970s and early 1980s restricted international lending. These factors
slowed Western lending to the East in the mid-1980s. Between 1980 and
1985, East European hard currency debt rose only by 4 percent. 19
Several explanations have been advanced for the marketing difficul-
ties experienced by the administrative-command economies, especially in
the area of manufactured exports. The inflexibility of foreign trade plan-
ning and the lack of contact between the planned producer and the
Western consumer explain much of the problem. 20 The reluctance of
enterprises to produce for export and to produce spare parts can be
cited as other factors. One point raised by the East-bloc countries them-
selves is that some Western governments have discriminated against social-
ist exports, and such discrimination is cited as a cause of hard-currency
difficulties. 21
Soviet Foreign Debt

The growth of Soviet imports from the industrialized West was concen-
trated in two broad areas-industrial goods and services to support
the technological needs of the Soviet economy, and agricultural goods
(largely grain and fertilizer) to offset serious harvest reverses and to
stimulate agricultural productivity. Although Soviet hard-currency im-
ports grew sharply in the 1970s, the dollar volume of these imports peaked
in the early 1980s and declined through the mid-1980s. With a leveling
and thereafter a shrinkage of hard-currency exports through the mid-
1980s, the Soviet gross debt (that is, outstanding debt denominated in
hard currency but not including Soviet hard-currency assets in Western
banks) grew significantly. The gross debt of $11.5 billion in 1975 grew to
$22 billion in the early 1980s and to $38 billion by the mid-1980s. 22
The burden of Soviet hard-currency debt can be measured in different
ways. A common measure of debt burden is the debt service ratio: the
ratio of hard-currency debt payments (interest and principal payments)
to total hard-currency earnings. Judged by this indicator, the Soviet hard-
currency debt position was not of major concern in the early 1980s. The
pattern of the debt service ratio is of interest, however. From a low of just
over 10 percent in the mid-1970s, the Soviet debt service ratio grew to
23 percent in the mid-1980s.
A second measure of debt burden is the ratio of gross hard-currency
debt to hard-currency earnings. This ratio was 73 percent in 1980; it was
115 percent in 1985. The increase in Soviet hard-currency debt in the
mid-1980s was the result of a slackening of hard-currency export earnings
(in part the result of weak oil prices) and a resulting expansion of Soviet
borrowing, largely through commercial debt.
As the Soviet economy collapsed in the late 1980s, the Soviet debt
burden became unmanageable. As oil exports fell and central control over
currency earnings dissipated, the Soviet Union, like its Eastern European
counterparts, found itself unable to service its external debt.
THE ADMINISTRATIVE-COMMAND ECONOMY:

BARRIERS TO ATIRACTING CAPITAL
International trade is comprised both of flows of goods and services and

of capital. Capital flows have served as significant instruments of develop-
ment in the West. Most of the now-industrialized countries required at one
time substantial inflows of capital to finance their economic development.
The administrative-command economy has lacked the institutions to
attract direct foreign capital. In fact, the only capital that the Soviet
administrative-command economy succeeded in attracting was bank
loans, often guaranteed by foreign government. The direct foreign invest-
ment that played such an important role in other countries was lacking.
To attract direct foreign investment, the foreign investor requires an
equity ownership in the venture. Under prevailing property law in the
Soviet administrative-command economy, equity participation was pro-
hibited; in later years, it was restricted to minority ownership. Even when
foreign equity participation was permitted, laws protecting property rights
were weak and investment guarantees were deficient.
The few significant Soviet East-West ventures that were in effect prior
to the breakup of the Soviet Union required innovative, high-risk solutions
to the lack of equity participation. In some cases, complicated counter-
trade arrangements were used. In other cases, Western investors were
granted shares of production. Although a limited number of success stories
can be cited, the most striking feature was the virtual absence of working
East-West ventures in the Soviet administrative-command system.
The inability of the administrative-command system to attract exter-
nal capital can be cited as one of its major disadvantages. The lack of
external capital meant that investments had to be financed internally in
countries that were (and remain) relatively poor.
REFERENCES
1. For a general discussion of foreign trade in centrally planned economies, see
F. D. Holzman, International Trade Under Communism (New York: Basic
Books, 1976); and A. A. Brown, "Towards a Theory of Centrally Planned
Foreign Trade," in A. A. Brown and E. Neuberger, eds., International Trade

and Central Planning (Berkeley and Los Angeles: University of California
Press, 1968), pp. 57-93. For a survey of the literature and basic issues, see
F. D. Holzman, Foreign Trade Under Central Planning (Cambridge, Mass.:
Harvard University Press, 1974), chap. 1. For details of organizational ar-
rangements, see V. P. Gruzinov, The USSR 's Management of Foreign Trade
(White Plains, N.Y.: M. E. Sharpe, 1979). For details of recent organizational
changes, see S. Bozek, "The U.S.S.R.: Intensifying the Development of Its
Foreign Trade Structure," in U.S. Congress, Joint Economic Committee, So-
viet Economy in a Time of Change (Washington, D.C.: U.S. Government
Printing Office, 1979), vol. 2, pp. 506-525; and H. S. Gardner, Soviet Foreign
Trade: The Decision Process (Boston: Kluwer-Nijhoff, 1983); and U.S. Con-
gress, Joint Economic Committee, Gorbachev's Economic Plans, vol. 2
(Washington, D.C.: U.S. Government Printing Office, 1987), pp. 429-556.
2. For more detail on financial arrangements, see G. Garvy, Money, Financial
Flows, and Credit in the Soviet Union (Cambridge, Mass.: Ballinger, 1977),
pp. 152-155.
3. This discussion is based on L. J. Brainard, "Soviet Foreign Trade Planning,"
in U.S. Congress, Joint Economic Committee, Soviet Economy in a New
Perspective (Washington, D.C.: U.S. Government Printing Office, 1976), pp.
695-708; V. G. Treml, "Foreign Trade and the Soviet Economy: Changing
Parameters and Interrelationships," in E. Neuberger and L. Tyson, eds.,
Transmission and Response: The Impact of International Disturbances on the
Soviet Union and Eastern Europe (New York: Pergamon Press, 1980); H.
Levine, "The Effects of Foreign Trade on Soviet Planning Practices," in A. A.
Brown and E. Neuberger, eds., International Trade and Central Planning, pp.
225-276; and Metodicheskie ukazaniia k razrabotke gosudarstvennykh
planov ekonomicheskogo i sotsial'nogo razvitia SSSR [Methodological direc-
tives to working out the state plan of economic and social development of the
USSR] (Moscow: Ekonomika, 1980), chap. 25.
4. Treml, "Foreign Trade." This surplus is the consequence of overvalued ex-
change rates used to translate valuta ruble prices into domestic prices and the
rise in the world prices of Soviet raw material exports.
5. For empirical evidence on this point, see, for example, P. R. Gregory, Socialist
and Nonsocialist Industrialization Patterns (New York: Praeger, 1970), pp.
119-120; and F. L. Pryor, The Communist Foreign Trade System (Cambridge,
Mass.: MIT Press, 1963), chap. 1. According to Treml, "Foreign Trade," the
Soviets in the 1970s abandoned their "policy of trade aversion" and now have
a trade share of national income of 21 percent. The confusion lies in the
manner of translating Soviet trade data in valuta rubies into domestic prices,
and there is much controversy over this issue.
6. For a discussion, see M. R. Dohan, Soviet Foreign Trade in the NEP Economy
and Soviet Industrialization Strategy, unpublished doctoral dissertation, Mas-
sachusetts Institute of Technology, 1969.
7. P. G. Ericson, "Soviet Efforts to Increase Exports of Manufactured Products
to the West," in U.S. Congress, Joint Economic Committee, Soviet Economy
in a New Perspective, pp. 709-727; and H. H. Kravailis et al., "Soviet Ex-

ports to the Industrialized West: Performance and Prospects," in U.S. Con-
gress, Joint Economic Committee, Soviet Economy in a Time of Change, vol.
2, pp. 414-462.
8. F. D. Holzman, "Some Theories of the Hard Currency Shortages of Centrally
Planned Economies," in U.S. Congress, Joint Economic Committee, Soviet
Economy in a Time of Change, vol. 2, pp. 297-316.
9. For discussions of FTEI, consult L. Brainard, "Soviet Foreign Trade Plan-
ning," pp. 701-707; C. H. McMillan, "Some Recent Developments in Soviet
Foreign Trade Theory," Canadian Slavonic Papers, vol. 12, no. 3 (Fall 1970),
243-272; and A. Boltho, Foreign Trade Criteria in Socialist Economies (Cam-
bridge: Cambridge University Press, 1971). Typically, FTEI were calculated
separately for potential exports and imports. In simplified form, the import
index was
Z;X;.,q
X;,=-y-.-
'
where X;, = the index of import effectiveness of the product
V; = the foreign exchange cost of one unit of the product
Z; the domestic cost of producing one unit of the product
X;.,q = the ratio of foreign exchange receipts from the country in
question from exported goods to the domestic cost of
producing these goods
The import effectiveness index is easy to understand except for X;·eq• which
plays the role of a crude exchange rate. The Z values represent the internal
ruble prices of imported items, and the V values represent foreign prices
expressed in transfer (va/uta) rubies. These transfer rubies are determined
administratively and will vary for each of the USSR's trading partners. The
problem is translating these foreign prices into domestic prices-a role played
by exchange rates in capitalist countries. For this purpose, a form of oppor-
tunity cost measure is calculated for each trading partner. For the import
index, this is the average domestic cost of producing goods domestically to
earn the foreign exchange necessary to import the item from the particular
country. It is calculated by taking the foreign exchange earnings from Soviet
exports to that country and dividing by the domestic cost of producing these
goods for export.
The general principle underlying FTEI formulas is that foreign trade prices
should be translated into domestic prices by calculating the amount of domes-
tic production required to earn the foreign exchange (valuta rubies) needed to
purchase the foreign item (in the case of the FTEI, for imports). These
formulas bear only a distant resemblance to the relative cost comparisons
made by capitalist economies. To be an accurate index of the opportunity
costs of domestic production versus foreign production, internal prices must
reflect domestic relative scarcities, and the implicit exchange rates used in the
indexes must indicate the relative purchasing power of the foreign exchange
accounting units. These conditions are not met.
10. The members of COMECON were Bulgaria, Cuba (since 1972), Czechoslo-
vakia, the German Democratic Republic, Hungary, Poland, Rumania, Mon-
golia, and the Soviet Union. For a more extensive discussion of bloc trade, see
M. Kaser, COMECON, Integration Problems of the Planned Economies, 2nd
ed. (London: Oxford University Press, 1967); F. L. Pryor, The Communist
Foreign Trade System (Cambridge, Mass.: MIT Press, 1963); J.M. van Bra-
bant, East European Cooperation: The Role of Money and Finance (New
York: Praeger, 1977); and E. A. Hewett, Foreign Trade Prices in the Council
for Mutual Economic Assistance (Cambridge: Cambridge University Press,
1974).
11. For discussions of the degree of integration of the COMECON countries, see
Pelzman, "Trade Integration in the Council for Mutual Economic Assistance:
Creation and Diversion, 1954-1970," ACES Bulletin, vol. 18, no. 2 (Fall
1976), 39-60; and J.M. van Brabant, "Trade Creation and Trade Diversion
in Eastern Europe: A Comment," ACES Bulletin, vol. 19, no. 1(Spring1977),
79-98.
12. For a discussion of one particular but important case, see J. M. Montias,
Economic Development in Communist Rumania (Cambridge, Mass.: MIT
Press, 1967), chap. 4. Also see J.M. Montias, "Socialist Industrialization and
Trade in Machinery Products," in A. A. Brown and E. Neuberger, eds.,
International Trade and Central Planning (Berkeley and Los Angeles: Univer-
sity of California Press, 1968), pp. 130-158.
13. See M. Bornstein, "East-West Economic Relations and Soviet-East European
Economic Relations," in U.S. Congress, Joint Economic Committee, Soviet
Economy in a Time of Change, vol. 1, pp. 291-311; A. Smith, "The Council
for Mutual Economic Assistance in 1977: New Economic Power, New Politi-
cal Perspectives, and Some Old and New Problems," in U.S. Congress, Joint
Economic Committee, East European Economies Post-Helsinki (Washington,
D.C.: U.S. Government Printing Office, 1977), pp. 152-173; and M. Lavigne,
"The Soviet Union Inside Comecon," Soviet Studies, vol. 35, no. 2 (April
1983), 135-153.
14. For in-depth discussions, see van Brabant, East European Cooperation,
chaps. 3 and 4; and M. Kohn and N. Lang, "The Intra-CMEA Foreign Trade
System: Major Price Changes, Little Reform," in U.S. Congress, Joint Eco-
nomic Committee, East European Economies Post-Helsinki, p. 137.
15. M. Marrese and J. Vanous, Soviet Subsidization of Trade with Eastern Europe:
A Soviet Perspective (Berkeley: University of California Institute of Interna-
tional Studies, 1983); and J. Brada, "Soviet Subsidization of Eastern Europe:
The Primacy of Economics over Politics," Journal of Comparative Economics,
vol. 9, no. 1 (March 1985), 80-85; F. D. Holzman, "The Significance of Soviet
Subsidies to Eastern Europe," Comparative Economic Studies, vol. 28, no. 1
(Spring 1986), 54. Michael Marrese and Jan Vanous claimed that the USSR
at times has deliberately subsidized Eastern Europe by selling Soviet raw ma-
terials at low prices to gain political leverage. On the other hand, Josef Brada
finds that Soviet export pricing to Eastern Europe has been the natural result
of relative resource endowments. More recently, Franklyn Holzman, a long-

time analyst of Soviet foreign trade, suggested that Soviet transfers to Eastern
Europe may be explained by the fact that " ... CMEA has many of the
characteristics of a highly autarkic customs union."
Prior to 1975, COMECON prices were fixed over the life of long-term
national plans. According to the pricing formula agreed upon in Bucharest in
1958, the world market prices of 1957 were applied to intrabloc transactions
until 1965. For the planning period 1966-1970, average 1961-1965 world
market prices were used, and then average world prices of 1966-1970 were
used for the period 1971-1975. The explosion of energy and other raw
material prices in the 1970s caused the USSR to change this pricing formula,
as the former Soviet Union remains the dominant supplier of energy to
Eastern Europe. COMECON adopted in 1975 a new "sliding pricing for-
mula," whereby average world market prices of the preceding five years are
used. Thus, rising energy prices can be passed on to COMECON partners
gradually over time. Also, provision was made to pay for Soviet energy
deliveries above targeted levels in hard currencies at prevailing world market
prices. These changes led to a substantial improvement in the USSR's terms of
trade with Eastern Europe during the energy crisis of the 1970s.
16. TsSU, Narodnoe khoziaistvo SSSR v 1982 g [The national economy of the
UsSR in 1982] (Moscow: Finansy i Statistika, 1983), p. 534; and Goskomstat,
Narodnoe khoziaistvo SSSR za 70 let [The national economy of the USSR
over 70 years] (Moscow: Finansy i Statistika, 1987], p. 646.
17. See J. F. Mcintyre, "The USSR's Hard Currency Trade and Payments Posi-
tion," in U.S. Congress, Joint Economic Committee, Gorbachev's Economic
Plans, vol. 2, pp. 474-488.
18. Jan Vanous, "Soviet and Eastern European Foreign Trade in the 1970s: A
Quantitative Assessment," U.S. Congress, Joint Economic Committee, East
European Economic Assessment, part 2 (Washington, D.C.: Government
Printing Office, 1981), pp. 698-704; A. Lang and H. Kravalis, "An Analysis
of Recent and Potential Soviet and Eastern European Exports to Fifteen
Industrialized Western Countries," in Joint Economic Committee, Eastern
European Economies Post-Helsinki, pp. 1074-1075.
19. National Foreign Assessment Center, Handbook of Economic Statistics 1990
(Washington, D.C.: Central Intelligence Agency, 1990), p. 48.
20. For a case study of Soviet-manufactured exports, see P. Ericson, "Soviet
Efforts to Increase Exports of Manufactured Products to the West," in Joint
Economic Committee, Soviet Economy in a New Perspective, pp. 709-726.
21. R. Campbell and J. Hardt, eds., "The US-Soviet Agreement on Trade, Three
Interpretations," The ACES Bulletin, 15 (Spring 1973), 108-113. Also see
"Commercial Relations" (contributions by Jurew, Bresnick, and Prejelj), in
Joint Economic Committee, East European Economic Assessment, part 2, pp.
635-684.
22. Mcintyre, "The USSR's Hard Currency Trade and Payments Position,"
p. 482.
G. Adler-Karlsson, Western Economic Warfare: 1947-1967 (New York: Humani-

ties Press, 1968).
Q. V. S. Bach, Soviet Economic Assistance to the Less Developed Countries: A
Statistical Analysis (New York: Oxford University Press, 1988).
A. Boltho, Foreign Trade Criteria in Socialist Economies (Cambridge: Cambridge
J. C. Brada, ed., Quantitative and Analytical Studies in East-West Economic
Relations (Bloomington: Indiana University Press, 1976).
A. A. Brown and E. Neuberger, eds., International Trade and Central Planning
(Berkeley and Los Angeles: University of California Press, 1968).
R. Campbell and P. Marer, eds., East- West Trade and Technology Transfer
(Bloomington, Ind.: International Development Research Center, 1974).
C. C. Carvounis and B. Z. Carvounis, U.S. Commercial Opportunities in the
Soviet Union (New York: Quorum Books, 1989).
M. R. Dohan, Soviet Foreign Trade in the NEP Economy and Soviet Industrialization
Strategy, unpublished doctoral dissertation, Massachusetts Institute of Tech-
nology, 1969.
Z. Fallenbuchl and C. H. McMillan, eds., Partners in East-West Economic Rela-
tions: The Determinants of Choice (London: Pergamon Press, 1980).
C. Fogarty and K. Tritle, "Moscow's Economic Aid Programs in Less-Developed
Countries: A Perspective on the 1980's," in U.S. Congress, Joint Economic
H. S. Gardner, Soviet Foreign Trade: The Decision Process (Boston: Kluwer-
Nijhoff, 1983).
M. I. Goldman, Soviet Foreign Aid (New York: Praeger, 1967).
G. Grossman, "U.S.-Soviet Trade and Economic Relations: Problems and Pros-
pects," ACES Bulletin, vol. 15, no. 1 (Spring 1973), pp. 3-22.
V. P. Gruzinov, The USSR's Management of Foreign Trade (White Plains, N.Y.:
P. Hanson, Trade and Technology Transfer in Soviet- Western Relations (New
York: Columbia University Press, 1981).
H. W. Heiss, "U.S.-Soviet Trade Trends," in U.S. Congress, Joint Economic
E. A. Hewett, Foreign Trade Prices in the Council for Mutual Economic Assistance
(Cambridge: Cambridge University Press, 1974).
- - - , "Most-Favored Nation Treatment in Trade Under Central Planning,"
Slavic Review, vol. 37, no. 1 (March 1978), 25-39.
F. D. Holzman, "East-West Trade and Investment Policy Issues," in United States

International Economic Policy in an Interdependent World (Washington,
D.C.: U.S. Government Printing Office, 1971), pp. 363-395.
---,"Foreign Trade," in A. Bergson and S. Kuznets, eds., Economic Trends in
the Soviet Union (Cambridge, Mass.: Harvard University Press, 1963),
pp. 283-332.
- - - , "Foreign Trade Behavior of Centrally Planned Economies," in H.
Rosovsky, ed., Industrialization in Two Systems: Essays in Honor of Alex-
ander Gerschenkron (New York: Wiley, 1966).
---,Foreign Trade Under Central Planning (Cambridge, Mass.: Harvard Uni-
versity Press, 1974 ).
---,International Trade Under Communism (New York: B~sic Books, 1976).
- - - , "The Significance of Soviet Subsidies to Eastern Europe," Comparative
Economic Studies, vol. 28, no. 1 (Spring 1986), 54-65.
M. Kaser, COMECON: Integration Problems of the Planned Economies, 2nd ed.
(London: Oxford University Press, 1967).
M. Lavigne, "Soviet Trade with LDC's," in U.S. Congress, Joint Economic Com-
mittee, Gorbachev's Economic Plans, vol. 2 (Washington, D.C.: U.S. Gov-
ernment Printing Office, 1987), pp. 504-531.
J. F. Mcintyre, "Soviet Efforts to Revamp the Foreign Trade Sector," in U.S.
Congress, Joint Economic Committee, Gorbachev's Economic Plans, vol. 2
- - - , "The USSR's Hard Currency Trade and Payments Position," in U.S.
Congress, Joint Economic Committee, Gorbachev's Economic Plans, vol. 2
C. H. McMillan, ed., Changing Perspectives in East- West Commerce (Lexington,
Mass.: Heath, 1974).
- - - , Multinationals from the Second World: Growth of Foreign Investments
by Soviet and East European State Enterprises (London: Macmillan, 1987).
A. Malish, Jr., United States-East European Trade: Considerations Involved in
Granting Most-Favored-Nation Treatment to the Countries of Eastern
Europe (Washington, D.C.: United States Tariff Commission, Staff Research
Studies, no. 4, 1972).
P. Marer, Soviet and East-European Trade (1946-1969): Statistical Compendium
and Guide (Bloomington: Indiana University Press, 1972).
M. Marrese and J. Vanous, Soviet Subsidization of Trade with Eastern Europe: A
Soviet Perspective (Berkeley: University of California Institute of Interna-
tional Studies, 1983).
J. M. Montias, Economic Development in Communist Rumania (Cambridge,
Mass.: MIT Press, 1967), chap. 4.
B. Parrott, ed., Trade, Technology and Soviet-American Relations (Bloomington:
Indiana University Press, 1985).
F. L. Pryor, The Communist Foreign Trade System (Cambridge, Mass.: MIT Press,
1963).
J. Quigley, The Soviet Foreign Trade Monopoly: Institutions and Laws (Colum-
bus: Ohio State University Press, 1974).
G. A. Smith, Soviet Foreign Trade: Organization, Operations, and Policy, 1918-
1971 (New York: Praeger, 1973).
A. C. Sutton, Western Technology and Soviet Economic Development 1917 to
1930 (Stanford, Calif.: The Hoover Institution, 1968).
- - - , Western Technology and Soviet Economic Development 1930 to 1945
(Stanford, Calif.: The Hoover Institution, 1971).
- - - , Western Technology and Soviet Economic Development 1945 to 1965
(Stanford, Calif.: The Hoover Institution, 1973).
V. G. Treml, "Foreign Trade and the Soviet Economy: Changing Parameters and
Interrelationships," in E. Neuberger and L. Tyson, eds., Transmission and
Response: The Impact of International Disturbances on the Soviet Union
and Eastern Europe (New York: Pergamon Press, 1980).
U.S. Congress, Joint Economic Committee, "Foreign Economic Activities," in
Soviet Economy in a New Perspective (Washington, D.C.: U.S. Government
Printing Office, 1976), part 3.
- - - , "Foreign Economic Activities," in Soviet Economy in a Time of Change
(Washington, D.C.: U.S. Government Printing Office, 1979), vol. 2, part 4.
- - - , "Foreign Economic Relations," in East European Economies Post-Hel-
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- - - , "Foreign Economy," in Soviet Economic Prospects for the Seventies
(Washington, D.C.: U.S. Government Printing Office, 1973), part 7.
- - - , Soviet Economy in the 1980's: Problems and Prospects (Washington,
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et al., and part VIII.
J.M. van Brabant, East European Cooperation: The Role of Money and Finance
(New York: Praeger, 1977).
J. Wilczynski, The Economics and Politics of East-West Trade (New York:
Praeger, 1969).
P. J. D. Wiles, Communist International Economics (Oxford: Blackwell, 1968).
T. Wolf, U.S. East-West Trade Policy (Lexington, Mass.: Heath, 1973).
- - - , "Estimating 'Foregone· Gains' in Soviet-East European Foreign Trade: A
Methodological Note," Comparative Economic Studies, vol. 27, no. 3 (Fall
1985), 83-98.
THREE
••
REFORM AND
CHANGE IN THE
SOVIET ERA
227
TEN
••
The Administrative-
Command Economy:
Growth and Performance
L e performance of the administrative-command economy has been an

issue of major interest and complexity.
We now know that in spite of what had always been viewed as
impressive rates of economic growth in the early years, lagging economic
performance became the central reason for economic reform in the former
Soviet Union. Indeed, as we shall see, the dismantling of the old economic
system in the Gorbachev era was a direct response to stagnation, a state
of affairs that would have surprised Soviet leaders of earlier eras. How
serious was the economic decline, and more importantly, what were its
causes?
The Soviet version of the administrative-command system had always
been viewed as a prototype of the command economy. 1 In spite of all of
the difficulties of generalizing from a single case, the Soviet economy was,
after all, the most important example of this type of economy. To what
degree were the outcomes of the Soviet economic experience a direct result
of the command arrangements and the policies implemented under these
arrangements?
229
230 Reform and Change in the Soviet Era
A series of Soviet leaders presented their system as one capable of

economic performance far better than that of capitalist competitors. The
administrative-command system, its leaders argued, was capable of high
rates of economic growth and significant increases in levels of consumer
well-being, while avoiding the inequalities of the old capitalist order. To
what extent were these promises kept, and where they were not kept,
where should the blame be placed?
As a world power, the former Soviet Union was a potential threat to
the West. In the years following World War II, while the performance of
the economy was a subject of ongoing discussion and debate, the Soviet
military arsenal was an important ingredient in the balance-of-power
equation. The issue of Soviet economic strength, whether it be in the
military sphere or in other areas of potential rivalry, such as international
trade, was a major theme.
As we examine the issue of Soviet economic performance, we ap-
proach it with many questions in mind; thus we must understand it from
a variety of different perspectives. Assessing the extent of military achieve-
ment is a very different task from comparing Soviet economic performance
to that of the United States or Japan. Whatever our comparisons, however,
we focus on two critical issues: the nature of Soviet performance and the
major forces contributing to this record.
PROBLEMS OF MEASUREMENT
Measuring economic performance is a difficult and complicated task for a

variety of reasons. An understanding of the record cannot be gained
without some appreciati'on of these problems and how they might be
handled in practice.
First, performance comparisons, regardless of the nature of the sys-
tems being compared, must be made with due recognition of the difficulty
of selecting performance criteria in an unambiguous manner. 2 For exam-
ple, economic growth (the rate of growth of output) is a popular and very
specific indicator of the performance of an economy. However, as we will
see, estimates of growth rates can be dramatically affected by the choice
of price weights used when different types of physical units of output are
aggregated. Thus even when we choose what would seem to be a techni-
cally defined and well-understood measure of performance, measurement
problems can make comparisons difficult. It is even more difficult to
measure less easily quantifiable performance criteria, for example, envi-
ronmental quality. In many cases, "objective" indicators are in fact quite
subjective.
The Administrative-Command Economy: Growth and Performance 231
Second, suppose we select a series of performance criteria, such as

economic growth, equity of income distribution, and levels of consumer
well-being. How can we rank one country against another unless one
economy outperforms the other economy in all categories? Suppose that
we find the Soviet Union outperformed the United States in terms of
economic growth and equity of income distribution, but that the United
States outperformed the Soviet Union in all other categories. Which system
should receive the higher rating? The answer, of course, depends on the
relative importance of the various chosen performance criteria, and this is
a matter of individual judgment rather than objective economics. It is not
possible, therefore, to have a single conclusion in spite of the careful
selection of properly calculated performance indicators.
Beyond these general sorts of problems, performance comparisons
always involve myriad special-and frequently quite technical-issues.
Economists use prices for aggregation. But what is measured by different
prices can be a matter of complexity. Rather than discuss each of these
issues in isolation from their context, we treat them as the need arises
when the different performance indicators are discussed.
A second issue is that of new information. During and after the era of
glasnost in the latter half of the 1980s, a great deal of new statistical
information surfaced. The quality and impact of this information is very
uneven. In some cases, there have been considerable revisions of previously
estimated Soviet performance indicators. In other cases, there have been
minimal changes. However, in all cases, the reader should be sensitive to
these issues and especially those areas where further changes are likely in
the future. Here, as in the case of specific technical issues, we deal with the
matter of new information as it arises in the indicators that we examine.
In light of the many difficulties of assessing performance, we adopt a
compromise solution. We will examine a series of commonly accepted
performance indicators, specifically economic growth, static and dynamic
efficiency, the equity of income distribution, consumer well-being (private
and public goods), economic stability (inflation and unemployment), and
finally, selected nonconventional indicators such as military strength and
environmental quality.
SOVIET ECONOMIC GROWTH
Although it is not widely recognized, measures of the long-term growth of

real GNP are sensitive to the choice of price weights used in the process
of aggregation. If one measures the growth rate of an economy that has
successfully transformed itself into an advanced industrial country, the
computed rate of economic growth will frequently be much higher if

preindustrialization price weights are used. The phenomenon of index
number relativity, or the "Gerschenkron effect," derives from the work of
Alexander Gerschenkron who analyzed the problem in early studies of
Soviet economic growth. 3
Index number relativity is an important issue in assessing the magni-
tude of growth in the 1930s. What is the nature of the problem?
In the course of industrialization, a negative correlation exists between
the rates of growth of sector outputs and the rates of growth of sector
prices. The fastest-growing sectors, machinery, electricity, and transporta-
tion equipment, all tend to experience relative declines in prices (relative to
the slowly growing sectors such as food products) as advanced technology
is introduced· and economies of scale are achieved. Thus in measuring
economic growth, if constant preindustrialization prices are used, the most
rapidly expanding sectors will receive large relative weights, whereas other
sectors will receive smaller relative weights. This same logic would apply
to comparisons of the relative size of total output in two economies, one
"industrialized" and the other "backward." To assist the reader in appreci-
ating this point, we provide an example in the end-of-chapter references. 4
To what extent did this problem affect estimates of the output of the
Soviet and American economies? In his pioneering study of Soviet eco-
nomic growth, Abram Bergson concluded that the annual rate of growth
of real Soviet GNP between 1928 and 1937 was 11.9 percent using the
preindustrialization prices of 1928 and 5.5 percent when using the postin-
dustrialization prices of 1937. 5 This is an important difference and yet the
issue is even more complicated. If we wish to compare early Soviet rates
of economic growth with those of the United States, comparable estimates
of American growth in preindustrialization prices are not available. 6 What
then, is the true rate of economic growth of the Soviet Union or the United
States? There is in fact no single true rate but rather a series of rates, one
for each set of prices. This issue has been especially important for our
analysis of the Soviet Union in the 1930s, a period when there were rapid
structural changes and hence expected shifts in relative prices. Although
the problem exists in subsequent periods, the magnitude of its impact is
small.
In this chapter we analyze "comparable" Soviet and Western growth
rates. We use series generated with postindustrialization price weights and
examine Soviet rates calculated from recomputed series of Soviet GNP
using Western definitions to ensure a measure of comparability. 7 We
include former official estimates of net material product, which differs
from Western concepts of output by its exclusion of services not directly
associated with physical production. Finally, we include recent computa-
tions based upon new evidence to assist in our reassessment of the Soviet
past.
In Table 10.1 we supply traditional growth estimates of tsarist GNP
(1885-1913), of Soviet real GNP during the plan era (1928-1984), and of
the United States between 1834 and 1984. The Soviet figures in this table
are based on estimates by Abram Bergson, which have been the most
widely accepted Western estimates of Soviet economic growth. Bergson's
figures are applicable through 1958. Estimates from the Central Intelli-
gence Agency (CIA) are available for the entire postwar era and are used
to update the Bergson series. 8 We examine these series, after which we turn
to issues of recomputation in the postcommand era. What conclusions can
be drawn from Table 10.1?
It is evident that Soviet growth since 1928 has been more rapid than
American growth during the same period. In these estimates, the average
annual rate of growth of the Soviet economy between 1928 and 1984 was
4.3 percent, whereas the rate of growth for the United States between 1929
and 1984 was 3.1 percent. The performance comparison is more favorable
to the Soviet case if one looks at "effective years. " 9
The Soviet growth rate during the postwar period (1950-1984) of 4.4
percent exceeded the comparable American rate of 3.4 percent (1950-
1984).
Soviet economic growth in the postwar period has been declining from
a high of 6.0 percent between 1950 and 1960 to 3.7 percent between 1970
and 1980, dropping further to 2 percent between 1980 and 1984. It is
important to note that this steady decline meant that the overall Soviet
growth rates represent a combination of higher earlier growth rates with
substantially slower recent growth rates.
The official Soviet estimates of growth of net material product in
constant prices are much larger than American estimates of Soviet growth
using Western GNP concepts and different price weights. Such differences
are greatest for the period 1928-1940. This partially can be explained by
the Soviet use of preindustrialization price weights, that is, prices from
1926-1927, which the Soviets continued to use until 1950.
U.S. growth rates during the early periods of industrial transformation
are closer to the Soviet plan period rates than are the twentieth-century
American rates.
Whereas the Soviet growth rate of 6 percent between 1950 and 1960
was judged to be high by international standards, it was in fact exceeded
by other countries. The West German rate of growth between 1950 and
1960 was 7.8 percent per annum, while the Japanese rate for the same
period was almost 9 percent. 10 Moreover, in subsequent years, these coun-
tries were able to sustain generally high rates of economic growth.
Table 10.1 LONG-TERM GROWTH OF GNP IN THE USSR AND THE UNITED STATES
Annual Rates of Growth
American Official Soviet estimates

USSR estimates (net material product)
1885-1913 3.3c
1928-1940 5.4 8 14.6d
1950-1960 6.0c 10.1
1960-1970 5.1 c 7.0
1970-1980 3.7c 5.3
1980-1984 2.0c 3.2
1928-1984 4_3b 8.8
1928-1984, effective years 4.8b 9.7
1950-1984 4.4c 7.6
1860 1929 1958 and

United States prices prices 1972 prices
1834-1843 to 1879-1888 4.4

1879-1888 to 1899-1908 3.7 3.8
1899-1908 to 1929 3.4
1929-1950 2.5
1950-1960 3.3
1960-1970 3.9
1970-1984 3.0
1929-1984 3.1
1950-1984 3.4
a 1950 prices.
b Combined index, 1950 prices 1928-1950, 1970 prices thereafter.
c 1970 weights.
d 1926--1927 prices.
e 1913 prices.
Sources: A. Bergson, The Real National Income of Soviet Russia Since 1928
(Cambridge, Mass.: Harvard University Press. 1961). p. 210; H. Block, "Soviet
Economic Performance in a Global Context," in U.S. Congress. Joint Economic
Committee, Soviet Economy in a Time of Change (Washington, D.C.: U.S.
Government Printing Office, 1979). vol. 1, p. 135; P. Gregory, Russian National
Income, 7885-7973(Cambridge: Cambridge University Press. 1982). Table 1;
A. L. Vainshtein. Narodny dokhod Rossii i SSSR !The national income of Russia
and the USSR) (Moscow: Statistika, 1969). p. 119; Narodnoe khoziaistvo SSSR
v 1978 g !The national economy of the USSR in 1978) (Moscow: 1979), pp. 31-33;
National Foreign Assessment Center, Handbook of Economic Statistics 7984,
ER79-10274, Washington. D.C., August 1984, p. 22; The Economic Report of
the President (selected years); Dostizheniia sovetskoi vlasti za 40 let v tsifrakh
[The accomplishments of the Soviet regime over 40 years in numbers) (Moscow:
Gosstatizdat, 1957). p. 327; R. Gallman. "Gross National Product in the United
States, 1834-1909," Output, Employment and Productivity in the United States
After 1800 (New York and London: National Bureau of Economic Research,
1966), p. 26.
234
The Soviet rates of economic growth during the Soviet plan era ex-
ceeded the rates of growth during the tsarist industrialization era. The
Soviet early plan era did represent an acceleration of economic growth.
Economic Growth Revisited: What Is New?

The story told by the Soviet GNP figures is familiar: Soviet economic
growth was rapid during the early years, but as the economy matured, the
Soviet Union was unable to maintain its growth advantage. In fact, in its
last two decades, the Soviet economy produced mediocre but positive rates
of economic growth. Glasnost provided new evidence against which to test
the credibility of the GNP figures. We begin with a discussion of measure-
ment issues, new evidence on these issues, and the resulting recent growth
estimates. Finally, we present a variety of new estimates and reassess the
above conclusions. 11
The issue of bias in estimates of growth in the former Soviet Union is
not new. What is new is some evidence on the nature and possible magni-
tude of these biases, and whether bias problems have worsened in recent
years. Of specific interest here is the measurement of the growth of output,
and second, the nature of the resulting structure in terms of both the
sources and the uses of the national product.
Although there is considerable agreement on where the problems lie,
there is much less agreement on the magnitude of the problems, and only
modest ability to do anything about them. Put another way, the era of
glasnost did provide new evidence on many economic issues, but much less
than generally imagined.
Generally speaking, revised estimates of Soviet economic growth have
become available for the period since 1950. These estimates by both
Western and former Soviet scholars vary considerably and are markedly
lower than those provided by official Soviet sources (even during glasnost).
What accounts for the differences?
For the measurement of the growth of output, there are really two
basic problems. First, to the extent that estimates are based upon physical
series on output (tons of cement, kilowatt hours of electricity, and the like)
there may be underreporting of actual output and overreporting of prod-
uct quality. Most Western observers have tended to view physical series as
reasonably accurate and free of major changes in accuracy over time. On
the other hand, the problem of quality is viewed as very serious and
growing more serious over time. Later in this chapter when we examine
consumption, the matter of quality will be of great relevance. If a product
is useless and unsalable, there is a real issue about its inclusion in gross
output at any price, let alone the Soviet ruble price.
The second major issue is prices. We have already emphasized the

importance of price weights in the aggregation of output series. Recent
work has focused on two important issues. First, most analysts have
adjusted net material product to derive gross national product. In doing
so, capital charges and depreciation have been introduced, both unknown
in the former Soviet Union. In addition, there is the issue of inflation.
Analysts now believe that in many cases, the so-called constant ruble
prices used by Soviet statistical authorities were in many cases subject to
considerable amounts of unknown (hidden) inflation. Inadequate adjust-
ment for inflation possibly sharply overstates real rates of growth when
measured in rubies.
A major feature of the Soviet system has been a high investment ratio
(I/GNP) and high annual rates of growth of investment. However, in a
recent study of Soviet investment series done by Vladimir Kontorovich and
Boris Rumer, inflation in Soviet investment series for the 1970s was
estimated to be between 2 and 4 percent annually. 12 If these estimates are
reasonable, they will lower the real rate of growth of investment in this
period and naturally will lead to revisions of the investment shares ob-
served in the period.
In Table 10.2, we summarize several alternative estimates of contem-
porary (post-1950) Soviet economic growth. The interested reader can
pursue the details of these estimates in the sources cited. What message do
they provide?
There are obviously considerable differences among the estimates. For
example, the official Soviet series for the 1950s and the 1980s yield growth
rates double those of the CIA.
It is evident in all the series that a striking slowdown of Soviet growth
occurred, although the magnitude of the slowdown differs among the vari-
ous estimates. For example, if we compare the often criticized Brezhnev
Table 10.2 SOVIET ECONOMIC GROWTH: RECENT ALTERNATIVE ESTIMATES
Time period Soviet official Selyunin/Khanin* CIA Steinberg
1951-1960 10.3 7.2 5.1

1961-1965 6.5 4.4 4.8
1966-1970 7.8 4.1 5.0 4.8
1971-1975 5.7 3.2 3.1 2.1
1976-1980 4.3 1.0 2.2 1.6
1981-1985 3.6 0.6 1.8 1.0
*Selyunin and Khanin are Soviet economists who made unofficial estimates of Soviet-era
growth during the period of glasnost.
Sources: The first three columns are from Directorate of Intelligence, Revisiting Soviet
Economic Performance Under Glasnost: Implications for CIA Estimates (Washington. D.C.:
CIA, 1988). table 5; Steinberg estimates are from Dmitri Steinberg, The Sovfet Economy
1970-1990: A Statistical Analysis (San Francisco: International Trade Press, 1990).
era (1976-1980) with the 1950s (1950-1960), both the Soviet and the CIA
series show growth in the latter period to be roughly 43 percent of that in
the former. But if we compare the late 1970s with the early 1960s (one
might argue that the postwar Soviet economy had "normalized" by the
early 1960s) the slowdown demonstrated by the Soviet series is consider-
ably greater than that shown by the CIA series. If Soviet leaders in fact
looked at their own data to discover a slowdown, there was ample evidence.
All the alternative estimates show markedly slower growth perfor-
mance than the Soviet series, and generally slower than previous estimates.
If generally accepted, these new estimates will change our conclusions
about the administrative-command economy vis-a-vis the market econ-
omy in the postwar era. For example, while Soviet growth rates were
declining markedly in the 1960s and 1970s, American rates of growth,
while modest by world standards, were nevertheless fairly stable over the
long haul. This is ironic in light of the widespread concerns in the 1950s
that the rapidly growing Soviet economy would overtake the slowly grow-
ing American economy. As Soviet growth rates continued to decline, talk
shifted to the possibility that the Soviet economy might not be able to keep
pace with the industrialized economies of the West. Concern about the
Soviet economy overtaking Western economies largely disappeared in the
1960s and thereafter.
We do not yet have revisions that would allow us to make new
judgments about long-term Soviet rates of economic growth, that is, from
the beginning of the administrative-command economy in 1928. Although
this era is complicated by other issues, such as index number relativity, it
is reasonable to suggest that long-term rates of economic growth will
eventually be revised downward.
The main problem that we have with glasnost-era calculations is that
they, unlike the earlier estimates, fail to spell out specifically methodology
and assumptions. Although a significant downward revision of growth
estimates eventually may be required, the current scientific basis for the
downward revision remains weak.
Efficiency and Productivity

Throughout our analysis of the administrative-command economy, we
have emphasized that it followed an extensive growth strategy, that is,
input expansion to achieve output expansion. While this is an under-
standable pattern in less-developed economies, we know from historical
experience that there must be a transformation to intensive growth, to the
expansion of output from the better utilization of available inputs.
Dynamic efficiency is an important performance criterion, for it meas-
ures the rate at which a country is able to increase the efficiency of
resource utilization over time. Dynamic efficiency, or the operation of an
economy closer to its production possibilities frontier over time, can only
be measured imperfectly and imprecisely. The most common measure of
dynamic efficiency is the rate of growth per unit of combined inputs. A
less general measure would be the rate of growth of output per unit of a
single input; for example, capital or labor.
A simple way to measure the growth of output per unit of input is to
subtract the growth rate of the input from that of the rate of growth of
output. For example, if output grows at a rate of 5 percent annually and
combined inputs grow at 3 percent annually, the annual rate of growth of
output per unit of combined inputs would be 2 percent.
From this discussion, it is evident that total factor productivity pro-
vides only an indirect link to dynamic efficiency. Not only is it difficult to
measure inputs accurately (for example, including qualitative changes in
inputs), but also we are traditionally limited to the inclusion of conven-
tional inputs excluding, for example, improvements in management or in
scientific knowledge.
THE RECORD: LONG-TERM INTERNATIONAL COMPARISONS
In Table 10.3 we relate several measures of the rates of growth of factor

productivity in the Soviet Union, the United States, and selected other
countries, over the long run and for the postwar period. The table includes
Table 10.3 ANNUAL RATES OF GROWTH OF INPUTS AND PRODUCTIVITY: USSR, UNITED STATES, AND
SELECTED COUNTRIES
(1) (2) (3) (4) (5) (6) (7)
Panel A: Output per unit Labor Capital
Long-term Labor, Fixed Combined of combined productivity productivity
trends Output employment capital inputs input (1-4) (1-2) (1-3)
USSR (GNP)
1928-1966 5.5 2.2 7.4 3.5 2.0 3.3 -1.9
United States
(GNP)
1929-1969 3.3 0.8 2.0 1.1 2.2 2.5 1.3
United Kingdom
(GDP)
1925-1929 to
1963 1.9 0.8 1.8 1.1 0.8 1.1 0.1
France (GDP)
1913-1966 2.3 --0.5 2.0 0.2 2.2 2.8 0.3
Canada (GNP)
1926-1956 3.9 0.8 2.9 1.2 2.7 3.1 1.0
Norway (GDP)
1899-1956 2.8 0.3 2.5 0.7 2.1 2.5 0.3
Table 10.3 (Continued)
(1) (2) (3) (4) (5) (6) (7)
Panel B: Output per unit Labor Capital
Postwar Labor, Fixed Combined of combined productivity productivity
trends Output employment capital inputs input (1-4) (1-2) (1-3)
USSR
1950-1960 5.8 1.2 9.4 4.1 1.7 4.6 1.7
1960-1981 4.1 1.4 7.6 3.3 0.8 2.7 -3.5
1983-1987 2.0 0.5 5.8 2.7 --0.7 1.5 -3.8
United States
1948-1960 3.2 1.4 3.2 2.0 1.2 1.7 0.0
1960-1981 3.5 2.0 3.6 2.6 0.9 1.4 --0.1
Canada
1960-1980 4.6 2.9 4.9 3.6 1.0 1.7 --0.3
Belgium
1950-1962 3.2 0.6 2.3 1.2 2.0 2.6 0.9
Denmark
1950-1962 3.5 0.9 5.1 2.4 1.1 2.6 -1.6
France
1950-1962 4.9 .1 4.2 1.5 3.4 4.8 0.7
1960-1980 4.6 .8 5.0 2.3 2.3 3.6 -0.4
West Germany
1950-1962 7.3 2.0 6.9 3.5 3.8 5.3 0.9
1960-1980 3.8 .0 4.8 1.7 2.1 3.8 -1.0
Italy
1950-1962 6.0 .6 3.5 1.6 4.4 5.4 2.5
Netherlands
1950-1962 4.7 1.1 4.7 3.1 1.6 3.6 0.0
Norway
1950-1962 3.5 .2 4.2 1.6 1.9 3.3 --0.7
1960-1980 4.7 .5 4.1 1.7 3.1 4.2 0.6
United Kingdom
1950-1962 2.3 .7 3.4 1.7 0.6 1.6 -1.1
1960-1980 2.3 .4 3.4 1.5 0.8 1.9 -1.1
Japan
1953-1970 10.0 1.7 9.8 4.5 5.5 8.3 0.2
1970-1980 5.0 .9 8.4 3.5 1.5 4.1 -3.4
Greece
1960-1980 6.1 .0 6.2 2.2 3.9 6.1 --0.1
Sources: Panel A: R. Moorsteen and R. Powell, The Soviet Capital Stock (Homewood, Ill., Irwin, 1966), pp. 38, 166, 315,
'.'ll-362, 365; A. Becker, R. Moorsteen, and R. Powell, Soviet Capital Stock: Revisions and Extension, 1961-1967 (New Haven,
-~ .ri.: The Economic Growth Center. 1968), p. 11, 25, 26; Kuznets, Economic Growth of Nations, p. 74; E. Denison, Accounting
for U.-.ited States Economic Growth. 1929-1969 (Washington, D.C.: The Brookings Institution, 1974), pp. 54, 186; B. J.
Wattenbrg, ed., The Statistical History of the United States from Colonial Times to the Present (New York: Basic Books, 1976),
pp. 257--2&8. Panel B: Handbook of Economic Statistics (various years), employment; U.S. Department of Labor, Trends in
Multifactor Pro•1uctivity. 1948-81. Bulletin 2178, September 1983. p. 22; Growth Rates of Employment Reproducible Capital, and
Output: E. De11ison, Why Growth Rates Differ(Washington, D.C.: Brookings Institution, 1967), pp. 42, 190, and chap. 21; E.
Denison, Accounting for United States Economic Growth, 1929-1969 (Washington, D.C.: Brookings Institution, 1974), pp. 32,
58; E. Denison and W. Chung, How Japan's Economy Grew So Fast (Washington, D.C.: Brookings Institution, 1976), pp. 19, 31;
OECD, Department of Economics and Statistics, Flows and Stocks of Fixed Capital, 1955-1980 (Paris: OECD, 1983), pp. 1-39;
Handbook of Economic Statistics 1980, p. 47; World Tables, 1980, country tables and Table 5 (social indicators).
239
both the rates of growth of output per unit of combined (capital and labor)
input (column 5) and also the growth of output per unit of specific factor
input, namely labor productivity (column 6) and capital productivity
(column 7).
Looking at the long-term trends in Panel A, we see that the Soviet
Union distinguishes itself from the United States and other countries by a
more rapid growth of both labor and capital. In the USSR, about 65
percent of the long-term growth (Panel A, column 1 divided by column 4)
was accounted for by the growth of inputs, whereas in the United States
and other countries (the United Kingdom is an exception), a much smaller
portion of growth could be attributed to input expansion.
Thus Soviet economic growth was extensive rather than intensive, and
it was purchased at significant cost. Capital was expanded rapidly at the
expense of current consumption, and labor was expanded at the cost of
leisure.
The postwar trends in Panel B show that Soviet input growth was
indeed rapid by international standards, but it was not unique. Canada
(which experienced rapid labor force growth), West Germany (rapid
growth of both labor and capital), and Japan (rapid growth of labor and
capital) matched the Soviet postwar growth of combined inputs. It is
notable that in the case of West Germany (1950-1962) and Japan (1953-
1970) the payoff to rapid input growth was much higher (in terms of
output growth) than in the Soviet Union.
Turning to the rate of growth of output per unit of combined input
(Panel A, column 5), we see that the long-term Soviet rate (1928-1966)
was somewhat below, or roughly equivalent to, the long-term productiv-
ity growth rates in the United States, France, Canada, and Norway. It
is difficult to generalize on the basis of such narrow differences because
the impact of wartime destruction on Soviet productivity is hard to
gauge; such estimates are quite sensitive to measurement errors. For
the postwar period, while the average annual rate of growth of output
per unit of combined input in the Soviet Union from 1950 to 1960-1.7
percent-exceeded the American rate of 1.2 percent, it was only aver-
age as far as Western Europe was concerned. Moreover, it was exceeded
by France, West Germany, and Italy, and dwarfed by the Japanese rate.
The rate of growth of Soviet factor productivity was especially low after
1960.
The long-term growth of Soviet labor productivity (3.3 percent annu-
ally) was slightly above the rates in other countries examined and well
above that of the United Kingdom. Soviet labor productivity growth in the
early postwar period (4.6 percent annually) was rapid and far exceeded
the American rate.
After 1960, Soviet labor productivity growth dropped to 60 percent

of its earlier rate. At 2. 7 percent per annum, it exceeded the American and
English rates but was well below those of France, West Germany, Japan,
and Greece.
Soviet capital productivity trends are important to note. The long-term
rate of growth of Soviet capital productivity was -1.9 percent indicating
a rising capital/output ratio. Of the countries surveyed here, none experi-
enced a long-negative rate of growth of capital productivity. After 1960,
Soviet capital productivity declined at an annual rate of -3.5 percent.
Both the long-term and the postwar comparisons show dynamic effi-
ciency, as measured indirectly by the rate of growth of combined input, to
be neither exceptionally large or small when compared to trends in the
United States and other industrialized countries. In this context, Soviet
productivity would be described as average. But, the relatively low pro-
portion of Soviet output growth explained by productivity growth means
that Soviet economic growth was of the "high cost" variety.
To what extent might recent estimates of economic growth presented
in Table 10.2 change these patterns? As noted earlier, we have no new
evidence for the long term. However, for the contemporary postwar pe-
riod, slower rates of growth of output, if input patterns remained the
same, would worsen the trends that we have observed. At the same time,
if rates of growth of the capital inputs were in fact slower, this change
might offset the decline in observed output growth lessening observed
change. It is our suspicion that, insofar as labor inputs can be measured
with some accuracy, subsequent revisions are likely to lower Soviet pro-
ductivity growth.
Comparisons of Soviet long-term growth trends with those of other
countries is instructive for placing the Soviet experience in a global per-
spective. However, the contemporary growth experience, and especially
the reasons behind the declining rate of economic growth as seen in Table
10.2 are matters of great importance. The declining growth performance,
as we have emphasized, was a major factor leading to economic reform.
But, in the absence of meaningful reform, this declining performance
record ultimately led to the end of the economic system.
THE PRODUCTIVITY ISSUE
Although there is controversy surrounding the measurement of Soviet

economic growth, it is important to emphasize that even quite different
estimates demonstrate a continuing decline in the rate of growth of output
up to and following the collapse of the Soviet Union.
For the postwar period, the rate of increase of inputs (land, labor, and
capital) has declined. However, the rate of growth of output decreased
more than the decreases in the rate of growth of inputs. Although we
might expect lower levels of efficiency for an economy at lower levels of
economic development, it was always troubling in the Soviet case that the
transformation from extensive to intensive growth never occurred. Given
the difficulty of sustaining input growth, it was inevitable that the rate of
the Soviet Union's growth of output would decline.
In a major study of economic growth during the Soviet era, Gur Ofer
proposed a number of explanations for the Soviet growth malaise. 13
First, it has been argued that rates of growth of output are inversely
related to the complexity of the economy. Although it is difficult to define
the concept of complexity, it has always been argued that at early stages
of development, there are relatively few (and simply defined) products
produced by a relatively small number of enterprises. As the economy
grows, products with increasing variability are produced by a growing
number of enterprises making problems of coordination, especially in a
planned economy, increasingly difficult. Is there any evidence to support
this view?
In a recent theoretical analysis, Banerjee and Spagat demonstrate that
as an economy becomes more complex, where complexity is defined as the
number of intermediate products needed to produce a final product,
shortages become increasingly disruptive. 14 The authors argue that the
outcome of increased complexity is reduced static efficiency and increasing
difficulty in meeting consumer needs.
Banerjee and Spagat emphasize that empirical studies comparing
former Soviet industries with those in the West would be of great bene-
fit in attempting to find empirical support for the complexity hypo-
thesis. Indeed it may also be useful to consider alternative definitions of
complexity.
Second, Western observers of the Soviet system always argued that
incentives were inadequate. Although important, this concept is very
difficult to demonstrate with rigor. The relationship between incentives
and effort is not well developed in theory. Moreover, in the Soviet case,
while we can demonstrate neglect in the sphere of consumption, it is
difficult to relate the low level and slow rate of growth of consumption
with worker effort. However, the widely held conviction that lack of
material rewards explains part of the Soviet productivity malaise is prob-
ably correct.
Third, the Soviet emphasis on defense spending may have contrib-
uted to the productivity malaise. The very large share of the defense
sector in the Soviet economy detracted from consumer and alternative
investment spending. Moreover, it is evident that the consumer spin-off

from the defense sector was very limited despite Soviet efforts (especially
in the Gorbachev era) to produce consumer goods in the defense sector. It
was, therefore, a major factor inhibiting the growth of consumption.
Fourth, the issue of technology and productivity growth have been
center stage in our analysis of the causes of the Soviet slowdown. Consider
the evidence presented in Table 10.4.
Factor productivity declined throughout the postwar era. While labor
productivity remained positive, it also declined. Most important, capital
productivity became increasingly negative over time. These issues have
been the subject of a lengthy debate in the Western literature. What caused
the productivity slowdown?
Much of the literature involves the specification and estimation of a
production function relating inputs to outputs. Although the discussion is
technical and involves a number of complex measurement issues (notably
definitions of inputs, outputs, and technology), the basic results deserve
our attention.
In an early contribution to this literature, Martin Weitzman argued
that the problem involved the substitution of capital for labor. 15 Through-
out the postwar era, industrial capital grew at a much more rapid rate than
industrial labor. With such divergent rates of inputs growth, the success of
capital substituted for labor depends upon the technology (the production
function) of Soviet industry. If capital readily can be substituted for labor
(that is, the isoquant relating output to capital and labor inputs is rela-
tively flat), then the divergent rates of growth of inputs should not have a
significant impact upon output growth. If, however, it becomes increas-
Table 10.4 FACTOR PRODUCTIVITY IN THE SOVIET UNION

Average Annual Rates of Growth
1961-1970 1971-1980 1981-1985
Gross national product 6.2 3.8 1.8

Factor productivity .2 -.6 -1.2
Man hours 3.1 2.0 1.2
Capital -2.3 -3.1 -3.5
Industrial production 6.1 3.9 1.9
Factor productivity -.3 -.6 -1.4
Manhours 3.1 2.6 1.3
Capital -2.9 -3.0 -3.5
Note: Gross national product is defined as nonagricultural, nonservice GNP based

on 1982 ruble indexes at factor cost.
Source: Directorate of Intelligence, Handbook of Economic Statistics. 1991
(Washington, D.C.: CIA, 1991), Tables 35-36.
ingly difficult to substitute capital for labor (isoquants are approaching

"corner solutions"), then one would expect a decline in the rate of growth
of output. The substitutability of one input for another, in this case capital
for labor, is known as the elasticity of substitution.·~
Although Weitzman's early work suggested the possibility of a rela-
tively low elasticity of substitution of capital for labor, subsequent work
by Weitzman and others raised doubts. A recent study by Erkin Bairam,
who summarizes the discussion, claims that the elasticity of substitution
of capital for labor in the Soviet Union probably approached unity, sug-
gesting that problems of capital-labor substitution were not important
explanations of the growth slowdown. Bairam argues that in the aggre-
gate, there has been constant or decreasing returns to scale in Soviet
industry. 16 This recent evidence seems to confirm results found earlier by
Padma Desai, who argued that it was not a low elasticity of substitution
that was the explanatory factor but rather a declining growth rate of the
unexplained productivity residual. 17
Although this body of evidence helps to eliminate some possible ex-
planations of the Soviet growth slowdown, it leaves us not knowing what
in fact did cause the slowdown. Gertrude Schroeder, in a study of the
growth slowdown in the Brezhnev era, suggested a number of other
important causal factors. 18 First, she argues that after 1976, Soviet plan-
ners relaxed the growth of targets in an attempt to motivate managers to
take more initiative. Rather than increasing their levels of efficiency,
managers responded to this reduced pressure by introducing more slack
into the system. Schroeder also suggests that in the 1970s, the Soviet Union
experienced continuing difficulties in the distribution of key industrial raw
•A simple technical explanation of the substitution problem is as follows. The increase in output
(dQ) can be decomposed (assuming a linear homogeneous production function and other "usual"
assumptions concerning the shape of the production function) into that increase due to increases
in labor (L) and capital (K) inputs and a residual due to technical progress (n. Thus,
SQ SQ
dQ= SLdL+ SKdK+dT
Dividing through by Q yields
!!.Q__dL dK dT
Q -T/Ly+ T/K/(+T
where
SD L SD K
T/L = SL . Q and T/K = SK . Q
are the partial elasticities of output with respect to each factor input. If the elasticity of
substitution is less than unity, then it follows (Weitzman, "Soviet Postwar Growth," p. 679) that
TIL will increase if K grows more rapidly than L (definitely true in the Soviet case). Thus, the
weight of the slower-growing factor input (L) increases over time, while that of the faster-growing
input (K) declines. The growth rate of combined factor inputs declines over time, therefore
partially (or fully) offsetting the decline in the rate of growth of output.
materials, especially with transportation bottlenecks. Finally, she argues

that declines in worker morale may well have been important. This is an
issue widely noted by Soviet emigres.
SOVIET STATIC EFFICIENCY
Static efficiency refers to the efficiency of an economy at a given point in

time. Static efficiency is defined intuitively by Abram Bergson as "the de-
gree to which, equity apart, the community is, in fact, able to exploit the
opportunities that are open. " 19 The degree of static efficiency, therefore,
will depend on the stock of available technological knowledge and the ef-
fectiveness with which this stock is utilized, both of which serve to define
the economic opportunities open to the community at a given point in
time.*
How can we measure static efficiency? Unfortunately we can only
measure static efficiency indirectly by comparing the magnitude of output
that is derived from a unit of "combined" factor inputs at a given point in
time. This type of measurement is inexact because typically we are forced
to ignore forces that may be important; for example, quality differentials,
scale factors, cultural factors, and the like. In effect, when we compare
factor productivities at points of time across countries and draw static-
efficiency conclusions, we are assuming that underlying production condi-
tions are identical.
There is another measurement problem. To compute the relative mag-
nitudes (as opposed to rates of growth) of output per unit of combined
factor inputs, both outputs and inputs must be measured in a common
unit. Thus in a comparison of the Soviet Union and the United States, it is
•The problem of comparing the productivity performance of two countries at different levels of
development is illustrated in the figure below using the Production Possibilities Schedule (PPS).
The country at a higher level of development would have a higher PPS (aa) than the country at
a lower level of development (bb). If we define the PPS in terms of a combined unit of resources,
then both countries may be operating at maximum static efficiency (at points A and B), yet the
computed productivity at A will be greater than at B.
J.lli_
I
.:J
b 8
A
b a
Consumer goods
necessary to value the Soviet output in dollars or U.S. output in rubies.

The same problem arises for the measurement of inputs. As we have
emphasized, index number relativity will affect such measures because
output mixes and relative prices vary among different economies. What
one country produces in abundance at relatively low prices may well be
produced in smaller quantities at relatively higher prices by another coun-
try. In this manner, the relative GNP of one country valued in its own
prices will be smaller than when valued in the prices of another country.
A further problem in the Soviet case is that the combined inputs must
be computed using "synthetic" charges for capital since capital and land
did not generate rent or interest as would be the case in a market economy.
Although an arbitrary rate of return can be applied to a net value of capital
stock, the choice of this rate can significantly affect the outcome of the
productivity comparisons. 20
Despite all of the conceptual and measurement difficulties noted here,
we nevertheless think it important to examine available estimates. We
begin by examining evidence presented by Abram Bergson in the late
1970s (Table 10.5) in which the Soviet Union is compared to the United
States and several European economies.
According to this evidence, the Soviet economy in 1960 derived only
41 percent as much output per unit of combined input as did the American
economy, about 65 percent as much as France and the United Kingdom,
and roughly 4 7 percent of that achieved in Italy. Examination of the
comparisons for industry show the Soviet position to improve only some-
what, reflective of poor Soviet performance in agriculture and services.
Although it is possible that a substantial portion of the computed produc-
tivity differentials could be accounted for by input quality differences, and
by omitted factor inputs such as land or entrepreneurship, this seems
unlikely. 21
In a more recent study by Bergson, comparisons were made between
the Soviet Union and Western countries for the year 1975. 22 In this study,
Bergson uses the basic Cobb-Douglas production function to relate output
per worker to capital per worker and land per worker (all calculated
relative to the United States). Dummy variable techniques are used to iso-
late the effect of the economic system, whether capitalist or socialist. In his
conclusions, Bergson notes that output per worker in socialist countries
"is found to fall systematically short of that in Western mixed-economy
(WME) countries .... " 23 Specifically, the difference in output per worker
between the socialist and WME samples varies from 25 to 34 percent, the
socialist being lower than the WME countries, the amount depending on
the measurement assumptions used; for example, specific prices. 24
Table 10.5 NATIONAL INCOME PER UNIT OF COMBINED FACTOR INPUTS

United States= 100
Country National income Industry
United States 100 100

France 63 71
West Germany 65 69
United
Kingdom 64 61
Italy 47 60
Soviet Union 41 58
Note: Factor inputs are labor and reproducible capital using

1960 U.S. price weights.
Source: A. Bergson, Productivity and The Social System:
The USSR and The West (Cambridge, Mass.: Harvard
University Press, 1978), pp. 101, 111.
It is likely that ongoing recomputations of the Soviet national accounts

will lead to new studies of comparative fact productivities and hence some
reconsideration of the issue of static efficiency. In a recent study examining
some of these issues for the year 1985, Bergson presents evidence on gross
domestic product (GDP) per worker. 25 In this study, Bergson concludes
that GDP per worker in the Soviet Union in 1985 was 36.7 percent that
of the United States, while France was 81.4 percent, Italy 81.0 percent,
and Spain 73.7 percent. 26
The issue of static efficiency has been the subject of considerable
discussion and debate. In the Soviet case, is the relatively low static
efficiency a function of the economic system, a function of Soviet eco-
nomic policies, or a function of the level of economic development?
One could argue that low levels of output per unit of combined inputs
tend to be correlated with low levels of economic development, although
it is difficult to make such a case. To determine the extent to which low
Soviet static efficiency is related to the level of economic development (as
measured by some indicator such as per capita income) would require
information relating efficiency levels and levels of economic development.
Moreover, if one attempts to make hypothetical adjustments for the level
of development, the outcome in the Soviet case depends on which devel-
opment indicator one employs. After examining this matter, Bergson con-
cludes that "the low Soviet factor productivity does not seem fully
explicable in such terms. " 27 Also, it is not clear whether we would expect
Soviet static efficiency to improve (in relative terms) as the stage of
development advances, for the administrative-command economy's ability
to deal with growing complexity was never really demonstrated. At best,

the growth of Soviet factor productivity over time was modest when
compared to other industrialized countries. The Soviet Union did not
appear to dose its productivity gap as it dosed its development gap, a
result that one would expect if low productivity were primarily related to
low levels of economic development.
The issue of static efficiency may seem highly abstract to the reader. It
has been, however, the subject of much debate in the Western literature
and indeed raises fundamental issues about the strategy of Soviet economic
growth and the resulting costs of that growth. For example, two long-time
analysts of the Soviet economic experience, Peter Wiles and Alec Nove,
have argued that the Soviets may have deliberately sacrificed static effi-
ciency to achieve long-run political objectives. 28 Thus static efficiency may
have been thrown out to achieve rapid economic growth through political
control of the economic system and accompanying changes such as expan-
sion of the military and changes in property relations. These changes
would have been difficult under a slower marginalist approach.
Bergson has argued, however, that static efficiency and economic
development are not incompatible. 29 He points out that an economy with
greater static efficiency will produce a larger volume of output, and
consequently a larger volume of savings (with the same savings rate),
which will promote economic growth. Bergson does grant, though, that a
centrally planned economy may opt to autonomously increase the savings
rate through other measures such as the introduction of forced savings,
administrative controls, collectivization, and autarky, all of which may
reduce static efficiency yet generate more rapid economic growth at least
in the short run. However, these steps would be taken at the expense of
reducing living standards, a significant cost to be considered in the evalu-
ation of different economic systems. According to Bergson, the basic
question should be: to what extent could similar rates of economic growth
or slightly lower rates have been attained in the Soviet case through the
maximum utilization of resources (that is, static efficiency) without sacri-
ficing living standards?
One further aspect of the relative efficiency of the Soviet economy that
fails to show up in output or input measures is that such figures often
indicate output per unit of employed labor and capital inputs. 30 We always
assumed that in the Soviet Union, there was minimal aggregate unemploy-
ment. Thus while unemployment may be a major source of inefficiency in
market systems, planned systems are more likely to suffer from underem-
ployment. In a study of Soviet unemployment for the 1970s, Irwin Collier
and Paul Gregory found a lower bound on unemployment of 1.2 percent. 31
A final measurement problem worth noting is the issue of product

quality. Measures of efficiency that consider output per unit of combined
inputs can take little account of the quality of the output. We know that
this was a serious problem in the Soviet Union.
THE TECHNOLOGY ISSUE
Throughout the Soviet era, a great deal of attention was given to the issue
of technology. 32 Interest in technology issues increased during the Gor-
bachev era because it was often argued that productivity problems in the
Soviet economy were closely related to problems of generating and using
new ideas in the administrative-command economy. Moreover, as we will
see when we examine the content of perestroika, a major effort was made
to promote technological advancement, especially through civilian use of
the military sector.
Measuring Soviet technological achievement was always a very diffi-
cult task. In some cases, industry studies could be used, but generalizing
to the economy was difficult. Also, the characteristics of technology in a
particular case should depend in part on basic factor endowments. One
might expect the appropriate use of less advanced technology based upon
such considerations in a less-developed country.
Indirect measures of technology represent an alternative but imperfect
basis for judgment. Thus low factor productivity vis-a-vis other countries
may in part be accounted for by technology differences. However, the
relationship between technology and productivity is complex, and produc-
tivity differences that we observe may in fact be accounted for by other
problems; for example, our inability to accurately measure the quality of
factor inputs.
Further measures of the technology level (lead times to the utilization
of new technology, numbers of patents, etc.) supplement our under-
standing of the Soviet case, though none of these measures is completely
accurate.
Granted that no single adequate measure of technological perfor-
mance is available, it is nevertheless useful to consider indirect if imperfect
information.
First, we have noted that low levels of factor productivity are impor-
tant but imperfect sources of evidence on levels of technological achieve-
ment.
Second, sectoral studies have shown that "there is no evidence of a
substantial diminution of the technological gap between the Soviet Union
and the West in the past 15 to 20 years, either at the prototype/commercial

application stages or in the diffusion of advanced technology. " 33
Third, Soviet technological achievement was uneven. There were areas
(for example, metallurgy and welding) where Soviet methods were ad-
vanced. In other critical areas (computers, for example) the reverse was
true. It was estimated that the Soviet Union lagged behind the United
States in the development of computers by 9-15 years (mainframes), 4-10
years (microcomputers), and 8-10 years (macrocircuits). 34
Fourth, the Soviet Union relied heavily upon imports to sustain and
improve its level of technology. While such a posture might seem to be
quite rational as a country pursues economic growth and development, in
the Soviet case, there were problems. As Marshall Goldman has empha-
sized, growing complementarities among technologies may in fact make it
increasingly difficult to jump from behind and sustain lead positions
simply by importing new technologies. 35
Finally, implementation was a major problem in the Soviet system.
Evidence suggested that lead times between the granting of a patent and
its practical implementation were generally longer in the Soviet Union
than in Western industrialized nations. Moreover in a major study of
Soviet technology, Joseph Berliner identified many of the basic systematic
reasons for lack of diffusion of new ideas. 36 Put simply, the Soviet mana-
gerial system-that is, the rules of the game, the incentive arrangements,
and the framework of pricing-al~ mitigated against change at the enter-
prise level.
Our conclusion is that the technological achievements of the Soviet
industrial economy were modest but uneven. Moreover, in light of heavy
reliance on borrowing and the difficulties of internal diffusion, lead times
probably changed little in the Brezhnev and post-Brezhnev eras. Clearly
the problems of technology were critical in the Gorbachev era and remain
obstacles to transition in the 1990s.
EQUITY OF INCOME DISTRIBUTION
Another criterion of performance is the equity of income distribution. Of

all our criteria of performance, this is the most difficult to measure. In
addition to data problems, equity is an inherently subjective issue. Social-
ists have always favored a relatively more equal distribution of income,
while some argue that rewards must be differentiated to induce effort.
Moreover, in countries such as the United States, major differentials in
income distribution derive not from wage and salary differentials but
rather from those accruing from property ownership.
Traditionally the Soviets published very little data on income distribu-

tion. Although a number of Western experts analyzed available data, there
were always problems-in particular, the omission of certain groups at
both the upper and lower levels. However, early data did permit a number
of conclusions to be drawn.
From early evidence on industrial wage income, we can corrclude that
within industrial branches, Soviet wage differentials between highly paid
and low-paid workers during the early 1930s and 1950s were probably
greater than in the United States. But since the 1950s, Soviet differentials
narrowed to become, toward the end of the administrative-command era,
less than those in the United States. Although intercountry wage-differen-
tial comparisons are rather inexact, they do provide a useful indicator of
general trends and patterns. In general, the Soviet patterns tend to confirm
the notion that inequality during the early years of the socialist experience
would be quite consistent with Marxian thinking, greater equality to come
at a later stage.
Although comparisons of overall income distribution in the Soviet
Union with that of other countries is difficult, we provide some basic
observations based upon evidence gathered by Bergson and presented in
Table 10.6.
The distribution of income probably became more equal between the
late 1950s and the late 1960s. During this period there was a marked
reduction in industrial wage differentials.
The overall distribution of money income after taxes in the USSR in
1967 was more unequal than that in other planned socialist countries of
Eastern Europe.
The Soviet distribution of income was not very different from similar
distributions in a number of industrialized countries. The 1972-1974
Soviet distribution looked very much like the Swedish and Norwegian
after-tax distributions.
Contrary to the popular impression of the Soviet countryside, there
was apparently as much differentiation in the distribution of income
among the farm population as among the city population. 37
To what extent can our earlier views be confirmed by new evidence in
the era of glasnost? Fortunately new data pertaining to both wage and
income distribution were released in the late 1980s. Although these data
contain many of the problems discussed earlier (omission of some groups,
open-ended categories at the upper and lower end of the distributions,
absence of second-economy earnings), we nevertheless are fortunate to
have analysis of these new data by Michael Alexeev and Clifford Gaddy. 38
What does the new evidence (see Table 10. 7 for the basic data) suggest
about wage and income distribution in the Soviet Union?
Table 10.6 DISTRIBUTION OF INCOME, SOVIET UNION AND WESTERN COUNTRIES,

HOUSEHOLDS BY PER CAPITA HOUSEHOLD INCOME
Income share of
Lowest Lowest Highest Highest

10% 20% 20% 10%
USSR, nonfarm households,

before tax 1967 {McCauley) 4.4 10.4 33.8 19.9
USSR, urban households, after
tax 1972-1974 {Ofer-Vinokur) 3.4 8.7 38.5 24.1
All households
Australia, 1966-1967
Before tax 3.5 8.3 41.0 25.6
After tax 3.5 8.3 40.9 25.5
Norway, 1970
Before tax 3.5 8.2 39.0 23.5
After tax 4.7 10.5 35.6 22.4
United Kingdom, 1973
Before tax 3.5 8.3 39.9 23.9
After tax 4.2 9.7 38.3 22.7
France, 1970
Before tax 2.0 5.8 47.2 31.8
After tax 1.9 5.8 47.1 31.2
Canada, 1969
Before tax 2.2 6.2 43.6 27.8
After tax 2.8 7.2 41.3 25.7
United States, 1972
Before tax 1.8 5.5 44.4 28.6
After tax 2.3 6.5 42.5 26.8
Sweden, 1972
After tax 3.5 9.3 35.2 20.5
Source: A. Bergson, "Income Inequality Under Soviet Socialism," Journal of Economic

Literature, vol. 22, no. 3 (September 1984), 1070, 1072. Bergson uses the work of McCauley,
Ofer and Vinokur, and A. Sawyer in his comparisons.
Note: The posttax figures (except for Sweden) are calculated from the posttax/pretax ratios
for total household income (Bergson, p. 1072).
First, Alexeev and Gaddy conclude that "wage inequality in the Soviet
Union as a whole has remained relatively stable since 1968, with a slight
increase in inequality in the 1980s." 39 This evidence supports our prior
knowledge, although in this earlier evidence we did not know a lot about
what had happened after the 1960s.
Second, if one examines recent trends in the distribution of income
(excluding illegal income) for the entire country, there appears to be
Table 10.7 DISTRIBUTION OF SOVIET WORKERS AND EMPLOYEES, 1956-1986

By Wage and Salary Level (%)
Rubies earned March April March April March April

per month 1956 1968 1972 1976 1981 1986
Under 80 71.0 32.7 23.6 15.2 6.4 4.9

80-100 13.2 21.3 18.5 14.6 13.6 11.3
100-120 6.6 15.1 14.7 13.2 12.3 10.3
120-140 3.6 10.7 12.1 12.9 12.5 11.0
140-160 2.0 7.3 9.5 11.6 11.7 11.4
160-200 1.9 7.4 11.9 16.2 19.2 18.4
200-250 1.2 3.1 5.6 9.0 12.5 15.3
250-300 1.3 2.1 3.8 5.6 7.7
Over300 0.4 1.1 2.0 3.4 6.2 9.6
Source: M. V. Alexeev and C. G. Gaddy, "Trends in Wage and Income Distribution Under
Gorbachev: Analysis of New Soviet Data," Berkeley-Duke Occasional Papers on the
Second Economy in the USSR (Bala Cynwyd, Pa.: The WEFA Group, 1991).
essentially no change in inequality during the first half of the 1980s, a

pattern rather different than that observed for wages.
Third, a major feature of new evidence is wage and income data by
former republics. Alexeev and Gaddy have computed gini coefficients for
the republics and conclude that "both wage and income inequality are
clearly greater in the Soviet South than in the North. " 40 Moreover, while
inequality increased in every republic in the 1980s, the extent of increase
was greater in the south than in the north probably due to the greater
extent of second-economy activity in the south. These facts will be impor-
tant for the post-Soviet era in the less-developed states of the south.
Finally, does the growth of the second economy change these findings?
Alexeev and Gaddy conclude that "when we take into consideration the ad-
ditional factor of the second economy, a factor largely ignored in the offi-
cial income statistics, we corroborate our original finding that the Soviet
South displays greater income inequality than the North and that income
inequality in the Soviet Union has grown during the Gorbachev period." 41
CONSUMER WELFARE IN THE SOVIET UNION
How well an economy meets the material needs of its population with a
given productive capacity is yet an.other measure of economic per-
formance. Although we must omit nonmeasureable aspects of well-being,
they are nevertheless important in assessing overall consumer satisfaction.
For a variety of reasons, comparing consumer satisfaction in the Soviet
Union with that of other countries is a difficult task. Some reasons are
obvious, others less so. For example, a frequently used standard of per
capita availability of various types of goods and services ignores quality
differences, level-of-development issues, and differences of culture and
taste. Moreover, if we use aggregate measures of consumption, the issue
of using prices for aggregation purposes is again a major measurement
problem.
In addition to measurement problems, selecting a standard can be
difficult. For example, while it is usual to look at average levels of con-
sumption (particular products or aggregate consumption) such evidence
masks unevenness in the distribution of goods and services. Moreover, it
may be more important to consider relative levels of consumption and
changes in levels rather than absolute levels of consumption.
In the Soviet case, there is another problem. In a socialist economy,
one would expect that communal consumption would be a relatively
larger share of total consumption than that prevailing in market capitalist
cases. In many cases, quite apart from definitional problems leading to
their exclusion from Soviet output calculations, Soviet communal services
are provided without user charges; hence they are very difficult to evalu-
ate. There is, therefore, only a loose relationship between statistical meas-
ures of the availability of consumer goods and services and the level of
well-being of the population. With these reservations in mind, we will
consider some of the available evidence.
In a recent study summarizing the evidence on consumption in the
Soviet Union, Abram Bergson presented the data shown in Table 10.8.
What do the numbers in Table 10.8 tell us? According to this evidence,
Soviet per capita consumption in 1985 was just 28.6 percent of U.S. levels
and well below other countries. It is important to emphasize that this
represents a downward adjustment of an earlier estimate made in a major
study by Gertrude Schroeder and Imogene Edwards. 42 Although there is
considerable disparity in these estimates, they seem reasonable and indeed
fall within the ballpark of adjustments suggested by Igor Birman and
others, even though they neglect the second economy and only crudely
adjust for differences of consumption bundles and quality factors. 43 Of
particular importance in the Soviet case is the problem of measuring
services and consumer durables.
Most would agree that even allowing for quite significant errors of
measurement, levels of consumption in the USSR were low compared to
what one might expect from such a long period of economic growth. 44
Moreover, if we accept the CIA figures on changes in per capita consump-
tion, the average annual rate of growth declined from 3.8 percent in the
period 1961-1970 to 0.7 percent in the period 1981-1985. 45
Table 10.8 PER CAPITA CONSUMPTION IN COMPARATIVE PERSPECTIVE: 1985

USA= 100
Country Per capita consumption
USA 100.0
USSR 28.6
France 68.1
Japan 65.7
Italy 64.6
Austria 59.0
Spain 46.1
Portugal 32.3
Turkey 20.0
Source: A. Bergson, "The USSR Before the

Fall: How Poor and Why?" Journal of Economic
Perspectives. vol. 5, no. 4 (Fall 1991). 31.
A final issue of importance is assessing the reasons for such low levels
of consumption and a continuing decline in the average annual rate of
growth of per capita consumption in the post-World War II era. What
might account for these patterns?
There are two fundamental reasons for the consumption patterns that
we observe. First, it may be that the economy simply did not produce the
output in the first place. Put simply, levels of consumption and increases
in those levels over time may be modest because the level of output of the
economy and increased in such output levels were themselves modest.
Second, it may be that however the output picture may have been judged
in comparative terms, output was not directed to the satisfaction of
consumer needs either due to policy or other reasons. What is the evidence
on these issues?
The matter of measuring the size of the former Soviet economy is one
of great complexity and, accordingly, controversy. In the past, most esti-
mates of Soviet per capita output placed it in the range of 50 percent of
per capita output in the United States. Recent studies have resulted in
sharp downward adjustments in this figure, although there is little agree-
ment on precisely how big the Soviet economy was compared to that of
the United States. The Bergson study cited above concludes that in 1985,
GDP per worker in the Soviet Union was roughly 36 percent of that in the
United States, while the comparable figure for consumption per capita was
25 percent. 46 If one considers this type of evidence in a comparative
context for other countries, it is evident that per capita output in the Soviet
Union was relatively very low, a major factor explaining low (relative)
levels of per capita consumption.
It is also instructive to note that in most studies comparing the Soviet
Union with the United States, a consumption gap is evident. Although
there are a variety of measures with considerable variation, a consistent
pattern is comparative per capita consumption much lower than compara-
tive per capita output. The reason for this pattern is evident; the Soviet
Union devoted much larger shares of output to investment and to defense
than was the case in many other countries. The output was simply not
directed toward the consumer sector.
Although our picture of consumption in the Soviet Union is generally
negative, the reader should now appreciate the need for using multiple
criteria when assessing issues such as consumption. Much of our evidence
is of an aggregate nature, and while it is generally instructive, aggregation,
as we have emphasized, brings forward significant measurement problems.
If one compares the structure of consumption in the Soviet Union to
that in the United States controlling for very different levels of economic
development, a number of important differences emerge. For example, the
Soviet Union placed great emphasis on education and health care, even
though in both cases there were major quality differentials unfavorable to
the Soviet case. For example, comparative studies have shown that the
daily caloric intake of the average Soviet citizen was roughly comparable
to levels in the United States. However, there were important dietary
differences. For example, staple foods such as grain and potatoes were
much more important in the Soviet diet.
There are also important differences in the quality of and availability
of consumer durables. In some cases (for example, the availability of
television receivers), the Soviet record was quite good. On the other hand,
if one were to compare automobiles per 1OOO of population, the picture
would be quite different.
Much of our evidence on consumption should not be viewed with
surprise. After all, the essence of the Soviet model was to divert resources
to investment and increases in Soviet productive capacity at the expense
of consumption, at least in the short run. What is surprising is that the
Soviet Union did not seem to change this policy over time. Moreover, new
estimates of the relevant magnitudes seem to confirm the existence of a
larger consumption gap than was earlier suspected. These sorts of esti-
mates and especially the declining rate of growth of consumption levels in
recent years seem to confirm suspicions about decline in Soviet worker
morale, especially in the 1970s and thereafter.
Although the relationship is complicated, we tend to assume that
increases in output through economic growth result in increases in welfare.
In the literature on foreign trade, the concept of "immiserizing" growth

has been developed to assist in explaining those cases where increases in
output seem to result in decreases in consumer well-being.
In a recent study of Soviet economic growth for the period 1928-
1940, Gene Hsin Chang argues that this period in the Soviet Union may
in fact have been such a case of immiserizing economic growth.47 However,
Chang argues that in the Soviet case, it was not the issue of foreign trade
but rather the peculiar arrangements of the centrally planned economy
that permitted and indeed fostered distortions leading to increases in
output with reductions in consumer well-being.
We have found that Soviet levels of consumption per capita were low,
and although there was a growth of consumption over time, that growth
declined steadily. Low Soviet consumption was in part a result of low
output per capita, but it was also caused by the devotion of output to other
uses, especially investment. Soviet consumption patterns emphasized ne-
cessities and deemphasized luxuries. Moreover, while the quality of Soviet
consumer goods was probably in many cases very low, it remains even
more difficult to estimate the quality and availability of Soviet consumer
services.
Living Standards: The Issue of Poverty

We have emphasized that looking at consumption levels in terms of
aggregates on a per capita basis is only a rough approximation of the
actual well-being of the population. An aspect that deserves additional
attention is the distribution of consumer goods. One way to look at
distribution is to consider issues of poverty and, in particular, offici;ll
definitions of poverty.
In the Soviet case, the "minimum material satisfaction budget" (the
MMS budget) was described as containing the "volume and structure of
necessaries of life required for the reproduction of labor power among
unskilled workers. " 48 In a study of poverty in the Soviet Union done by
Alastair McCauley in the late 1970s, it was estimated that in 1967 42 mil-
lion nonagricultural employees and their dependents, 5 to 10 million state
farm families, and 32 million families on collective farms kohlkhozy had
incomes at or below the MMS level. 49 These figures add up to an
astonishing 79 million (roughly one-third of the Soviet population at that
time) below the minimum MMS budget. It may be that the Soviet MMS
budget was a liberal estimate of requirements, but even with a much more
conservative definition (one-half the MMS level) there were roughly
25 million Soviet citizens (approximately 10 percent of the Soviet popula-
tion) below the poverty level in 1967.
REFERENCES
1. Whether or not the Soviet economic system was in fact representative of

planned economies in general is a complicated issue. For a discussion, see P.
Hanson, "East-West Comparisons and Comparative Economic Systems,"
Soviet Studies, vol. 22, no. 3 (January 1991), 327-343; for a recent treatment
of these issues, see P. R. Gregory and R. C. Stuart, Comparative Economic
Systems, 4th ed. (Houghton Mifflin, 1992).
2. For a discussion of the matter of selecting performance criteria, see Gregory
and Stuart, Comparative Economic Systems, chaps. 1-4.
3. A. Gerschenkron, "The Soviet Indices of Industrial Production," Review of
Economics and Statistics, vol. 29, no. 4 (November 1947), 217-226.
4. For example, consider a hypothetical case in which the USSR in 1928 pro-
duced 100 "units" of textiles and 50 "units" of machinery and that is all. The
1928 per unit prices of textiles and machinery were lR and 2R respectively.
Assume further that in 1980, the USSR produced 200 "units" of textiles and
1000 "units" of machinery and that the prices of textiles and machinery had
risen to lOR and lOR respectively. If one values both 1928 and 1980 outputs
in 1928 prices, 1980 output is 11 times 1928 output. If one values both 1928
and 1980 output in 1980 prices, 1980 output is 8 times 1928 output. For a
formal analysis, see R. Moorsteen, "On Measuring Productive Potential and
Relative Efficiency," Quarterly Journal of Economics, vol. 75, no. 3 (August
1961), 451-467; and G. W. Nutter, "On Economic Size and Economic Growth,"
Journal of Law and Economics, vol. 9, no. 2 (October 1966), 163-188.
5. A. Bergson, The Real National Income of Soviet Russia Since 1928 (Cam-
bridge, Mass.: Harvard University Press, 1961), p. 261.
6. Growth in the United States between 1834 and 1908 has been estimated in
1860 prices. See R. Gallman, "Gross National Product in The United States,
1834-1909," in Output, Employment and Productivity in The United States
After 1800 (New York and London: National Bureau of Economic Research,
1966), pp. 3-75. These estimates are not comparable with the figures in 1929
prices cited in Table 10.1 because the two differ on current price estimates.
Thus these figures are not tests of the impact of index number relativity on
the measurement of U.S. GNP.
7. There is a large volume of literature that examines the issue of measuring
Soviet economic growth and comparing that growth to similar measures from
other economies. The reader will find extensive citations at the end of this
chapter.
8. The Bergson figures are in 1950 prices, and the CIA figures employ 1959 or
1970 weights. Thus this is a mixed index. Differences that arise as a result of
the mixed weighting scheme are likely to be minimal. Differences between this
index and one based on the Bergson 1937 price-weighted figures (to 1958)
are negligible. For a summary of issues in the pre-Gorbachev era, see U.S.
Congress, Joint Economic Committee, USSR: Measures of Economic Growth
and Development, 1950-1980 (Washington, D.C.: U.S. Government Printing
Office, 1980).
9. The practice of computing growth for "effective years" was originated by

Gregory Grossman as a suggested measure of what long-term Soviet economic
growth might look like in the absence of war. See G. Grossman, "Thirty Years
of Soviet Industrialization," Soviet Survey (October 1958). One could argue
for similar adjustments to growth rates in market economic systems.
10. National Foreign Assessment Center, Handbook of Economic Statistics,
1976, p. 22; The World Bank, World Tables (Baltimore: Johns Hopkins
11. Estimates by the Central Intelligence Agency have been the subject of continu-
ing discussion. See, for example, Michael Boretsky, "The Tenability of CIA
Estimates of Soviet Economic Growth," Journal of Comparative Economics,
vol. 11, no. 4 (December 1987), 517-542; M. Boretsky, "The CIA's Queries
About Boretsky's Criticism of the Estimates of Soviet Economic Growth,"
Journal of Comparative Economics, vol. 14, no. 2 (June 1990), 315-326;
J. S. Pitzer, "The Tenability of the CIA Estimates of Soviet Economic Growth:
A Comment," Journal of Comparative Economics, vol. 14, no. 2 (June 1990),
310-314. There are a number of CIA publications contributing to the discus-
sion; see, for example, Directorate of Intelligence, The Impact of Gorbachev's
Policies on Soviet Economic Statistics (Washington, D.C.: CIA, 1988); Direc-
torate of Intelligence, Revisiting Soviet Economic Performance Under Glas-
nost: Implications for CIA Estimates (Washington, D.C.: CIA, 1988);
Directorate of Intelligence, Measuring Soviet GNP: Problems and Solutions
(Washington, D.C.: CIA, 1990); for a major recomputation of Soviet national
accounts, see D. Steinberg, The Soviet Economy, 1970-1990: A Statistical
Analysis (San Francisco: International Trade Press, 1990).
12. The original source is V. Kontorovich and B. Rumer, Inflation in The Soviet
Investment Complex (Princeton Junction, N.J.: Command Economies Re-
search, Inc., 1988); the matter is discussed in Directorate of Intelligence,
Revisiting Soviet Economic Performance Under Glasnost: Implications for
CIA Estimates (Washington, D.C.: CIA, 1988), p. 14.
13. G. Ofer, "Soviet Economic Growth: 1928-1985," Journal of Economic Lit-
erature, vol. 25, no. 4 (December 1987), 1767-1833.
14. A. V. Banerjee and M. Spagat, "Productivity Paralysis and the Complexity
Problem: Why Do Centrally Planned Economies Become Prematurely Gray?"
journal of Comparative Economics, vol. 15, no. 4 (December 1991), 646-
660.
15. See M. Weitzman, "Soviet Postwar Growth and Capital-Labor Substitution,"
American Economic Review, vol. 60, no. 4 (September 1970), 676-692.
Other contributors include P. Desai, "The Production Function and Technical
Change in Postwar Soviet Industry," American Economic Review, vol. 66, no.
3 (June 1976), 372-381; S. Gomulka, "Soviet Postwar Industrial Growth,
Capital-Labor Substitution and Technical Changes: A Reexamination," in Z.
M. Fallenbuchl, ed., Economic Development in The Soviet Union and Eastern
Europe (New York: Praeger, 1976); S. Rosefielde and C. A. Lovell, "The
Impact of Adjusted Factor Cost Valuation on the CES Interpretation of
Postwar Soviet Economic Growth," Economica, vol. 44 (November 1977),
381-392; A. Bergson, "Notes on the Production Function in Soviet Postwar

Industrial Growth," journal of Comparative Economics, vol. 3, no. 2 (June
1979), 116-126; E. Bairam, "Capital-Labor Substitution and the Slowdown
in Soviet Economic Growth: A Reexamination," Bulletin of Economic Re-
search, vol. 42, no. 1 (1990), 63-72.
16. E. I. Bairam, Technical Progress and Industrial Growth in the USSR and
Eastern Europe (Brookfield, Vt.: Gower Publishers, 1988).
17. P. Desai, "Total Factor Productivity in Soviet Postwar Industry and Its
Branches," Journal of Comparative Economics, vol. 9, no. 1 (March 1985),
1-23.
18. G. E. Schroeder, "The Slowdown in Soviet Industry, 1976-1982," Soviet
Economy, vol. 1, no. 1 (January-March 1985), 42-74.
19. See A. Bergson, Planning and Productivity Under Soviet Socialism (New
York: Columbia University Press, 1968), p. 15. See also J. S. Berliner, "The
Static Efficiency of The Soviet Economy," The American Economic Review,
vol. 54, no. 2 (May 1964), 480-490.
20. P. Hanson has argued that during the early 1960s Soviet tabor may have been
in "excess supply" because of tabor hoarding in industry and seasonal unem-
ployment in agriculture. Thus a low weight should be attached to tabor and
a high weight attached to capital. This adjustment would raise Soviet factor
productivity considerably relative to the United States because the Soviet
tabor force is much larger than the American tabor force. See P. Hanson,
"East-West Comparisons and Comparative Economic Systems," Soviet Stud-
ies, vol. 22, no. 3 (January 1971), 327-343.
21. Bergson made adjustments for quality differences in the American and Soviet
tabor forces, as indicated by the larger Soviet female labor force and the lower
educational levels of Soviet workers. The adjustments, admittedly crude, raise
Soviet factor productivity relative to that of the United States by about 10
percent but fail to change the overall judgment about the relatively low
productivity of the Soviet economy. See A. Bergson, The Economics of Soviet
Planning (New Haven, Conn.: Yale University Press, 1964), p. 342. It has been
observed that the low productivity of the commerce and service sectors is a
major factor explaining overall low Soviet factor productivity.This issue has
received a great deal of recent attention, which we note in our discussion of
levels of Soviet consumer well-being and associated problems of measurement.
22. A. Bergson, "Comparative Productivity: The USSR, Eastern Europe, and the
West," American Economic Review, vol. 77, no. 3 (June 1987), 342-357.
23. Ibid., 355.
24. Ibid., 355.
25. A. Bergson, "The USSR Before The Fall: How Poor and Why?" Journal of
Economic Perspectives, vol. 5, no. 4 (Fall 1991), 29-44.
26. Ibid., 39.
27. Bergson, Productivity and The Social System, p. 104.
28. For the original contributions, see A. Nave, "The Politics of Economic Ra-
tionality," in A. Nave, ed., Economic Rationality and Soviet Politics (New
York: Praeger, 1964), p. 53; P. D. J. Wiles, The Political Economy of Commu-

nism (London: Blackwell, 1963), chap. 11.
29. See Bergson, Planning and Productivity, pp. 16-19, and Bergson, The Eco-
nomics of Soviet Planning, chap. 14.
30. See Hanson, "East-West Comparisons," 338.
31. P. R. Gregory and I. L. Collier, Jr., "Unemployment in The Soviet Union:
Evidence From the Soviet Interview Project," American Economic Review,
vol. 78, no. 4 (September 1988), 613-632.
32. For a discussion of the Soviet era, see J. S. Berliner, The Innovation Decision
in Soviet Industry (Cambridge, Mass.: MIT Press, 1976); J. Berliner, "Pros-
pects for Technological Progress," in U.S. Congress, Joint Economic Commit-
tee, Soviet Economy in a New Perspective (Washington, D.C.: U.S.
Government Printing Office, 1976), 431-446; R. Amann, J. Cooper, and
R. W. Davies, The Technological Level of Soviet Industry (New Haven,
Conn.: Yale University Press, 1977); J. R. Thomas and U. Kruse-Vaucienne,
eds., Soviet Science and Technology (Washington, D.C.: George Washington
University, 1977), parts 3 and 4; E. Zaleski et al., Science Policy in the USSR
(Paris: OECD, 1969); J. Martens, and J.P. Young, "Soviet Implementation of
Domestic Inventions: First Results," in U.S. Congress, Joint Economic Com-
mittee, Soviet Economy in a Time of Change (Washington, D.C.: U.S. Gov-
ernment Printing Office, 1979), vol. 1, 472-509; J. Grant, "Soviet Machine
Tools: Lagging Technology and Rising Imports," in U.S. Congress, Joint
Economic Committee, Soviet Economy in a Time of Change, vol. 1, 524-553;
P. Hanson, "International Technology Transfer from the West to the USSR,"
in U.S. Congress, Joint Economic Committee, Soviet Economy in a New
Perspective, 786-812; R. Amann and J. Cooper, eds., Industrial Innovation
in the Soviet Union (New Haven: Yale University Press, 1982); B. Parrott,
Politics and Technology in the Soviet Union (Cambridge, Mass.: MIT Press,
1983); U.S. Congress, Joint Economic Committee, Gorbachev's Economic
Plans, vol. 2, 141-209.
33. This is a basic conclusion from R. Amann, J. Cooper, and R. W. Davies, The
Technological Level of Soviet Industry (New Haven: Yale University Press,
1977).
34. For a discussion of computing, see S. E. Goodman, "The Prospective Impacts
of Computing: Selected Economic-Industrial-Strategic Issues," in U.S. Con-
gress, Joint Economic Committee, Gorbachev's Economic Plans (Washington,
D.C.: U.S. Government Printing Office, 1987), vol. 2, 176-184; Central
Intelligence Agency, The Soviet Economy in 1988: Gorbachev Changes
Course (Washington, D.C.: CIA, 1988), fig. 3.
35. M. I. Goldman, Gorbachev's Challenge (New York: Norton, 1987), chaps.
4-5.
36. J. S. Berliner, The Innovation Decision in Soviet Industry (Cambridge, Mass.:
MIT Press, 1976).
37. See A. McCauley, Economic Welfare in The Soviet Union (Madison: Univer-
sity of Wisconsin Press, 1967), 59-61.
38. Michael V. Alexeev and Clifford G. Gaddy, "Trends in Wage and Income
Distribution Under Gorbachev," Berkeley-Duke Occasional Papers on The
Second Economy in The USSR (Bala Cynwyd, Pa.: The WEFA Group, 1991).
39. Alexeev and Gaddy, "Trends in Wage and Income Distribution," 15.
40. Ibid., 19.
41. Ibid., 21.
42. G. E. Schroeder and I. Edwards, Consumption in the USSR: An International
Comparison (Washington, D.C.: U.S. Government Printing Office, 1981).
43. I. Birman, Personal Consumption in the USSR and the USA (New York: St.
Martin's Press, 1989).
44. For early contributions to measurement, see E. R. Brubaker, "A Sectoral
Analysis of Efficiency Under Market and Plan," Soviet Studies, vol. 23, no. 3
(January 1972); G. Ofer, The Service Sector in Soviet Economic Growth
(Cambridge, Mass.: Harvard University Press, 1973); see also M. A. Prell,
"The Role of the Service Sector in Soviet GNP and Productivity Estimates,"
Journal of Comparative Economics, vol. 13, no. 3 (September 1989), 383-
405; A. Bergson, "Trade Services and the Measurement of Comparative
USSR-USA Consumption," Journal of Comparative Economics, vol. 14, no.
3 (September 1990), 493-510.
45. Directorate of Intelligence, Handbook of Economic Statistics, 1991 (Wash-
ington, D.C.: CIA, 1991), p. 69.
46. A. Bergson, "The USSR Before the Fall," table 4.
47. G. H. Chang, "Immiserizing Growth in Centrally Planned Economies," Jour-
nal of Comparative Economics, vol. 15, no. 4 (December 1991), 711-717.
48. McCauley, Economic Welfare in The Soviet Union, p. 18.
49. Ibid.
Overall Evaluation Problems

A. Bergson, "East-West Comparisons and Comparative Economic Systems: A
Reply," Soviet Studies, vol. 23, no. 2 (October 1971), 282-295.
- - - , The Economics of Soviet Planning (New Haven, Conn.: Yale University
Press, 1964), chap. 14.
---,"National Income," in A. Bergson and S. Kuznets, eds., Economic Trends
in the Soviet Union (Cambridge, Mass.: Harvard University Press, 1963),
pp. 1-37.
R. Campbell et al., "Methodological Problems Comparing the US and USSR
Economies," in U.S. Congress, Joint Economic Committee, Soviet Economic
Prospects for the Seventies (Washington, D.C.: U.S. Government Printing
Office, 1973), 122-146.
A. Eckstein, ed., Comparison of Economic Systems (Berkeley: University of Cali-
fornia Press, 1971).
I. Edwards, M. Hughes, and J. Noren, "U.S. and USSR: Comparisons of GNP,"

pp. 369-401.
P. Hanson, "East-West Comparisons and Comparative Economic Systems," So-
viet Studies, vol. 22, no. 3 (January 1971).
L. Kurtzweg, "Trends in Soviet Gross National Product," in U.S. Congress, Joint
Economic Committee, Gorbachev's Economic Plans, vol. 2 (Washington,
D.C.: U.S. Government Printing Office, 1987), 126-165.
P. Marer, Dollar GNPs of the Soviet Union and Eastern Europe (Baltimore: The
Johns Hopkins Press, 1985).
M. A. Prell, "The Role of the Service Sector in Soviet GNP and Productivity
Estimates," journal of Comparative Economics, vol. 13, no. 3 (September
1989), 383-405.
V. G. Treml and D. Gallik, Soviet Studies on Ruble/Dollar Parity Ratios, U.S.
Department of Commerce, Foreign Economic Reports, no. 4 (November
1973).
V. G. Treml and J. P. Hardt, eds., Soviet Economic Statistics (Durham: University
of North Carolina Press, 1972).
U.S. Congress, Joint Economic Committee, Measures of Soviet Economic Growth
and Development 1950-80 (Washington, D.C.: U.S. Government Printing
Office, 1982).
C. K. Wilber, "Economic Development, Central Planning, and Allocative Effi-
ciency," Yearbook of East European Economics (Munich: Gunter Olzog
Verlag, 1971), 221-246.
Soviet Economic Growth

A. Becker, Soviet National Income, 195 8-1964 (Berkeley: University of California
Press, 1969).
A. Bergson, Productivity and the Social System: The USSR and the West (Cam-
bridge, Mass.: Harvard University Press, 1978), part 3.
- - - , The Real National Income of Soviet Russia Since 1928 (Cambridge,
H. Block, "Soviet Economic Performance in a Global Context," in U.S. Congress,
Joint Economic Committee, Soviet Economy in a Time of Change (Washing-
ton, D.C.: U.S. Government Printing Office, 1979), vol. 1, pp. 110-140.
M. Bornstein, "A Comparison of Soviet and United States National Product," in
M. Bornstein and D. Fusfeld, eds., The Soviet Economy (Homewood, Ill.:
Irwin, 1962).
S. Cohn, Economic Development in the Soviet Union (Lexington, Mass.: Heath,
1969), chap. 7.
---,"General Growth Performance of the Soviet Economy," in U.S. Congress,

Joint Economic Committee, Economic Performance and the Military Bur-
den in the Soviet Union (Washington, D.C.: U.S. Government Printing
Office, 1970).
Directorate of Intelligence, Measuring Soviet GNP: Problems and Solutions
(Washington, D.C.: CIA, 1990).
R. Greenslade, "The Real Gross National Product of the USSR, 1950-1975,'' in
U.S. Congress, Joint Economic Committee, Soviet Economy in a New Per-
spective (Washington, D.C.: U.S. Government Printing Office, 1976),
pp. 269-300.
G. Ofer, "Soviet Economic Growth, 1928-1985," journal of Economic Litera-
ture, vol. 25, no. 4 (December 1987), 1767-1833.
G. E. Schroeder, "The Slowdown in Soviet Industry, 1976-1982," Soviet Econ-
omy, vol. 1, no. 1 (January-March 1985), 42-74.
U.S. Congress, Joint Economic Committee, Measures of Economic Growth and
Development, 1950-80 (Washington, D.C.: U.S. Government Printing Of-
fice, 1982).
Dynamic Efficiency and the Growth of Productivity

E. I. Bairam, Technical Progress and Industrial Growth in the USSR and Eastern
Europe (Brookfield, Vt.: Gower Publishers, 1988).
A. Bergson, "Comparative Productivity: The USSR, Eastern Europe, and
the West," American Economic Review, vol. 77, no. 3 (June 1987), 342-
357.
- - - , "Development Under Two Systems: Comparative Productivity Growth
Since 1950," World Politics, vol. 23, no. 4 (July 1971), 579-617.
- - - , "Index Numbers and the Computation of Factor Productivity," Review
of Income and Wealth, vol. 21, no. 3 (September 1975), 259-278.
- - - , Planning and Productivity Under Soviet Socialism (New York: Columbia
---,Productivity and the Social System: The USSR and the West (Cambridge,
Mass.: Harvard University Press, 1978), part 3.
E. Brubaker, "Embodied Technology, the Asymptotic Behavior of Capital's Age,
and Soviet Growth," Review of Economics and Statistics, vol. 50, no. 3
August 1968), 304-311.
R. Moorsteen and R. Powell, The Soviet Capital Stock, 1928-1962 (Homewood,
Ill.: Irwin, 1966).
F. D. Whitehouse and R. Converse, "Soviet Industry: Recent Performance and
Future Prospects," in U.S. Congress, Joint Economic Committee, Soviet
Economy in a Time of Change (Washington, D.C.: U.S. Government Print-
ing Office, 1979), vol. 1, pp. 402-422.
Consumer Welfare in the Soviet Union

A. Bergson, "The USSR Before the Fall: How Poor and Why?" Journal of Eco-
nomic Perspectives, vol. 5, no. 4 (Fall 1991), 29-44.
D. W. Bronson and B. S. Severin, "Consumer Welfare," in U.S. Congress, Joint
Economic Committee, Economic Performance and the Military Burden in
the Soviet Union (Washington, D.C.: U.S. Government Printing Office,
1973), pp. 93-99.
- - - , "Soviet Consumer Welfare: The Brezhnev Era," in U.S. Congress, Joint
Economic Committee, Soviet Economic Prospects for the Seventies (Wash-
ington, D.C.: U.S. Government Printing Office, 1973), pp. 376-403.
J. G. Chapman, "Consumption," in A. Bergson and S. Kuznets, eds., Economic
Trends in the Soviet Union (Cambridge, Mass.: Harvard University Press,
1963), pp. 235-282.
---,Real Wages in the Soviet Union (Cambridge, Mass.: Harvard University
Press, 1963).
"Consumption and Incentives," in U.S. Congress, Joint Economic Committee,
Gorbachev's Economic Plans, vol. 2 (Washington, D.C.: U.S. Government
Printing Office, 1987), pp. 219-352.
M. E. Denton, "Soviet Consumer Policy: Trends and Prospects," in U.S. Con-
gress, Joint Economic Committee, Soviet Economy in a Time of Change,
vol. 1 (Washington, D.C.: U.S. Government Printing Office, 1979), pp. 759-
798.
H. Herlemann, ed., The Quality of Life in the Soviet Union (Boulder, Colo.:
Westview Press, 1987).
B. Q. Madison, "Social Services: Families and Children in the Soviet Union Since
1967," Slavic Review, vol. 31, no. 4 (December 1972), 831-852.
- - - , Social Welfare in the Soviet Union (Stanford: Stanford University Press,
1968).
A. McCauley, Economic Welfare in the Soviet Union (Madison: University of
Wisconsin Press, 1979).
R. J. Osborn, Soviet Social Policies: Welfare, Equality, and Community (Home-
wood, Ill.: Dorsey Press, 1970).
G. E. Schroeder, "Consumption," in A. Bergson and H. S. Levine, eds., The Soviet
Economy: Towards the Year 2000 (Boston: Allen & Unwin, 1983), pp. 311-
349.
G. E. Schroeder and B. S. Severin, "Soviet Consumption and Income Policies in
Perspective," in U.S. Congress, Joint Economic Committee, Soviet Economy
in a New Perspective (Washington, D.C.: U.S. Government Printing Office,
1976), pp. 620-660.
U.S. Congress, Joint Economic Committee, Consumption in the USSR: An Inter-
national Comparison (Washington, D.C.: U.S. Government Printing Office,
1981).
Economic Security in the Soviet Union

M. Bornstein, "Unemployment in Capitalist Regulated Market Economies and
Socialist Centrally Planned Economies," American Economic Review, vol.
68, no. 2 (May 1978), 38-43.
D. Granick, Job Rights in the Soviet Union: Their Consequences (New York:
P.R. Gregory and I. L. Collier, Jr., "Unemployment in the Soviet Union: Evidence
from the Soviet Interview Project," American Economic Review, vol. 78, no.
4 (September 1988), 613-632.
D. Lane, ed., Labour and Employment in the USSR (Brighton, Eng.: Wheatsheaf
Books, 1986).
]. Millar, ed., Politics, Work, and Daily Life in the USSR (New York: Cambridge
NATO, Aspects of Life in the USSR (Brussels: NATO, Directorate of Economic
Affairs, 1976).
P. ]. D. Wiles, "A Note on Soviet Unemployment in U.S. Definitions," Soviet
Studies, vol. 23, no. 2 (April 1972), 619-628.
Soviet Static Efficiency

A. Bergson, "Comparative Productivity and Efficiency in the USA and the USSR,"
in A. Eckstein, ed., Comparison of Economic Systems (Berkeley: University
of California Press, 1971), pp. 161-218.
- - - , "Comparative Productivity: The USSR, Eastern Europe, and the West,"
American Economic Review, vol. 77, no. 3 (June 1987), 342-357.
- - - , The Economics of Soviet Planning (New Haven, Conn.: Yale University
Press, 1964), chap. 14.
- - - , Planning and Productivity Under Soviet Socialism (New York: Columbia
]. S. Berliner, "The Static Efficiency of the Soviet Economy," The American
Economic Review, vol. 54, no. 2 (May 1964), 480-490.
E. Domar, "On the Measurement of Comparative Efficiency," in A. Eckstein, ed.,
Comparison of Economic Systems (Berkeley: University of California Press,
1971), pp. 219-232.
Income Distribution in the Soviet Union

M. V. Alexeev and C. G. Gaddy, "Trends in Wage and Income Distribution Under
Gorbachev," Berkeley-Duke Occasional Papers on the Second Economy in
the USSR (Bala Cynwyd, Pa.: The WEFA Group, 1991).
A. Bergson, The Structure of Soviet Wages (Cambridge, Mass.: Harvard University
Press, 1944).
---,"Income Inequality Under Soviet Socialism," Journal of Economic Litera-

ture, vol. 22, no. 3 (September 1984), 1052-1099.
J. G. Chapman, "Earnings Distribution in the USSR, 1968-1976," Soviet Studies,
vol. 25, no. 3 (July 1983), 410-413.
---,"Income Distribution and Social Justice in the Soviet Union," Compara-
tive Economic Studies, vol. 31, no. 1 (Spring 1989), 14-45.
Directorate of Intelligence, USSR: Estimates of Personal Incomes and Savings
M. Ellman, "A Note on the Distribution of Earnings in the USSR Under Brezh-
nev," Slavic Review, vol. 39, no. 4 (December 1987), 669-671.
M. Matthews, Privilege in the Soviet Union (London: Allen & Unwin, 1978).
A. McCauley, "The Distribution of Earnings and Income in the Soviet Union,"
Soviet Studies, vol. 29, no. 2 (April 1977), 214-237.
- - - , Economic Welfare in the Soviet Union (Madison: University of Wisconsin
Press, 1979).
A. Nove, "Income Distribution in the USSR: A Possible Explanation of Some
Recent Data," Soviet Studies, vol. 34, no. 2 (April 1982), 286-288.
G. Ofer and A. Vinokur, "Earnings Differentials by Sex in the Soviet Union: A First
Look," in S. Rosefielde, ed., Economic Welfare and the Economics of
Socialism: Essays in Honor of Abram Bergson (Cambridge: Cambridge
P. J. D. Wiles, Distribution of Income East and West (Amsterdam: North-Holland,
1974).
P. J. D. Wiles and S. Markowski, "Income Distribution Under Communism and
Capitalism: Some Facts About Poland, the U.K., and the USA and the
USSR," Soviet Studies, vol. 22, nos. 3 and 4 (January and April 1971),
344-369 and 487-511.
M. Yanowitch, Social and Economic Inequality in the USSR (White Plains, N.Y.:
- - - , "The Soviet Income Revolution," Slavic Review, vol. 22, no. 4 (Decem-
ber 1963).
ELEVEN
••
Performance Continued:
Human Capital,
Economic Stability, and
the Environment
L e previous chapter described, in statistical terms, the performance of

the Soviet administrative-command economy. Ultimately, an economic
system's growth and productivity, measured either in the aggregate or by
sector, provide the most comprehensive measure of its performance.
Not all aspects relevant to judging economic performance can be
captured in such statistics. Extreme ups and downs of the business cycle,
hyperinflation, or high rates of unemployment are also important gauges.
Availability of environmental protection is yet another indicator of per-
formance as is the question of whether the economy provides its citizens
with meaningful education and training.
HUMAN CAPITAL
Chapter 8 discussed how the administrative-command economy allocated

tabor resources. It explained that this is one area where the market does
most of the work. However, Chapter 8 did not address the degree to which
269
the Soviet administrative-command economy succeeded in creating human

capital in what was, at the time of the 1917 revolutions, a nation poor in
human capital.
Qualitative Changes in Human Capital

Soviet labor policy brought about significant qualitative changes in a labor
force poorly equipped to meet the needs of the economy. The 1897 census
showed 78 percent of the over-15-year-old population to be illiterate. Only
1.4 million out of a population of 126 million had education beyond the
seventh grade. Only 93,000 had completed higher education. The 1926
census showed considerable improvement. The illiteracy rate had dropped
to 56 percent, 6 million had received education beyond the seventh grade,
and roughly half a million had completed higher education. 1
The major spurt in educational achievement occurred during the
1930s. By 1939, the illiteracy rate had dropped to 20 percent, 14 million
had completed education beyond the seventh grade, and more than 1 mil-
lion had completed higher education.
Soviet policy contributed to this modernization in several ways. Labor
codes forbidding the employment of younger people were enforced. Wage
differentials between skilled and unskilled laborers provided incentives to
acquire skills. Universal education decrees were implemented. Moreover,
education was increasingly perceived as an important route to self-im-
provement.
Science and Technology Training

The Soviet regime focused its attention on scientific and technical (S&T)
manpower. The task of training specialists was undertaken by the higher
educational institution (VUZ) system of universities and scientific research
institutes under the jurisdiction of the Academy of Sciences and the various
ministries. VUZ enrollments were determined by Gosplan, the Ministry of
Higher and Secondary Specialized Education, and other ministries.
The S&T training system can be judged according to its ability to
select the most qualified candidates by the quality of training, and by the
rational placement of S&T personnel. Admittance to advanced S&T train-
ing, with some exceptions, appears to have been based on scientific poten-
tial. The best higher educational establishments, which were located in the
major cities, offered advanced training equal to that of the United States
and Western Europe. VUZs located in the provinces attracted less-quali-
fied candidates and faculty. The S&T curriculum was highly standardized
and roughly on a par with that of the West.
Performance Continued: Human Capital, Economic Stability, and the Environment 271
The achievements ·of the S&T training establishment were impressive.

In 1914-1915, 127,000 students were enrolled in higher-education estab-
lishments. By 1940-1941, this number had risen to 812,000, and by the
1980s there were over 5 million students enrolled in higher education. In
1914, 136,000 employed people had completed higher education. In 1959,
3.8 million such persons had done so. By 1987, the number had increased
to 20.8 million. The number of scientific workers with advanced degrees
tripled during the 1950s and tripled again during the 1960s. In 1914-
1915, there were 105 higher-education establishments in the Soviet Union.
By 1970, there were 805, and by 1988, the number had risen to 898. The
number of teachers in higher education rose from 61,000 in 1940, to
263,000 in 1967, and to 510,000 in 1984.
The number of scientists and engineers employed in the United States
in 1980 (600,000) was only about three-quarters the number of R&D
scientists and engineers employed in the USSR (830,000). The numerical
superiority of the Soviet Union was a relatively new phenomenon dating
to the late 1960s. 2
In terms of the number of advanced degrees granted in the physical
and life sciences, the United States and the Soviet Union were proportion-
ally about even. The major difference is that 30 percent of Soviet advanced
degrees were in engineering, while only 15 percent of American advanced
degrees were in that field. The United States retained numerical superiority
at the advanced-degree level only in the social sciences and humanities. 3
Differences in the quality of engineering training are not overwhelm-
ing. To quote a U.S. specialist:
Comparisons to the level of training received in specific areas, how-
ever, indicate that the level of professional attainment of a science or
engineering graduate of Soviet higher education establishments (in
the full-time programs at least) is about the same as or occasionally
higher than the level of attainment of a science or engineering gradu-
ate of a U.S. college or university. 4
In physics-a field in which Soviet scientists historically have ex-

celled-Soviets have captured seven Nobel Prizes since 1950, as compared
to the 31 by American-located physicists. In scientific fields not empha-
sized in Soviet resource allocation policies, Soviet scientists have per-
formed less well. Citation indexes reveal that Soviet scientists have
international reputations in mathematics, physics, and earth and space
sciences. American mathematicians cite approximately as manY' Soviet
mathematical articles as Soviet mathematicians cite American. The num-
ber of Soviet-publication citations by U.S. scientists in physics and earth
and space sciences is also quite high. 5
Quantitative Changes in Human Capital

Despite the slower population growth after the 1917 revolutions, the
Soviets were able to expand their total labor force at an annual rate of 2.5
percent between 1928 and 1937. This was quite a high rate by interna-
tional standards. 6 In keeping with the state policy of rapid industrial
transformation, the nonagricultural labor force expanded at an annual
rate of nearly 9 percent, while the agricultural labor force contracted at
an annual rate of 2.5 percent. Light industry suffered a decline in its labor
force between 1928 and 1937 that was as dramatic as the shift of labor
out of agriculture.
The rapid growth of the labor force was explained by the large rise in
the participation rate (the percentage of total population employed on a
full-time basis).7 Various labor policies contributed to high participation.
First, low wages in agriculture, coupled with the organized recruitment of
workers in agriculture, transferred labor out of agriculture to industry.
Second, authorities introduced moral and legal as well as economic incen-
tives for all able-bodied individuals to work. Parasitism became subject to
severe penalties. Legal pressures increased throughout the 1930s and
peaked in the 1940s. The low real wages of the 1930s made it necessary
for both husband and wife to work to make ends meet. By 1939, 71 per-
cent of able-bodied women were members of the labor force.
The high relative wages in heavy industry, the use of closed-shop
privileges to reward workers in high-priority branches, and the favorable
piece-rate norms in heavy industry encouraged the rapid transfer of labor
into priority branches. Relative wages go a long way toward explaining
the radical shift of labor within industry.
The quantitative growth of human capital was largely explained by the
rise in participation rates, not by the rapid growth of population. After
1970, there was a significant decline in population growth. 8 This decline
can be explained by changes in both birthrates and death rates. Crude
birthrates declined significantly but rose in the mid-1980s. In 1960 there
were 25 births per 1OOO population; however, by 1970, this number had
been reduced to 17 per 1000. By 1986, the number climbed to 20. The
crude birthrate in 1986 varied from a low of 16 per 1000 in Estonia to a
high of 37 per 1000 in Uzbekistan. The general decline in crude birthrates
was a result of declining fertility and declining age-specific fertility. There
were fewer women of childbearing age, but, in addition, women in this age
group were choosing to have fewer children. 9
Crude death rates, after a long decline through the 1970s, increased
in the 1980s. Crude death rates increased from 7.1 per 1000 in 1960 to
10.3 per 1000 in 1980. The three major components underlying these
increases were the aging of the population, rising infant mortality, and
higher death rates for males aged 20-44. Specific death rates increased for
most segments of the prime-aged population, although the death rate for
males was higher than for females.
Quantitative changes in the labor force depend upon private matters
of family and choice, and on public policy. Although Soviet labor policy
achieved significant increases in labor supply in the 1930s, demographic
trends during the mature phase of the administrative-command structure
point to growing weaknesses in the system. The rise in death rates plus the
plummeting birthrates in European Russia and the Baltics pointed to
impending long-term growth problems. Moreover, significant regional
differentials presented major problems subsequently to be faced by Russia
and the CIS states.
Efficiency of Use of Human Capital

A society can create human capital yet fail to use it effectively. Effective
use of human capital requires that people work to their best advantage in
the jobs for which they have been trained and that they work in the regions
and industries in which their marginal productivity is highest.
Full-Employment Policies Unemployment should not be a serious prob-

lem in an administrative-command economy. The output of goods and
services is planned as a function of available capital and labor. Planners
automatically factor in the production of an aggregate level of output that
provides employment for the able-bodied adult population. In fact, there
usually is more concern about labor shortages. According to official sta-
tistics, unemployment was "liquidated" during the first Five Year Plan. On
the eve of the first Five Year Plan (1927-1928), unemployment averaged
8 percent of the Soviet labor force. By the early 1930s, it had "disap-
peared" (see Table 11.1).
Table 11.1 UNEMPLOYMENT IN THE USSR: 1922-1930

Unemployed
Year (in thousands)
1922 407
1924 1344
1929 1741
April 1930 1081
October 1930 240
December 1930 No unemployment
Source: L. M. Danilov and I. I. Matrozova, "Trudovye resursy

ispolzovanie" ILabor resources and their utilization]. in A. R. Volkova
et al., eds .. Trudi zarabotnaia plata v SSSR ILabor and
wages in the USSR] (Moscow: Finansy i Statistika, 1968),
pp. 245--248.
27 4 Reform and Change in the Soviet Era
Frictional unemployment is required for a smoothly functioning dy-

namic economy. Societies would like to keep frictional unemployment to
a minimum, but no economy could afford a 0 percent unemployment rate.
A natural consequence of the ebb and flow of economic fortunes is that
people change jobs. Whenever there are job changes, frictional unemploy-
ment will result.
Studies for the 1960s and 1970s suggest unemployment between 1 and
2 percent for the Soviet labor market, a rate well below current unemploy-
ment rates in the West but not far below rates achieved during the
booming 1960s. These low rates illustrate the full employment planning
policies of the administrative-command system. 10
Soviet full-employment policies have had efficiency costs. Full-employ-
ment policies meant that workers could change jobs at will without fear
of income loss. The growing concern with reducing labor turnover meant
that planners considered turnover excessive. On the positive side, labor
turnover allows the economy to adjust to differential growth patterns
among employers. It allows workers to shift to employment where their
productivity (and pay) will be higher. On the negative side, excessive
turnover raises training and placement costs.
The major costs of a "job rights" economy is that guaranteed jobs
result in efficiency losses. Outmoded factories cannot be closed, poor
workers cannot be laid off, and necessary adjustments cannot be made. 11
The ultimate cost of full-employment policies is underemployment.
Managers, reluctant to let workers go, hoard labor to protect against
overambitious plan targets in the future. Yet if workers know that it is
unlikely they will be fired for mediocre performance, they have little
incentive to work hard. Guaranteed job tenure can definitely have negative
effects on allocative efficiency. 12
Women in the Labor Force Society must strike an optimal balance in its
use of human capital. If women are prevented by discrimination or custom
from working where their productivity is highest, there will be a loss of
social welfare. If society devotes too little household production to edu-
cating the young, society will also suffer efficiency losses. 13
No evaluation of Soviet labor policy would be complete without
considering the role of women. The traditional Western view, prompted
by Soviet writings and the absence of meaningful data on male-female
earnings differentials, was that Soviet women enjoyed relatively free access
to the various occupations and professions. The allocative inefficiency
from discrimination was largely avoided. This view was supported by the
high female participation rates, child care and other support services, and
the dominant roles played by women in key professions such as medicine.
The overall participation rate of both men and women in the mature
Soviet economy was very high, an aggregate rate of approximately 88
percent. I 4 Although steps were taken to continue to increase female em-
ployment, any future increases would have to come from Central Asia
where female participation rates were low. Where participation rates ap-
proach 100 percent, they have reached an upper limit.
As in the West, Soviet women tended to predominate in sectors with
relatively low pay. Furthermore, within low-pay sectors, women occupied
a lower proportion of the technical and higher-paying positions. Is Women
earned less than men due to their higher representation in lower-paying
sectors and occupations. Unlike the United States, Soviet women tended
to earn less for equal work. I 6
Soviet women enjoyed substantial achievement in terms of education
and participation in the labor force. These achievements were the result of
changing values and policies. At the same time, the typical Soviet woman
bore a rather large share of the household work burden. High participa-
tion rates were functions of a severe labor shortage and World War II.
Soviet women did not participate equally with Soviet men in the better-
paying jobs or in jobs of administrative responsibility, such as enterprise
director or farm head.17 The use of women in the labor force suggests
inefficiencies due to labor market discrimination. Recent empirical evi-
dence suggests that the magnitude of discrimination is similar to that
observed in the West.
The Regional and Occupational Distribution of Labor

Economic efficiency requires that labor be distributed both regionally and
by occupation to produce its highest return. In the case of the administra-
tive-command economy, planners determine these distributions through
labor plans. Efficiency, therefore, is to be judged in terms of plan fulfill-
ment.
The rural-urban balance was a crucial test of labor allocation prac-
tices. The Soviet Union became a predominantly urban society in a rela-
tively short period of time through rapid rural-to-urban migration. Is Both
administrative and market-type mechanisms were used to control this
process, and wage differentials were important in motivating the rural-to-
urban shifts of the labor force. I 9 In fact, rural-to-urban migration was the
crucial source of urban labor supply in the sense that it was rural youth
that migrated to take advantage of the better opportunities in the city.
However, while the urban sector may have benefited, increasingly the
rural sector came to face a labor shortage, especially during peak growing
seasons. The rural sector could no longer be viewed as a major source of
incremental urban labor. Sharp improvements in the standard of living

were required to make rural life more attractive and stem the migratory
flow.
Achieving an appropriate regional distribution of labor proved to be
more difficult than expected as the Soviet administrative-command econ-
omy matured.
Planners also had difficulty with the regional distribution of labor.
Fertility rates were much higher in the southern regions of mainly Central
Asia and Kazakhstan (a territory of predominantly Muslim population),
than in other areas of the Soviet Union. 20 The result has been a signifi-
cantly higher rate of population growth, able-bodied population, and
labor force in these regions.
Virtually the entire projected net increases in labor have had to come
from Central Asia and Kazakhstan. Industrial capacity was not located in
Central Asia but rather to the north. 21 The discrepancy between the
demand for labor and labor supply by region required correction. Central
Asia is a less-developed region. Labor-force participation has been gener-
ally lower with a greater tendency to remain in rural activity. Educational
levels are also lower. All of this suggests lesser market orientation, espe-
cially for women. 22 Finally, these differences would lead one to doubt that
significant shifts of labor from the south to the north could be accom-
plished easily. Likewise, major shifts of industrial activity toward the south
would not be easy. 23
Similar problems were encountered in maintaining the labor supply to
Siberia and the far north. Although generous wage supplements were
offered for these regions, labor authorities were hard-pressed to meet labor
staffing plans. Traditionally the flow of labor out of these regions exceeded
the flow in.
In sum, the mature administrative-command economy appeared to
lack the mechanisms for creating the appropriate regional distribution of
local labor. Having a "job rights" economy of guaranteed jobs contributed
to the problem by depriving individuals of the incentive to move from
areas of low to areas of high labor demand.
ECONOMIC STABILITY
Citizens pay considerable attention to matters of economic stability in

judging their economic system. In the West, presidential elections are
determined on the basis of the incumbent's record with regard to inflation
or unemployment. Parliamentary governments are toppled by bad news
on inflation or unemployment.
It is difficult to judge the degree of economic stability provided by

the Soviet administrative-command economy. In market economies, the
degree of economic stability is immediately apparent. Demand or supply
shocks show up in the form of acceleration in the inflation rate. Down-
turns in the business cycle are reflected as upsurges in unemployment rates.
Things are not that simple in the administrative-command economy.
Soviet authorities claimed to have liquidated unemployment in the
1930s. No society can completely eliminate unemployment, at least not in
terms of its traditional definition. Frictional unemployment, or the time
spent changing jobs, exists in every society. However, cyclical unemploy-
ment was probably significantly less in the administrative-command econ-
omy than in market capitalist systems.
Soviet planners deliberately pursued a policy of full-employment plan-
ning. Enterprises' utilization of labor was planned, and regional authori-
ties ensured the full utilization of labor resources. Enterprises were not
allowed to fail. Moreover, enterprise cost reduction was not a major
success indicator, and rules for dismissal were not stringent. Enterprise
managers had neither the means nor the motivation to reduce enterprise
staffing.
The achievement of low unemployment, therefore, is a direct conse-
quence of the nature of the administrative-command system.
Soviet official price indexes revealed very little if any inflation in the
recent past. The issue of inflation is complex even though there is little
evidence of soaring prices. Until the collapse of the administrative-com-
mand system in the late 1980s, there was little indication of significant
price or wage inflation. Lack of evidence on overt inflation does not rule
out potentially disruptive hidden inflation. Excess demand appears in the
form of queues rather than price increases. 24
In addition to the immediate problem of shortages, there are addi-
tional repercussions from excess demand in consumer markets. First,
under conditions of excess demand, savings may be considered more
important than consumption. Savings in this context is forced and serves
as an indication of repressed inflation rather than as a natural process
of asset accumulation. Second, consumer market disequilibrium in offi-
cial markets may spill over into private markets. If consumer demand
cannot be satisfied in official markets, consumers turn to unofficial or
second-economy markets to satisfy this demand. Third, if the income
earner cannot use the income to satisfy demand, there will be a tendency
to withdraw labor services, at least at the margin. Worker attitudes to-
ward overtime might change, there might be reduced interest in hav-
ing multiple wage earners in the family, or the workers may simply work
less.
Consumer market disequilibrium can hence reduce labor effort and

disrupt monetary incentive systems. Effort declines throughout the econ-
omy and barter activities increase.
To what extent did excess demand characterize the Soviet economy in
its later years? This is an empirical and theoretical issue that has yet to be
answered conclusively. 25
Shortage models are based on the work of Janos Kornai. 26 Kornai did
not approach the socialist economy with a view to modeling specific
markets or cases, but rather with an interest in modeling the socialist
economy as a whole. The various empirical studies that have been under-
taken have yielded mixed results. Some suggest that savings rates are
normal and provide no evidence of economywide excess demand. Others
point to an ominous "monetary overhang" caused by the consumer's
inability to find goods in the marketplace. Sophisticated econometric
studies also yield mixed results. 27
Observers of the mature administrative-command economy appear
convinced that repressed inflation has taken its toll on economic effi-
ciency. The adage "They pretend to pay us and we pretend to work"
captures the manner in which consumer market disequilibrium can depress
incentives.
ENVIRONMENTAL PROTECTION
Increasingly, people judge economic performance on the basis of environ-

mental quality. Important political groupings in the West even reject
growth and modern living standards as prices too high to pay in terms of
environmental disruption.
Under capitalism, environmental disruption is caused by external ef-
fects. External effects arise whenever the private costs (or benefits) of a
particular action diverge from its social costs (or benefits). If a profit-maxi-
mizing capitalist firm is able to pollute the air without being charged a
price for this activity, the social cost of production will exceed the private
cost and a greater than optimal level of environmental disruption will
emerge. Only if private enterprises can be charged for the social costs of
their pollution or if such activities are internalized will the level of envi-
ronmental disruption be optimal. The optimality criterion is such that
pollution should be allowed up to that level at which its marginal social
cost equals the marginal cost of pollution abatement. 28
Advocates of socialism argued that pollution will not arise in a social-
ist society. Where decisions are centralized there is literally nothing exter-
nal to the decision makers. Planner can also develop an incentive structure
that ensures the harmony of local decisions with central goals. It is only
necessary that appropriate resource valuations, which reflect central goals,
be available to the central decision makers. 29
Oskar Lange argued in his famous article "On the Economic Theory
of Socialism" that under socialism, a high value will be placed by the
Central Planning Board upon a clean environment. 30 Maurice Dobb ar-
gued that, although information may be a problem, socialist planners will
tend to make decisions with an eye to their environmental impact. 31 Jan
Tinbergen, the Dutch Nobel laureate, has also endorsed the notion that
decisions made at the highest possible levels will minimize the problems of
externalities. 32 Despite these theoretical arguments there are a variety of
reasons for environmental problems in the Soviet Union. 33
First, the dominant focus of economic policy was rapid economic
growth. A relatively poor country may select to achieve growth by post-
poning some of the real costs. Environmental preservation may be sacri-
ficed in a maximum growth environment.
Second, Soviet thinking emphasized the ability of the administrative-
command system to master the environment with benefit rather than harm
for the economy and society.
Third, organizational arrangements had an impact on the environ-
mental outcome. The potential for conflict between powerful ministries
with differing objectives was evident in the struggle for the preservation of
the environment. In a highly centralized system, local views cannot change
central views and actions. The absence of appropriate valuation of natural
resources may put inappropriate or inadequate information into existing
channels. Finally, policies of secrecy inhibited the development of an
environmental lobby.
To assess the Soviet record of environmental protection, one must
compare the stock of pollution in the Soviet Union relative to capitalist
countries. There is no established system of weights to aggregate environ-
mental disruption into a single global measure. In place of global mea-
sures, one must rely in partial measures. According to calculations for
1968-1969, the gross weights of air pollutants produced in the Soviet
Union were as follows: dust, 61 percent of U.S. level; sulfur dioxide, 49
percent of U.S. level; carbon monoxide, 19 percent of U.S. level; and
hydrocarbon, 22 percent of U.S. level. 34 Although these calculations relate
to a period some 25 years ago, they are nevertheless suggestive of lower
levels of air pollution relative to levels in the United States.
In the Soviet Union, industrial emissions were more of a problem than
automobile emissions because of the smaller number of cars.
With glasnost and the formation of vocal environmental groups, the
magnitude of the pollution problem has become apparent. The oil indus-
try, chemicals, and nuclear power industries appear to be the worst offend-
ers, and talk of an environmental disaster does not seem to be an exag-
geration. The planners and party officials clearly had followed a
production-at-any-cost strategy.
In sum, the earlier optimistic forecasts about the ability of the admin-
istrative-command economy to manage the environment were clearly
wrong. The costs of cleaning up the environment will be particularly hard
to bear in an economy undergoing a difficult transition.
CONCLUSIONS
It is difficult to draw conclusions about how well an economic system has

developed and utilized its resources. The Soviet administrative-command
economy can note some achievements but a number of failures. Probably
the most notable achievement was in the area of the creation of human
capital. A country that had been backward in human resources up to the
1930s had achieved remarkable advances, particularly in the area of
scientific and engineering personnel by the late 1930s. There is serious
question as to how efficiently that personnel was utilized. Although we can
determine that Soviet planners had trouble achieving the desired regional
distribution of labor, that problem likely paled in comparison to getting
the maximum effort from individuals facing disequilibrium in the con-
sumer goods market. We have no way of quantifying the effects on job
rights. In an economy in which people are guaranteed employment and
underemployment, an immense problem of motivating the work force
remams.
The revelations that have accompanied glasnost and the breakup of
the Soviet Union dispel any serious arguments about the ability of the
administrative-command economy to deal effectively with the environ-
ment. The description "environmental disaster" appears appropriate. The
environmental disaster appears not to be the consequence of individual
misplaced decision making. Rather the system itself promoted a produc-
tion-at-any-cost philosophy, characteristic of developing countries in gen-
eral, that simply deemed the environment a low priority.
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vol. 28, no. 4 (July 1975), 524-534.
18. R. C. Stuart, "The Sources of Soviet Urban Growth," in H. W. Morton and
R. C. Stuart, The Contemporary Soviet City (Armonk, N.Y.: M. E. Sharpe,
1984), chap. 2.
19. R. C. Stuart and P.R. Gregory, "A Model of Soviet Rural-Urban Migration,"
Economic Development and Cultural Change, vol. 426, no. 1 (October
1977), 81-92.
20. See M. Feshbach, "Trends in the Soviet Muslim Population-Demographic
Aspects," in U.S. Congress, Joint Economic Committee, Soviet Economy in
the 1980s: Problems and Prospects, part 2, pp. 297-322.
21. Goodman and Schleifer, "The Soviet Labor Market in the 1980s," U.S.
Congress, Joint Economic Committee, Soviet Economy in the 1980s: Prob-
lems and Prospects, part 2 (Washington, D.C.: U.S. Government Printing
Office, 1982), p. 333.
22. The question of labor from Central Asia has received considerable attention.
See, for example, M. Feshbach, "Trends in the Soviet Muslim Population-
Demographic Aspects; M. Feshbach, "Prospects for Outmigration from Cen-
tral Asia and Kazakhstan in the Next Decade," in U.S. Congress, Joint
Economic Committee, Soviet Economy in a Time of Change, vol. 1, pp.
656-709; and S. E. Wimbush and D. Ponomarett, Alternatives for Mobilizing
Central Asian Labor: Outmigration and Regional Development (Santa
Monica, Calif.: The Rand Corporation, 1979).
23. The question of outmigration from Central Asia has been one of controversy.
For an analysis, see Feshbach, "Prospects for Outmigration from Central Asia
and Kazakhstan in the Next Decade."
24. J. Winiecki, The Distorted World of Soviet-Type Economics (London and
New York: Routledge, 1988).
25. C. M. Davis, "The Second Economy in Disequilibrium and Shortage Models
of Centrally Planned Economics," in Berkeley-Duke Occasional Papers on
the Second Economy of the USSR, no. 12 (July 1988); D. H. Howard, "The
Disequilibrium Model in a Controlled Economy: An Empirical Test of the
Barro-Grossman Model," American Economic Review, vol. 66, no. 5 (Decem-
ber 1976), 871-879; R. J. Barro and H. I. Grossman, "A General Disequi-
librium Model of Income and Employment," American Economic Review,
vol. 61, no. 1 (March 1971), 83-93; L. Podkaminer, "Macroeconomic Dis-
equilibria in Centrally Planned Economies: Identifiability of Econometric
Models Based on the Theory of Household Behavior Under Quantity Con-
straints," Journal of Comparative Economics, vol. 13, no. 1 (March 1989),
47-60.
26. See, for example, J. Kornai, Growth, Shortage, and Efficiency: A Macrody-
namic Model of the Socialist Economy (Berkeley: University of California
Press, 1983).
27. J. Pickersgill, "Soviet Inflation: Causes and Consequences," Soviet Union,

vol. 4, no. 2 (1977), 297-313; J. Pickersgill, "Soviet Household Saving
Behavior," Review of Economics and Statistics, vol. 58, no. 2 (May 1976),
139-147; G. Ofer and J. Pickersgill, "Soviet Household Saving: A Cross-sec-
tion Study of Soviet Emigrant Families," Quarterly Journal of Economics,
vol. 95, no. 3 (August 1980), pp. 121-144; I. Birman, Secret Incomes of the
Soviet State Budget (Hague: Nijhoff, 1981); I. Birman, "The Budget Gap,
Excess Money and Reform," Communist Economies, vol. 2, no. 1 (1990),
24-45; I. Birman and R. A. Clarke, "Inflation and Money Supply in the Soviet
Economy," Soviet Studies, vol. 37, no. 4(October1985), 494-504; G. Gross-
man, "A Note on Soviet Inflation," in U.S. Congress, Joint Economic Com-
mittee, Soviet Economy in the 1980s, part 1 (Washington, D.C.: U.S.
Government Printing Office, 1982), pp. 267-286; Gavin Peebles, "Choosing
Hypotheses in Comparative Economic Studies: Lessons from a Current Case
Study," Comparative Economic Studies, vol. 34, no. 1 (Spring 1992), 13-25.
28. R. Mcintyre and J. Thornton, "On the Environmental Efficiency of Economic
Systems," Soviet Studies, vol. 30, no. 2 (April 1978 ), 173-192.
29. A. Wright, "Environmental Disruption and Economic Systems: An Attempt
at an Analytical Framework," ASTE Bulletin, vol. 13, no. 1 (Spring 1971),
11-12.
30. Lange's paper appears in B. E. Lippincott, ed., On the Economic Theory of
Socialism (Minneapolis: University of Minnesota Press, 1938), p. 103, re-
printed by McGraw-Hill, 1964.
31. M. Dobb, Welfare Economics and the Economics of Socialism (Cambridge:
Cambridge University Press, 1969), p. 133.
32. For a discussion of this point, see Dobb, Welfare Economics, pp. 133-134.
For a survey of theorizing on environmental quality, see M. I. Goldman, The
Spoils of Progress: Environmental Pollution in the Soviet Union (Cambridge,
Mass.: MIT Press, 1972), pp. 12-22.
33. M. I. Goldman, "Externalities and the Race for Economic Growth in the
Soviet Union: Will the Environment Ever Win?" Journal of Political Economy,
vol. 80, no. 2 (March-April 1972); K. Bush, "Environmental Disruption: The
Soviet Response," L'Est, no. 2 (June 1972); D. Kelley, K. Stunkel, and R.
Wescott, The Economic Superpowers and the Environment: The United
States, the Soviet Union, and Japan (San Francisco: Freeman, 1976); W. A.
Jackson, ed., Soviet Resource Management and the Environment (Columbus,
Ohio: Anchor Press, 1978); V. Mote, "Environmental Protection and the
Soviet Tenth Five Year Plan," Geographical Survey, vol. 7, no. 2 (April 1978);
P.R. Pryde, Conservation in the Soviet Union (Cambridge, Mass.: Harvard
University Press, 1972); F. Singleton, Environmental Misuse in the USSR
(New York: Praeger, 1976); C. E. Ziegler, Environmental Policy in the USSR
(Amherst: University of Massachusetts Press, 1987); and C. ZumBrunnen,
"Gorbachev, Economics and the Environment," in U.S. Congress, Joint Eco-
nomic Committee, Gorbachev's Economic Plans, vol. 2, pp. 397-424.
34. Mcintyre and Thornton, "On the Environmental Efficiency," 182-183.
Labor Allocation
J. Adam, Employment Policies in the Soviet Union and Eastern Europe, 2nd rev.
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Press, 1944), chap. 8.
L. J. Kirsch, Soviet Wages: Changes in Structure and Administration Since 1956
(Cambridge, Mass.: MIT Press, 1972), pp. 1-8.
M. McCauley, Labor Disputes in Soviet Russia 1957-1965 (Oxford: Oxford
B. A. Ruble, Soviet Trade Unions (New York: Cambridge University Press, 1981).
D. Slider, "Reforming the Workplace: The 1983 Soviet Law on Labour Collec-
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M. Yanowitch, Work in the Soviet Union (New York: Sharper, 1985).
Women in the Soviet Union

B. A. Anderson, "The Life Course of Soviet Women Born 1905-1960, " in J. R.
Millar, ed., Politics, Work, and Daily Life in the USSR (New York: Cam-
D. Atkinson et al., eds., Women in Russia (Stanford, Calif.: Stanford University
Press, 1977).
K. M. Bartol and R. A. Bartol, "Women in Managerial and Professional Positions:
The United States and the Soviet Union," Industrial and Labor Relations
Review, vol. 28, no. 4 (July 1975), 524-534.
S. Bridger, Women in the Soviet Countryside (New York: Cambridge University
Press, 1987).
G. K. Browning, Women and Politics in the USSR: Consciousness Raising and
Soviet Women's Groups (New York: St. Martin's Press, 1987).
N. T. Dodge, Women in the Soviet Economy (Baltimore: Johns Hopkins Press,
1966).
G. W. Lapidus, Women in Soviet Society (Berkeley and Los Angeles: University of
California Press, 1979).
J. R. Moroney, "Do Women Earn Less Under Capitalism?" Economic Journal,
vol. 89, no. 355 (September 1979), 601-613.
W. Moskoff, "An Estimate of the Soviet Male-Female Income Gap," ACES Bulle-
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- - - , Labor and Leisure in the Soviet Union (New York: St. Martin's Press,
1984).
G. Ofer and A. Vinokur, "Earnings Differentials by Sex in the Soviet Union: A First
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M. P. Sacks, Women's Work in Soviet Russia: Continuity in the Midst of Change
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Science Education
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United States and the Soviet Union, SRI International, SSC-TN-7557-12,
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S. Kassel and C. Campbell, The Soviet Academy of Science and Technological
Development, Rand Corporation R-2533-ARPA.
J. Martens and J.P. Young, "Soviet Implementation of Domestic Inventions: First
Results," in U.S. Congress, Joint Economic Committee, Soviet Economy in
a Time of Change (Washington, D.C.: U.S. Government Printing Office,
1979), vol. 1, pp. 472-509.
M. Mathews, "Long Term Trends in Soviet Education," in J. J. Tomiak, ed., Soviet
Education in the 1980s (New York: St. Martin's Press, 1983), pp. 1-24.
B. Parrott, Politics and Technology in the Soviet Union (Cambridge, Mass.: MIT
Press, 1983).
J. R. Thomas and U. Kruse-Vaucienne, eds., Soviet Science and Technology (Wash-
ington, D.C.: George Washington University Press, 1977), parts 3 and 4.
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part VII (Washington, D.C.: U.S. Government Printing Office, 1987),
pp. 141-209.
E. Zaleski et al., Science Policy in the USSR (Paris: OECD, 1969).
Disequilibrium Economics
W. Charemza and M. Gronicki, Plans and Disequilibria in Centrally Planned
Economies (Amsterdam: North Holland, 1988).
C. M. Davis, The Second Economy in Disequilibrium and Shortage Models of
Centrally Planned Economies (Durham, N.C.: Berkeley-Duke Occasional
Papers on the Second Economy of the USSR, no. 12, July 1988).
C. Davis and W. Charemza, eds., Models of Disequilibrium and Shortage in
Centrally Planned Economies (London: Chapman and Hall, 1989).
D. H. Howard, "The Disequilibrium Model in a Controlled Economy: An Empiri-
cal Test of the Barro-Grossman Model," American Economic Review, vol.
66, no. 5 (December 1976), 871-879.
Performance Continued: Human Capital, Economic Stability. and the Environment 287
J. Kornai, Economics of Shortage (Amsterdam: North Holland, 1980).

- - , Growth, Shortage, and Efficiency: A Macrodynamic Model of the Social-
ist Economy (Berkeley: University of California Press, 1983).
---,The Socialist System (Princeton: Princeton University Press, 1992).
L. Podkaminer, "Macroeconomic Disequilibria in Centrally Planned Economies:
Identifiability of Econometric Models Based on the Theory of Household
Behavior Under Quantity Constraints," Journal of Comparative Economics,
vol. 13, no. 1 (March 1989), 47-84.
R. E. Quandt, "Econometric Disequilibrium Models," Econometric Review, vol. 1
(1982), pp. 1-63.
- - - , "Tests of the Equilibrium vs. Disequilibrium Hypothesis," International
Economic Review, vol. 19, no. 2 (1978), pp. 435-452.
Environmental Quality
K. Bush, "Environmental Disruption: The Soviet Response," L'Est, no. 2 (June
1972).
R. C. Cooper, "Transboundary Pollution: Sulfur Dioxide Emissions in the Repub-
lics of the USSR," Comparative Economic Studies, vol. 34, no. 2 (Summer
1992), 38-49.
M. Feshbach and A. Friendly, Jr., Ecocide in the USSR (New York: Basic Books,
1992).
M. I. Goldman, "Externalities and the Race for Economic Growth in the Soviet
Union: Will the Environment Ever Win?" Journal of Political Economy,
vol. 80, no. 2 (March-April 1972).
T. Gustafson, Reform in Soviet Politics: Lessons of Recent Policies on Land and
Water (Cambridge: Cambridge University Press, 1981).
W. A. Jackson, ed., Soviet Resource Management and the Environment (Colum-
bus, Ohio: Anchor Press, 1978).
B. Jancar, Environmental Management in the Soviet Union and Yugoslavia (Dur-
ham, N.C.: Duke University Press, 1987).
D. Kelley, K. Stunkel, and R. Wescott, The Economic Superpowers and the
Environment: The United States, the Soviet Union, and Japan (San Fran-
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R. M. Lyon, "Environmental Management in the Former Soviet Union: A Com-
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63-67.
D. Marples, Chernobyl and Nuclear Power in the USSR (New York: St. Martin's
Press, 1986).
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R. Mcintyre and J. Thornton, "On the Environmental Efficiency of Economic

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V. Mote, "Environmental Protection and the Soviet Tenth Five Year Plan,'' Geo-
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Approaches to Pollution Control,'' Comparative Economic Studies, vol. 34,
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1983), 274-279.
---,Environmental Management in the Soviet Union (New York: Cambridge
B. A. Ruble, "The Emergence of Soviet Environmental Studies," Review, vol. 5,
no. 1 (1980).
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Geography, vol. 27, no. 7 (September 1986), 504-526.
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Anchor Press, 1978), pp. 1-12.
M. Turnbull, Soviet Environmental Policies and Practices (Brookfield, Vt.: Dart-
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1992), 19-37.
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TWELVE
••
Change of Economic
Systems: Reform and
Transition
L u s far we have focused on the working arrangements of the Soviet

administrative-command economy, not paying special attention to issues
of change. From the vantage point of the 1990s, we tend to focus on the
monumental changes of the Gorbachev era and the ultimate dissolution of
the Soviet Union as a political entity. There were, however, important
reform attempts well before the emergence of Mikhail Gorbachev. In this
chapter, we turn our attention to issues of change in the adminstrative-
command economy. Specifically, we examine pre-Gorbachev Soviet at-
tempts to reform the economic system. We begin with the early reforms in
the socialist systems. As a background to understand the events of per-
estroika in the 1980s, we then examine the nature of early Soviet economic
reforms and the failure of these reforms. We then return to the world of
transition as we examine the issues underlying economic change in the
contemporary era.
289
TAXONOMY OF ECONOMIC REFORM
Prior to the monumental events of the late 1980s and early 1990s, there
had been many reform proposals and programs both in the Soviet Union
and in other planned socialist economies. These attempts had a limited
impact on economic performance and on the economic system. In this
setting, interest in major reform programs dwindled, though day-to-day
minor changes and tinkering continued. If economic reform was meant to
improve economic performance, especially the lagging growth-and-pro-
ductivity record, then by any standard they had been largely unsuccessful.
During this period, Western interest in the reform process dwindled since
the attempted implementation of a series of reform programs did not seem
to make any difference.
The literature on socialist economic reform is large and diverse in
approach. In our present discussion, reform refers to changes in a socialist
system whereby performance will improve but the fundamental charac-
teristics of the socialist system will be preserved. Transition, on the other
hand, implies that the socialist system will be abandoned, and that the
mechanism of resource allocation will be the market rather than the plan.
Traditionally reform in the planned socialist economic systems could
be classified in three broad and to some degree overlapping categories.
First, organizational change refers to a change in organizational arrange-
ments either for the economic system itself or for the subunits within the
system. A second and rather different type of reform is improvement of
planning, or making the plan mechanism function better within existing
organizational arrangements. Third, decentralization reform refers to
changes in the levels of decision making within an economic system,
typically shifting decision-making authority and responsibility from upper
to lower levels. Each of these approaches to reform deserves additional
comment.
Organizational Reform
The organizational arrangements of an economy, that is, the economic
system, have an impact upon observed outcomes. Hence changes in these
arrangements, or organizational reform, should change outcomes. Al-
though this concept has been important in the field of comparative eco-
nomic systems, it has nevertheless proven difficult to isolate outcomes and
relate them specifically to particular sorts of organizational arrangements.
If such connections were more easily understood, then organizational
reform could be appealing as the economy evolves. Specifically, one could
imagine that an optimal set of organizational arrangements would be
possible in theory and in practice.
Change of Economic Systems: Reform and Transition 291
Although one can look at the generally centralized organizational

arrangements of the former socialist planned economies and relate certain
outcomes to these arrangements, the drive for organizational reform in
these systems was generally spurred on by much more pragmatic issues.
For example, whether in the Khrushchev era or in the Gorbachev era, there
was a prevailing feeling that the ministerial authority was too great and
that it should be dispersed by changing the organizational arrangements.
Khrushchev attempted to regionalize decision making through regional
planning bodies. More typically, however, the argument was that the span
of control of the ministries was too great, and that a reorganization of
ministries to focus on more narrow commodity groupings would be useful.
Thus the supervision of steel firms making sheet steel would be a different
function from the supervision of steel firms making rolled steel.
In the Soviet case, organizational change was typically formulated at
upper levels of the hierarchy rather than at the enterprise level. However,
over a long span of years, organizational change was a continuing and
pervasive theme in the Soviet Union. There were a great many changes in
the organs of power concerned with agriculture and indeed a great deal of
organizational change at lower levels including reorganization of farm
units and the implementation of agro-industrial integration in the late
1960s and thereafter.
More Western observers of organizational change were skeptical
about its effectiveness. In part changes were proposed but never imple-
mented. What ever changes were actually made had little or no impact on
decision making.
Improvement of Planning
National planning was always the dominant mechanism for decision mak-
ing in the planned socialist economic systems. The use of planning was
justified not as a means to simulate the market, but rather as a means to
overcome the market and to make decisions differently than would be the
case with market forces. This theme is dominant in the history of socialist
economic thought. Moreover, the plan mechanism was widely viewed as
being responsible for major outcomes in the Soviet case, such as high levels
of investment and rapid economic growth.
One could argue, however, that the nature of planning in an underde-
veloped economy would be rather different from that in a more mature
economy. Indeed, many of the difficulties that we have discussed in the
Soviet case arose from information and incentive problems. As the Soviet
economy grew more complex (an issue we examined in Chapter 10), it
became increasingly difficult for decision makers at various levels to gain
the correct information required for their actions. Moreover, even if they
did have correct information, it was not always clear that incentive ar-
rangements would harmonize local decisions with central wishes.
Although there were a variety of means by which information prob-
lems could be overcome, one of the most promising appeared to be
computerization. If planners needed more and better information from
local enterprises, a computer network would seem to be an ideal solution
in terms of both capacity and speed. Although Soviet planners discussed
and worked on the development of a nationwide computer system for the
development and dissemination of information required for decision mak-
ing, computerization did not make Soviet planning significantly better.
Decentralization Reform
Decentralization is the devolution of decision-making authority and re-
sponsibility from upper to lower levels in an established administrative
hierarchy. 1 Although difficult to define with precision, many of the reform
programs of the Soviet Union and other planned socialist economic sys-
tems involved some sort of attempted decentralization, albeit with a desire
to maintain substantial central control over decisions.
Morris Bornstein draws a useful distinction between administrative
decentralization and economic decentralization. 2 Administrative decen-
tralization occurs when local units (enterprises) are given increased
authority to make decisions previously made by higher administrative
units within a framework of parameters and rules set by higher authorities.
For example, an enterprise may be given greater authority to determine an
appropriate input mix subject to some rule; for example, cost minimiza-
tion with given prices. To encourage rational decision making by enter-
prises, higher authorities would monitor cost reductions within an
enterprise and reward the enterprise for such achievements. The key
feature of administrative decentralization is the fact that higher authorities
control the parameters in which local decisions are made. In our example,
higher authorities set prices, establish rules for cost reduction, and set the
arrangements for rewarding goal achievement. Thus while a decision may
actually be made within the enterprise, it is substantially controlled by the
upper-level authority.
Economic decentralization implies that a greater degree of authority
will be devolved from upper- to lower-level units. For example, in our
previous example, an enterprise may be responsible for making input
decisions on a least-cost basis, but input prices may be market determined
and/or incentive arrangements may be more general; for example, maxi-
mizing the well-being of the enterprise.
The choice of administrative versus economic decentralization under-

scores the dilemma of past Soviet economic reforms. As long as higher
authorities controlled the parameters guiding local decision making, they
were in a much better position to impose the state's will on participants.
In the 1930s, for example, administrative control and monitoring were
probably at their peak allowing the system to be governed according to
the wishes of a ruling elite. Microunits, though they possessed local
iQformation important to enterprise decision making, were nevertheless
not permitted to use this information to affect planning indicators. There
is a great deal of evidence that mistakes were made under these arrange-
ments, though one could argue that microeconomic mistakes are in some
sense less costly at earlier stages of economic development. As the Soviet
economy grew, however, the issue of managerial success indicators became
one of the dominant themes of economic reform. Indeed it became com-
mon to identify such changes as the introduction of new economic levers
or mechanisms for the guidance of decision making within individual
production units.
A common example of an economic lever was the matter of profit. As
traditional socialist reforms proceeded over the years, more and more
emphasis was put on the achievement of profit in enterprises. While the
concept of profit would be quite rational in a system where prices (of both
products and factors) reflected relative scarcities, its meaning in the social-
ist context was much less clear. For. this reason there was much skepticism
about profit-oriented reform in the absence of serious price reform. It is
ironic that many of the issues that dominated the reform debates of the
past would in fact turn out to be critical in the contemporary era of
transition. One such issue is that of the timing and sequencing of reform.
In the context of our present discussion, can a "profit reform" succeed if
there is no price reform, and if not, must the price reform precede the
profit reform?
ECONOMIC REFORM: THE SOVIET ERA
Although it is simplistic to think of economic reform as "centralizing" or

"decentralizing," in fact the approach is quite.useful for our understanding
of long-term reform trends in the Soviet ec-onomy. 3
The supporters of NEP were advocating a measure of decentralization
in the sense that day-to-day decisions could be made by managers and
"experts" while the more important long-run decisions about resource
allocation would be made at higher levels, the commanding heights. As
Stephen Cohen noted, "the first great reform in Soviet history was the
introduction of ... NEP in 1921. " 4 Although events would follow a dif-
ferent path, the appeal of NEP would be resurrected in the reforms of the
Gorbachev era.
The 1920s were productive years for theorizing about planning op-
tions for resource allocation in socialist economic systems. At the time,
talented economists and statisticians were working on the concept of
national balances, a major example being the well-known 1923-1924
balance of the national economy prepared by the Central Statistics Board
under the direction of P. I. Popov. 5 Such efforts were the intellectual
predecessors of input-output analysis later developed in the United States
by Wassily Leontief. These early efforts would become the background for
the development of sophisticated mathematical approaches to planning
involving both balancing and optimization, a path largely ignored by
Stalin.
During the Stalin era, brutal repression of economic science brought
to an end the search for rational administrative-planning procedures. The
system was declared to be infallible; mistakes were considered the function
of errant individuals or outright acts of sabotage. The "law of value"-
supply and demand-was declared by Stalin not to operate in a socialist
economy. The planning principle would be the new economic regulator,
and concepts developed by bourgeois economists were viewed as irrelevant
if not dangerous for understanding the new arrangements. The antimarket
bias in the former Soviet Union was of long standing. The "chaos" of the
market would be replaced by the "rationality" of the plan, the latter
developed by engineers. 6
In the 1930s, the idea was not to simulate the market but rather to
replace it. In this setting, economic theorizing about concepts such as
balanced growth and equilibrium became dangerous and was replaced
largely by ad hoe responses. 7 The two attempts by high officials to initiate
reform (in 1933 and 1947) led to the execution of the ill-fated reformers. 8
The death of Stalin in 1953 and the emergence of Nikita Khrushchev
unleashed pent-up demand for change. Khrushchev responded in a num-
ber of different dimensions. First, there was a shift away from blaming all
problems on human shortcomings to a willingness to experiment with
organizational change. Although the issue of organizational change in the
Soviet economic reforms would have a continuing and controversial his-
tory, such changes, even if they failed to alter economic performance, must
nevertheless be viewed as important. Khrushchev attempted a number of
major organizational changes, especially in agriculture. He also experi-
mented with organizational reform. His best-known industrial experiment
was the Sovnarkhoz reform in which an attempt was made to shift away
from industrial branch planning through ministries to regional planning
through regional economic councils.
Second, there was a resurgence of interest in the development of

mathematical models of national economic planning. Prominent Soviet
pioneers in this area, such as L. V. Kantorovich, V. V. Novozhilov, and
V. S. Nemchinov, argued that resources could be used more efficiently
without loss of central control if greater attention were paid to rational
planning methods. 9 In 1959, the book The Use of Mathematics in Eco-
nomics was published under the editorship of Nemchinov. This volume
contained original work by Kantorovich and Novozhilov written during
the repressive Stalin era. In subsequent years, these and other researchers
would publish many scientific papers on the concept of optimal planning.
This work came to be recognized internationally with the awarding of the
prestigious Lenin Prize to Nemchinov, Novozhilov, and Kantorovich, and
the Nobel Prize in economics to Kantorovich. Indeed, it was evident that
the issue of economic reform could be discussed, and even the most
obscure scientific journals once again published articles on reform. 10
The Khrushchev was an era of important changes in the organizational
arrangements of the Soviet economic system. Yet from the vantage point
of the external world, major attention became focused on reform only
after the publication of an article entitled "Plan, Profits and Bonuses" by
a then obscure economist Evsei Liberman of Kharkov University. 11 This
article, published in Pravda in 1962, signaled the start of a serious discus-
sion about the relationship between planners and managers and the issue
of enterprise guidance.
The Liberman Proposals and Their Aftermath

Although Evsei Liberman had been writing about enterprise guidance
systems for many years, little formal attention was paid to such issues until
the initiation of reform discussion in the late 1950s and early 1960s.
Liberman, during the ensuing discussion both in the Soviet Union and in
the West, gained prominence well out of proportion to the importance of
his proposals. The major reason for this outcome was his perceived em-
phasis on profit. However, Liberman was quite clear in pointing out that
central planning would be maintained in full vigor and that profits would
serve only as a basis for managerial rewards after targets for quantity and
assortment had been met. If such targets were not met, enterprises would
be "deprived of the right to bonuses." 12 Liberman did not propose that
profits be a fundamental guide to economic activity but rather that profits
should have a more important role along with other success criteria.
Specifically, Liberman proposed that bonus payments (after fulfillment
of the planned output target) should be an increasing function of the profit
rate (profit/capital ratio), thus encouraging the expansion of profits but
the reduction of capital usage. Profitability norms established for each

industry would serve as the basis for evaluating managerial performance.
To encourage managers to set ambitious targets for themselves, rewards
would be higher for successful fulfillment, or perhaps even underfulfill-
ment, of an ambitious profitability plan than for overfulfillment of an easy
target.
A major feature of Soviet enterprise guidance arrangements had al-
ways been multiple and often conflicting success indicators. In the Liber-
man approach, the number of centrally planned directives would be
limited to the quantity and assortment of output and its appropriate
delivery. The enterprise would be responsible for planning materials needs,
labor, and technology. Under Liberman's new arrangements, managers
would in fact be interested in cost reduction and thus would seek out ways
to lower costs rather than to build up excess stocks.
On the crucial issue of centralization versus decentralization, Liber-
man remained ambiguous. All of the basic instruments of central planning
including the centralized planning of material supply were to remain in
place. 13 How this system could be compatible with enterprises planning
their own material inputs Liberman did not spell out except to suggest that
("with reasonable confidence") the two could prove compatible. 14 Liber-
man's conservatism on the issue of material supply was in stark contrast
to "marketeers" such as Nemchinov and Birman who advocated free trade
in producer goods. 15 On the critical issues of prices, Liberman also equivo-
cated, although he did suggest that the existing Soviet price system would
give unfair profitability advantages to some producers while discriminat-
ing against others. 16 Nevertheless, he believed that his new arrangements
if implemented would .force managers to press for more rational prices.17
During the period between 1962 and 1965, there was considerable
discussion of reform ideas, and especially the controversial idea of profit
in a socialist society. 18 However, there were a number of experiments
conducted to test reform ideas.
A reform track alternate to LiDerman was the light-industry experi-
ment designed to provide a feedback mechanism between the producer
and the consumer. The absence of feedback was especially prominent in
sectors such as clothing, where unsalable inventories had accumulated. In
an attempt to resolve this problem, an experimental program was sanc-
tioned by the Central Committee in 1964. 19 The Bolshevichka factory in
Moscow and the Maiak factory in Gorky were allowed to receive their
production orders directly from a select group of retail outlets rather than
being assigned quantitative plan targets. Unsold stock or returned output
was to be deducted from fulfillment of output objectives. Consumer de-
mand was to become a motivating force for production with bonuses (set
between 40 and 50 percent) dependent upon fulfillment of delivery and

profit plans, not output plans. 20
Although these enterprises remained under central control for material
supplies, their performance was considered to be a success and the experi-
ment was expanded. By 1965, the light-industry experiment had been
extended to 25 percent of the garment factories, 28 percent of the foot-
wear factories, 18 percent of the textile mills, and 30 percent of the leather
factories.
It is not clear to what extent this experiment was expanded after 1965,
although the issue would resurface in the Gorbachev era. 21 The light-
industry experiments were in fact subsumed under a broader reform begun
in 1965. At the time, there seemed to be a general reluctance to remove
the enterprises from administrative controls.
The Kosygin Reforms of 1965

The last major reform prior to Gorbachev's perestroika was the Kosygin
Reform, announced in September of 1965 by then-prime minister Alexei
Kosygin. This reform attempt, which was ultimately to fail, was once
again a major confrontation between conservatism and the status quo
versus decentralization and relaxation of the administrative-command
system.
The basic thrust of the Kosygin Reforms was to reduce the number of
enterprise targets set from above and, most important, to replace gross
output by "realized output" (or sales) as the primary indicator of success
for the enterprise. In addition, the number of indicators of labor planning,
previously four, was to be reduced to a single wage fund indicator. An
enterprise manager was to face eight targets established under the central
plan compared to the earlier system of twenty or thirty targets. These eight
targets were as follows.
1. Value of goods to be sold
2. Main assortment
3. Wage fund
4. Amount of profit and level of profitability
5. Payments to and allocations from the state budget
6. Volume of investment and the exploitation of fixed assets
7. Assignments for the introduction of new technology
8. Material and technical supplies
The Kosygin Reforms made several changes in financial planning. An
interest charge on fixed and working capital was introduced at a rate of
6 percent. 22 In addition, provisions were made for an enhanced role to be
played by Gosbank. The importance of the state budget in the financing

of investment was reduced. Gosbank was given a new and expanded role,
especially for the provision of investment funds at differentiated charges.
Gosbank also was to facilitate the clearance of debts among enterprises
and their customers in the trade network.
The reforms also placed increased emphasis on enterprise self-financ-
ing. Ties to the budget as a source of financing and subsidies were to be
reduced, and a production development fund was to be established. This
fund would be fed by profits, the amortization of equipment. Automatic
subsidies to loss-making enterprises were to be denied.
Profits and Incentives The change in the role of profits in the Kosygin
reforms was to be quite modest. Prices were to be revised to allow
enterprises to be profitable under normal conditions of operation. This
reform was designed to eliminate one of the long-standing results of
branch average costing, namely, loss-making enterprises. In addition, the
role of profit was to change in two respects. First, profit was to be given
greater attention along with the now reduced number of managerial
success indicators. Second, profits were to be an important source of funds
for decentralized investment by enterprise managers (a 20 percent share
for decentralized investment was envisioned) and as a source of funds for
bonus payments. 23 Investment funds were to be channeled through two
funds-the production development fund and the fund for social welfare
and housing (to build factory-owned apartments)-while the bonus funds
would be channeled through a new material incentive fund. These three
funds were to replace the old enterprise fund and were designed to enhance
the importance of profits for enterprise activity in addition to giving
enterprise managers greater freedom of decision making.
Prior to 1965, worker bonus schemes had been the subject of criticism
not only because of the meager amounts involved, but also because the
funding was typically from the wage fund rather than from profits. The
1965 rules for the utilization of the new incentive fund were complex. 24
However, this fund was to be largely under the control of the enterprise
itself and was to provide incentive payments above and beyond those
normally generated from the wage fund.
It was apparent that sales would remain the dominant success indica-
tor; profit would play only a modest role. Moreover, even where greater
managerial freedom in the use of profit was envisioned, this freedom was
often circumscribed by new regulations pertaining to bonus payments,
availability of supplies, and the like.
Organizational Changes The economic bureaucracy was recentralized by

the Kosygin Reforms. Power was returned to the ministries, and the
regional economic councils (the sovnarkhozy) established by Khrushchev

in 1957 were abolished. Decision-making authority was shifted from
regional back to national levels.
The Kosygin Reforms called for a variety of organizational changes in
economic management and planning. 25 Key functions were centralized in
three new powerful state committees: the State Committee for Material-
Technical Supply (Gossnab), the State Committee for Prices (Gostsen) and
the State Committee for Science and Technology (Gostekhnika). Industrial
enterprises were to be combined into organizations called production
associations and research enterprises and institutes were to be grouped
into science production associations. The rationale given for these new
associations was the generation of economies of scale, reduction of bu-
reaucracy, and improvement of the planning process. Gossnab was given
the primary responsibility for allocating producer goods, and the ministe-
rial supply organizations that had dominated the rationing of funded
goods largely disappeared. Gossnab was to apply itself to the creation of
a wholesale trade system based upon direct contracting arrangements
between suppliers and users.
Changes in the planning system were also proposed. There was to be
an increased emphasis on long-term plans; the scientific basis of planning
was to be upgraded through the use of computers, mathematical program-
ming, and the like; and complex planning (the planning of regional com-
plexes) was to be emphasized.
Counterplans Enterprises were encouraged to propose counterplans-

plans more difficult than those proposed by the ministries. Enterprises that
took on difficult counterplans were to be rewarded by higher bonuses and
were not to be penalized by even more difficult targets in future years.
Emphasis on hard long-term targets (targets that would not be ratcheted
up), it was argued, would encourage enterprises to engage in serious
counterplanning.
Rejection of the Kosygin Reforms: Lessons for the Present

The Kosygin Reforms of 1965 provide a valuable case study of how
and why the Soviet economic system rejects change. Initially, two phases
of reform implementation were anticipated. The first or "extensive"
phase was to be the slow conversion of nonagricultural enterprises to
the new system. The second or "intensive" phase, scheduled to begin in
1970, would be the phase in which the true potential of the reform would
be achieved. 26 In terms of the original format, all industrial enterprises
were to be converted to the new system by 1968 with the remainder of
the economy converted by the end of 1970. The exception was agricul-
ture, where the introduction of the reforms was to take place at a slower
pace.
As stated earlier, the basic thrust of the Kosygin Reforms was a
reduction in the tutelage of industrial enterprises by the planning organs
at higher levels. The basic idea was the creation of a system in which
enterprise managers would respond spontaneously to various economic
"levers"-profits, bonuses, increased authority over investment, and so
on-to make the Soviet enterprise more efficient, thus releasing "hidden
reserves."
Initially there was a tendency to view this reform as decentralization
of decision making; though in hindsight, it may be more appropriate to
think of it as changing the way in which enterprise managers make
decisions. Indeed between 1965 and 1971, there was evidence of greater
managerial spontaneity, especially with regard to the disposition of bonus
funds. Indeed planners and other bureaucrats began to react against
"undesirable" enterprise actions and to press for amendments to the
original plan changes. During what would have been the intensive phase,
the original intentions were in fact significantly modified. In particular,
there were concerns over the large share of bonuses received by managerial
personnel, the lack of attention to the issue of labor productivity and
quality improvement, and the unwillingness of managers to propose coun-
terplans. Many of these shortcomings were in fact those addressed origi-
nally by the reform program.
Beginning in 1971, a series of changes substantially modifying the
original intent of reform were introduced. Rigid rules regarding the size of
incentive funds replaced the more flexible rules that had been introduced.
The ministry, based on limits determined by Gasp/an, was allowed to set
the size of enterprise funds by fixing planned incentive fund targets. The
size of the various incentive funds came to depend on enterprise perfor-
mance vis-a-vis planned indicators such as output, profitability, and labor
productivity targets. Three additional targets-the plan for key products
in physical units, the plan for consumer goods, and the plans for changes
in product quality and new products-were introduced. Furthermore, the
size of the incentive fund was tied to the tautness of the enterprise plan;
the higher the output, profitability, and labor productivity targets, the
larger the potential incentive funds. These restrictions on enterprise funds
restored to the ministries the authority to determine the conditions under
which the incentive funds were to be accumulated and disbursed. Enter-
prises could be punished by fund reductions for failing to meet ministry
targets.
Strict controls over enterprise incentive funds were introduced. In the
new regulations, limits were placed on the growth of managerial bonuses.
Average wages were not allowed to increase faster than labor productivity,
and regulations were established to reduce bonus differentials among
branches. Significantly, managerial bonuses were tied to fulfillment of sales
and profitability plans plus the fulfillment of the physical assortment plan.
The ministries were allowed to add additional conditions if they so de-
sired. Thus the ministry could deny bonuses if delivery plans were not met.
The manager's control over the production development fund (for
investment) was circumscribed. Under the modified rules, the proportion
of enterprise profits to be allocated to this fund was set by the ministry in
accordance with bank credits planned for decentralized investments. The
incentive effects of the enterprise investment fund were nullified. Under
these decrees, the distinction between centralized and decentralized invest-
ment lost its meaning. On the one hand, the managers were encouraged to
invest on a decentralized basis, while on the other hand, they were unable
to purchase investment goods through the material supply network. The
supply problems persisted in spite of fines for nondelivery and various
attempts to develop "free sales. " 27 The supply system remained centralized
and largely out of the reach of the enterprise manager.
The envisioned expansion of the banking system as a supplier of credit
did not materialize. Credits, though available, remained a minor source of
finance. Bank financing of state centralized investment accounted for only
2.3 percent of all investment in 1973. Enterprises had surplus working
capital resulting from the inability to spend production development and
housing funds due to the absence of a mechanism for decentralized invest-
ment.
The proposed changes in Soviet planning failed to materialize. The
Kosygin Reforms called for an enhanced role for long-term planning,
seeking to establish the Five Year Plan as the basic operating plan of the
national economy. Yet throughout the reform process, the annual plan
remained the operative plan. Despite campaigns to promote counterplans,
only 13,000 enterprises engaged in counterplanning in 1977. As of 1981,
only 6.6 percent of industrial enterprises adopted counterplans. Moreover,
enterprise managers proposed cosmetic counterplans that did not alter the
substance of planned targets. 28 The lack of success of counterplanning
reflected the continued fear of enterprise managers with regard to the
ratchet effect.
Many of the administrative changes proposed in the Kosygin Reforms
were in fact not implemented. 29 During the early years of the reform,
enterprises did not amalgamate into production associations. It required a
separate decree in April of 1973 before the formation of production
associations proceeded at a rapid pace. The purpose of the production
association was to gain the advantages of economies of scale in manage-
ment through the amalgamation of firms involved in similar lines of

activity and to economize on administrative personnel. In practice, the
formation of industrial associations often meant little more than changing
the names on the doors in Moscow; supervisory powers remained in the
hands of the main administration of the ministries. There was a 60 percent
expansion of the bureaucracy between 1966 and 1977. 30 The ministries
continued to be the centers of economic power, allocating materials and
equipment, dictating the incentive arrangements of enterprises and indus-
trial associations, and controlling investment. Gossnab was supposed to
replace the ministerial supply organs, but Gossnab handled only one-half
of the value of rationed producer goods by the late 1970s. The marker for
producer goods failed to emerge, and the traditional system of material
supplies and central balances continued to function.
Finally, and perhaps most important, the number of enterprise targets
was expanded. New targets were reinstated in the 1970s: labor productiv-
ity, gross output, consumer goods assignments in heavy industry, quality
targets, materials and fuel economy targets, delivery obligations, new
products guidelines, and the size of basic incentive funds.
Most observers agreed that by the mid-1970s, for all practical pur-
poses, the Kosygin Reforms of 1965 were dead. Nevertheless, the Soviet
Union remained on a treadmill of reforms thereafter. Scarcely a year
passed without the announcement of some new reform or experiment to
solve long-standing problems. Experiments begun in the late 1960s con-
tinued.31
In the 1970s, the emphasis seemed to be on better planning rather than
decentralization of decision making. One Western student of the reform
wrote in 1973 that "after seven years of the reform, economic methods,
or 'levers,' have been effectively converted into administrative 'levers' ...
as a consequence, centralized planning and administration are even more
entrenched .... " 32
Improving Planning: The July 1979 Decree

In July of 1979, a decree was issued entitled "On Improving Planning and
Strengthening the Economic Mechanism's Influence on Raising the Effec-
tiveness of Production and the Quality of Work. " 33 This decree, generally
abbreviated as PIEM or Program to Improve the Economic Mechanism,
was not a systematic program to change the economic system. Morris
Bornstein, in a major study of PIEM, described the 1979 decree "as an
attempt within the framework of 'traditional' ('Soviet type') socialist cen-
trally planned economy to improve economic performance through
changes in the arrangements for the choice of output, the allocation of
resources to produce it, and the distribution of personal income. " 34 The
aim of the PIEM program was " ... to increase output; to reduce cost, and
particularly the use of materials and fuels; to improve quality through the
introduction of new products; to secure the timely delivery of output
according to the contracted product mix and to cut production time and
costs." These objectives were to be pursued through "a variety of measures
affecting planning, performance indicators, incentives, and finance. " 35
Planning was to be improved in five general areas. First, enterprise
capacity was to be better known through a "passport" system-a system-
atic effort to know more about production capacity in each producing unit
by requiring more information on a regular basis.
Second, the norming process was to be improved and was to replace
"directive indicators" so that the planning process could be simplified and
differing local conditions accounted for. Instead of an enterprise being told
how much labor it could use for a particular task, a predetermined norm
would cover the particular application and enterprise performance would
be judged by the achievement of the norm.
Third, enterprises were encouraged to operate under taut plans as
measured by such indicators as the percentage use of capacity. Rewards
would be provided for the adoption of counterplans requiring more than
the official plans.
Fourth, long-term planning was again emphasized but with greater
emphasis on the coordination of one year, five year, and regional plans.
The emphasis was on firm plan tasks that would not be subject to ongoing
correction.
Finally, the material supply system was to be improved largely through
the expanded use of contracting. Enterprises were encouraged to establish
supply contracts with user enterprises that would fulfill contract terms.
A crucial part of the 1979 decree related to performance indicators.
Specifically, the decree addressed three traditional problem areas of Soviet
enterprise performance, namely, the overutilization of material inputs, lack
of interest in quality, and neglect of product mix.
The emphasis on gross output as an enterprise success indicator had
in the past led to the overutilization of material inputs. Under the new
rules, labor productivity was to be a key indicator of enterprise per-
formance, measured as net output per worker, through norms set by
planning authorities. The basic idea of normed net output was to calculate
enterprise value added (net output) by subtracting planned costs from
gross output. An enterprise that overused material inputs or substituted
expensive inputs would be penalized because it could only use normed
costs. Costs in excess of planned costs could not enter into the value of
output. 36
Quality was emphasized in the PIEM decree by making it an important

indicator of enterprise performance related to bonus payments. A commis-
sion was established to categorize products according to quality. Enter-
prises were to be rewarded according to the share of better-quality
products in their output. The assortment problem was attacked by better
specification of output in the plan and by tying rewards to the completion
of delivery contracts. Efforts were planned to make the output specifica-
tion more detailed so that deviations from plan could be spotted more
readily.
PIEM decreed changes in bonus arrangements. Although enterprise
profits remained the main source of bonus funds, the rules for forming and
disbursing bonus funds changed and became more complex. The bonus
system was to be tied more closely to labor productivity and quality
indicators.
Finally, changes were decreed in the area of investment planning. The
emphasis was placed on self-financing, especially at the ministerial level.
Some ministries were placed on khozraschet and increasingly were to be
accountable for their plan fulfillment. Ministries were to have profit plans,
and after various payments to the state budget, retained ministry profits
were to be used for investment.
From its inception, the 1979 PIEM decree aimed at improving the
existing system. It proposed to improve planning procedures (focus on
long-term plans and counterplans), manipulate levers (greater emphasis on
quality and productivity indicators), and make the supply system more
flexible by expanding the role of contracts. It sought to reduce waste by
introducing net output normatives. These were not major changes in the
Soviet economic system.
In her 1983 evaluation of the 1979 PIEM decree, Gertrude Schroeder
concludes:
Planning is more centralized, rigid, and detailed than ever; the scope
for initiative of the producing units is more circumscribed; producer goods
are more tightly rationed; administratively set, inflexible, average cost-
based prices are retained; and intricate incentive systems are tied to meet-
ing plans for many potentially conflicting variables, with priority given to
production plans expressed in physical units. 37
Price Reform: A Continuing Issue

Western observers long argued that prices in the Soviet Union were mean-
ingless in terms of scarcity. In this context, one can understand the com-
plexities of the decentralization issue where there is no primary
information system upon which decisions can be based-no "rational"
price system.
In 1966, there was a general reform of industrial pricing conducted

largely in isolation from the Liberman discussions and the ensuing Kosy-
gin Reforms of 1965. The goals of this reform program were modest. In
view of the enhanced role of profits and monetary incentives in the
Kosygin Reforms, it was deemed necessary to set industrial prices at
average cost plus a profit margin sufficient to eliminate the pattern of
subsidization of unprofitable enterprises. No attempt was made to set
prices with respect to supply-and-demand forces (if indeed this is possible
in the planned economy). The more radical views of the mathematical
programming school advocating scarcity prices were rejected. Prices were
raised, and this reduced to some degree the number of planned loss
enterprises and profitability differentials among branches of industry. 38 In
addition, a new centralized organ, the State Committee for Prices (Gostsen)
was established with rather broad powers to administer the price system.
The reform of the price system was always seen as crucial to the
success of any attempt to enhance the role of the profits (which, as we have
seen, was not a major goal of the Kosygin Reforms) and to resolve the
problem of low-quality consumer goods (which was a major goal of the
reform). The price reform of 1966-1967 and a similar reform in 1982
failed to confront the basic issue with regard to profitability, namely, to
set prices in such a manner that enterprise profitability would reflect
managerial performance. Without price reform, profit-oriented reforms,
even with the support of the leadership, would be essentially meaningless.
After 1967, a series of measures was adopted to encourage technologi-
cal progress, the production of high-quality consumer and producer
goods, and to establish realistic regional price differentials. The proce-
dures for setting "limit prices," "sliding prices," and quality differentials
were complex. These procedures did not seem to bring about major
changes in the Soviet price system.
ECONOMIC REFORM IN RETROSPECT: THE EARLY YEARS
We have examined pre-Gorbachev Soviet economic reform from the Liber-

man discussions of the late 1950s through the many reform attempts of
the 1960s, 1970s, and early 1980s. A number of observations seem
relevant.
First, Soviet economic reform as represented by the events of the 1960s
and 1970s was clearly a complex mix of the three types of reform dis-
cussed in the beginning of this chapter. Obviously Soviet reformers wanted
better decision making; and yet at the same time they wanted to maintain
control of the direction of the economy. These reforms failed; planning
was not improved and decentralization of decision making did not take
place.
Second, Soviet economic reform during this period was very conserva-
tive. If the earlier definition of economic reform requires "fundamentally
changing working arrangements," then there was really no reform at all.
It is evident that some day-to-day procedures did change, but nothing of
great substance.
Third, to the extent that there were in the Soviet Union voices on both
sides of the market-versus-plan debate, the planners won the day. In terms
of the dominant mechanism for resource allocation, clearly the system of
planning balances was retained.
Fourth, it was evident from Soviet attempts to reform the economic
system that blueprints of reform were one thing, implementation of reform
blueprints was quite another. However, having made this point, it turns
out to be difficult to assess the reasons for rejection. In part the blueprints
were faulty (profits would be meaningless without price reform), yet at the
same time, resistance to change would be a dominant force. Soviet discus-
sion of reform programs revealed considerable bureaucratic resistance to
change. One could not expect change to be introduced when such a move
would directly challenge vested interests.
Finally, one could argue, especially in light of the contemporary focus
on transition, that mixed systems are inherently difficult to create and are
unstable over time. For example, to return to our earlier example, if Soviet
enterprises were to make input decisions based upon cost minimization
with market determined prices, there would be immediate ramifications
for the allocation of both capital and labor. Specifically, unemployment
would be a likely outcome, one traditionally unacceptable to Soviet
authorities.
The last Soviet economic reform, perestroika, was in many respects
different from earlier Soviet reform attempts; yet in spite of these differ-
ences, it was reform, not transition. However, as perestroika came to an
end after 1989, it became increasingly clear that whatever the political
arrangements, the economic system would have to change fundamentally
and the order of the day would be transition. Thus far we have discussed
transition only to the extent that it differs from reform. In the remainder
of this chapter, we focus on transition.
TRANSITION: SYSTEM CHANGE IN THE 1990s

Transition implies the shift from one set of system arrangements to an-
other (for example, the replacement of plan by market), while reform
implies changes in an existing system (for example, attempts to make a
socialist system work better). While this distinction is somewhat arbitrary,
the focus of the 1990s nevertheless has been transition. 39
The terrain of contemporary transition in both theory and practice is

uncharted and controversial. Few would disagree that the transition cases
that we are observing in the 1990s are dramatic, and yet there is a good
deal of "learning by doing" guided not by any systematic body of eco-
nomic theory or paradigm of transition, but rather by the concepts of
neoclassical economic theory of mixed relevance often applied in settings
of political and social uncertainty.
Whether we look at the broad spectrum of transition cases of Eastern
Europe, Russia, and the CIS states, or whether we focus largely on selected
cases, ongoing transition cases vary considerably. For many years, the
Soviet Union was a single political entity with a strong set of regional
policies implemented in a very large and regionally diverse country. It is
not surprising that in the present day, transition will be different in cases
such as Russia, Ukraine, and Central Asia. 40
Furthermore, the literature shows that the Soviet Union and its former
republics were in a variety of dimensions "distorted" vis-a-vis economies
that grew under the influence of market forces and world trading arrange-
ments. What type and pattern of market reforms will be necessary if these
new countries are to be integrated into the world economy? From an
economic perspective, these are important issues especially as they bear
upon day-to-day policies and practices of conversion to a new set of
working arrangements. Yet much of the literature on transition pays only
limited attention to cultural, social, and historical precedents. Given the
diversity of experiences, ethnic and geographic differences, and a "dis-
torted" starting point, transition will not be easy. 41
One would imagine that the discussion of transition from planned
economy to market arrangements would be cast within the traditional
framework of comparative economic systems, in effect a shift from
one system type to another. In fact, there has been a tendency to pay
relatively little attention to the "isms" and to treat transition as a change
in organizational arrangements and the decision-making procedures
within these arrangements. In a very real sense, there is a convergence in
the way we look at different economic systems, albeit with widely differing
specifics. 42
We have emphasized that the theory and practice of transition is itself
a developing subject of inquiry. Although one might approach the issues
of transition from differing perspectives, many would agree that the fol-
lowing are key elements.
1. The macroeconomy: Monetary policy, fiscal policy, budgets and
stabilization
2. The microeconomy: Privatization and the development of
markets
3. Price liberalization: The elimination of state-set prices for pro-

ducer and consumer goods
4. International trade: The development of decentralized organiza-
tional arrangements and the issue of a convertible currency
5. Social safety net: Policies to sustain a minimal standard of
living
Before we turn to a discussion of these transition factors, it is impor-
tant to consider some general issues. For example, it is evident that many
of these transition issues are closely interrelated and in fact cannot be
isolated readily from one another. Moreover, issues of speed and sequenc-
ing are of fundamental importance. 43 If it has been decided, in a particular
case (country) that market arrangements are to replace the plan as a means
to direct economic activity, should the transition be rapid, or should it be
carried out on a more gradual basis? This has been a critical issue as Russia
recently has changed rapidly under the leadership of Boris Yeltsin. How-
ever, the inevitable economic disruption has both social and political
consequences. Moreover, one could argue that transition is much more
complex in cases such as Russia and the CIS states as opposed to the
experience thus far in countries such as Poland and Hungary.
Sequencing is a complicated issue. Even if there is agreement on the
issue of speed, harmonizing the transition process is difficult. For example,
most economists would argue that price liberalization is a central ingredi-
ent of any transition of the formerly planned socialist economic systems.
But is the development of market infrastructure through privatization to
precede price liberalization? If such were the case, clearly the speed of price
liberalization would be slowed. If price liberalization is carried out rapidly,
should changes in the safety net be developed and implemented first or
simultaneously? There are no simple answers to these questions, and yet
as we examine the major components of transition, it is important to bear
in mind that their implementation in the real world is clouded by these
issues.
The Macroeconomy: Stabilization

It is important to bear in mind that in the formerly planned socialist
systems, macroeconomic arrangements (monetary and fiscal policies and
mechanisms), and budgets differed greatly from those found in market
economies. Monetary policies and mechanisms pertain to the money side
of the economy, and in particular, the institutions and policies designed to
govern the appropriate growth of the money supply. In addition to the
development of financial markets and appropriate infrastructure, of ut-
most importance is the development of a governing mechanism (a central

bank) and associated (independent) banks.
The other side of macroeconomic policy related to the fiscal needs of
the economy, specifically the financing of the _public sector. 44 Here again,
the mechanisms of plan and market differ fundamentally. As the economy
shifts toward the use of market mechanisms, the sources of government
revenue will change, hence the need to develop a modern and effective
system of taxation. On the expenditure side, traditional needs will be
sustained (for example, the urban infrastructure), while new and different
demands (the social safety net) will be developed.
On both the fiscal and the monetary side, a critical issue is that of
stabilization. Even in advanced and industrialized market economies, the
issues of stabilization and especially the development and implementation
of appropriate stabilization policies are complex and controversial. But in
the transition setting, there is a critical short-term set of issues. In cases
such as Russia, it was widely argued that there was a growing problem of
monetary overhang or, put simply, an excess demand in consumer-goods
markets exacerbated by inappropriate monetary expansion. At the same
time, demands on state budgets typically exceed revenues available with
an inevitable temptation to further expand the growth of the money
supply. In light of our earlier discussion of the administrative-command
economy, one can readily understand that in these transition cases, the
monetary side of the economy is one of the least developed issues, making
it most difficult to convert this element to new arrangements.
In this setting, it is understandable that price liberalization, while
necessary from an allocative perspective, would most likely be accompa-
nied by negative consequences; for example, declines in the real standard
of living. In addition to the potential damage done to emerging and fragile
market mechanisms, these difficulties of transition are likely to have other
harmful effects, especially as viewed from the vantage point of the external
world of potential foreign investors and providers of foreign aid.
Macroeconomic transition is difficult for a variety of well-known
reasons. As we have emphasized, the role of money under the former
socialist arrangements was very different from that anticipated under
market arrangements. The functions of money must change, but most
important, system participants must become aware of and respond to
those changes. The implication is clear that decision-making arrangements
will change fundamentally in both enterprises and households, a very
difficult task after long years of a planned socialist order.
It is evident that financial markets, long absent in socialist systems,
must be created, a lengthy and complicated task. Moreover, during the
intermediate stages of transition, steps must be taken to shift the economy
away from the system of centralized directives toward the use of decen-
tralized monetary incentives and constraints. This task is difficult, and
there is an inevitable tendency for the economy to revert to a familiar path,
namely, the continued use of controls.
As we have emphasized, there are important potential contradictions
between the demands placed upon monetary authorities and the ability of
those authorities to respond within reasonable policy guidelines. In this
sphere, the issues of speed and sequencing are of primary importance.
Domestic monetary and fiscal policies have important implications for
the development of the foreign sector. Again, there is a delicate balance
difficult to maintain in a political setting of modest stability and significant
uncertainty.
The Microeconomy: Privatization and Markets

Microeconomic transition policies refer to changes in the arrangements for
decision making at the micro level, that is, within the firm and the
household. 45 As the role of the planner is changed or eliminated, market
mechanisms must be developed, a process that evolves largely through
privatization, restructuring, and the development of a legal and institu-
tional framework in which contractual arrangements can be developed
and enforced. Much of the contemporary focus of transition has been on
the issue of privatization. While deemed fundamental to transition and the
development of markets, privatization has proven to be complex in the
real world.
Much of socialist industry, especially in the former Soviet Union, is
large-scale and technologically backward. Under any set of purchase terms
and possible arrangements, such large enterprises are appropriately viewed
as unprofitable and hence unattractive. This is in part an issue of restruc-
turing; yet even with restructuring, there may well be large components of
the original enterprise that are unattractive to potential investors.
If enterprises are unprofitable, it is difficult if not impossible to find
buyers, whether domestic or foreign. Moreover, such enterprises are, un-
der traditional Soviet arrangements, a major source of employment that
with the use of some form of bankruptcy would disappear.
The issue of valuation is important. If an enterprise is to be sold, there
must be some means to assess its worth so that a potential investor can
have some sense of potential profitability of the venture. Unfortunately,
given past socialist accounting methods combined with the absence of
capital markets, it is difficult to value assets. It is necessary to consider
these issues under potential price liberalization arrangements, guiding
mechanisms very different from those used in the past.
Even if some of these obstacles can be overcome, it is necessary to

develop a mechanism through which the actual privatization process can
be implemented. First, the nature of existing property rights must be
determined. Second, a mechanism for distribution of these rights must be
established. A number of schemes have been used varying from direct
distribution (for example, workers assuming equity rights in their enter-
prise), direct sales to the population (through a mechanism such as an
auction), or indirect routes (such as the issuance of general privatization
vouchers).
The outcome of privatization does not end with a change in ownership
arrangements, though this is a critical first step. Even if buyers are found
and enterprises privatized, it is not clear if the new owners can and will
act as might be the case in a full-blown market economic system. Put
another way, the formal implementation of nonstate ownership is not
sufficient to bring about meaningful market forces.
The existence of private ownership in a transition setting does not
guarantee the existence of entrepreneurial and managerial talent. Indeed,
in the former socialist economic systems, one might expect such talent to
be difficult to find. Moreover, in almost every transition case, matters of
equity are controversial. How are property rights to be determined?
Should special arrangements be made for handling assets previously con-
fiscated from known claimants? Is it possible that ownership will in fact
revert to a known and networked elite, namely, former members of the
Communist Party?
As we will see, many of these issues are difficult in practice. Russia has
found it hard to privatize. The focus understandably has been small-scale
service enterprises; due to fear of unemployment, lack of profitability, and
other problems, large-scale enterprises have been left in state hands.
Price Liberalization
Economists have always argued that a major disadvantage of the planned
economy is the lack of knowledge about relative scarcities, prices unre-
lated to scarcities, and a set of prices that where used, in fact provide false
and misleading information. On the other hand, a major element of
transition is the freeing of prices at all levels. But as we have already
emphasized, problems of speed and sequencing are critical in the case of
price liberalization. Privatization is a slow and complex process, but is it
necessary to establish markets before prices are freed? If prices are freed
at whatever stage of the transition, is it not likely that there will be serious
standard-of-living effects-required from an allocative and efficiency per-
spective but not offset to any degree by a safety net? Clearly price liberali-
zation is an essential component of transition, and yet its implementation

presents serious problems of speed and sequencing.
International Trade
In Chapter 9, we examined in detail the arrangements for the conduct of
foreign trade in the administrative-command economy. From this discus-
sion, it was evident that the organizational arrangements and the policies
for the conduct of foreign trade differed sharply from those found in
market economies. Moreover, it became evident through time that whether
in consumer well-being or technology, the Soviet Union paid a price for
these arrangements. A nonconvertible currency and barter arrangements
were the norm.
During transition, two major changes are envisioned. First, rather than
a centralized trade bureaucracy, decentralization occurs placing the trade
decision at the enterprise level, but with a sustained role for the state
during the transition period. Second, it is essential that the new country
move quickly toward the establishment of a convertible currency, most
likely through a series of managed exchange-rate regimes with increasing
liberalization.
Although the need for such changes might seem to be self-evident, it
bears repetition that in the foreign trade sector, new arrangements and
policies are designed to bring these formerly isolated economies into the
world economic system. The implications of such changes are immense not
only for participation in world economic organizations, but also for the
impact of world economic forces upon the domestic arrangements of these
formerly socialist countries.
The Social Safety Net

Most economists would argue that any transition involves cost that must
be borne by the system participants. For the general population, this cost
is most evident in the form of a shrinkage of output, rapidly rising prices
against at best modest wage increases, unemployment, and possibly most
difficult, fundamental changes in the general social contract. These issues
are especially difficult in the formerly socialist systems where for many
years efforts were made to socialize consumption. Many of the instru-
ments that we take for granted in market systems-for example, unem-
ployment compensation-did not exist in the formerly socialist systems.
During transition, there are two major issues relating to the safety net.
First, what sort of safety net will in fact be established? Will this net be
limited in scope, or wilt it be broader as we observe in the so-called
"welfare states"? Second, how will the benefits be financed, and how
should their development be timed? We have already emphasized that
issues of sequencing are· critical, especially insofar as the safety net is

designed to put a floor on the burden of transition and thereby sustain
social and political tranquility.
Sectoral Issues
There are transition cases where it is useful to consider special problems
on a sectoral or even a regional basis. Consider, for example, the case of
agriculture. 46 Prior to the era of transition, the West tended to assume that
if there was to be serious reform in the planned socialist economic systems,
it would inevitably begin in the agricultural sector. This posture reflected
the perception that change, especially privatization, would be well received
in agriculture and that priority by political leaders would be placed upon
improvements in the availability of basic food requirements. In the case of
Russia, one could argue that neither perception was correct; hence beyond
initial concerns for a food problem the agricultural sector has received
limited attention.
Consider the case of energy. The Soviet Union was a country with vast
natural resources and supplies of basic energy resources. However, then as
now, energy turns out to be a major domestic problem in terms of its cost,
availability, and distribution. What are the major problems of this sector,
and how should they be resolved? Can energy be a major player in the
overall problems of transition? In part, energy problems can be resolved
within the general framework of transition, and yet there are special
circumstances.
Energy was available to Soviet domestic consumers at prices totally
unrelated to real costs of production and distribution. As with other
products formerly supplied with significant state subsidies, changes can be
made (for example, through price increases), but this will entail dramatic
welfare implications. Moreover, in the case of energy, changes are likely to
take place with the active involvement of foreign capital and technical
talent. One could devise a long list of special problems beyond the list of
standard transition issues identified above. In Chapter 14, we will return
to some of these issues as we examine the specifics of transition in Russia.
REFERENCES
1. The concepts of centralization and decentralization are in fact difficult to
define with precision. For a recent critique, see R. G. Lynch, "Centralization
and Decentralization Redefined," Journal of Comparative Economics, vol.
13, no. 1 (March 1989), 1-14.
2. M. Bornstein, "Economic Reform in Eastern Europe," in U.S. Congress, Joint
Economic Committee, East European Economies Post-Helsinki (Washington,
D.C.: U.S. Government Printing Office, 1977), pp. 102-134.
3. Useful sources on the period are A: Bergson, "Planning and the Market in the
USSR: The Current Soviet Planning Reforms," in A. Balinky et al., Planning
and the Market in the USSR: the 1960s (New Brunswick, N.J.: Rutgers
University Press, 1967), pp. 43-64; G. E. Schroeder, "The 'Reform' of the
Supply System in Soviet Industry," Soviet Studies, vol. 24, no. 1 (July 1972),
97-119; G. E. Schroeder, "The Soviet Economy on a Treadmill of 'Reforms,"'
pp. 312-340; G. E. Schroeder, "Soviet Economic 'Reform' Decrees: More
Steps on the Treadmill," in U.S. Congress, Joint Economic Committee, Soviet
Economy in the 1980s: Problems and Prospects, part 1 (Washington, D.C.:
U.S. Government Printing Office, 1982), pp. 65-88; A. Nove, The Soviet
Economic System (London: Allen & Unwin, 1977), p. 11.
4. S. F. Cohen, "The Friends and Foes of Change: Reformism and Conservatism
in the Soviet Union," Slavic Review, vol. 38, no. 2 (June 1979), 195.
5. See V. S. Nemchinov's comments on the 1923-1924 balance in The Use of
Mathematics in Economics (Cambridge, Mass.: MIT Press, 1964), pp. 2-10.
Popov's original presentation of the 1923-1924 balance is translated in N.
Spulber, ed., Foundations of Soviet Strategy for Economic Growth (Bloom-
ington, Indiana: Indiana University Press, 1964), pp. 5-19; for a discussion of
the early Soviet mathematical economics school, see L. Smolinski, "The Ori-
gins of Soviet Mathematical Economics," in H. Raupach, ed., Yearbook of East-
European Economics, vol. 2 (Munich: Gunter Olzog Verlag, 1971), pp.137-154.
6. See E. H. Carr and R. W. Davies, Foundations of a Planned Economy, 1926-
1929, vol. 1, part 2 (London: Macmillan, 1969), pp. 787-801.
7. Spulber, Soviet Strategy for Economic Growth, chap. 2; G. Grossman, "Scarce
Capital and Soviet Doctrine," Quarterly Journal of Economics, vol. 67, no. 3
(August 1953), 311-315; R. 'Dunayevskaya, "A New Revision of Marxian
Economics," American Economic Review, vol. 34, no. 3 (September 1944 ), 531-
537; and Smolinski, "The Origins of Soviet Mathematical Economics," 150-151.
8. Cohen, "The Friends and Foes of Change," 196.
9. For a review of these contributions, see R. W. Campbell, "Marx, Kan-
torovich, and Novozhilov, Stoimost' versus Reality," Slavic Review, vol. 20,
no. 3 (October 1961), 402-418. For a general survey, see M. Ellman, Soviet
Planning Today: Proposals for an Optimally Functioning Economic System
(Cambridge: Cambridge University Press, 1971); A. Zauberman, The Mathe-
matical Revolution in Soviet Planning (Oxford: Oxford University Press,
1975); A. Katsenelinboigen, Studies in Soviet Economic Planning (White
Plains, N.Y.: M. E. Sharpe, 1978), chap. 3; L. Smolinski, ed., L. V. Kan-
torovich: Essays in Optimal Planning (White Plains, N.Y.: International Arts
and Sciences Press, 1976).
10. Liberman's reform proposals had been made in the Soviet journal voprosy
ekonomiki [problems of economics] as early as 1955.
11. The original Liberman paper and the debate that it generated are presented
in M. E. Sharpe, ed., Planning, Profit and Incentives in the USSR, vols. 1-2
(White Plains, N.Y.: International Arts and Sciences Press, 1966).
12. E. G. Liberman, in M. Bornstein and D. Fusfield, eds., The Soviet Economy:

A Book of Readings, 3rd ed. (Homewood, Ill.: Irwin, 1970), p. 361; see also
E. G. Liberman, Economic Methods and Effectiveness of Production (White
13. Liberman, in Bornstein and Fusfield, The Soviet Economy, pp. 362-363.
14. Ibid, p. 363.
15. A. Nove, The Soviet Economic System (London: Allen & Unwin, 1977), pp.
309-310.
16. According to Nove, The Soviet Economic System, p. 309, Liberman never
developed a coherent pricing system. Prices, in Liberman's own words, were
to be "fixed" and "flexible."
17. M. Kaser, "Kosygin, Liberman, and the Pace of Soviet Industrial Reform," in
G. R. Feiwel, ed., New Currents in Soviet-Type Economies: A Reader (Scran-
ton, Pa.: International Textbook, 1968), p. 334.
18. For further English translations of major contributions to the debate, see
M. E. Sharpe, ed., The Liberman Discussion: A New Phase in Soviet Eco-
nomic Thought (White Plains, N.Y.: International Arts and Sciences Press,
1965). For chronological accounts of the 1962-1965 debate, see Kaser, "Ko-
sygin, Liberman," 330-343; and Felker, Soviet Economic Controversies
(Cambridge, Mass.: MIT Press, 1972), chaps. 3-4.
19. For a discussion of this reform, see Goldman, "Economic Growth and Insti-
tutional Change," 322; Kaser, "Kosygin, Liberman," 337-338; E. Zaleski,
Planning Reforms in The Soviet Union, 1962-1966 (Chapel Hill: University
of North Carolina Press, 1967), pp. 122-140.
20. M. Goldman, "Economic Growth and Structural Change in the Soviet Un-
ion," in P. Juliver and H. Morton, eds., Soviet Policy Making: Studies of
Communism in Transition (New York: Praeger, 1967), pp. 63-80; M. Gold-
man, "Economic Growth and Institutional Change," 357; G. Feiwel, The
Soviet Quest for Economic Efficiency (New York: Praeger, 1972), pp. 242-
250.
21. See A. Kosygin, "On Improving Management of Industry, Perfecting Plan-
ning, and Enhancing Economic Incentives in Industrial Production," in Born-
stein and Fusfield, eds., The Soviet Economy: A Book of Readings, pp.
387-396.
22. This rate could be lower for unprofitable enterprises; see Zaleski, Planning
Reforms, p. 143.
23. K. Bush, "The Implementation of the Soviet Economic Reform," Osteuropa
Wirtschaft, vol. 2 (1970), 67-90, and vol. 3 (1970), 190-198.
24. L. J. Kirsch, Soviet Wages: Changes in Structure and Administration Since
1956 (Cambridge, Mass.: MIT Press, 1972), chap. 7.
25. For discussion of the organizational aspects of the 1965. reform, see Kushnir-
sky, Soviet Economic Planning, and National Foreign Assessment Center,
Organization and Management in the Soviet Economy: The Ceaseless Search
for Panaceas (Washington, D.C.: CIA, 1977).
26. G. E. Schroeder, "Recent Developments in Soviet Planning and Managerial
Incentives," in U.S. Congress, Joint Economic Committee, Soviet Economic
Prospects for the Seventies (Washington, D.C.: U.S. Government Printing

Office, 1973 ), p. 12.
27. Goldman, "Economic Growth and Institutional Change," 323; Schroeder,
"Recent Developments in Soviet Planning," 107-111. On the lack of material
supplies as a brake on decentralized investment see, for example, D. Allak-
hverdian, "O finansovykh problemakh khoziaistvennoi reformy," [About the
financial problems of economic reform] Voprosy ekonomiki [Problems of
economics], vol. 11 (1970), 63-74.
28. S. J. Linz, "Managerial Autonomy in Soviet Firms," Soviet Studies, vol. 40,
no. 2 (April 1988).
29. This discussion is based upon M. Bornstein, "Improving the Soviet Economic
Mechanism," Soviet Studies, vol. 37, no. 1 (January 1985), 1-30; Schroeder,
"Soviet Economic 'Reform' Decrees"; Schroeder, "Recent Developments in
Soviet Planning and Incentives," 11-38; Schroeder, "The Soviet Economy on
a Treadmill of 'Reforms,"' 312-340; Schroeder, "Post-Khrushchev Reforms
and Public Financial Goals," in Z. M. Fallenbuchl, ed., Economic Develop-
ment in the Soviet Union and Eastern Europe (New York: Praeger, 1976),
348-367; National Foreign Assessment Center, Organization and Manage-
ment in the Soviet Economy, pp. 1-22; A. C. Godin, "Industrial Reorganiza-
tion: The Associations," in U.S. Congress, Joint Economic Committee, Soviet
Economy in a New Perspective (Washington, D.C.: U.S. Government Printing
Office, 1976), pp. 162-188; and Kushnirsky, Soviet Economic Planning,
chaps. 1-3.
30. Schroeder, "The Soviet Economy on a Treadmill of 'Reforms,"' 314.
31. For a discussion of the Shchekino experiment, see P. Rutland, "The Shchekino
Method and the Struggle to Raise Labour Productivity in Soviet Industry,"
Soviet Studies, vol. 36, no. 3 (July 1984), 345-365; B. Arnot, "Soviet Labour
Productivity and the Failure of the Shchekino Experiment," Critique, vol. 1,
no. 5 (1981), 32-56; and B. Arnot, Controlling Soviet Labour (London:
Macmillan, 1988), chaps. 5-8.
32. P. K. Cook, "The Political Setting," in U.S. Congress, Joint Economic Com-
mittee, Soviet Economic Prospects for the Seventies (Washington, D.C.: U.S.
Government Printing Office, 1973).
33. This section is based on Bornstein, "Improving the Soviet Economic Mecha-
nism"; Schroeder, "Soviet Economic 'Reform' Decrees"; P. Hanson, "Success
Indicators Revisited: The 1979 Soviet Decree on Planning and Management,"
Soviet Studies, vol. 35, no. 1 (January 1983), 1-13; and N. Nimitz, "Reform
and Technological Innovation in the llth Five Year Plan," in S. Bialer and T.
Gustafson, eds., Russia at the Crossroads (London: Allen & Unwin, 1982),
chap. 7.
34. Bornstein, "Improving the Soviet Economic Mechanism," Soviet Studies, vol.
37, no. 1 (January 1985), 2.
35. Ibid., 23.
36. Ibid.
37. Schroeder, "Soviet Economic 'Reform' Decrees," 82.
38. G. E. Schroeder, "The 1966-67 Soviet Industrial Price Reform: A Study in
Complications," Soviet Studies, vol. 20, no. 4 (April 1969), 464; M. Born-
stein, "Soviet Price Policy in the 1970s," in U.S. Congress, Joint Economic
Committee, Soviet Economy in a New Perspective, pp. 17-67; and J. S.
Berliner, "Flexible Pricing and New Products in the USSR," Soviet Studies,
vol. 27, no. 4 (October 1975), 525-544.
39. The reader will not be surprised to learn that there is a very large and growing
literature on transition. A useful point of entry for those interested in the
former Soviet Union is P. Murrell, ed., "Symposium on Economic Transition
in the Soviet Union and Eastern Europe," Journal of Economic Perspectives,
vol. 5, no. 4 (Fall 1991).
40. For a discussion of issues relating to the base from which transition begins,
see T. A. Wolf, "The Lessons of Limited Market-Oriented Reform," journal
of Economic Perspectives, vol. 5, no. 4 (Fall 1991), 45-58.
41. Traditionally, the Western literature has characterized planned socialist sys-
tems in a variety of familiar dimensions-underutilization of foreign trade,
underurbanization, lack of efficiency in production, etc. If all of these charac-
terizations are correct, such systems are in fact "distorted" vis-a-vis market
systems. Moreover, the path from plan to market could be characterized in
terms of the nature and magnitude of the distortions. For reservations about
this view, see P. Murrell, "Can Neoclassical Economics Underpin the Reform
of Centrally Planned Economies?" Journal of Economic Perspectives, vol. 5,
no. 4 (Fall 1991), 59-76.
42. See, for example, J. E. Stiglitz, Whither Socialism? Perspectives from the
Economics of Information (Cambridge: MIT Press, 1991).
43. For a useful overview, see S. Fischer and A. Gelb, "The Process of Socialist
Economic Transformation," journal of Economic Perspectives, vol. 5, no. 4
(Fall 1991), 91-106.
44. For a discussion of financial aspects of transition, see R. I. McKinnon, "Fi-
nancial Control in the Transition from Classical Socialism to a Market Econ-
omy," journal of Economic Perspectives, vol. 5, no. 4 (Fall 1991), 107-122.
45. See, for example, Jan Svejnar, "Microeconomic Issues in the Transition to a
Market Economy," Journal of Economic Perspectives, vol. 5, no. 4 (Fall
1991), 123-138.
46. See, for example, K. Brooks et al., "Agriculture and the Transition to the
Market," Journal of Economic Perspectives, vol. 5, no. 4 (Fall 1991), 149-
161; A. Braverman and J. L. Guasch, "Agricultural Reform in Developing
Countries: Reflections for Eastern Europe."
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of Economic Perspectives, vol. 5, no. 4 (Fall 1991), 77-89.
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and Socialist Economies," Comparative Economic Studies, vol. 32, no. 3
(Fall 1990), 93-137.
P. Murrell, "Can Neoclassical Economics Underpin the Reform of Centrally
Planned Economies?" Journal of Economic Perspectives, vol. 5, no. 4 (Fall
1991), 59-76.
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Road to Monetary Union (New York: Kluwer Academic Publishers, 1993).
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Change (Washington, D.C.: The World Bank, 1992).
THIRTEEN
••
Perestroika: The Last

Reform
"'\"Xi:en Mikhail Gorbachev became general secretary of the Soviet

Communist Party in March of 1985, he inherited a wide range of pressing
economic problems, issues which we examined in detail in Chapter 10. In
addition to a continuing slowdown in the rate of economic growth asso-
ciated with serious productivity difficulties, there was also evidence of
more fundamental problems. The Soviet Union suffered from a serious
technology gap with the West and was unable to modernize its stagnant
economic system. Possibly most important, growing social problems arose
in a population increasingly restive in the absence of long-promised im-
provements of consumer goods and food products.
Although many of these problems had been building over a long span
of years, traditional Soviet economic reform, which we examined in Chap-
ter 12, had been unable to cope with them. Previous reform programs had
not altered the path of the Soviet economy. It was increasingly evident that
change was necessary, and that change would have to be different from
earlier defeated reform efforts. 1
323
As we examine the Gorbachev era from the perspective of the mid-

1990s, we know that the last Soviet reform was a major effort to recast
the Soviet economic and social systems, and yet we also know that in the
end it failed. The economy did not improve to any appreciable degree, and
on December 25, 1991, the Soviet Union officially came to an end, to be
replaced by the Commonwealth of Independent States (CIS) based on the
former Soviet republics with the Russian Republic as the successor state
to the former Soviet Union. How will history judge the Gorbachev era?
Will it be viewed as a serious effort to revitalize the planned socialist
system? Or will it be viewed as an effort destined from the earliest stages
to replace that system with a new set of arrangements, via a transition
from planning to the market?
Although our approach is to some degree arbitrary, we follow the
example of other authors who have divided the era of perestroika into four
phases. 2 Phase 1 we characterize as the introduction of perestroika from
early 1985 to early 1986 when Gorbachev spoke about the vision of
perestroika, short on specifics, but long on rhetoric. Phase 2, roughly 1986
through 1987 and to some degree extending into 1988, was an effort to
lessen growing Western criticisms of the perestroika program. In Phase 1,
Gorbachev envisioned change without the use of any program of change.
It was naively felt that Soviet economic problems could be turned around
through modest changes in the economic system. Phase 2 was charac-
terized by a flow of legislation, which started to address fundamental
issues that would be the subject of intense discussion and debate. This
legislation was clearly designed to be the substance of perestroika as a
program of economic reform.
Phase 3, from 1988 through 1989, followed the initial flow of legisla-
tion and was supposed to be a period of implementation, roughly 1988
and 1989.
In Phase 4, it became evident that Gorbachev's comprehensive reform
program lacked a totality and a sequencing focus necessary for the serious
implementation of change. The traditional system was collapsing, but
nothing was taking its place. Although performance had improved to some
degree in the early Gorbachev years, performance slumped badly in 1989
and thereafter. Domestic support for the Soviet leader had waned, and the
discussion of change took on a new perspective. A series of transition plans
were designed not to improve the existing system but rather to change the
system. It became clear that a new economic market-oriented system had
to be created. We turn to a discussion of the Gorbachev era cast in terms
of these four general phases of attempted change.
Perestroika: The Last Reform 325
GORBACHEV'S REFORM THEMES: THE FIRST PHASE OF PERESTROIKA
The spirit of Gorbachev's reform program emerged early during his period
of leadership. At the Twenty-Seventh Party Conference in February of
1986, Gorbachev called for "radical reform" (radikal'naia reforma). It
was clear that major changes would have to be made in what was still
derisively called "the administrative-command system" to reverse the
long-term deficiencies of the system and the contemporary period of
stagnation (period zastoia), for which many blamed Leonid Brezhnev. 3 The
early Gorbachev era was characterized by new slogans that were much
discussed both within and beyond the Soviet Union.
Perestroika, meaning literally "restructuring," referred to the concept
of economic reform, designed to reverse the declining performance of the
Soviet economy and, most important, to raise its technological level.
Gorbachev; however, came to represent much more than simply economic
reform. In light of the history of Soviet society, much of U.S. attention
understandably would focus on the concept of glasnost or openness.
Glasnost was a concept much broader than perestroika and envisioned an
opening of Soviet society in terms of daily discussion, the media, literature,
and the conduct of daily life. Gorbachev envisioned a democratization
(demokratizatsiia) of Soviet political life. While this concept would apply
to participation of the general population in Soviet political life, it would
also come to include worker participation in enterprise decision making. 4
Although the precise meaning and possible impact of these new
ideas in Soviet society remained unclear during the early Gorbachev years,
he had begun to distinguish his economic reforms from those of earlier
years. In particular, Gorbachev hoped that a combination of economic,
political, and social change would result in a new resiliency of the Soviet
economy, and specifically, in acceleration (uskorenie) of Soviet economic
performance. In light of the ultimate demise of perestroika and the Soviet
Union itself, it is worth dwelling for a moment on these early themes.
Although Gorbachev would be criticized for not bringing forth a
viable reform program, his initial pronouncements on change were met
with excitement. It is thus ironic that while Gorbachev stressed new and
very different themes such as glasnost, his vision of change clearly was
based upon many concepts from the past, concepts that had failed. The
most noticeable theme from the past was the idea that the Soviet people
contained unbounded capabilities, if only these capabilities could be un-
leashed with new energy and new enthusiasm. Why was economic reform
linked to social change?
First, Gorbachev concluded that the "human factor" contributed sig-

nificantly to the stagnation of the Brezhnev era. 5 Thus any reform effort
that failed to come to grips with motivational factors stood little chance
of success. The idea was that if workers had an increasing voice in
enterprise affairs and even in political affairs, they would be less likely to
feel alienated from the Soviet system.
Second, if ordinary citizens were to support the policies of perestroika,
they had to have a better understanding of both the costs and the benefits
of economic reform. In order to effect both the costs and the benefits of
reform, candor would be required to sustain necessary popular support.
One could also argue that increased candor would serve to weaken the
voices of political opponents, especially those in the economic bureaucracy
and the upper reaches of the Communist Party, traditional sources of
opposition to economic reform. 6 In the late 1980s, Soviet revaluations of
the official growth statistics of the 1970s illustrated how glasnost could in
fact be used to strengthen the case for economic reform.
Third, a democratization of Soviet life, by giving ordinary Soviet citi-
zens a say in economic and political life, would make them more willing to
bear the costs of restructuring. Democratization also would give the gen-
eral population a chance to share in the process of discrediting the failed
policies of past politicians. Democratization was widely viewed as a mech-
anism to increase morale in the Soviet workplace. In spite of improvements
in the Soviet standard of living, rewards were generally regarded as inade-
quate to motivate effort. Moreover, vague promises of a "socialist future"
could no longer be relied upon as they might have been in the 1930s.
Indeed, as we emphasized in Chapter 10, a key contributor to Soviet
economic decline was the issue of inadequate attention to consumption. 7
Fourth, both glasnost and democratization were seen as mechanisms
to enhance the Soviet Union's standing in the world community. Key
features of perestroika (for example, generating technological change to
modernize the Soviet economy) would inevitably require the active sup-
port and participation of the advanced industrialized nations. As the
legislative underpinning of perestroika unfolded, the role of the external
world would be very important.
Most observers viewed Gorbachev's efforts as serious and motivated
by the lack of legitimate alternatives. Even in the early days of perestroika,
it was evident that Gorbachev had learned from the past. If new reforms
were to succeed, several conditions had to be met.
The power of the entrenched bureaucracy (especially at the ministerial
level) had to be reduced. Bureaucratic resistance had been a major obstacle
to past reform efforts. One simply could not expect the most important
beneficiaries of past policies to be eager to see those policies changed.
Gorbachev had learned that piecemeal reforms would fail. There was
no single magic key to success; what was needed was a comprehensive and
integrated set of changes in both institutions and policies.
Although local officials and especially enterprise managers could find
much to criticize in the administrative-command economy, one must recall
that it was a system of long standing, in which enterprise managers had
risen to positions of power and influence. Like their counterparts in the
ministerial structure, enterprise managers would not quickly abandon the
system that had allowed them to achieve substantial personal benefits.
Although the early years of perestroika were very short on specifics,
some general directions of change, in part directions derived from past (if
failed) reforms, were evident. The key, according to Gorbachev, would be
greater initiative at the enterprise level and less petty tutelage (opeka) from
above. 8 Enterprises should have greater control over and responsibility for
their affairs, especially with regard to the basic decisions on output and
inputs. Enterprises, spurred on by the human factor and democratization,
would be encouraged to take responsibility for their results, while upper-
level bodies, especially ministries, would be concerned with long-run
trends, issues of technological change, and the like.
Thus enterprises would require new and better mechanisms for inter-
nal decision making, and at the same time, would seek to establish new
horizontal links, especially with customers. Under earlier "direct links"
experiments, it was argued that an enterprise must know what the cus-
tomer wants, and must face penalties for poor quality or for unwanted
products.
Clearly the early themes of the Gorbachev era represented significant
departures from the pre-Gorbachev administrations. At the same time,
much of the Gorbachev rhetoric contained familiar jargon from the past;
there was in fact no coherent and complete reform program. To some
degree, the critics would be silenced by the onslaught of reform legislation
that would unfold beginning in 1986. We turn to an examination of the
substance of perestroika as economic reform.
THE CONTENT OF PERESTROIKA
The content of perestroika was subject to significant change over time.

Perestroika's main and durable themes can be found in a relatively limited
number of decrees that the interested observer can follow without major
difficulty. Rather than develop the content of perestroika by examination
of a series of decrees, however, we choose to look at major themes in more
or less chronological order. To assist the reader, we provide a list of major
documents in Table 13.1.
Table 13.1 PERESTROIKA LEGISLATION
Date Source Title Content
February 1986 27th Congress of Guidelines Targets to be

the Communist Party achieved by
of the Soviet Union 1990 and 2000
June 1987 Plenum, Central Basic Provisions General outline
Committee of CPSU of basics
June 1987 Law Law on State Detail of
Enterprises changes for
enterprises
July 1987 Law Law on Expanded co-op
Self-Employment activities
May 1988 Law Law on Cooperatives Formation of
co-ops
February 1990 Law Law on Property Major changes
in the USSR in ownership
Source: Compiled by the authors from E. A. Hewett and V. H. Winston, eds., Milestones in Glasnost and
Perestroyka (Washington, D.C.: The Brookings Institution, 1991). pp. 498-506.
Organizational Change
Before we turn to the specifics of legislation, it is important to note that
the early years of perestroika were characterized by organizational change,
much of which bore a striking similarity to earlier failed reforms. The
focus of attention was a reduction of ministerial authority and the estab-
lishment of yet more organizations. Late in 1985 the Machine Building
Bureau was established to coordinate the activities of the machine-building
ministries. In early 1986, the Fuel and Energy Bureau was created. In late
1985, agricultural ministries were consolidated to form a "super ministry"
(Gosagroprom) with a reduction in central staffs and an expansion of
activities on a regional basis. 9 A similar reorganization of the construction
ministries took place in August 1986, and in September of that year, the
Foreign Economic Commission was established. This latter reorganization
was an important signal for change in the foreign sector. It gave a limited
number of enterprises the right to engage directly in foreign trade, a major
departure from past policies. As time passed, more and more enterprises
received the right to engage in foreign trade directly, a fact that led to
considerable chaos in foreign trade dealings. At the same time, while there
had been major problems in both agriculture and construction, the
changes implemented at this time· were seen as organizational in character,
similar to changes made during past failed reforms.
While the Basic Provisions for Radical Restructuring of Economic
Management outlined the major directions of change, the important leg-
islative content of perestroika began with the Law on the State Enterprise
(LSE) in mid-1987. 10
Reduction in Enterprise Tutelage

As with previous economic reforms in the Soviet Union, LSE envisioned a
reduction in intervention of planners and ministerial officials in the rou-
tine affairs of enterprises. Upper-level officials were to be concerned with
long-term issues such as investment, technological achievement, and the
like. Firms would be given increased freedom to enter into supply-and-
delivery contracts with other enterprises without approval from superiors.
Initially, plan targets would be replaced with state orders (goszakazy),
which the centralized supply system would control. The share of state
orders in the output of an enterprise declined as perestroika progressed.
Ministries and planners were to influence enterprise actions not
through directives (that is, beyond state orders) but rather through indirect
instruments such as rules, norms, and laws. Directives were to be severely
limited and new rules established. Moreover, local Communist Party or-
gans (the obkom, gorkom, etc.) were to cease their tutelage of local
enterprises, eliminating the local redistribution of materials and ending the
practice of requiring local enterprises to perform civic tasks.
Insofar as a "direct links" approach was to replace much of the
traditional administrative-supply system, a new emphasis would be placed
upon contract enforcement through legal channels. Central authorities
would determine if their supply plan (plan postavok) had been fulfilled,
including issues of assortment, timeliness, etc. Indeed, under the new
arrangements, fulfillment of the supply plan was to be of great importance
with increased legal sanctions to enforce fulfillment.
A new state committee, Gospriemka, was established to monitor
quality. This agency was to be wholly independent of enterprises and thus
in a position to act as an independent agent on issues of product quality.
These new themes suggested that, if implemented, there would be a
significant reduction in the external controls upon the Soviet firm. At the
same time, enterprises were themselves being asked to assume a much
greater responsibility for their actions.
Enterprise Accountability
Under perestroika, enterprises were to be responsible for their "final
results." Each enterprise was to be self-financing in the long run, meeting
wage payments and other financial obligations from enterprise revenues.
Investment requirements were to be met from retained earnings or bank
borrowing, while bonus funds were to be drawn from enterprise profits.
Perestroika implied that enterprises would be placed on full economic
accounting (po/'ny khozraschet). 11 Put simply, full accounting implied that
unprofitable enterprises must eventually go out of business either through
bankruptcy or through another enterprise taking over its assets. Thus the
system of automatic subsidies would come to an end. If fully implemented,

these new rules would imply the end to guaranteed employment, as failing
(unprofitable) enterprises would no longer be able to guarantee the jobs
of their employees. Although the concept of economic accountability was
not new, there seemed to be a new seriousness of intent.
Whereas enterprise managers were to be freed from excessive interven-
tion from above, enterprises were also to operate on a self-management
basis (samoupravlenie). Managers would be elected and would work with
a council selected from among the workers determining enterprise policies.
This was a major component of Gorbachev's earlier emphasis on democ-
ratization.12
The increase in enterprise responsibility was designed to guarantee
that enterprises would act in an economically rational manner. Enterprises
unable to produce quality goods for their customers would not be able to
survive. Moreover, workers would exercise a new measure of control over
management. The soft budget constraint was to be replaced with a hard
budget constraint.
Although the risks for managers and workers seemed to increase under
these new arrangements, there were also potential benefits. Managers and
workers would have strong financial incentives. 13 At the same time, enter-
prises would be required to surrender a portion of their profits to the state
in the form of a uniform tax, with after-tax profits available for manage-
ment and worker rewards. Under these rules, the nonprofitable enterprise
would assume a very undesirable position.
The rules of enterprise behavior and the framework in which these
rules would function were both to change significantly under perestroika.
Although ownership arrangemdnts were not to change, new regulations
did call for an expanded role for individual economic activity.
Cooperatives, Private Activity, and

Property Rights in Agriculture
The Law on Private Economic Activity, passed in late 1986, allowed
individuals to engage in a wide range of economic activities previously
deemed (at least officially) illegal. 14 For example, private activity in taxicab
service, dry cleaning, restaurants, and repair services would be legal,
although these activities were to be carried out by able-bodied individuals
on a part-time basis (in addition to a main job in the state sector) or by
students, housewives, and others permitted to work on a full-time basis.
Private activity would be licensed with a licensing fee.
State employees were permitted, on a part-time basis, to form coop-
eratives for the production of consumer goods. After the payment of
income taxes to the state, after-tax income would be distributed among

cooperative members as a form of profit sharing. Cooperatives would be
free to contract for materials and services and would set their own prices.
The major restrictions would be that cooperatives were not envisioned as
full-time activity for able-bodied adults, and also that there were severe
restrictions on the cooperatives' ability to hire labor.
In effect, the legalization of private activities brought some of the
second-economy activity to the surface, which helped provide quality
consumer goods for the general population.
If the legalization of private economic activity seemed to be limited, it
remained even more limited in the agricultural sector. In the early years of
perestroika, Gorbachev envisioned the retention of state and collective
farms, though he advocated limited rights to private property in the form
of long-term leases. For many observers, it was striking that the early
legislation of perestroika paid relatively little attention to agricultural
production, and even less attention to the chronic problems of storage,
processing, and distribution of food.
Mikhail Gorbachev had long recognized the problems of modernizing
the Soviet economy and especially the need to import foreign technology.
The issue of technology was a fundamental part of the Gorbachev pro-
gram, important both at home and in terms of Soviet relations with the
rest of the world. Proposed changes in this area were among the most
dramatic of the Gorbachev era and deserve close attention.
The Technology Issue

Gorbachev's major industrial policy was that of modernization, specifi-
cally to raise the technological level of Soviet industry to that of the United
States and Western Europe by the end of the 1990s. Such changes would
require the extensive retooling of production facilities and the improve-
ment of specialized machine tool production. However, the achievement
of such goals would have to overcome traditional problems of managerial
resistance, construction delays, production of low-quality output, and the
like. Capital allocation procedures would have to change to foster a
rational retirement of outdated and outmoded capital equipment. Product
quality would have to be emphasized and personnel rewarded in more
innovative ways to implement a successful program of research and devel-
opment. In short, Gorbachev envisioned improvements in the quality of
the capital stock, rather than continuing additions to the existing capital
stock.
Gorbachev sought to improve the technological level of Soviet indus-
try in two important ways. First, he envisioned opening up the Soviet
economy, changing foreign trade arrangements and policies (especially the

development of joint ventures) to attract Western capital, Western technol-
ogy, and Western management skills. Second, Gorbachev envisioned en-
forcement of sectoral priorities to be emphasized through a Japanlike
industrial policy. The enterprise reward structure would be changed to
emphasize material savings, accelerated retirement of equipment, and the
meeting of assortment and quality targets. Although Gorbachev resorted
to outmoded organizational solutions such as the creation of super organi-
zations to centralize research-and-development work, he also emphasized
limits on new construction and modernization of existing facilities. 15
Foreign Trade: The Opening of the Soviet Economy

In earlier chapters, we examined the economic arrangements and policies
that served to isolate the Soviet economy from the impact of world
economic events. In a series of legislative acts beginning in 1986, the
foreign trade arrangements of the Soviet Union were to undergo signifi-
cant change. 16
The monopoly of the state exercised through the ministry of foreign
trade was to be relaxed with ministries and enterprises increasingly per-
mitted to conduct foreign trade directly with foreign customers. Soviet
enterprises would thus be able to make deals abroad and accumulate hard
currency. Under these new arrangements, the formerly overwhelming pow-
ers of the Ministry of Foreign Trade would be reduced. In 1986, the State
Committee for Foreign Economic Relations was created to coordinate
foreign trade under the new more decentralized arrangements. Beginning
in 1986, enterprises were permitted to retain a significant portion of
hard-currency earnings for their own use.
Another major reform of trading arrangements pertained to joint
ventures. Beginning in 1987, new Soviet legislation permitted and indeed
encouraged the establishment of joint ventures between Western firms and
Soviet enterprises. In the initial phases, legislation was quite restrictive
with regard to key issues such as equity, repatriation of profits, and so on.
Over time, however, there was a relaxation of these conditions. Although
these changes in the foreign sector were dramatic departures from past
Soviet practices, they would nevertheless be among the most difficult to
implement. Even with substantially relaxed regulations regarding foreign
investment in the Soviet Union, it proved difficult to attract any significant
amount of foreign capital. Moreover, as problems arose in the servicing of
foreign debt, the government had to back away from promises to allow
exporting firms to retain hard currency.
Beyond the changing of organizational arrangements and policies in
Soviet foreign trade, the Soviet Union moved steadily toward full partner-
ship in the international community. Steps were taken to seek Soviet

membership in GATT, the World Bank, and the International Monetary
Fund. Discussions were begun regarding the issue of making the ruble
convertible, an essential basis of any future integration of the Soviet Union
with Western nations. However, all of these steps proved very difficult to
implement in a system so long isolated from the world community of
trading nations. The Soviet economy's performance continued to deterio-
rate.
Price Reform
Much of the early emphasis of perestroika was the development of new
enterprise rules and a new framework within which these rules would
function. A critical element of any such framework would be prices and
price reform, a long-standing and controversial problem in the adminis-
trative-command economy.
Western economists had always argued that if prices were to be
meaningful purveyors of information on relative scarcities, and if they
were to be used in the decision-making process, the entire Soviet price
system would need to change. 17 The early decrees of perestroika called for
relatively limited price reform to be implemented over a fairly long period
of time stretching into the 1990s.
The initial intent was to create an industrial wholesale price system in
which only a relatively few nationally important commodities would have
centrally set prices. The bulk of the remaining wholesale prices would be
set by negotiated contracts between buyer and seller according to price-
setting rules and limits set by central authorities. A number of wholesale
prices (presumably those on products with the lowest national impor-
tance) were to be set freely (independently of existing rules) according to
contracts and/or market conditions.
Retail prices also were to be reformed. Because a large number of
commodities contained subsidies, a primary goal of retail-price reform
would be the elimination of price subsidies. This meant, however, changes
in relative prices and, for the most part, sharp increases in the aggregate
price level. If prices were to be used in decision making, changes were
essential. However, the political difficulty of making such changes, espe-
cially rapidly, meant that relatively limited attention would be given to
price reform. The nature of formulas chosen and the results actually
achieved would be targets of criticism.
From the vantage point of hindsight, it is very easy to see that, as a
program, perestroika lacked many of what we now know to be the critical
elements of transition, such as sequencing, macroeconomic stabilization,
and attention to property rights and market-type infrastructure. However,
it may be best to judge perestroika as serious reform, not transition. So

judged, we may argue that many significant problems would emerge from
the legislative content of perestroika. Indeed, continuing changes in legis-
lation often made it difficult to know precisely what sort of laws prevailed
at any particular point in time. However, compared to past Soviet reform
efforts, it did envision major changes, especially in the sphere of enterprise
decision making and foreign trade.
THE IMPLEMENTATION OF PERESTROIKA
Thus far we have outlined the major features of perestroika as developed

through a series of legislative acts. However, if they were not implemented,
none of these potential changes would matter. After all, successful resis-
tance to implementation was a hallmark of previous Soviet economic
reform.
Whether or not the body of legislative acts did in fact constitute a
comprehensive reform program, there were many ongoing changes. It
became difficult to discover precisely what piece of law was relevant.
As with previous reforms, it was very difficult to assess implementa-
tion. For example, consider the case of the switch from plan targets to state
orders (goszakazy). If this were to take place, it would be a very important
change in Soviet governance of the economy. Yet, one might well argue, is
there any real difference between a state target and a state order? Could
one really believe the numbers being released about the distribution of
enterprise output between targets and orders? Although there was appar-
ently some movement toward state orders, it had always been difficult to
judge reform implementation in this area.
It had also been very difficult to judge the impact of Soviet economic
reform by looking at the results of economic activity, in large part because
reform seemed to have only very limited impact. Indeed, one might argue
that in the short run, serious change could not be expected. In any event,
the observers of perestroika may have been initially lulled into a view of
success because of relatively good economic performance. Compared to
the early 1980s, 1986 was judged to be a very good year in terms of
traditional indicators such as the rate of growth of output. However, both
1987 and 1988 were in fact relatively bad years. Although it was hoped
that the positive effects would be felt by the end of the decade, this did not
turn out to be the case, and the economy slumped badly in 1989 and
thereafter.
Although the quantitative indicators of Soviet economic performance
were signs of important trouble as the 1980s came to an end, possibly even
more serious troubles were to come in the consumer sector, where money
incomes were growing but real rates of growth of consumption were at

best modest. By the end of the decade, it became apparent that perestroika
as originally conceived was failing. There were problems in the basic
conception of the program, but in any event, it was not being imple-
mented. The Soviet economy increasingly became a system with ho guid-
ance mechanism. Old ways were breaking down, new ways were not
emerging, and fundamental economic difficulties were surfacing rapidly.
The final stage of perestroika deserves close attention; it marked the end
of the reform era and the beginning of the transition era. The latter, even
before the breakup of the Soviet Union as a political entity, was a qualita-
tively different era, incompatible with the early Gorbachev image of a
revived and workable socialist economic system. By the end of the per-
estroika era, a consensus had formed that repair of the old system would
not be possible. The development and implementation of a new economic
system would be necessary.
PERESTROIKA: THE END
Looking back, it is not especially difficult to see why perestroika might

fail. There were many traditional reasons, and after all, the Soviet econ-
omy was, by the mid-1980s, an economy with major and increasing
distortions. Moreover, we now know that the shift away from the admin-
istrative-command model automatically raised a number of very compli-
cated issues presenting a task far more difficult than previously expected.
One might well ask whether any program proposed by Gorbachev in the
mid-1980s could have led to significant reform. The difficulties facing
perestroika were formidable.
First, a,lthough we have treated the body of legislation as representing
a reform program, in reality it was much less clear cut. True, the legislative
acts focused on major issues and in most cases would have represented
major departures from past Soviet practices. At the same time, there were
large-scale internal problems and inconsistencies. Consider the enterprise
law. A delicate and probably impossible balance between local initiative
and central influence was to be maintained. But the latter was to be
developed by more rule making, and the former was to be largely mana-
gerial initiative responding to prices. Judged against previous reforms, one
could have had little faith in either component. Soviet prices had little or
no economic meaning, and as such remained largely irrelevant for deci-
sion-making purposes. Proposed changes were limited, slow to be
achieved, and probably irrational. Given Soviet property-ownership ar-
rangements, it was inappropriate to believe that rational prices could
emerge from a bargaining process between producers and consumers.
A second major problem with perestroika was that of timing and

complementarity. If enterprises are increasingly to deal with other enter-
prises, the infrastructure within which such dealings can take place must
exist. Consider a specific example. Little attention had been paid to reform
of the Soviet legal system. How could new enterprise decision-making
mechanisms and enforcement arrangements function in a traditional So-
viet legal setting attempting to enforce contractual arrangements based
upon irrelevant prices? One simply could not expect rational decision
making to emerge in this setting, even though the issue of reform timing
was in fact very complicated. It is difficult to institute critical changes
simultaneously, and yet any interim period would be difficult. It was for
this reason that Gorbachev, after his initial period of optimism, clearly
envisioned a period of decreasing economic achievement. 18 We now know,
however, that the decreases are much larger and likely to be sustained over
a longer period of time than had been thought.
A third obstacle to reform in Soviet industry was that of input selec-
tion. Traditionally, input usage was dictated by the plan with actual
allocation of material inputs through the state wholesale trade structure.
Under new arrangements, enterprises were increasingly freed from such
strict allocations, but no replacements were envisioned. There was little or
no discussion of wholesale markets and even less discussion of the re-
quired underpinnings of markets, such as new property rights. In light of
these developments, it is not surprising that enterprises continued to
pursue old ways using the arrangements that had in fact been available for
many years. In effect, Gorbachev was seeking to impose change on the
existing economic system. Gorbachev was indeed a reformer interested in
change, but it was ultimately change within a modified socialist economic
order.
Perestroika had to confront a fourth major problem traditionally
important in the Soviet Union, namely, bureaucratic resistance. 19 Gor-
bachev clearly was concerned with this issue. Bureaucratic resistance is
often described, in both the Soviet and Western literature, as motivated
solely by a fear of loss of prestige and authority. But bureaucrats resist
reform and change for a number of more basic and rational reasons.
Ministerial officials would resist decentralization of decision-making
authority as long as they retained responsibility for enterprise achieve-
ments under traditional rules of the game. Ministers, as long as they had
to meet physical output goals, were reluctant to end enterprise tutelage;
combined results determined ministerial success. Thus ministries applied
their own levers (for example, redistribution) not necessarily because they
enjoyed such actions, but rather because these actions led to goal achieve-
ment under existing rules. Throughout the era of perestroika, it was
evident that the matter of determining an appropriate role for bureaucrats

of ministries and other upper-level organizations was in fact a major and
unresolved issue.
A fifth major issue was that of uncertainty, especially critical in a time
of transition. Uncertainty is a problem facing the players in a market
economy, yet with reasonable stability of rules, objectives, and decision-
making tools, these players can act in a rational manner vis-a-vis the
objectives. In the Soviet reform era, the objectives were changing; the rules
were changing and often were not clear; and the players were entering a
system with little historical experience in decision making in such environ-
ments. In these circumstances, it is not surprising that players would, even
though in some sense trying to do their best, behave in what might well be
a socially irrational manner. This is a problem of change in general, not
peculiar to changes in the administrative-command system.
Possibly the most important reason for the demise of perestroika was
the ultimate decline of the Soviet economy. As the 1980s came to an end,
it was clear that the Soviet economy was facing increasingly serious
economic problems, and that perestroika, however well intentioned, was
definitely not coping with this fact. It was economic decline that rapidly
brought the reform issue to a head and led to a completely new way of
thinking about change.
PERESTROIKA AND ECONOMIC DECLINE: UNDERSTANDING THE END
As we emphasized in Chapter 10, evaluating Soviet economic performance

was always a difficult and challenging task. Much of our analysis of the
Soviet economy had been cast in terms of indicators relevant to their
system; for example, plan fulfillment, output growth, and the like. At the
same time, it was difficult to track performance indicators such as unem-
ployment, inflation, and standard of living used in other societies. To some
degree, the era of glasnost changed this, thereby changing our assessment
of the Soviet economy during the latter years of perestroika.
The year 1989 turned out to be pivotal. During this year, emergency
measures were introduced to respond to growing economic problems.
Administrative controls were introduced; attention to consumer goods
was to increase; financial discipline was to be tightened. Consumer-goods
price ceilings were to be enforced and wage increases above a certain
amount would result in a heavy tax on the enterprise. These changes were
a direct response to performance problems.
Compared to 1986, the years 1987 through 1989 saw at best only very
modest increases in per capita output (see Table 13.2). Moreover, while
Table 13.2 AGGREGATE ECONOMIC PERFORMANCE DURING PERESTROIKA

Annual Percentage Change
1986 1987 1988 1989 1990
GNP 2.5 2.5 2.8 -0.1 -3.1

Factor productivity -.1 .6 2.0 -0.6 -3.7
Man hours 1.9 2.6 4.2 1.5 -2.3
Capital -1.8 -1.0 0.0 -2.3 -4.8
Note: GNP is defined as nonagricultural, nonservice output based on 1982

ruble indexes, sector of origin at factor cost.
Source: Directorate of Intelligence, Handbook of Economic Statistics, 1991
Washington, D.C.: CIA. 1991).
personal money income grew rapidly throughout the period, real con-
sumption grew at a much slower pace. By 1989, the average annual rate
of repressed inflation was generally thought to be over 5 percent. The
Soviet budget deficit increased rapidly from roughly 4 percent of GNP in
1985 to over 10 percent in 1989. In 1984, the gross hard-currency debt
of the Soviet Union was estimated to be about $22 billion in U.S. dollars.
This figure had doubled by 1989. The value of the ruble fell from roughly
20 rubies to the dollar in late 1990 to around 700 rubies to the dollar in
early 1993. While the increase in currency in 1985 was 4.1 billion rubies,
the increase in 1990 was 28 billi~n rubles. 20
During 1989, a new Economic Reform Commission was created, later
headed by Leonid Abalkin. The goal of this commission was legislation
focusing on market-oriented economic reforms. Although there was legis-
lative discussion, it was clear that efforts were being made to stall a
movement toward the market and it was not until 1990 that further action
would be taken. The appointment of Nikolai Petrakov as an advisor to
Gorbachev was viewed as a signal for a move toward the market. How-
ever, the Law on Property in the USSR in 1990 was the only piece of
legislation suggesting such moves, and at the same time, administrative
methods were being used to limit undesired changes (for example, price
reform).
However, both 1990 and 1991 were important years. Beginning with
the work of Leonid Abalkin and subsequent revisions by then prime
minister Nikolai Ryzhkov, Gorbachev began to endorse a set of proposals
that would, within a specified time frame, shift the Soviet Union away
from the administrative-command economy toward a market-oriented
economy. The government timetable for this transition was cautious and
vague. The program that would receive the most attention was the
Shatalin 500 Day Plan, a plan developed in 1990 by a team of advisors to
Gorbachev and Russian president Boris Yeltsin headed by economist Stan-

islav Shatalin. Subsequently, this plan was modified by Abel Aganbegian
and would become what was termed the "Presidential Plan" to take effect
in the Soviet Union in November of 1990.
These new plans brought a focus on transition and the need to develop
both appropriate transition policies and the infrastructure of the market,
namely, private property and general privatization. This period repre-
sented a fundamental shift away from the earlier concepts of reform and
toward contemporary concepts of transition. The latter would be the focus
of attention in Russia and the CIS states as all emerged in 1992 as separate
and distinct political and economic entities.
REFERENCES
1. For an excellent discussion of the early years of perestroika and the back-
ground to this era, see E. A. Hewett, Reforming the Soviet Economy (Wash-
ington, D.C.: The Brookings Institution, 1988).
2. For such an approach, see A. F. Dowlah, Soviet Political Economy in Transi-
tion: From Lenin to Gorbachev (Westport: Greenwood Press, 1992), chap. 5;
P. R. Gregory and R. C. Stuart, Comparative Economic Systems 4th ed.
(Boston: Houghton Mifflin, 1992), chap. 16.
3. There has been considerable controversy over the performance of the Soviet
economy in the late Brezhnev period. Gorbachev argued that there was little
if any economic progress during this period.
4. During the early years of perestroika, there was considerable interest in the
issue of what (if any) country might serve as a "model" for change in the
Soviet Union. Attention focused variously on Sweden, Yugoslavia, and China.
5. For an early discussion of these issues, see E. Teague, "Gorbachev's 'Human
Factor' Policies," in U.S. Congress, Joint Economic Committee, Gorbachev's
Economic Plans, vol. 2 (Washington, D.C.: U.S. Government Printing Office,
1987), pp. 224-239.
6. For a discussion of bureaucratic resistance to reform, see P. R. Gregory, "The
Soviet Bureaucracy and Perestroika," Comparative Economic Studies vol. 31,
no. 1 (Spring 1989), 1-13. For general background to the issues in the Soviet
setting, see P. R. Gregory, Restructuring the Soviet Bureaucracy (New York:
Cambridge University Press, 1990), chap. 8.
7. It is worth emphasizing a point that is often difficult to capture with avail-
able numbers. It may well be that through the 1970s, the social contract in
the Soviet Union was increasingly violated as long-promised expansion of
consumer well-being was simply not achieved. Repressed inflation was erod-
ing the growth of consumer well-being, while the very poor quality of avail-
able goods and services may have led Western specialists to overstate
expansion.
8. Changes in enterprise relations with superiors would be a major theme of the

Gorbachev era and would be spelled out in detail in the enterprise law
promulgated in 1987. For details, see R. E. Ericson, "The New Enterprise
Law" The Harriman Forum, vol. 1 (February 1988).
9. For a discussion of changes in agriculture, see J. Butterfield, "Devolution of
Decision Making and Organizational Change in Soviet Agriculture," Com-
parative Economic Studies, vol. 32, no. 2 (Summer 1990), 29-64.
10. Much of the literature on perestroika pays attention to this pivotal piece of
legislation. For a lucid discussion of critical issues, see R. E. Ericson, "The
New Enterprise Law."
11. There are two important issues relating to economic accountability. First,
although this concept was of long standing in Soviet economic thought, it was
not widely adhered to in practice, and even when it was implemented, it meant
a mechanical accounting balance of revenues and expenditures in rather
meaningless Soviet prices. Second, during the Gorbachev era, the implication
seemed to be that eventually subsidies must be eliminated, and thus economic
accountability would have real significance with loss-making enterprises ulti-
mately being liquidated. This latter interpretation of economic accountability
was fundamentally different from that of earlier Soviet practice.
12. In 1986, as part of his emphasis on the "human factor," Gorbachev called
for greater worker participation in the selection and dismissal of enterprise
managers.
13. Gorbachev called for significant changes in the systems of wages and mana-
gerial rewards. For a discussion, see]. G. Chapman, "Income Distribution
and Social Justice in the Soviet Union," Comparative Economic Studies, vol.
31, no. 1 (Spring 1989), 14-45; ]. G. Chapman, "Gorbachev's Wage Re-
form," Soviet Economy, vol. 4 (1988), 338-365.
14. For a discussion of ownership arrangements in different sectors, see K. Plok-
ker, "The Development of Cooperative and Individual Labour Activity in the
Soviet Union," Soviet Studies, vol. 2 (July 1990), 403-428; K. Brooks, "Lease
Contracting in Soviet Agriculture in 1989," Comparative Economic Studies,
vol. 32, no. 2 (Summer 1990), 85-108; Nicoletta Amodio, "Forms of Own-
ership in the USSR," Most, vol. 1, no. 1(1991),114-117.
15. If implemented, the idea of limiting new construction in favor of modernizing
old construction would represent a major change from the Soviet past and
would be an attempt to solve the major problem of unfinished construction,
and outcome of Soviet systemic and policy elements in construction.
16. Needless to say, changes in Soviet foreign trade arrangements and policies
were both dramatic departures with the past. For discussion of basic issues,
see, for example, A. Aslund, "The New Soviet Policies Towards International
Economic Organizations," The World Today, vol. 44, no. 6 (February 1988);
E. A. Hewett, "The Foreign Economic Factor in Perestroika," The Harriman
Forum, vol. 1, no. 8 (August 1988); F. D. Holzman, "Moving Toward Ruble
Convertibility," Comparative Economic Studies, vol. 33, no. 3 (Fall 1991),
3-66; C. M. McMillan, "Strategy or Tactics? Recent Initiatives in Soviet
Foreign Economic Policy," in NATO, Directorate of Economic Affairs, Soviet
Economic Reforms: Implementation Underway (Brussels: NATO, 1989), pp.

145-156; D. Thorniley, "Reforming the Soviet Foreign Trade Structure and
Adapting to Change," in NATO, Soviet Economic Reforms, pp. 157-184.
17. See M. Bornstein, "Problems of Price Reform in the U.S.S.R.," in NATO,
Soviet Economic Reforms, pp. 130-144.
18. For a discussion of early plan targets and their relationship to those developed
under perestroika, see R. C. Stuart, "Soviet Plan Targets and Achievements:
The Party Programmes," Communist Economies, vol. 2, no. 3 (1990), 403-
411.
19. See P. R. Gregory, "The Impact of Perestroika on the Soviet Planned Econ-
omy: Results of a Survey of Moscow Officials," Soviet Studies, vol. 43, no. 5
(1991), pp. 859-874.
20. See A. Aslund, Gorbachev's Struggle for Economic Reform rev. ed. (London:
Pinter Publishers, 1991), p. 190.
Works by Soviet Authors

Aganbegian, The Economic Challenge of Perestroika (Bloomington: Indiana Uni-
---,Inside Perestroika (New York: HarperCollins, 1990).
- - - and T. Timofeyev, The New Stage of Perestroika (Boulder, Colo.: Westview
Press, 1988).
M. Gorbachev, Perestroika: New Thinking for Our Country and the World (New
York: Harper and Row, 1987).
N. Shemelyev and V. Popov, The Turning Point: Revitalizing the Soviet Economy,
translated by M. A. Berdy (New York: Doubleday, 1989).
Early Works on Perestroika

A. Aslund, "Gorbachev's Economic Advisors," Soviet Economy, vol. 3, no. 3
(July-September, 1987), 246-269.
D. Dyker, ed., The Soviet Economy Under Gorbachev: The Prospects for Reform
(London: Croom Helm, 1987).
M. Goldman, Gorbachev's Challenge: Economic Reform in the Age of High
Technology (New York: W.W. Norton, 1987).
"Gorbachev's Economic Reform: A Soviet Economy Roundtable," Soviet Econ-
omy, vol. 3, no. 1 (January-March, 1983), 40-53.
P. Hanson, "The Shape of Gorbachev's Economic Reform," Soviet Economy,
vol. 2, no. 4 (December-January, 1986), 313-326.
R. C. Harmstone, "Background to Gorbachev's Investment Strategy," Compara-
tive Economic Studies, vol. 30, no. 4 (Winter 1988), 58-91.
E. A. Hewett, Reforming the Soviet Economy (Washington, D.C.: The Brookings

Institution, 1988).
P. Juviler and H. Kimura, eds., Gorbachev's Reforms: U.S. and Japanese Assess-
ments (New York: Aldine de Gruyter, 1988).
V. Kulikov et al., eds., The USSR: Acceleration of Socio-Economic Development
(Moscow: USSR Academy of Sciences, 1987).
S. J. Linz, ed., "A Symposium on Reorganization and Reform in the Soviet
Economy," Comparative Economic Studies, vol. 29, no. 4 (Winter 1987).
- - - and W. Moskoff, eds., Reorganization and Reform in the Soviet Economy
(Armonk, N.Y.: M. E. Sharpe, 1988).
M. McCauley, ed., The Soviet Union Under Gorbachev (New York: St. Martin's,
1987).
Z. Medvedev, Gorbachev (Oxford: Basil Blackwell, 1986).
NATO, The Soviet Economy After Brezhnev (Brussels: NATO, 1984).
B. Rumer, "Realities of Gorbachev's Economic Program," Problems of Commu-
nism, vol. 35, no. 3 (May-June 1986), 20-31.
G. E. Schroeder, "Anatomy of Gorbachev's Economic Reform," Soviet Economy,
vol. 3, no. 3 (July-September 1987), 219-241.
U.S. Congress, Joint Economic Committee, Gorbachev's Economic Plans (Wash-
ington, D.C.: U.S. Government Printing Office, 1987).
G. W. Weickhardt, "Gorbachev's Record on Economic Reform," Soviet Union,
vol. 12, no. 3 (1985), 251-276.
T. Zaslavskaya, "The Novosibirsk Report," Survey, vol. 28, no. 1(1984),88-108.
Statistics: New Interpretations Under Perestroika

M. Boretsky, "The Tenability of the CIA Estimates of Soviet Economic Growth,"
journal of Comparative Economics, vol. 11, no. 4 (December 1987), 517-542.
J.C. Brada and R. L. Groves, "The Slowdown in Soviet Defense Expenditures,"
Southern Economic journal, vol. 54, no. 4 (April 1988), 969-983.
- - - , "CIA's Queries About Boretsky's Criticism of the Estimates of Soviet
Economic Growth," Journal of Comparative Economics, vol. 14, no. 2
(June 1990), 315-326.
Directorate of Intelligence, The Impact of Gorbachev's Policies on Soviet Eco-
nomic Statistics (Washington, D.C.: CIA, 1988).
---,Measuring Soviet GNP: Problems and Solutions (Washington, D.C.: CIA,
1990).
- - - , Revisiting Soviet Economic Performance Under Glasnost: Implications
for CIA Estimates (Washington, D.C.: CIA, 1988).
J. S. Pitzer, "The Tenability of the CIA Estimates of Soviet Economic Growth: A
Comment," journal of Comparative Economics, vol. 14, no. 2 (June 1990),
301-314.
D. Steinberg, The Soviet Economy, 1970-1990: A Statistical Analysis (San Fran-

cisco: International Trade Press, 1990).
Agriculture Under Perestroika

E. C. Cook, "Soviet Food Markets: Will the Situation Improve Under Gor-
bachev?" Comparative Economic Studies, vol. 29, no. 1 (Spring 1987),
1-36.
K. Gray, Soviet Agriculture: Comparative Perspectives (Ames: Iowa State Univer-
sity Press, 1990).
W. Moskoff, ed., Perestroika in the Countryside: Agricultural Reform in the
Gorbachev Era (Armonk, N.Y.: M. E. Sharpe, 1990).
S. K. Wegren, "Dilemmas of Agrarian Reform in the Soviet Union," Soviet Stud-
ies, vol. 44, no. 1 (1992), 3-36.
Foreign Trade Under .Perestroika

A. Aslund, "The New Soviet Policy Towards International Economic Organiza-
tions," The World Today, vol. 44, no. 6 (February 1988).
S. M. Collins and D. Rodrik, Eastern Europe and the Soviet Union in the World
Economy (Washington, D.C.: Institute for International Economics, 1991).
L. Geron, Soviet Foreign Economic Policy Under Perestroika (London: Pinter
Publishers, 1990).
E. A. Hewett, "The Foreign Economic Factor in Perestroika," The Harriman
Forum, vol. 1, no. 8 (August 1988).
- - - and C. D. Gaddy, Open for Business: Russia's Return to the Global
Economy (Washington, D.C.: The Brookings Institution, 1992).
F. D. Holzman, "Moving Toward Ruble Convertibility," Comparative Economic
Studies, vol. 33, no. 3 (Fall 1991), 3-66.
General Works on Perestroika

A. Aslund, Gorbachev's Struggle for Economic Reform, rev. ed. (London: Pinter
Publishers, 1991 ).
---,"The Making of Economic Policy in 1989 and 1990," Soviet Economy,
vol. 6, no. 1 (1990), 65-93.
Central Intelligence Agency, Gorbachev's Modernization Program: A Status Re-
port (Washington, D.C.: CIA, 1987).
- - - , Beyond Perestroika: The Soviet Economy in Crisis (Washington, D.C.:
CIA, 1991).
---,The Soviet Economy in 1988: Gorbachev Changes Course (Washington,
D.C.: CIA, 1989).
- - - , Gorbachev's Economic Program: Problems Emerge (Washington, D.C.:

CIA, 1988).
D. A. Dyker, Restructuring the Soviet Economy (New York: Routledge, 1992).
M. Ellman and V. Kontorovich, eds., The Disintegration of the Soviet Economic
System (London: Routledge, 1992).
R. E. Ericson, The Soviet Union: 1979-1990 (San Francisco: ICS Press, 1990).
M. I. Goldman, What Went Wrong With Perestroika (New York: W.W. Norton
& Company, 1992).
P.R. Gregory, "The Soviet Bureaucracy and Perestroika," Comparative Economic
Studies, vol. 31, no. 1(Spring1989), 1-13.
---,Restructuring the Soviet Bureaucracy (New York: Cambridge University
Press, 1990).
P. Hanson, "Property Rights in the New Phase of Reforms," Soviet Economy, vol.
6, no. 2 (1990), 95-124.
E. A. Hewett, "The New Soviet Plan," Foreign Affairs, vol. 69, no. 5 (Winter
1990/91), 146-167.
- - - and V. H. Winston, eds., Milestones in Glasnost and Perestroyka (Wash-
ington, D.C.: The Brookings Institution, 1991).
IMF, IBRD, OECD, and EBRD, The Economy of the USSR: Summary and Rec-
ommendations (Washington, D.C.: IMF et al., 1990).
NATO, Soviet Economic Reform: Implementation Underway (Brussels: NATO,
1989).
- - , The Soviet Economy Under Gorbachev (Brussels: NATO, 1991).
J. H. Noren, "The Soviet Economic Crisis: Another Perspective," Soviet Economy,
vol. 6, no. 1 (1990), 3-55.
G. Ofer, "Budget Deficit, Market Disequilibrium and Soviet Economic Reforms,"
Soviet Economy, vol. 5, no. 2 (1989), 107-161.
M. J. Peck and T. J. Richardson, eds., What Is to Be Done? Proposals for the
Transition to the Market (New Haven: Yale University Press, 1991).
G. Standing, ed., The New Soviet Labour Market: In Search of Flexibility (Ge-
neva: Ill., 1991).
"Symposium on Economic Transition in the Soviet Union and Eastern Europe,"
Journal of Economic Perspectives, vol. 5, no. 4 (Fall 1991).
J.E. Tedstrom, ed., Socialism, Perestroika, and the Dilemmas of Soviet Economic
Reform (Boulder, Colo.: Westview Press, 1990).
G. G. Weickhardt, "The Soviet Military-Industrial Complex and Economic Re-
form," Soviet Economy, vol. 2, no. 3 (July-September, 1986), 193-220.
FO UR
••
RUSSIA AND THE

INDEPENDENT STATES
345
FOU RTEEN
••
Russia and the

Independent States:
Basic Characteristics
O n December 25, 1991, the Soviet flag was lowered on the Kremlin
in Moscow bringing the Soviet Union to an end and signaling the begin-
ning of new political entities, specifically Russia and the Commonwealth
of Independent States (CIS). In addition, to Russia and the CIS states
formed from the republics of the former Soviet Union, the Baltic states
(Latvia, Lithuania, and Estonia) as well as Georgia gained independence.
As we examine these new arrangements, it is important to be aware of
some basic realities.
While it is convenient to date the beginning of the new era to January
of 1992, we have seen that the decline of the old order began much earlier.
Boris Yeltsin had contemplated new economic arrangements (for Russia)
throughout the previous year.
The administrative-command system was disintegrating and gradually
being replaced by new arrangements; this process would prove to be both
slow and painful. The disintegration of the old order was occurring
without the simultaneous introduction of new political arrangements. The
347
348 Russia and the Independent States
resulting chaos led to an inevitable decline in the output of goods and

services in the former republics.
In spite of contemporary transition difficulties, the new states are very
much a product of their long Soviet past. It is ironic that a general lack of
appropriate data and a past Soviet denial of regional differences made it
difficult for scholars to focus on critical regional issues. Although we have
been able to examine regions (generally former Soviet republics) in terms
of their economic base, levels of living, and such issues, interrepublican
trade flows were difficult to analyze and could not be a central focus of
research for a region that was a single country. Put another way, it has
always been difficult to isolate and to examine the impact of the Soviet
system and Soviet policies on regional economic outcomes. In the new
setting, however, regional issues suddenly assumed major importance since
many of the basic characteristics of these new states were in fact a direct
outcome of their Soviet past.
Historically we have always been critical of Soviet statistics and what
we can learn from them. It is important to emphasize that in the new
setting, we are not suddenly blessed with comprehensive and accurate
statistical information. In some respects, we are presented with new num-
bers from many new sources but with new problems of collection and
interpretation. These new problems limit our ability to analyze the newly
independent states, especially in the early years of this decade.
The newly independent states would in fact begin the process of
transition from plan to market from widely differing bases. Although this
chapter focuses on these new states within the context of appropriate
regional groupings and ultimately the Russian economy, it is useful to
begin with an examination of the basic indicators pertaining to the former
republics.
From the evidence presented in Table 14.1, it is quite apparent that
Russia and the remaining states are fundamentally different units. These
newly formed countries differ dramatically according to almost any indi-
cator that one might imagine-size, level of economic development, indus-
trial structure, and the like. For example, judged by the ruble value of
output in 1990 just before the breakup of the former Soviet Union, Russia
accounted for roughly 61 percent of the total ruble income of all former
republics. If one adds to Russia Ukraine, Belarus, and Kazakhstan, this
share rises to over 80 percent. 1 But even these numbers are deceptive;
differences among the newly independent states are vast.
In part the differences can be explained by variations in basic natural
environment and geography. But there are also major differences in almost
every social dimension imaginable, suggesting that the paths of future
economic development will likely differ substantially among the new
Russia and the Independent States: Basic Characteristics 349
Table 14.1 RUSSIA AND THE INDEPENDENT STATES: BASIC CHARACTERISTICS: 1990
Land Change
Area in
% (million Agriculture Ruble NMP
State Population Urban hectares) (%) Income (1991)
Russia 149,527,000 74 1707.5 38 1074.4 -11.0

Belarus 10,374,000 65 20.7 80 77.3 -3.0
Ukraine 51,940,000 67 60.4 59 283.8 -11.0
Moldavia 4,458,000 47 3.4 85 22.3 -12.0
Georgia 5,571,000 56 7.0 66 22.7 -23.1
Armenia 3,416,000 68 3.0 77 16.8 -11.0
Azerbaijan 7,451,000 54 8.7 77 25.9 -10.3
Uzbekistan 21,627,000 41 44.8 74 57.0 -10.8
Turkmenistan 3,838,000 45 48.8 78 12.8 -10.6
Tajikistan 5,680,000 33 14.3 67 13.6 -9.0
Kazakhstan 17,104,000 57 271.7 81 81.2 -10.0
Kyrgizstan 4,568,000 38 19.8 81 13.8 -14.5
Estonia 1,607,000 72 4.5 58 13.4 -10.0
Latvia 2,729,000 71 6.5 60 21.9 -8.0
Lithuania 3,789,000 68 6.5 71 23.0 -15.0
Sources: Compiled from Central Intelligence Agency, The World Factbook 1992 (Washington, D.C.: CIA,
1992); CIA, Handbook of International Statistics 1992 (Washington, D.C.: CIA 1992); IMEMO, Russian
Economic Monitor. various issues; Central Intelligence Agency, The Republics of the Former Soviet Union
and the Baltic States: An Overview (Washington, D.C.: CIA, 1992).
countries. There is another critical issue. To what extent are contemporary

differences a result of the common arid lengthy Soviet heritage shared by
all of the countries? To pursue this question, it is necessary to understand
past Soviet systemic arrangements and policies, especially Soviet regional
policies.
RUSSIA AND THE INDEPENDENT STATES:

IMPACT OF THE SOVIET PAST
In a study of Central Asia published in 1989, the author, Boris Rumer,

begins by noting that "The conflict between regionalism and centralism in
the economic development of the USSR is a contradiction that neither
theory nor practice has been able to resolve in the 70 years that the Soviet
state has been in existence. " 2 What precisely was the conflict, and how did
it affect resource allocation in the regions of the former Soviet Union?
Throughout the Soviet era, the issue of primary interest was the desire
for (and belief in) the exercise of central control in a setting of important
regional differences. 3 Throughout the Soviet era, a stated goal was the
equalization of regional differences, yet the reality was policy inconsisten-
cies both across regions and over time as regional specialization was
pursued. This conflict was never resolved.
There is probably no subject of greater controversy than the location
of economic activity, both agricultural and industrial, in the former Soviet
economy. Were there rules to guide locational decisions? There is a large
body of literature on these issues, which addresses the differing perspec-
tives of economists, geographers, and political scientists. While there are
significant differences of opinion and limited evidence, some generaliza-
tions are possible.
As we have already emphasized, Soviet planning was really a dominant
force directing Soviet economic activity. Although there were obvious
constraints influencing the location of economic activities (for example,
climatic factors in agriculture and labor force factors in industry), plan-
ning was nevertheless sectoral, not regional, in character. Even though a
significant amount of economic activity was functioning with directives
from units well below the center (for example, the union-republican min-
istries), the type of economic activity planned and coordinated at lower
levels in the hierarchy was typically of a local character and not of great
importance to the national economy. Even in these cases, it was not always
evident that local decision-making powers were in fact significant.
To the extent that there were regional economic activities in the former
Soviet Union, planning and/or coordination was conducted through then
long-standing political/administrative units, namely the republics (now
independent states), the provinces (the oblast units within the republics),
the regions (the raion within the provinces), and finally the cities (gorod).
Although there was a continuing effort in the Soviet Union (more impor-
tant in recent years) to define large "economic regions" for planning
purposes, there were in fact a variety of proposals discussed over time with
little evidence that any were of actual importance for the ultimate location
of economic activities. Soviet planners and economists did devote consid-
erable attention to regional and republic modeling, especially using input-
output techniques. In addition, over the years, the Soviets espoused a
variety of locational rules (sometimes termed "laws"), which were confus-
ing in theory and probably ignored in practice. For example, the Soviet
economy often was said to be governed by the "law of planned propor-
tionate development" suggesting that under Soviet socialism, there was in
fact some guarantee of proportionality (equality) of regional economic
development derived from the system of planning.
In market economic systems, local political/administrative authorities
play a significant role in determining the nature and magnitude of local
public investment. In the Soviet case, the local budget was probably of
much less significance in the determination of local activities in part
because the dominant share of both revenues and expenditures were
national in character. Local budgets were simply not a major force influ-
encing the location of economic activity.
However, the outcomes of this regional/locational history are com-
plex and very difficult to judge. While a great deal of our analysis focuses
on understanding the theory behind Soviet location decisions, many So-
viet actions seemed to be based less on theory than on practicality
and political whim. Attention always was focused on grandiose projects
such as hydroelectric stations; water diversion programs; the major rail
links, such as the Trans-Siberian and Baikal-Amur Mainline (BAM); or
regional issues, such as the continuing struggle over the preservation of
lake Baikal.
In the case of agriculture, the issue of regional specialization was
important but apparently neglected. The Soviet Union did not seem to pay
a great deal of attention to regional specialization in agriculture beyond
the obvious climatic factors (for example, cotton in Central Asia) and the
influence of major central programs, such as the Virgin Lands Campaign
of the 1950s.
Looking at the many years of Soviet location practice, a number of
generalizations can be made. Soviet industry frequently was described as
relatively "dispersed" in the sense that industrial capacity often was placed
in remote areas such as Siberia, possibly for security reasons. Whether or
not it was justified on cost-benefit grounds, the Soviet Union devoted a
great deal of effort to the development of these remote areas.
Another feature of Soviet industrial (and agricultural) establishment
was the preference for large scale. Dating from the 1930s and the .era of
"gigantomania," there was continuing faith in the advantages of large
scale. In many sectors, such as steel, for example, the scale of the industrial
establishment at the plant level was large and backed by generally greater
capital intensity than in the West.
Soviet industry became more vertically integrated over time. Analysts
of this integration policy argued that it was derived in part from the
ongoing problems of the Soviet system of material-technical supply. To the
extent that there were supply uncertainties.that might threaten plan fulfill-
ment and bonuses, managers could look to integrated production facilities
to gain control over material supplies. In some cases, this type of argument
could be made when production facilities were built near raw material
supplies in conjunction with the development of a small population center
to guarantee adequate labor supplies. These types of arrangements were
called territorial production complexes.
The resulting Soviet agricultural and industrial structure represented a

double-edged sword for the successor states. To the extent that industry
was relatively dispersed, newly independent states were more likely to
have industrial capacity; although in some cases, this capacity might be
located in less than ideal circumstances. Moreover, scale was probably
larger than optimal, which along with substantial integration, makes
enterprises difficult to privatize. In fact, while subunits may be privatized
easily, the existence of large overcapitalized enterprises makes privatiza-
tion generally difficult.
REGIONAL ISSUES AND THE NEW STATES
The issue of the location of economic activity assumed immediate impor-

tance as the former republics of the Soviet Union became independent
states at the end of 1991. Interstate trade suddenly replaced intrarepublic
trade, a circumstance that was critical to sustaining the well-being of the
population but difficult to maintain in a very new and politically unstable
setting. Moreover, two large units, namely, Russia and Ukraine, might well
dominate.
In this setting, there were two immediate issues to be faced. First, what
was the nature of the trade balances among the successor states, and how
could the issue of trade flows under new arrangements be handled? Sec-
ond, assuming that the trade flows were important (and they were), what
sort of new trading arrangements might be established?
In a recent analysis, James Noren and Robin Watson examined these
issues and concluded that not only are interstate trade flows very impor-
tant, but that not surprisingly they are often dominated by selected critical
items such as energy and food products. 4 In addition, these flows are
influenced by the nature of the valuation process used and thereafter the
trading rules established among the states. Similar conclusions are found
in an examination of the former republics done by Alastair McAuley. 5
McAuley concludes that "In eight of the fifteen republics, 'exports' ac-
count for more than half net material product produced; in the three Baltic
republics, the share of 'exports' is closer to two-thirds." 6 In Table 14.2, we
have assembled some empirical evidence on interrepublic trade balances
developed by Noren and Watson.
The most striking conclusion to be derived from Table 14.2 is the
apparent impact of switching from ruble prices to world market prices. As
Noren and Watson noted, such a switch would generate a " ... huge
windfall ... " for Russia, while other regions of the former USSR would
suffer significant deficits, especially large in the West and in the Baltics. 7
Alastair McAuley derives similar conclusions noting that "The analysis
Table 14.2 TRADE BALANCES OF THE FORMER REPUBLICS: 1988
Domestic rubies World market prices
Ruble Percent of Terms of trade Dollar Percent of

balance imports change(%) balance imports
Russia 260 0 30 28,642 20

Ukraine 3,624 10 -17 -5,368 -8
West* -231 -2 -24 -5,905 -25
Baltic** -1,258 -9 -19 -6,424 -26
Central Asia*** -8,545 -26 -3 -15,246 -28
Azerbaijan 2,099 49 0 3,435 49
* Armenia/Georgia/Moldovia
•*Latvia/Lithuania/Estonia
***Kyrgizhistan/Tajikistan/Turkmenistan/Uzbekistan
Source: Derived from J. H. Noren and R. Watson, "lnterrepublican Relations After the Disintegration of the
USSR," Soviet Economy, vol. 8, no. 2 (1992), 89-129.
suggests, then, that most if not all Soviet republics would experience
adverse trade effects if the Soviet economy were to break up. " 8 McAuley
emphasizes, however, that the magnitudes of trade flows and resulting
balances are sensitive not only to the prices used in the aggregation
process, but also the peculiarities of former Soviet accounting practices
and pricing procedures when domestic rubies are utilized.
If the pace and sequencing of transition policies are complicated by
differences among sectors within a single country, then one might expect
substantially greater complications among successor states, especially as
the previously intertwined units press for sovereignty. As the year 1991
drew to a close, these issues dominated; Russia and the other states,
especially the large states, began to carve out new policies and procedures
for resource allocation. The discussion between Russia and the other
emerging states proved relatively unsatisfactory. The issue of potential
Russian dominance would remain on the front burner, especially critical
in light of announced Russian intentions to move toward hard currency
and world market prices in such trade beginning in 1992.
As one might expect, there was considerable negative reaction by
many of the former republics to the patterns of change then being contem-
plated in Russia. However, on December 8, 1991, Russia, Ukraine, and
Belarus agreed to form a "community of independent states." Other
~epublics subsequently were invited to join.
Subsequent events through 1992 and 1993 involved a series of meet-
ings and intermediate discussions reflecting ongoing differences and diffi-
culties. Although economic reform continued and the price liberalization

took place in January of 1992, the basic issues among these states remain
important. As some states (for example, the Baltic states and Ukraine)
pursued the introduction of new currencies, difficulties with new trading
arrangements and currency issues led to a reinstatement of a considerable
amount of bilateral trade in 1992. As Noren and Watson emphasize,
however, the breakdown of former planning arrangements meant that
much of this trade would be decentralized to the local level, suggesting the
evolution of a set of problems quite different from those faced in earlier
times.
BASIC CHARACTERISTICS: THE IMPACT ON TRANSITION
We have concluded that there remain fundamental differences among what

are now the independent states. These differences, as we have seen, led to
immediate difficulties of distribution (trade after the breakup of the Soviet
Union) and differences in consumer well-being in the various states. But
beyond the immediate problems and the pressure to set up new trading
arrangements, there are significant long-term issues.
First, the level of economic development of the new states, whatever
indicator we might choose, differs significantly from one case to another.
Such differences imply that past socialist policies did not work (or at least
did not work to the degree apparently intended). In the absence of regional
policies, these differences will take on new importance as each newly
independent state attempts to find its own path toward economic growth
and development.
Second, though the legacy of the past will be of major importance in
determining the path of the future, there will not be a simple one-to-one
relationship between the two. For example, consider the case of Central
Asia. As a less-developed region with major natural devastation resulting
from the cotton monoculture, and without a significant industrial base,
the path to balanced economic development will be difficult and slow.
Indeed in such cases, our knowledge of economic development may be
more relevant than our knowledge of transition. On the other hand, a
relatively developed state such as Ukraine, which possesses a significant
agricultural and industrial base, will face rather more "traditional" prob-
lems of transition, namely, the establishment of markets, restructuring and
privatization of the industrial base, and the like. To the extent that major
industrial capacity was established in the Ukraine during the Soviet era,
the task will be the modernization and rationalization of that capacity.
Third, although the tasks facing the newly independent states will
require cooperation among these states, development of the infrastructure
to facilitate such cooperation will not be easy. Indeed, only in the summer
of 1993 were early steps taken to achieve an economic union, and this
among only three-quarters of the newly independent states.
REFERENCES
1. A summary of regional data can be found in CIA, Handbook of International

Economic Statistics 1992 (Washington, D.C.: CIA, 1992).
2. B. Z. Rumer, Soviet Central Asia: A Tragic Experiment (Boston: Unwin Hy-
man, 1989), p. 1.
3. Throughout the Soviet era, a great deal of interest centered on the analysis of
regional issues. For a discussion of the Soviet economic system from a regional
perspective, see J. Pallot and D. J. B. Shaw, Planning in the Soviet Union
(Athens: University of Georgia Press, 1981). Other background pieces include
J. W. Gillula, "The Economic Interdependence of Soviet Republics," in U.S.
Congress, Joint Economic Committee, Soviet Economy in a Time of Change
(Washington, D.C.: U.S. Government Printing Office, 1979), 618-655; V. N.
Bandera and Z. L. Melnyk, eds., The Soviet Economy in a Regional Perspective
(New York: Praeger, 1973), I. S. Koropeckyj, "Industrial Location Policy in the
USSR During the Postwar Period," in U.S. Congress, Joint Economic Commit-
tee, Economic Performance and the Military Burden in the Soviet Union
(Washington, D.C.: U.S. Government Printing Office, 1970); "Regional Devel-
opment, Transport, and the Environment," in U.S. Congress, Joint Economic
4. J. H. Noren and R. Watson, "Interrepublican Economic Relations After the
Disintegration of the USSR," Soviet Economy, vol. 8, no. 2 (April-June 1992),
89-129.
5. A. McAuley, "Costs and Benefits of De-integration in the USSR," Most, vol. 2
(1991), 51-61.
6. McAuley, "Costs and Benefits of De-integration," 57.
7. Noren and Watson, "Interrepublican Economic Relations," 92.
8. McAuley, "Costs and Benefits of De-integration," 60.
S. Aleksashenko, "The Economic Union of Republics: Federation, Confederation,

Community," in A. Aslund, ed., The Post-Soviet Economy: Soviet and
Western Perspectives (New York: St. Martin's Press, 1992), 115-131.
D. Bahry, "The Union Republics and Contradictions in Gorbachev's Economic
Reform," Soviet Economy, vol. 7, no. 3 (July-September, 1991), 215-255.
S. Brown, "Federalism and Marketization in the Soviet Union: Lessons From
Economic Theory," in A. Aslund, ed., The Post-Soviet Economy: Soviet and
Western Perspectives (New York: St. Martin's Press, 1992), 132-164.
---,and Misha V. Bekindas, "Who's Feeding Whom? An Analysis of Soviet

lnterrepublic Trade," (Typescript, 1992).
Central Intelligence Agency, Handbook of International Economic Statistics 1992
- - - , The Republics of the Former Soviet Union and the Baltic States: An
Overview (Washington, D.C.: CIA, 1992).
C. Cottarelli and M. I. Blejer, "Forced Saving and Repressed Inflation in the Soviet
Union, 1986-90," IMF Staff Papers, vol. 39, no. 2 (June 1992).
I. Filatochev and R. Bradshaw, "The Soviet Hyperinflation: Its Origins and Impact
Throughout the Former Republics," Soviet Studies, vol. 44, no. 5 (1992),
739-759.
A. McAuley, "Costs and Benefits of De-integration in the USSR," Most, vol. 2
(1991), 51-61.
S. S. Nello, "The Food Situation in the Ex-Soviet Republics," Soviet Studies, vol.
44, no. 5 (1992), 857-880.
J. H. Noren and R. Watson, "Inte~republican Economic Relations After the
Disintegration of the USSR," Soviet Economy, vol. 8, no. 2 (April-June,
1992), 89-129.
L. V. Palei and J. L. Petr, "Integration versus Independence for the Successor States
of the USSR: When Might Economics' 'Right Answers' Be Wrong?" Com-
parative Economic Studies, vol. 34, no. 1 (Spring 1992), 1-12.
J. Pallot and D. J. B. Shaw, Planning in the Soviet Unio,n (Athens: University of
Georgia Press, 1981).
FIFTEEN
••
The Russian Economy
Lroughout our discussion of the Soviet administrative-command

economy, we have focused on the organizational arrangements, policies,
and outcomes in the unique setting of the former Soviet Union. In spite of
continuing attempts at economic reform, most basic elements of the com-
mand system remained through the 1980s. Moreover, many of the ob-
served outcomes (industrial location, high investment ratios, and a growth
orientation), as we have emphasized, could be traced directly to the
command system and its economic policies. As economic performance has
lagged in the 1990s, inability to change the system appears to be a major
causal factor.
As we turn to the Russian economy and the economies of the CIS
states, our frame of reference must necessarily change. We cannot describe
and analyze an economic system because none is in place. The essence of
transition is the replacement of one system by another, in this case, the
replacement of plan by market. Therefore, in this chapter, we focus on
three major issues. First, we examine the nature of the transition process
focusing on problems and prospects and the major issues that have sur-
357
faced thus far. Second, we examine the progress made through 1993
looking at both indicators of systemic change (property rights, foreign
trade arrangements, etc.) and general performance indicators; for exam-
ple, unemployment and inflation. Finally, we examine selected sectoral is-
sues that have been and will continue to be important in the transition era.
Our approach here is dictated by contemporary events and differs
from the framework used to examine the Soviet past. As we examine
performance in the transition era, we also take a look at evidence on the
degree to which transition is taking place (for example, privatization) and
traditional market-type indicators such as indexes of output, inflation, and
the like. We examine the new arrangements in a very short span of time
beyond which extrapolation is difficult and dangerous.
TRANSITION: THE YELTSIN ERA
We have already emphasized that as the Soviet Union entered its final days
in the latter part of 1991, the stamp of Boris Yeltsin became increasingly
apparent. 1 In October of 1991, the Yeltsin economic program was un-
veiled. By any standards, it was aggressive, focusing on stabilization issues
(particularly the budget and monetary creation), decontrol of prices, and
a major drive toward privatization. In November, the economic czar Yegor
Gaidar was appointed and legislation focusing on a variety of important
issues began to emerge.
An important aspect of the early Yeltsin era was, and would remain,
the turbulence of the Soviet-and subsequently the Russian-political
scene. Not only did the Supreme Soviet and its leader Ruslan Khasbulatov
present obstacles, so too has the Russian Parliament continued to block
the Russian president. Many aspects of the Yeltsin plan would be criticized
even by Yeltsin's own vie~ president, Alexander Rutskoy. As 1992 passed,
some of the concerns expressed in the political setting would become
reality. The Yeltsin plan called for major changes; there was a degree of
popular discontent for the policies proposed and implemented in that
pivotal year.
In his earlier reform proposal, Yeltsin had advocated the liberalization
of prices, a policy that was implemented in January 1992. With the
advantage of hindsight, we now know that this liberalization of prices was
dramatic. Although there were significant problems' (for example, with
producer prices, monopoly influence, and the like), nevertheless prices
were generally freed in January of 1992. As one might expect, there were
sharp increases. For example, consumer prices rose at an annual rate of
8.1 percent in 1990, 168.8 percent in 1991, and 2510 percent in 1992.2
Although the government planned to index wages and had increased the
The Russian Economy 359
minimum wage, real monthly wages grew by 6.2 percent in 1990, -12.4
percent in 1991, and -31.7 percent in 1992. 3 These trends improved in
1992, although as we will see later, they worsened again in the latter part
of the year.
A major drive of the Yeltsin program was privatization. Initially, the
approach was valuation of state assets and their disbursement to partici-
pants through shares. A major decree dating from December 1991 envi-
sioned that by the end of 1992, some 20 to 25 percent of state assets worth
92 billion rubies would be privatized. 4 Agriculture was handled differently
as a result of the Agriculture Privatization Decree of April 1992. Farms
were to choose one of four options, namely, forming an association of
independent farms, becoming a joint-stock company through share issu-
ance, becoming a cooperative, or sustaining the existing farm. 5 Through
1992, privatization proceeded slowly. Sectoral shares of privately held
assets varied considerably, though by the end of 1992, in no sector did the
share of privatized assets exceed 10 percent of the total, and in most
sectors it was much lower. There have been important regional differen-
tials and, within regions, major sectoral differences. For example, the city
of Nizhniy Novgorod is often cited as a case where privatization has
worked. Privatization auctions have been held on a regular basis, and
although the share of all state properties privatized has been small, the
process seems to have worked (with positive signs, such as reasonable
numbers of bidders at auctions). Looking at special cases such as the city
of Moscow and focusing on the service sector, it is obvious that the share
of the sector privatized is much higher than aggregate data for Russia
might suggest.
In October 1992, the Russian government issued vouchers (or priva-
tization checks as they were called) with a face value of 10,000 rubles (the
average monthly salary at the end of 1992 was 12,000 rubles). 6 A secon-
dary market in these vouchers quickly emerged and by the spring of 1993,
they were being bought and sold at roughly 4000 rubles. This discount
was widely interpreted as representing a lack of popular faith in the
privatization program, though in part it represented a need for immediate
purchasing power, although the market price of vouchers increased in
1993.
The issue of macroeconomic stabilization was clearly a critical element
of the Yeltsin program. Recall that it was widely argued, prior to the end
of the Soviet Union, that macroeconomic disequilibrium was increasingly
serious. By the end of 1991, earlier signs of trouble were becoming
ominous. During that year, there was a substantial increase of money in
circulation, in part the result of a significant budget deficit (roughly 10
percent of GNP).7 For a variety of reasons, efforts to control currency
emission were resisted by the central bank as the rift between the bank and
the government widened. In early 1992, Yeltsin announced an effort to

balance the budget with a value-added tax to be a major source of
budgetary revenues. Although stabilization measures were expected to be
more rigid in 1992, this did not turn out to be the case.
ASSESSING RUSSIAN ECONOMIC PERFORMANCE
As the new Russian economic system emerges, any performance assess-

ment necessarily focuses upon short-term outcomes. Moreover, as we have
noted earlier, it is ironic that after so many criticisms of an earlier era, the
numbers we obtain may be viewed with skepticism. In spite of the difficul-
ties of such a short time horizon, it is useful to look at basic economic
indicators. In Table 15.1, we have assembled basic indicators for the end
of the Soviet era and the beginning of the Russian era.
What do these numbers tell us? In part, they serve to confirm the story
of transition outlined above. It is not surprising that the Russian popula-
tion would express disappointment with the impact of economic reform,
an issue that would be central to Boris Yeltsin's political difficulties in the
spring of 1993. But while these numbers provide us with a general picture
of events through the beginning of 1993, they also hide troubling devel-
opments in the latter part of 1992 and the early part of 1993.
Through the second and third quarters of 1992, many of the basic
economic indicators presented in Table 15.1 showed a degree of im-
provement; the same could not be said for the months thereafter. For
example, while the inflation rate (consumer prices) was roughly 222
percent (annual basis) in the third quarter of 1992, by the fourth quarter
Tabla 15.1 THE RUSSIAN ECONOMY: SELECTED PERFORMANCE INDICATORS
Indicator 1990 1991 1992 1Q 1993 2Q 1993
Industrial production* --0.8 -8.0 -18.8 -19.3 -16.5

Gross fixed investment* 0.1 -10.8 -45.0 -3.0 n.a.
Retail sales* 10.3 -8.1 -39.0 42.9 n.a.
Producer prices** 7.6 236.3 3280.0 1420.0 750.0
Consumer prices** 8.1 168.8 2510.0 1160.0 860.0
Real monthly wages 6.2 -12.4 -31.7 n.a. n.a.
Unemployment ('000) 0 59.4 600.0 750.6 n.a.
Money supply (M2)** 116.0 670.0 460.0 n.a.
Exchange rate ($/1,000r)*** 43.67 5.91 2.4 1.46 .94
Exports-billion $ annual level 80.9 50.9 38.1 28.0 95.0
Imports-billion $ annual level 82.9 44.5 35.0 13.9 20.0
Source: IMEMO, Russian Economic Monitor. vol. 2, no. 2 (February 1993). 1; vol 2. no. 6 (June 1993); vol.
2, no. 7 (July 1993).
it accelerated to 1320 percent (preliminary estimate on an annual basis). 8

Moreover, the rate (annual basis) for January 1993 was 2230 percent.
Similar cases could be made for other aggregates, notably the expansion
of the money supply. However, by February 1993, a measure of control
had been restored. However, as we have noted, it is inappropriate to place
great emphasis on month-to-month movements of these indicators.
It is impossible to make sensible future projections from these basic
numbers. If there is a J curve in the transition process, and if the transition
process is moving ahead, then any upturn in these indicators is to be
viewed as very positive for the long-term health of the Russian economy. 9
But most observers agree that such an upturn will come about only if the
basic disequilibrium forces can be controlled and over time reversed.
Finally, it is evident from Table 15 .1 that industrial production in
Russia declined by roughly 18 percent in 1992. While this decline seems
to be substantial, there were in fact significant variations by product (see
Table 15.2). However, there were very few sectors where industrial output
increased in 1992, and those sectors' increases were modest.
Table 15.2 RUSSIAN INDUSTRY IN 1992

Production in 1992 as a percent
of production in 1991*
Energy
Electricity 95
Oil 85
Natural gas 99.6
Coal 95
Metallurgy
Iron 94
Steel 87
Machine Building and Metal Working
Turbines 76
Telephone cable 40
Batteries 87
Chemicals
Synthetic resins and plastics 86
Sulphuric acid 84
Synthetic dyes 68
Construction
Cement 79
Bricks 92
•Based on physical output measures.

Source: 0 Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii (Dopolnitel'nye Dannye) v 1992 gody
[About the development of economic reform in the Russian federation-supplementary data-in 19921
(Moscow: Goskomstat Rossiiskoi Federatsii, 1993).
THE RUSSIAN ECONOMY: THE STATUS OF TRANSITION
Throughout our discussion of the Russian economy, we have emphasized

two basic themes. First, it is not possible to analyze the nature of an
economic system that is not yet in place. Second, during transition, it is
exceedingly risky to make predictions about possible future events. Hav-
ing made these points, however, it is important to have some sense of
where the Russian economy rests as the year 1993 comes to an end.
Privatization must take place within a context of reasonable political,
economic, and institutional stability. Although one may question the de-
gree of economic stability of the Russian economy as judged by traditional
indicators, such as price increases, monetary expansion, budget deficits,
and the like, it might be argued that the degree of instability could be
substantially worse than it is. Indeed, some would argue that under
existing conditions, transition can proceed. One could make a similar case
for the level of political instability, though the penchant of politicians to
change institutional arrangements and policies frequently tends to intro-
duce an unfortunate degree of uncertainty for participants in the economic
system.
Along with the accompanying development of the infrastructure of
markets, privatization is the core of transition. It is very difficult to feel
comfortable with data pertaining to the extent of privatization in the
Russian economy-the concept of privatization can be interpreted in many
different ways. A retail outlet started by a small group of investors may
be a genuinely private operation, while a large enterprise that has been
converted to a joint-stock company may well behave no differently than
it did under earlier arrangements. But, having noted difficulties of inter-
pretation, most would agree that the extent of meaningful privatization is
inversely related to the size and complexity of the operation. For small-
scale operations in the retail and service sectors, privatization has pro-
ceeded quickly. It has moved much more slowly for large-scale industrial
establishments. The reasons for this pattern are understandable; at the
same time, they relate closely to future problems.
First, capital markets are at a very early stage of development.
Commercial banks are in their infancy, and most are dealing not with
small-scale privatized operations but with larger firms (especially those
requiring dealings beyond Russian borders). Put another way, firms in
the early stages of privatization have only limited access to functioning
capital markets and are thus restricted in terms of available business
options.
Second, while small firms can quickly adjust product lines, train
personnel, and adapt to consumer demand, the same cannot be said for
large enterprises. Even in cases like Nizhny Novgorod, noted for its aggres-
sive posture on privatization and transition, much of the industry has been
defense-related, and conversion-the development of competitive prod-
ucts for the civilian market-has been difficult. For example, one of the
problems of the Soviet economy was its lack of marketing skills; this
remains a serious problem in the new era.
Third, the business environment is fragile. For example, under old
Soviet arrangements, inputs were provided to user enterprises through the
administrative structure. Under present emerging arrangements, supply
sources are very uncertain and in many cases must be negotiated across
what have become international borders. But in such cases, the usual
mechanisms for the conduct of international trade are either slowly emerg-
ing or missing altogether.
Another critical symptom of the fragile environment is the absence of
a sophisticated system of federal and local regulations and revenue genera-
tion and sharing. With a need to generate revenues for the federal budget,
there has been a tendency to add more taxes and to raise rates to the point
where the typical tax burden on enterprise is exceedingly high. Although
the Russian tax system is in the early stages of development, it seems to
be unduly complex, extracting large shares of enterprise revenues. The
inevitable result in such a system is a low level of compliance.
Finally, while many Russian enterprises can look to domestic demand
to sustain profitable operations, those involved in the international arena
face a much more difficult situation. Quite apart from the newly emerging
trading arrangements and mechanisms among the former Soviet republics,
Russian firms must be able to meet growing international competition in
an era when international markets seem to be increasingly open and
competitive. If American firms find it hard to adjust to and compete in the
new world order, it seems obvious that Russian firms would find adjust-
ment even more difficult.
In light of these patterns, one could argue that a rapid pace of privat-
ization-that is, meaningful privatization-cannot be sustained unless
changes are made. The most likely change would be serious abandonment
of subsidies, with a resulting increase in the level of unemployment in the
economy along with a willingness to sustain bankruptcy on a significant
scale. This latter path will be difficult unless conditioning factors can limit
the downside.
What are the conditioning factors? First, a reasonable safety net must
be in place; the tax system must ensure adequate revenues. We have noted
that lack of compliance is a serious problem and is not likely to improve,
especially in bad economic times with a complex and potentially burden-
some tax system. Moreover, while reliable measures of poverty are difficult
to discover in the early period of transition, real per capita income fell by
roughly 50 percent in the pivotal year of 1992.
Second, to the extent that many Russians hold more than one job, it
is possible that unemployment may not in fact increase significantly.
However, the standard of living may fall or at least not increase by any
appreciable amount. Structural changes in employment bear close scrutiny
as privatization proceeds, especially if the pace of real privatization among
large industrial enterprises accelerates.
Finally, recent increases in the demand for labor, though not of major
size, could nevertheless be important in limiting the growth of unemploy-
ment.
The Russian economy is at a watershed. The process of transition has
proceeded with some real successes, and yet one could argue that there are
hard times ahead. Basic structural adjustment is difficult in the United
States, in Japan, and in Germany. Such adjustment, even if the pace of
change is slowed somewhat, will be extremely difficult in Russia. We turn
next to some special issues that have captured our attention during the
early phase of transition.
THE RUSSIAN ECONOMY AND BEYOND: SPECIAL ISSUES
We have emphasized that the Russian economy is not like its Soviet
predecessor and thus must be examined in terms of rather traditional
microeconomic and macroeconomic indicators of success. However, it is
also important to look closely at a number of important conditioning
factors to which we now turn our attention.
The Food Problem: Has It Been Resolved?

During the Soviet era, agriculture and agricultural performance were the
subject of continuing discussion both in the Soviet Union and in the West.
Western economists tended to argue that if there was to be serious change
in the planned socialist economic systems, an obvious place to start was
agriculture, where, it was argued, privatization would be welcomed along
with an expansion in the quality and variety of basic food products.
It is evident that agriculture was not to be the starting point of
transition in Russia. Moreover, in the latter days of the Soviet era and the
early days of the post-Soviet era, the issue of food shortages, especially
during the winter, received much attention. Yet in the winter of 1992-
1993, these issues received much less notice, at least from the Western
press. What has happened in the agricultural sector?
Since the end of the Soviet era, trends in agriculture have been quite
°
complex. 1 First, if privatization was on the back burner during the Gor-
bachev era, it has been on the front burner during the Yeltsin era, and yet
the actual share of agricultural land that was privatized in 1993 was small.
By the end of 1991, Russia had passed land legislation that spelled out
four basic options for collective and state farms, with implementation to
be at the local (mostly oblast) level. A series of options was available, and
in 1992, deadlines were established. Farms could be broken up into
individual peasant farms with a service organization or association pro-
viding support for the acquisition of, for example, inputs. A second form
of organization was a joint-stock company (aktsionnoe khoziaistvo). The
third possibility was a producer cooperative in which individual farm units
would belong to a cooperative with a degree of internal independence.
Finally, it was possible that some state and collective farms might choose
to sustain their existing operations.
Although there has been a great deal of change in the rural sector (with
substantial regional differentials), by the beginning of 1992, only about 2
percent of the total area of plow land in Russia was under private or
cooperative arrangements. Moreover, it has been argued that in some
cases such arrangements are a formality to meet existing regulations. It is
likely that significant changes in organizational arrangements in the coun-
tryside will continue, and yet some major obstacles exist. For an elderly
population from a long history of socialized agriculture, the transition,
good or bad, is difficult. In addition to this sort of resistance and the
resistance of at least some local officials, mistrust of the rules and lack of
a system for providing inputs for the production process remain major
obstacles.
While change has been taking place, agricultural output has declined.
From the standpoint of agricultural performance, 1992 was a mixed year.
Although grain output was up in the territories of the former Soviet Union,
grain output in Russia was down, especially compared to 1990. At the
same time, the agricultural sector experienced growing input problems,
and Russia established a state grain fund to ensure adequate supplies
through trade with other former republics as necessary.
Basic economic trends in Russia were important in understanding the
food situation. While meat was generally replacing grains in the Russian
diet through the late 1980s, this trend was reversed during 1992. As
Western economists have noted, the perception of a food shortage arose
in part from the fact that at the end of the Gorbachev era, incomes were
rising while prices remained controlled. The excess demand for agricul-
tural products could not be met.
However, after the general release of prices at the beginning of 1992,
sharp increases in the price of meat made grain products relatively more
attractive. At the same time, there continued to be problems with the
system of distribution as old arrangements disintegrated and no new
arrangements were put in place.
Politics, Trade, and Aid

As economists, we tend to focus our attention on the specifics of the
economy. But as we know, there are other influential forces that will
interact with the economic issues to mold the outcomes that we observe.
For example, in Chapter 14, we emphasized the importance of the Soviet
legacy in understanding the problems of transition in Russia and in the
other independent states of the post-Soviet era. In the 1990s, political
issues in Russia and the other states will be of major importance. Indeed,
there is little likelihood of economic success if there is not a measure of
political stability.
In a country that moves toward the creation of democratic institutions
from a history that lacks such institutions, it is not surprising that there
may be a degree of instability. Even though Boris Yeltsin sustained his
position in the referendum held in April 1993, the subsequent proposal of
a new constitution (to replace the Soviet constitution of 1977) created
immediate discord. Under these new arrangements, the position of the
president would be enhanced (including the power to appoint a cabinet),
but at the same time a parliament with dual chambers would be elected to
represent regional and other interests. The power of the state would be
substantially reduced, while the rights of individuals would be greatly
increased.
Although the proposals of a new constitution would enhance regional
authority, it is important to realize that regional influence and regional
differences will grow, quite apart from the constitutional debate. As the
power of the center has diminished, local authorities have increasingly
found themselves, at least for local issues, in a position of real decision-
making power and responsibility. This decentralization of power and the
accompanying development of local infrastructure will be of major impor-
tance in defining regional economic outcomes.
While local issues will be important, overall stability has been and will
remain a critical factor for attracting foreign investment. Most Westerners
would argue that while there are great potential benefits in what is now a
land of "frontier capitalism," there are also substantial risks. The net
result of these forces undoubtedly has limited the inflow of foreign invest-
ment along with a host of practical limitations. But possibly most impor-
tant, it has tended to result in foreign investment being directed largely
into service-type activities where returns are quicker and long-term startup
costs less. While investment definitely is needed in the service sector, the
long-term health of the Russian economy requires modernization in the
basic sectors; for example, industry.
Similar observations could be made about more general issues relating
to foreign trade. As the basic numbers clearly show, the volume of foreign
trade has dropped sharply. For example, between 1990 and 1992, Russian
exports declined by roughly 50 percent, while for the same period, imports
declined by more than 50 percent. The share of trade with developed
countries has expanded quite significantly at the expense of the share with
former Council for Mutual Economic Assistance (CMEA) countries. Un-
der Yeltsin's leadership, import restrictions have been reduced (although a
value-added tax was placed on imports), and steps have been taken to
enhance exports, including the usually controversial component of ex-
panded exports of military equipment. The commodity composition of
Russian exports and imports has not changed dramatically, though many
basic issues remain unresolved. There are, for example, difficulties in the
shipment of basic materials across now independent states where basic
interstate agreements have not been stabilized. Moreover, the value of the
ruble has continued to slide, and stabilization is still in question.
For sustaining the value of the ruble, the issue of foreign aid is
important. 11 Western discussions of aid have paid close attention to issues
of political stability and especially the pace and success of the reform
program. There has been an ongoing controversy over both the amount
of aid and the most appropriate channels through which aid might be
delivered. The latter might be used for direct involvement in the transition
process (for example, stabilization of the ruble) or for more indirect
purposes such as assistance to such critical sectors as energy, where the
emphasis has been aid that might be channeled directly into industry and
not through the political process. In these cases, there is a direct and
immediate need for Western technology. There is also a possibility that
controls could be developed to maximize the benefits gained from the aid
process.
Although the aid question has captured major attention in the West,
actual deliveries of aid have been limited. There has been a continuing
concern about the lack of stabilization, and a sense that aid will be of little
value unless reasonable stabilization occurs. Some argue that while aid can
be helpful to the transition process, fundamentally the discipline to make
basic changes must come from within.
The Economy and the Military

One of the most controversial aspects of the Soviet economy was the
military, especially its size and growth as measured by the military budget.
Ironically, there is continuing debate on the issue of measuring the size of
the military sector. However, most observers agree that in 1991 through
1993, there were sharp cuts in some areas of military spending. 12 For
example, cuts in spending for strategic defense items have been less than
those made in the navy. Moreover, although there is military capacity in
the newly independent states, the major players are Russia and Ukraine,
although the former Soviet republics have moved to develop some sort of
military capability beyond that which has been sustained under CIS agree-
ments for the eleven members of the CIS.
The issue of military conversion is complex. After March 1992, a law
was passed to allow individual enterprises to prepare and implement
conversion plans, the emphasis being the development of high-technology
exports. Even in the Gorbachev era there was discussion of using military
expertise to solve civilian production problems. However, effective mili-
tary conversion has been limited, and there remains an emphasis on
sustaining basic military production capacity.
Attitudes Toward Reform

What is the public attitude toward economic reform in Russia? This is an
important question and yet one that is difficult to answer. 13 It is surprising
that in spite of growing unemployment and sharp reductions in real wages,
surveys of consumer attitudes suggest that there is support for the reform
program (although this support has tended to decline over time).
Understanding Russian and CIS population attitudes toward eco-
nomic and social change is an issue well beyond the scope of this book.
However, it is useful to note some general trends, since in the end, popular
support for transition will be essential to its success.
First, throughout the former Soviet territory, there is evidence of deep
concern about the state of the economies. Indeed, as we emphasized
earlier, it is possible that this concern predated the Gorbachev era. How-
ever, care should be taken with such generalizations since there are signifi-
cant regional differentials relating to concerns about the economy, with
pessimism less evident on the local level.
Second, there seems to be an overall view that markets in general are
possibly the only path toward economic improvement, although studies of
attitudes toward markets reveal important variations of opinion. While
surveys have revealed that Russians seem to understand markets to a
greater degree than generally anticipated by the West, there is nevertheless
understandable variation on individual issues. For example, one study has
shown that while there is support for markets as a mechanism, many feel
that they should be introduced gradually; this is doubtless an issue in the
Yeltsin era.
Third, popular attitudes on components of transition vary. For exam-
ple, there are differing attitudes on privatization-the extent to which it
should be carried out and the remaining role of the state during and
after the process. Moreover, there often are strong feelings on the
downside effects of transition. For example, there is considerable fear of
unemployment.
Some of these views obviously are responses based upon personal (and
possibly immediate) circumstances. The Soviet Union may have had un-
deremployment, but it had little experience with unemployment. But some
responses likely derive from the long-term impact of the Soviet era, an
impact that could present difficulties throughout the transition process.
Even while markets may be viewed approvingly, there remain deep feelings
on issues such as the impact of equity on current policy prescriptions and
outcomes.
THE FORMER REPUBLICS: A SUMMARY OF REFORM ISSUES
All the former Soviet republics beyond Russia have to varying degrees
been moving toward transition from plan to market. In these newly in-
dependent states, legislation generally has been introduced to develop the
appropriate market infrastructure through privatization, although there
are considerable differentials in the extent of privatization achieved, espe-
cially in agriculture. Following the Russian release of prices in January
1992, similar steps were taken in the independent states, although
throughout all of these states there remained varying degrees of controls.
Performance of these new states has been quite uneven. In Table 15.3,
we have assembled basic (official) statistics on industrial and agricultural
output.
In this chapter, we have emphasized the fragile state of data collection
and analysis in the post-Soviet era. If we date the beginning of significant
transition to January 1992 (when price controls were substantially re-
laxed), we are in the very early stages of independence for the former
Soviet republics. While it seems appropriate to make some generalizations
about post-independence performance, the evidence is at best fragmentary
and subject to much change as time passes.
Through 1991, for most of the newly independent states; performance
(defined as the rate of growth of industrial and agricultural output)
slipped, though this was not the case for all states, and interstate differ-
ences were significant. For example, although performance varies some-
what depending upon the indicator chosen, Turkmenistan, Uzbekistan,
and Azerbaidzhan have all limited the downside; they have generally
sustained, if not improved, agricultural performance through 1991.
Kazakhstan has also had reasonable performance, although agricultural
output slipped in 1991.
The Baltic states generally have been able to sustain industrial output
through 1991, though for all cases agricultural output fell rather signifi-
cantly.
Armenia has had a poor record in industry and a mixed record in
agriculture. Among the remaining states (with the exception of Moldova),
Table 15.3 FORMER SOVIET REPUBLICS: PERFORMANCE INDICATORS
Country 1985 1990 1991
Azerbaijan
Industrial production* 12.3 12.2 12.7
Agricultural production** 4.1 3.5 3.6
Armenia
Agricultural production 1.4 1.0 1.1
Belarus
Kazakhstan
Kyrgizhstan
Moldova
Russia
Tajikistan
Industrial production. 4.6 5.4 5.3
Turkmenistan
Uzbekistan
Ukraine
*billion rubies, comparable enterprise wholesale prices and methodology

of 1990
•*billion rubies, comparable prices of 1983
Source: Official data derived from Statisticheskii Komitet Sodruzhestva
Nezavisimykh gosudarstv, Ekonomika sodruzhestva nezavisimykh
gosudarstv (Economy of the Commonwealth of Independent States)
(Moscow: Finansovyi lnzhiniring, 1992).
the downturn of industrial output generally has been limited, while agri-
cultural performance for these states has been generally weak through the
end of 1991. In Figure 15.1, we provide a summary of economic changes
in the Commonwealth of Independent States (CIS) for 1990-1991.
Ptrttnt change
• •990 - 1991
-20 -10 0 JO 20 -20 -10 0 JO 20 -20

Russia Russia Russia
Ukraine Ukraine Ukraine
Belarus Belarus Belarus
Moldova Moldova Moldova
Kazakhstan KazakbsllUl Kazakhstan
Kyrgyzstan Kyrgyzstan Kyrgyzs1ao
Tajikistan Tajikistan Tajikistan
Turkmenistan Turkmenistan Turkmenistan
Uzbekistan U21>ekistan U21>ekistan
Armenia Armenia Armenia
Azerbaijan Azerbaijan Azerbaijan
Georgia Georgia Georgia
Estonia Estonia Estonia
Latvia Latvia Latvia
Li1huania Lithuania Lithuania
•National income produced n:llccts value added by • Total output including material inputs 'Total output including material inputs
primaiy inputs, such as labor and capital, used in used in production. used in production.
the production or material goods and services; it
excludes depreciation and semces that do not
contnbute din:ctly lo material oulpul.
w
...... 33591 7• 9-92
Figure 15.1 INDEPENDENT REPUBLICS OF THE FORMER SOVIET UNION : ECONOMIES AT A GLANCE
TRANSITION AND THE INDEPENDENT STATES: WHAT IS NEXT?
In this chapter we have discussed the transition from plan to market in

Russia with selected glances at change in the independent states. We have
emphasized that the former Soviet Union is, in the first half of this decade,
in the very early stages of transition. At best, we are able to look at
selected, limited, and not always fully reliable indicators of change. What
is next?
First, as market institutions emerge, economic activities resulting from
these institutions will allow us to see basic trends and thus better under-
stand emerging patterns of change. As time passes, we can hope that
random shocks will be less evident, basic influences from new organiza-
tional arrangements and policies more evident.
Second, any sustainable improvement in the economic sphere neces-
sarily will be predicated on reasonable political stability and the develop-
ment of appropriate political institutions and infrastructure at both the
upper and lower levels of the respective independent states. Moreover, it
will be essential that the newly developed infrastructure work in practice,
not just representing legislation that is generally ignored by the partici-
pants.
Third, regional differences have been and will remain important.
Moreover, these differences, however defined, will derive from myriad
forces, including local factor and organizational endowments and initia-
tives of the local population.
Fourth, while our initial indicators of economic performance have
focused on such basics as industrial and agricultural production, our
subsequent information and analysis will permit greater sophistication,
including analysis of levels of living and regional specialization.
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1. For an excellent and detailed discussion of this era, see J. H. Noren, "The
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2. IMEMO, Russian Economic Monitor, vol. 2, no. 2 (February 1993), 1.
3. Ibid.
4. See Noren, "The Russian Economic Reform," 11.
5. Ibid.
6. IMEMO, Russian Economic Monitor, 8.
7. Noren, "The Russian Economic Reform," 13.
8. IMEMO, Russian Economic Monitor, 1.
9. Observers have suggested that during the transition from plan to market, it is
likely that output will decline, reaching some minimal point after which there
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SIXTEEN
••
Conclusions and
Prospects
The Soviet Union came into being as a political entity in 1917 and was
dissolved in 1991. The economic arrangements of collectivized agriculture,
state ownership, and national economic planning were introduced in 1928
and lasted about 64 years. However history ultimately may judge the
Soviet era, most will agree that it was an era of some economic achieve-
ment, garnered at high human cost and without the ability to adjust to
new circumstances. The lack of adjustment ability was the inevitable result
of a set of particular policies enforced through rigid allocation mecha-
nisms. Significant costs had been imposed in the past; for example, rates
of growth of consumption were held down to enhance rates of growth of
investment. Substantial costs, however, will be borne by present and future
generations in Russia and the CIS states as the adjustment of the outmoded
economies takes place. Such costs exist in most economies at most times;
what is peculiar about the Russian/CIS case is the magnitude of the
adjustment necessary and the suddenness with which the problem arose.
With the ultimate collapse of the system, even its most ardent advocates
are hard-pressed to argue that the system's benefits outweighed its costs.
377
Even though Soviet economic performance declined in the 1970s and

1980s, few experts predicted that both the political and economic systems
of the Soviet Union would ultimately come to an end. The system of strict
Communist Party and government control appeared sufficient to guaran-
tee the continued existence of the system despite its obvious flaws. Also,
experts failed to predict that a product of the system, Mikhail Gorbachev,
would set in motion forces that would ultimately destroy the Soviet Union.
Understanding the past is important not only for our appreciation of the
changes that have taken place, but also for assessing the likelihood of
political and economic stability in the remainder of this century. What
were the major achievements and the major costs of the Soviet economic
experience? How will these costs and achievements mold our judgment of
Russian and CIS prospects through the 1990s?
SOVIET ECONOMIC ACHIEVEMENTS
International comparisons of economic achievements have always been

difficult. Comparisons of the Soviet Union with other market-type systems
presented additional problems that were not always resolved merely by the
availability of additional data. However, glasnost and the post-Soviet era
have permitted access to information heretofore unavailable or available
only on a limited basis. This new information may over time lead us to
alter established positions as further research is conducted. Most observers
would argue that at least in the early years of Soviet planning, rates of
economic growth were generally impressive by world historical standards.
The historical rate of economic growth of the tsarist economy (from 1885
to 1913) was slightly in excess of 3 percent per annum. From 1928 to
1980, Soviet GNP grew at an average annual rate of just over 4 percent.
While a capitalist Russia also might have experienced more significant
rates of growth, Soviet growth achievements were nevertheless impressive.
However, recent comparisons of the relative size of the Soviet and U.S.
economies have downgraded previously argued Soviet achievements.
How did the Soviet Union achieve high rates of economic growth?
Simply put, an authoritarian political system combined with the central-
ized allocation of state-owned resources permitted Soviet leaders to sub-
stitute their own preferences for those of the general population. Inputs
(land, capital, and labor) rapidly could be brought into the economic
system and moreover could be placed in those sectors where the growth
potential was greatest. Through the turnover tax and ownership of enter-
prises, the state had direct access to capital accumulation. This access, in
combination with both material incentives and administrative mecha-
nisms, facilitated input growth at relatively high rates.
Conclusions and Prospects 379
The Soviet economic experience was unique in the sense that the state,
through the administrative apparatus, took control of the available re-
sources and harnessed them to achieve state objectives. In a number of
important ways, these state objectives differed from those generally found
in market capitalist systems. It is ironic that what might be viewed as a
strength of the system in early years (namely, its power to direct and to
control resource allocation) in fact became a major weakness in a sub-
sequent era when the power to direct productivity growth could not be
mustered.
THE COSTS OF SOVIET ECONOMIC ACHIEVEMENTS
The early economic expansion of the Soviet economy unquestionably

was bought at the cost of limiting the growth of consumer well-being.
The expansion of the Soviet military and heavy industry resulted in a
cessation if not a reversal in the growth of Soviet living standards in the
1930s. Although one can argue that the consumer fared better in the
post-Stalin era, it is striking that as consumer confidence eroded steadily
throughout the contemporary era, a succession of Soviet leaders continued
to expand investment in outmoded projects and sectors producing un-
needed products that were noncompetitive in world markets. These costs,
then, were present in the short run and remain critical in the post-Soviet
era.
The nature of Soviet expansion created an economy structurally dis-
torted by market standards. Again, this meant a large and unnecessary
sector producing outmoded industrial products, but a limited consumer-
goods sector producing low-quality consumer goods. Structural biases
have been a major problem in the post-Soviet era. For example, consider
the structure of Soviet industry. Planners determined local policies, the
extent of sectoral development, and the scale of the particular sector. In
Russia and the CIS states, the regional distribution of industrial capacity
creates a host of new problems. Moreover, privatization has been difficult
due to the large scale of much of the former Soviet industrial estab-
lishment. Modernization is a massive task in a setting where technology is
frequently outmoded. These are real costs of past policies that will be
borne by present and future generations. Moreover, they are costs that will
continue to make any transition difficult.
During transition, Russia and the CIS economies need a skilled and
motivated labor force. But, considering 50 years of empty promises about
the abundance of socialism, more than promises will be required in the
present era. How can material incentives be expanded in an era when
transition costs are beyond available investment resources?
The answer to this question rests on the assumption that any economic
system can move toward an intensive mode in which factor productivity
is the major source of the growth of both producer and consumer goods.
Unfortunately, as we have emphasized, the available evidence suggests that
this transition never took place during the Soviet era. Although the issue
of technological advancement underlying this problem can be changed
under new arrangements, the structure from the past must be modified,
and that implies cost.
The issue of technology is critical to our understanding of both the
Soviet past and the post-Soviet future. Although the Soviet system seemed
to have the ability to import foreign technology and to focus that technol-
ogy on state objectives, the lag between the Soviet Union and the West
changed little during the Soviet era. This was partly a result of Soviet
priorities; advanced technology was limited to the military. But it was
much more than this. The Soviet Union clearly could import technology,
but it was unable to diffuse this technology, and thus the benefits of the
technology were very limited. Moreover, unlike arrangements in market
systems, it is likely that the Soviet civilian sector reaped very few spinoff
benefits from the Soviet military largely due to excessive secrecy. Some
have argued that in the post-cold war era, there will be a "peace divi-
dend," though even in more open market systems, the dividend has been
elusive.
In sum, the single dominant cost of the Soviet economic system was
its rigidity, a force still influential in the post-Soviet era.
THE TRANSITION AND BEYOND: RUSSIA AND THE INDEPENDENT

STATES IN THE YEAR 2000
While it would be simplistic to suggest that the Soviet economy did not
change over time, it is striking that the structural rigidities and the policies
that produced those rigidities remained largely intact through the Gor-
bachev era. Moreover, while the Gorbachev reforms will unquestionably
be a focus of scholarly interest for years to come, the issues at hand for
Russia and the CIS states differ greatly.
We have noted that the concept of transition in Russia and the CIS
states is recent (dating from 1989). While the transition to markets has
been proceeding, problems have and will continue to arise as difficult
issues such as privatization are faced. There is little doubt that the Russian
and CIS cases of transition are much more difficult than those faced by the
more advanced Eastern European cases; for example, Poland and Hun-
gary. At the same time, the difficulties may well be less than those of the
more backward cases such as Romania and Bulgaria.
Conclusions and Prospects 381
In the contemporary setting, transition will proceed on the assumption

of reasonable political stability. If this stability is sustained, then the issue
will be a race between the benefits and costs of change and the willingness
of the population to bear costs with only limited benefits. The latter must
expand if a new transition consensus is to survive. Are these assumptions
reasonable?
Although the concept of a mixed system has been viewed with hostility
by most, in other cases, the likelihood of a new target (something less than
a full-blown market system) remains possible. This is particularly true in
the case of Russia. Soviet arrangements functioned for a great many years
compared to most other similar cases. While many former Soviet citizens
may have come to realize the costs of that old order, they will also be
reluctant to give up the benefits such as employment, medical care, and
subsidized housing and education. In the long run, transition to markets
will survive only if the population favorably assesses the benefit/cost ratio
and acts to support perhaps costly change. This balance and the reaction
to it is very difficult to predict.
Western advisors realize that the transition is not easy. How well the
transition is navigated will determine the shape of the first half of the
twenty-first century. Thus far, no economy has found a simple formula for
reversing the effects of the administrative-command system. Successful
transition requires a blend of political and economic willpower never
before witnessed in any country. Institutions that required centuries to
evolve in the West must be created quickly before the population's toler-
ance is exhausted.
As more and more voices call for the stability and security of the old
system, resolve and determination will be required to resist such a path.
Return to the old system would be difficult since its pillars-centralized
power and the planning hierarchy-have been toppled.
The major lesson to be learned from this examination of the adminis-
trative-command system is that it failed due to internal contradictions, not
due to human error. This insight is important. Subsequent generations,
attracted by the appealing features of the administrative-command sys-
tem-equality, job rights, managed growth-may conclude that the system
itself was sound. In this view, its managers, from the late 1920s through
the early 1990s simply could not get it right. Such a conclusion could lead
to a repetition of the experiment with results that would perhaps not be
foreseen by future generations.
••
Abalkin, Leonid, 338 planning, 151-158, New Economic Policy,
Absenteeism, 184, 185 165-166, 193-194, 56-57,60-66, 108,
Academy of Sciences, 270 209-210, 211 113-114
Accountability, enterprise, price system, 186-193 organizational changes,
327,329-330 productivity, 237-245 130
Accounting research and development in post-Soviet era, 363-364
cost, 130, 187 in, 156 postwar period, 126-127
Gosbank's role, 159-161 trade unions, 179-180 privatization, 313
khozrashchet system, 304, transition to market prodnalog, 56
329-330 economy, 306-313, property rights, 331
Accounting prices, 187, 188 357-360, 361-363, regional specialization, 351
Administrative allocation. 367,371,378 state farms (sovkhozy),
See Resource allocation weaknesses of, 131-132, 130, 190
Administrative-command 194,218 subsidies, 138
economy, 4-7, 89, 95, World War II, 114-118 surpluses, 49, 111-112
126, 137, 139, 325, 327, Administrative under tsars, 19-23, 34
347,357, 379 decentralization, 292-293 War Communism, 48-49,
consumer goods balance Aganbegyan, Abel, 339 51
in, 161-163 Agent-principal relationship, Agriculture Privatization
consumer welfare, 253-257 176-177 Decree, 359
creation of, 95-118, 237 Agricultural procurement Air pollution, 278-280
credit balance in, 159-160 prices, 190 Alexeev, Michael, 252-253
economic bureaucracy, Agriculture. See also Collecti- Allocation of output, 49, 51
148-151 vization All-union ministries, 150
economic stability, balanced growth of, 83-85 Anderson, Barbara, 115
276-278,308-310 campaigns, 129 Andropov, Yuri, 126, 132
education, 183-184 contemporary trends, 331 Annual budgets, 163-164
enterprise management, corn program, 129 Annual plans, 152, 174
173-180 economic adjustments, Argentina, 216
environmental protection, 130-131 Armenian S.S.R. (Armenia),
278-280 emancipation of peasants, 349,369
evolution of, 100 19-23 Association of Industry and
foreign trade, 207-218 foreign trade in, 110-111 Trade, 16
growth, 231-241 grain collection crisis, Australia, 24, 26, 29, 252
human capital, 269-276 86-87, 102-104 Austria-Hungary, 18, 24-25
investment in, 155-158 grain imports, 217 Average branch costs, 187-188
labor allocation, 180-186 grain requisitions, 48, 49, Azerbaidzhan S.S.R.
material balances, 151-154 51 (Azerbaidzhan), 349,
measuring, 255, 269 Industrialization Debate, 30 353,368,369
monetary overhang, 161, Kolkhozy, 100, 110, 130,
309 190-191 Baikal, Lake, 351
money balance in, 160-161 leasing of land, 331 Bairam, Erkin, 244-245
383
384 Index
Balance of payments, 209, Bureaucracy, economic, Collective farms (kolkhozy),

216-217 16-17, 134, 137, 100, 110, 130, 190-191,
Balanced growth program, 148-151,336-337 257,365
83-85 market prices, 190
Balances of planned Canada,213,238,239,240, Collectivization, 31, 67-68,
economy, 151-154, 252 115. See also Agriculture
159-163,294 Capital. See also Investment assessment of, 91,
Bank for International accumulation of, 75-79, 112-113
Cooperation, 214 84, 112 decision for, 100-106
Banking foreign, dependence on, and economic
expansion, 301 30-31 development, 108-112
and foreign trade, 209 human, investment in, grain collection crisis,
New Economic Policy, 27-28 86-87, 102-104
58-59 needed for industry, 63, impact, 86-87, 105-106
in 1930s, 99 75-77, 114, 331 Collegiums, 150
organization of, 159-160 productivity, 237-245 Collier, Irwin, 249
under tsars, 16 Capital goods balance, 152 COMECON. See Council for
See also State Bank Capitalism, 80 Mutual Economic
Barshchina, 20 and environmental Assistance
Barsov, A. A., 112 disruption, 278 Command planning, 58, 69
Bazarov, V. A., 96 New Economic Policy, Commanding-heights
Belgium, 30, 239 9-10, 57-58 enterprises, 55, 57-58, 80
Belorussian S.S.R. (Belorussia), state, 79-80 Commission for Internal
348, 349, 353, 369 transition from, 77-79 Trade, 99
Bergson, Abram, 111, 233, under tsars, 16 Commission for Universal
245,246,247,248,251, Capitalist countries, foreign Labor Service, 50
254,255 trade with, 215-218 Commodity composition of
Berliner, Joseph, 250 Carr, E. H., 48 foreign trade, 212
Birman, Igor, 254, 296 Caucasian mountains, 47, 51 Commonwealth of
Birthrates, 28-29, 115, Central Committee, 85-86, Independent States (CIS),
272-273 97,99, 148, 149,296. 3-4, 139,307,308,324,
Blum, Jerome, 22 See also Communist Party 339,347-355,368-371
Bolsheviks, 14, 31, 32, 46-48, Central Intelligence Agency economy, 357-358, 372,
49, 51, 55, 57, 59, 62, (U.S.), 233, 236-237, 255 377-381
76-77, 79-80, 107-108, Central Planning Board, 2 79 Communal consumption, 254
113 Central Statistical Admini- Communes, agricultural
Bonuses stration, 149 (mir), 21-23, 46-47, 105
for managers, 177-178, Central Statistics Board, 294 Communism
295-298,300-301, Chang, Gene Hsin, 257 full, 48
304,329 Cheka, 49 transition to, 78-79
for workers, 297-298, Chemical industry, 130, 280 Communist Party, 127, 132,
300-301,304,329 Chayanov, A. V., 34 148,311,323,326,329,
Bornstein, Morris, 292, Chernenko, Konstantin, 126, 378. See also Central
302-303 132 Committee
Brezhnev, Leonid, 126, Chervonets (currency), 9, 59 and collectivization,
132-136,236,245,250, China, 5, 77 100-101, 104-105
325,326 Cities (gorody), 350 and economic planning,
Britain, 17, 24, 30, 66, 77, Civil War (1917-1920), 97-99, 148-149
238,239,241,246,252 8-10,32,36,51,59,63 Ninth Congress (1920), 53
Budgets, 163-164, 351 Class rations, 50-51 nomenklatura system, 186
Bukharin, Nikolai, 63, 76, "Closed shops," 184-185, and organized labor
80,83-85,86,90,91, 272 recruitment, 184
101, 104 Coal reserves, 16, 18 perestroika, 136, 138
Bulgaria, 213, 378 Cohen, Stephen, 293 in postwar period, 12 7
Index 385
split during Industrializa- trade, 216-218 dynamic, 237-238

tion Debate, 76-77, 85 Demographic patterns. See economic, 20-21
Twentieth Congress Population labor, 273-275
(1956), 128, 129 Demokratizatsiia (democrati- static, 245-249
Twenty-seventh Congress zation), 325, 326, 327, Electrification plan
(1986), 325 330 (GOELRO), 52
during World War II, Denationalization, 55, 57 Ellman, Michael, 110, 112
116-117 Denmark, 239 Emancipation Act (1861),
Comparative advantage Department of Planning and 20-23,35
thesis, 210 Finance Organs, 148 Energy, 313, 352, 366
Computers, 250 Dependence on the West Engels, Friedrich, 77
Congress of Soviets, 46 (before 1917), 30-31 Enterprise managers, 131, 134,
Construction industry, 328 Desai, Padma, 245 173-180,297-298,327
Consumer goods Differential wages, 181-182, bonuses for, 177-178,
balance, 161-163 192 295-296, 298,
and prices, 188-190, Distribution of goods, 78 300-301,304,329
191-192 Distribution ofincome, 193 external constraints,
rationing during World Districts (raion), 350 178-179
War II, 116 Dobb, Maurice, 48, 279 incentives for, 177-178,
Consumer welfare, 253-257, Dynamic efficiency, 237-238 295-298,300-301,
377 304,330
Consumption Eastern Trade Association risks, 178
communal, 254 ( Vostokintorg), 208 Enterprise plans (techpromfi-
food, 256 Economic decentralization, plans), 154, 158, 174
Industrialization Debate, 292-293 Enterprises
87-89 Economic growth. See accountability of, 327,
per capita, 254-257 Growth, economic 329-330
Control figures, 97, 152-153 Economic performance, and banking, 159-160, 301
Control function of prices, 192 measurement of, 230-231 direct links to customers,
Cooperatives, 330-331 Economic planning. See 327,329
Corn program, 129 Planning, economic foreign trade, 312
Cost accounting, 130, 187 Economic Reform material balance planning,
Costs Commission, 338 152-154
average branch, 187-188 Economic reforms, 290-306. 1965 reform, 133, 297-302
Council of Ministers, 149, See also Perestroika organization of, 173-174
156, 186-187,208 Economic stability, 276-278, and price reform, 333-334
Council for Mutual 308-310,358,359,361, principal-agent relationship,
Economic Assistance 367, 368 176-177
(COMECON), 207, Edinonachalie (one-person privatization of, 311
209,210,213,214,366 management principle), productive, 150
Counterplans, 135, 299, 301 174 reduction in tutelage, 327,
Coup attempt of August Education 329
1991, 126, 138-139 and labor allocation, success indicators, 175-176
Credit, 159-160, 301 183-184 and trade unions, 179-180
literacy rates, 27-28, 270 valuation of, 310
Dangerous work wage organization of, 183-184, Entrepreneurs, 16, 57
differentials, 181-182 270-271 Environmental quality,
Death rates, 19, 28-29, primary, 28 278-280
272-273 of science/technology contemporary issues,
Decentralization reforms, 290, professionals, 270-271 279-280
292-293,300,310,312 secondary, 183, 270-271 measurement of, 2 79
Defense. See Military power of workers, 183-184 Estonian S.S.R. (Estonia),
Deficits Edwards, Imogene, 254 272,347,349
budget, 164 Efficiency Evacuation Committee, 117
386 Index
Expanded reproduction New Economic Policy, 59 Gosplan. See State Planning

model, 77-79 in 1930s, 110-111 Committee
Exports. See Foreign trade organization of, 208-209 Gospriemka (state inspectors),
Externalities, 2 79 planning, 209-210 329
policy, 210-211 Gossnab. See State Committee
Factor productivity, in post-Soviet era, 365-366 for Material and Techni-
238-240,243,248 reforms under perestroika, cal Supply
Factory wholesale prices, 332-333 Gosstroi (State Committee
187-188 with socialist countries, for Construction), 149
Feudalism, 15, 20, 34 213-214 Gostekhnika (State Committee
Financial planning. See also War Communism, 54 for Science and Technol-
Planning, economic Foreign Trade Bank ogy), 299
and banking, 159-161 (Vneshtorgbank), 209 Costen, See State Committee
for inflation, 161 Foreign trade deficits, 216-218 for Prices
monetary aspects, 15 8-161 Foreign trade efficiency Goszakazy (state orders), 329,
ruble control, 158-159 indices, 213 334
and state budget, 163-164 Foreign trade organizations, Grain
500 Day Program, 138, 338 208-209,210 collection crisis, 86-87,
Five-Year Plans, 99-101, France, 17, 24, 30, 215, 238, 102-104
111, 115, 301 239,240,241,246,247, exports, 35
eighth (1966-1970), 155 252 imports, 217
fifth (1950-1955), 155 Fuel and Energy Bureau, 328 output under tsars, 16,
first (1928-1932), 60, 69, Full-employment policies, 18,22-23,35
86-87,98-101, 106, 273-274 peasant marketing, 61-66,
110-112, 126, 155, 76, 102, 103, 106
181,273 Gaddy, Clifford, 252-253 requisitions, 48, 49, 51
fourth (1946-1950), 126, Gaidar, Yegor, 358 surpluses, 49, 111-112
155 General Agreement on Tariffs Great Depression (1930s), 211
ninth (1971-1975), 155 and Trade, 333 Greece, 239, 241
second (1933-1937), 100, Genetic theory of planning, Gregory, Paul, 249
101, 155 96-97 Groman, V. G., 96
seventh (1959-1965), 155 Georgian S.S.R. (Georgia), Gross domestic product
tenth (1976-1980), 155 62,347,349 (GDP), 247, 255
Food consumption, 256, 352, Germany, 17, 24, 30, 47, 49, Gross national product
364-365 115, 118, 363. See also (GNP), 15, 19, 88-89,
Food shortages, 364-365 East Germany; West 128, 132-133, 163-164,
Foreign debt, 217-218 Germany 231,232,233,234,235,
Foreign Economic Commis- Gerschenkron, Alexander, 246,338,359,378
sion, 328 14, 17,21,30,34,232 Gross output, 175
Foreign exchange, 211 Glasnost, 107, 136, 231, Growth, economic, 14-15,
Foreign investment, 17, 235,251,279,280,325, 231-241
30-31,34-35 326,327,378 acceleration of, 325
Foreign trade Glavki (chief administrations), Brezhnev years, 132-133,
agricultural, 110-111 52,66,67,98, 150 134-135, 164,
with capitalist countries, GOELRO (electrification 236-237,245,325
85,215-218 plan), 52 contemporary record,
commodity composition Goldman, Marshal, 250 235-237,238-241
of, 212 Gorbachev, Mikhail, 126, 132, Gorbachev years, 13 7,
contemporary trends, 218, 136-139, 148,229,243, 164,337-339
312,332 249,253,289,291,294, immiserizing, 257
Industrialization Debate, 297,323-327,330,331, Khrushchev years, 128-132
82, 85 335-339,378,380 malaise, 242-245
internal barriers, 211 Gorkom, 148, 329 Marx's theory about, 78-79
Khrushchev years, 128 Gorody (cities), 350 New Economic Policy,
with LDCs, 216 Gosbank. See State Bank 9-10, 60-61
Index 387
in 1930s, 234 Industrial associations (obedi- in agriculture, 126

postwar period, 233, 234 neniia), 134, 150, 302 in human capital (before
and productivity decline, Industrial wages, 181-182, 1917), 27-28
133 251,272 in industry, 63-64, 75-76,
under tsars, 23-29, 31, Industrial wholesale prices, 81-82, 111
233,234 187-188, 192 planning, 156-158
U.S.-USSR comparisons, Industrialization Debate policies, 236
232-234, 237, (1924-1928), 30, 75, and unbalanced growth of
238-241,246,247 100-101 industry, 75-76, 80-83
Gubsovnarkhozy (provincial balanced growth, 83-85 Investment Bank (Stroibank),
economic councils), 52 and current Soviet ideology, 156
Gulag penal camps, 105, 90-91 Iron reserves, 16, 19
115, 185-186 Marxist-Leninist legacy, Italy, 18, 24-25, 215, 239,
77-79 240,246,247
"Hidden reserves," 134 outcome, 87-89
Hoarding of tabor, 274 setting, 75-77 Japan,25,30-31, 66,215,
Human capital and Stalin's consolidation 230,233,239,240,241,
creation of, 269-273, 280 of power, 85-87, 89 332, 363
efficient use of, 273-275 unbalanced growth of Jasny, Naum, 106, 111
investment in (before industry, 80-83 Jews, 16
1917), 27-28 Industry/industrialization, 31, Job turnover, 184-185
qualitative changes in, 270 108, 109-114,232,310 Joint stock companies, 359,
quantitative changes in, balanced growth of, 83-85 362,364
272-273 cooperatives, 330-331 Joint ventures, 218, 332
Human factor, 326, 327 Industrialization Debate,
Hungary, 308, 378 30, 80-83 Kahan, Arcadius, 17, 28
Hunter, Holland, 138 Khrushchev years, 131 Kamenev, Lev, 76
Hyperinflation, 47-48 nationalization, 49, 52, Kantorovich, L. V., 295
57-58 Karcz, Jerzy, 103, 110
Import-export associations, New Economic Policy, Kazakh S.S.R. (Kazakhstan),
208 9-10, 57-58, 60, 129, 182, 278, 348, 349,
Imports. See Foreign trade 63-66 370,371
Incentives and perestroika, 137-138, Khasbulatov, Ruslan, 358
Brezhnev years, 134 331-332,336 Khozrashchet accounting
for managers, 177-178, in post-Soviet era, 360-361 system, 304, 329-330
295-298, 300-301, postwar period, 126-12 7 Khrushchev, Nikita, 67, 117,
304,330 "shock" methods, 53 126, 127, 128-132, 133,
1965 reform, 133, unbalanced growth of, 134, 185,291,294-295,
297-302 80-83 299
principal-agent relation- under tsars, 15-19 Kirghiz S.S.R. (Kirghizstan),
ship, 176-177 vertical integration of, 351 349
for workers, 297-298, War Communism, 48-54 Kolkhoz. See Collective farms
300-301,304,330 Industry wholesale prices, Komsomol, 104, 184
Income 187-188, 189, 192, 194, Kondratiev, N. D., 96
national, 18, 24-26, 31, 333 Kontorovich, Vladimir, 236
32,60 Infant mortality, 19, 28-29 Kornai, Janos, 158, 278
per capital nominal, 193 Inflation, 47-48, 64, 76, 81, Kosygin, Alexei, 133, 297-302
Income distribution 82, 161, 164,236,277, Kosygin Reforms (1965),
equity of, 250-253 360-361 133,297-302,305
function of prices, 193 Institutes, 2 70-2 71 Kronstadt uprising (1921),
Inconvertability of rubies, Interest rates, 157-158, 297 54
211, 213, 214 International Monetary Fund, Krzhizhanovsky, G. M., 99
Index number relativity, 232 333 Kuibyshev, V. V., 96
India, 216 Interstate trade, 352 Kulak (prosperous peasant),
Indicative planning, 96 Investment. See also Capital 56, 71, 86, 101-105
388 Index
Kuznets, Simon, 15, 26, 28 Less-developed countries, planning, 98-99, 150,

Kyrgizhstan, 370, 371 32-33,216 152, 154-155, 156,
Lewin, M., 47 178, 179, 193, 304
Labor Liberman, Evsei, 132, 295-297 during World War II, 117
allocation, 116, 180-186, Linz, Susan, 115-116 Ministry of Education, 183
275-276 Literacy rates, 27-28 Ministry of Ferrous Metals, 149
balance, 150, 180-181 Lithuanian S.S.R. Ministry of Finance, 149, 156,
differential wages, 181-182 (Lithuania), 347, 349 159, 160, 164, 186,209
and education, 183-184 Living standards, 22-23, 110, Ministry of Foreign Trade,
full employment, 273-274 253-257,312-313,363, 208,209,210,332
hoarding, 274 379 Ministry of Higher and
legal controls, 184-185 Secondary Specialized
mobility, 184-185 Machine Building Bureau, 328 Education, 270
mobilization, 50, 53, Machine tractor stations, Ministry of Trade, 186
109-110, 181, 185 105, 130 Mir (agricultural communes),
nomenklatura system, 186 Macroeconomic policy, 21, 46-47, 105
organized recruitment, 184 308-310 Mobility, labor, 184-185
penal, 105, 115, 185-186 Malenkov, Georgi, 126, 12 7 Modernization of facilities, 332
planning, 180-181, 297 Managers. See Enterprise Moldavian S.S.R. (Moldavia),
policies, 272-276 managers 349,369
and population growth, March Revolution, 46 Monetary overhang, 161, 309
272-273 Market allocation, 47-48, Money
productivity, 240-241, 51,55-58,310-311 balance, 160-161
243,303 Market economy, 33-36 elimination of, 48
productivity bonuses, 177, transition to, 306-313 and financial planning,
182-183 Marx, Karl, 48, 56, 77-79, 80 158-159, 160-161
qualitative changes, Material balances, 96, 98, incentives, 134
270-271 117, 151-154, 209 reintroduction, 59
quantitative changes, McCauley, Alastair, 257, role of, 158
272-273 352-353 supply, and inflation, 47,
regional distribution, McKay, John, 34 64, 161
275-276 Measurement function of Moscow Narodny Bank of
trade unions, 53, 179-180 prices, 192-193 London,209
women in labor force, Menshevism, 97
274-275 Microeconomic policy, Narkomfin (People's Commis-
Labor books, 185 310-311 sariat of Finance), 58, 97
Labor theory of value, 78, 188 Military power, 15-16, 27, National income, 18, 23-26,
Land Decree (1917), 8, 46, 108 230 60,247
Lange, Oskar, 279 defense spending, 242-243, Nationalization, 49, 52, 57-58
Latvian S.S.R. (Latvia), 347, 366-367,377 Naturalization of economy,
349 Gorbachev years, 243, 249 48,51,55
Law on Cooperatives, 328 measurement of, 366 Nemchinov, V. S., 295, 296
Law on Private Economic Millar, James, 62-63, 110, Nepmen (private traders),
Activity, 330 112-113, 116 57, 61, 65, 68
Law on Property in the USSR, Mineral reserves, 13 8 Net material product, 232,
328,338 Minimum material satisfac- 234,236
Law on Self-Employment, 328 tion budget, 257 Net national product, 25-26,
Law of State Enterprises Ministries 30
(1987), 137, 328 Brezhnev years, 134, 298, Netherlands, 239
Leasing of land, 331 301,302,304 New Economic Policy
Lenin, Vladimir Ilich, 7-8, Khrushchev, 131, 291 (1921-1928), 9-10, 45,
14,21,34,36,46,48, organization of, 149-151, 54-56, 96, 107-108,
52,55,59, 76, 79-80, 291,304 114, 181, 293-294
83, 85, 101, 108 and perestroika, 137, 327, economic recovery of,
Leontief, Wassily, 294 328,329,336-337 60-61
Index 389
end of, 61-66, 107-108, grain collection crisis, Poland, 47, 54, 77, 213, 308,
118 86-87, 102-104 380
Industrialization Debate, grain requisitions from, 48, Politburo, 99
30, 75-76, 80, 83, 49,51 Political system, 136-137
84,86,90 kulak, 56, 71, 86, 101-105 Pollution, 278-280
and perestroika, 9 Scissors Crisis, 61-66 Popov, P. I., 294
planning, 99 seredniak, 103 Population, 18, 25, 109, 115,
policies, 56-60 Smychka strategy, 55, 76, 272-273,276
precedents set by, 66-69 83 Postwar period, 125-127,
New products, 188 under tsars, 15, 19-23, 34 243,255
Nobel prizes, 271, 295 Penal labor, 105, 115, 185-186 Poverty, 257
Nomenklatura system, 5, 186 People's Commissariat of Powell, Raymond, 193-194
Noren, James, 352, 354 Finance (Narkomfin), 58, Predpriiatie (productive
Norway, 238, 239, 240, 251 97 enterprises), 150
Nove, Alec, 248 People's Commissariat for Preobrazhensky, E. A.,
Novozhilov, V. V., 295 Trade, 65 80-83, 86, 87, 89,
Nuclear power, 280 People's Commissariat of 100-101, 111
Transportation, 97 Presidential Plan, 339
Ob'edineniia (industrial Perestroika, 126, 136-139, Prices
associations), 134, 150 249,306 agricultural, 130
Obkom, 148, 329 failure of, 335-339 agricultural procurement,
Oblast' (provinces), 148, legislation, 328, 334-335 190
187, 350, 361 phases, 324 and balanced growth,
Obrok, 20 reforms, 325-334 84-85
Obshchina. See Mir Peter the Great, 15 centralized administration
October Revolution (1917), Petrakov, Nikolai, 338 for, 99
14,32,36,46,80, 81, Planned commodities, 152 collective farm market,
115 Planning, economic, 58, 69, 116, 190-191
Ofer, Gur, 242 78. See also Financial control of, 192
Old Believers, 16 Planning; Five Year Plans decontrol of, 358, 368
One-person management basic balances, 151-154, energy, 313
principle (edinonachalie), 159-163, 165-166, evaluation of, 193-194
174 209 foreign trade, 209-210,
Opeka (petty tutelage), 131, centralized management, 211, 213
327,329 100, 134-136, 152, functions, 191-193
Organization of Petroleum 154-155 and income distribution,
Exporting Countries and Communist Party, 193
(OPEC), 216 148-149 Industrialization Debate,
Organizational reforms, debate over, 96-97 84-85, 88, 89,90
290-291,298-299 enterprise, 154, 158-159, industrial wholesale,
Orgnabor (Organized Recruit- 174-175, 193-194 187-188, 189, 192,
ment Administration), evaluation of, 165-166 194,305,333
184 evolution of planning and inflation, 236
Output, gross, 175 structure, 97-99 liberalization of, 308,
Output targets, 131, 133-134, foreign trade, 209-210 309,310,311-312,
158, 174-176, 178-179, fulfillment, 154-155 358
295,297,302,329,334 labor, 180-181, 297 measurement, 192-193
and perestroika, 137 monetary policy, 158
"Parasitism," 272 prices, 186-191 New Economic Policy,
Party. See Communist Party reforms, 131, 135-136, 64-66
Passports, internal, 22 290, 291-292, and perestroika, 137, 138
Peasants 297-298, 302-304, reforms, 293, 304-305,
distribution of land among, 350 333-334
46-47 and state economic and resource allocation,
emancipation, 19-23 apparatus, 148-151 191-192
390 Index
Prices (continued) Reforms Rubies

retail, 188-190, 333 under Brezhnev, 133-135, and currency reform of
ruble, 352 295-305 1947, 117
second-economy, 191 decentralization, 292-293, devaluation, 338
setting of, 157, 186-193 300 inconvertability of, 211,
Primary party organizations, and economic system, 213, 214, 312, 333
149 290-306,367-368 stabilization of, 366
Primitive capitalist accumu- foreign trade, 332-333 valuta, 209-210, 211, 214
lation, 79 under Gorbachev, Rumania, 380
Primitive socialist accumu- 136-139, 294, Rumer, Boris, 236, 349
lation, 79, 82-83, 86 325-339 Rural-urban migration, 277
Principal-agent relationship, historical background, Russia (Russian Empire),
176-177 293-306 13-15
Private trade, 50, 56-57, initiation of discussion in agriculture, 19-23
61-63,65-66,330-331 1960s, 295-297 business cycle, 35
Privatization, 310-311, 313, under Khrushchev, dependence on the West,
358,359,361,362,363, 131-132, 291, 30-31
368,379 294-295 economic growth, 23-29,
Prodnalog (agricultural tax), Kosygin, 297-302, 305 36
56 Liberman proposals, industry, 15-19
Prodrazverstka (grain requi- 295-297 market economy, 33-36
sitions), 48, 49, 51 organizational, 290-291, underdevelopment, 31-33
Product quality, 249, 304, 298-299 Russian S.F.S.R. (Russian
329,331,379 planning, 292, 302-304 Soviet Republic), 307,
Production associations, 299, price, 293, 304-305, 333, 308,311,313,324,339,
301 334 347,348-355
Productive enterprises public attitude toward, economy, 357-371,
(predpriiatie), 150 367-368 377-381
Productivity, 27-29, 137, 177, Soviet era, 293-305 Rutskoy, Alexander, 358
180,237-245,303,378 technology, 331-332 Rykov, Aleksei, 52, 76, 85, 90
Profits, 175, 187, 293, 295, under tsars, 21-22 Ryzhkov, Nikolai, 138, 338
301,304 Regional distribution of
Program to Improve Econo- labor, 275-276 Scarcities, relative, 192,
mic Management Regional diversity, 193-194
(1979), 302-304 equalization of, 350 Schroeder, Gertrude, 245,
Promfinplans (financial Relative scarcities, 192, 254,304
targets), 98 193-194 Scientific-technical institutes,
Property rights, 311 Relative wages, 272 270-271
in agriculture, 331 Repressed inflation, 236 Scissors Crisis (1923), 61-63,
Provinces (oblast'), 148 Republican ministries, 150 64
Pyatokov, G. L., 96 Republics, 149 Second economy, 50, 191
Research and development, Sel'sovet, 46-47
Qualitative/quantitative 156 Seredniak (middle peasant),
indicators, 175-176 Resource allocation, 49, 51, 103
113, 116, 135, 13~ 139, Shatalin, Stanislav, 339
"Radical" reform, 325-327 147, 154, 165, 192,376 "Shock" (udarny) methods,
Raikom, 148 Resource allocation function 53, 67
Railroads, 15-16, 19, 34, 351 of prices, 191-192 Shock-therapy program, 138,
Raion (districts), 350 Retail prices, 188-190, 333 139
Ratchet effect, 175 Revolution of 1905, 21 Siberia, 20, 47, 51, 129, 182,
Rations/rationing, 50-51, Revolution of 1917. See 276, 351
116, 151 October Revolution Silver, Brian, 115
Realized output, 133 Robinson, G. T., 22 Smychka (alliance) strategy,
Recentralization, 298-299 Rostow, W.W., 14 55, 76, 83
Red Army, 50 Ruble control, 158-159, 178 Social safety net, 312-313, 363
Index 391
Socialism, ,77-79, 85, 90-91, 156, 174, 180, 183, 186, Trade, balances among CIS,
107,278-279,290,291, 193,208,209,270, 300 353
292,308,309,312,313, Static efficiency, 245-249 Tomsky, Mikhail, 79, 85, 90
350,379 Stolypin Reforms (1906, Trade. See Foreign trade;
Socialist countries, foreign 1910), 21-22 Private trade
trade with, 213-214 Stroibank (Investment Bank), Trade unions, 52, 53, 68-69,
Soft budget constraints, 15 8 156 179-180
Solzhenitsyn, Alexander, 185 Structural changes, 26-27 Transition from
Sovkhozy. See State farms Strumilin, S., 96, 99 administrative-command
Soviet Union, collapse of, Subsidies, 138, 158, 164, to market economy,
139, 147,218,241,277, 187, 188,330,333, 306-313, 357-360,
289,377-378 363 361-363,367,373,380
Sovnarkhozy (regional eco- Success indicators, 175-176 macroeconomy, 308-309
nomic councils), 57-58, Supply system, 176, 303, microeconomy, 310-311
97, 131, 134, 299 329,351 price liberalization, 311-312
Spain, 18, 24, 247 Supreme Council of the international trade, 312
Specialization, 184 National Economy social safety net, 312-313
Stability, economic, 276-278, (VSNKh), 52, 57-58, Transportation, 16, 19, 35
308-310,358,359,361, 65,97-99 Trotsky, Leon, 48, 50, 53,
365,366 Supreme Soviet, 149, 358 67, 76, 77, 80, 85, 86
Stagnation (zastoi), 325, 326 Surpluses, agricultural, Trusts, 35, 52, 57-59, 61,
Stalin, Joseph, 4-5, 31, 50, 111-112 66, 67, 68, 148
71, 76, 80, 83, 85-87, Sweden,6-7,251,252 Tsarist economy, 7-8
89-91, 97, 99, 102-105, Syndicates, 58-59, 61, 65, Tugan-Baranovsky, M., 33
107, 113, 114, 115-118, 66,67 Turkmen S.S.R.
125-128, 131-132, 182, (Turkmenistan), 349, 369
185, 186,294,295 Tadzhik S.S.R. (Tadzhikistan), Turnover tax, 164, 189
State Bank (Gosbank), 58-59, 349,369
64-65, 84,99, 149, 156, Targets. See Output targets Udarny ("shock") methods,
159-161,208,209,298 Tarifnaia setka (wage 53, 67
State capitalism, 80 schedule), 182 Ukrainian S.S.R. (Ukraine),
State Committee for Con- Taut plans, 176, 303 16,47,63,307,348,
struction (Gosstroi), 149 Taxation, 21, 117, 164, 189, 349,352,353,354,370,
State Committee for Defense, 330-331,362 371
116, 126 prodnalog, 56 Underground economy. See
State Committee for Foreign turnover tax, 164, 189 Second economy
Economic Relations, 332 value-added tax, 360 Unemployment, 66, 249,
State Committee for Material Technology, 378 273-274,277,312,363,
and Technical Supply foreign, dependence on, 367-368
(Gossnab), 149, 194, 30-31,215,250,366 Union-republican ministries,
299,302 gap, economic causes of, 150,350
State Committee for Prices 250,323 Unions. See Trade unions
(Gostsen), 149, 186, Gorbachev years, United States
299,305 249-250,331-332 agriculture, 24, 129
State committees, 149 and investments, 331 budget, 163
State farms (sovkhozy), 130, measurement of, 249 capital equipment
190,365 and productivity growth, production, 30
State inspectors 243 consumer welfare,
(gospriemka), 329 Techpromfinplans. See 254-256
State orders (goszakazy), Enterprise plans economic growth, 26, 233,
329,334 Teleological theory of 234,237,238-241
State Orders Committee, 58 planning, 96-97 environmental quality, 279
State Planning Committee Territorial production foreign investments in, 31
(Gosplan), 58, 97-99, complexes, 351 foreign trade with, 213,
117, 149, 150, 152, 153, Tinbergen, Jan, 279 215-218
392 Index
United States (continued) von Hayek, Frederic, 165, policies, 49-51

industry, 17 193 precedents set by, 66-69
managers in, 177-178 von Mises, Ludwig, 165, 193 Water pollution, 278-280
population, 24, 28 Vostokintorg (Eastern Trade Watson, Robin, 352, 354
science and engineering Association), 208 Weitzman, Martin, 243, 244
training, 271 Vouchers, 359 West Germany, 215, 233,
Soviet economic rivalry VSNKh. See Supreme Council 240,241
with, 128 of the National Economy White Russians, 47, 49
structural adjustment in, VUZ system, 270-271 Wiles, Peter, 248
363 Witte, Sergei, 15
technology, 250, 331 Wages Women in labor force,
wages, 24, 182, 251, 252 Brezhnev years, 134 274-275
women in labor force, differentials, 181-182, Workers' committees, 47
275 192, 251, 270 World Bank, 333
Ural mountains, 16, 47 and income distribution, World War I, 31, 32, 35, 36,
Uzbek S.S.R. (Uzbekistan), 250-253 46,63
272, 349, 370, 371 industrial, 161, 181-182, World War II, 95, 114-118,
251 185,275
Vainshtein, A. L., 61 minimum, 359
Valuta rubies, 209-210, supplements, 276 Yeltsin, Boris, 138, 308, 339,
211-214 and trade unions, 179 347,358-360,365,366,
Virgin lands campaign, 129, War Communism, 50, 53 367
351 for women, 2 75
Vneshtorgbank (Foreign War Communism Zagotovki, 103
Trade Bank), 209 (1917-1921), 8, 48-49, Zaleski, Eugene, 100, 117
Volga River, 51 80, 84, 100 Zastoi (stagnation), 325, 326
Volin, Lazar, 22 evaluation of, 51-54 Zinoviev, Grigory, 76
ISBN 0-673-46971-9
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SOVIET

AND OST- OVIIT

SOVIET AND POST-SOVIET

Soviet and Post-Soviet Economic Structure and Performance, Fifth Edition

Copyright© 1994 by HarperCollins College Publishers

Library of Congress Cataloging-in-Publication Data

' ·CJI O~E J The Origins of the Soviet Economy 1

Chapter 1 The Administrative-Command Economy 3

Chapter 2 Economic History of Russia to 1917 13

Chapter 3 War Communism and the New Economic Policy

Chapter 4 The Soviet Industrialization Debate (1924-1928) 75

Chapter 5 Creating the Administrative-Command System:

Chapter 6 The Soviet Economy in the Postwar Era 125

IJ!i!ti TWO I How the Administrative-Command Economy

Chapter 7 Bureaucracy, Planning, Money, and Investment 147

Chapter 8 The Administrative-Command Economy:

The Price System 186

Chapter 9 Foreign Trade in the Soviet Administrative-Command

li4iJirHREEj Reform and Change in the Soviet Era 227

Chapter 10 The Administrative-Command Economy: Growth and

Chapter 11 Performance Continued: Human Capital, Economic

Chapter 12 Change of Economic Systems: Reform and

Economic Reform in Retrospect: The Early Years 305

Chapter 13 Perestroika: The Last Reform 323

liaiiiiFOURI Russia and the Independent States 345

Chapter 14 Russia and the Independent States: Basic

Chapter 15 The Russian Economy 35 7

Chapter 16 Conclusions and Prospects 377

ORGANIZATION OF THE TEXT

framework. We assume familiarity with basic microeconomics and macro-

h e collapse of the Soviet Union in late 1991 strengthened the resolve

NorWegian Arctic Ocean ;!

Figure 1.1 COMMONWEALTH OF INDEPENDENT STATES

tinue to rule. Old-line factory managers and directors continue to com-

THE LEGACY OF THE ADMINISTRATIVE-COMMAND ECONOMY

The Stalinist model oversaw the rapid transformation of the Russian

REASONS FOR CONTINUED STUDY

For a number of reasons other than pure intellectual curiosity, we should

It is important to chronicle the reasons for the failure of the adminis-

MARKET OR PLAN: Is THERE A THIRD WAY?

THE TSARIST ECONOMY AS A MODEL

THE 1920s AS A MODEL

creasingly apparent. Industry, agriculture, and transportation collapsed

1. S. Kuznets, "A Comparative Appraisal," in A. Bergson and S. Kuznets, eds.,

A. Gerschenkron, Economic Backwardness in Historical Perspective (Cam-

WAS THE TSARIST ECONOMY A Success?

The economic performance of any country must be judged in appro-

The Weakest Link

Industrial Growth Under the Tsars

railway transport in a land as massive as the Russian Empire. In 1860, the

aAverage 1867-1869. (Continued on facing page)

Table 2.1. Despite the considerable growth of industrial output, Russia on

Pig iron Crude steel Rail Infant

320 7 43.0 2.2 239 8

4,641 4,918 424 70.2 237

Is this conclusion justified? While significant industrial development is

Russian Agriculture Under the Tsars

of feudalism, which prepared the way for a modern agriculture unfettered

contain positive elements-an increase in the large estates that created

To preserve the obshchina until the liquidation of the redemption

ill-suited by climate and soil conditions to agriculture pursuits. 19 A gener-

Economic Growth Under the Tsars

Russia's most important relative achievement was the development of

Growth of Per Capita Output