Soviet Economic Reforms; Y. Maltsev

Fast-moving events in the Soviet bloc hold out the promise of a possible end or amelioration of the decades-long conflict between East and West. In light of the stakes involved, it is urgent to under stand accurately the nature of the declared re forms and prospects for their success. Dr. Maltsev was, until last summer, a Senior Researcher at the Institute of Economics ofthe Academy ofSciences ofthe U.S.S.R. in Moscow, where he worked with a team of leading Soviet economists on Mikhail Gorbachev's package of economic reforms. He is now a consultant with The Jamestown Foundation in Washington, D.C. The spectacular failure to date of the "radical" economic reforms in the U.S.S.R. has been due to the unwillingness or inability of Mikhail Gor bachev's administration to part with the obsolete and economically destructive Marxist-Leninist ideology and its economic doctrines. Mr. Gor bachev and other spokesmen of the Communist Party are quick to point out that their commitment is not to abandon, but to "better and improve" the current system. They view the socialist system as progressive and correct; its failures in practice, they maintain, result from a lack of discipline and deviation from Marxist-Leninist principles.

The whole package of economic reforms adopt ed by the Communist Party Central Committee in June 1987 was aimed toward "perfection of the economic mechanism" and induded measures which at best can be considered as inadequate to deal with the present situation. Designed by de partmental bureaucrats and their academic assis tants, these measures were rubber-stamped by in experienced and economically incompetent officials who were easily deceived by the radical talk of the new ministry heads. The effect of these "reforms" on the economy was disastrous~they seriously undermined the vertical system of eco nomic management but failed to replace it with horizontal linkages between enterprises. While the set of negative incentives for managers (disci pline was maintained by the fear of being relieved of their duties or even loss of their Party member ship cards) no longer works, the positive incentives failed to appear.

The real character of the so-called centrally planned economy is well illustrated by a quip I heard· some years ago by the Soviet economist Nikolai Fedorenko at a session of the Scientific Council of the Central Institute of Econometrics in Moscow.He said that a fully balanced, checked, and detailed economic plan for the next year would be ready, with the help of computers, in 30,000 years. There are millions of product vari ants. There are hundreds of thousands of enter prises in industry, agriculture, construction, trans port, and distribution. It is necessary to make thousands of millions of decisions in the area of materials supply alone. The plans must also relate to labor force, wages, costs, prices, profits, invest ments' and economy of materials. These decisions originate from different parts of the planning hier archy.They are all too often inconsistent with each other, as for instance when supplies don't match the output plan. Because next year's plan must be ready by next year, and not in 29,999years, it is in evitably neither balanced, nor disaggregated.2 Today the concept of "directive planning" is be ing substituted by a system of economic norma tives, state orders, and control figures.which their creators claim are of a "truly revolutionary na ture." But what kind of revolution is it when the state orders usually cover from 80 to 100 percent of the enterprises and all supplies are based on "non-obligatory" control figures?

Moreover, the so-called "political economy of socialism," formulated by Joseph Stalin in 1952,is still considered to be the sacrosanct theoretical foundation of economic policy and applied eco nomic analysis in the U.S.S.R. It is nothing, how ever, but a collection of political slogans discredit ed by harsh economic realities. For example, according to the "political economy of socialism," the main economic law of socialism is the "Law of the Complete Fulfillment of the Rising Needs and Requirements of the People." Other "basic laws" include the "Law of Remuneration According to the Quality and Quantity of the Work Performed," the "Law of Planned and Proportionate Develop ment of the Socialist Economy," the "Law of Re production of the Population on the Basis of Ris ing Standards of Lif~ and Constant Improvements of Living and Working Conditions," and so on. lt is a testimony to the strictures and rigidity of economic theory in the U.S.S.R. that much of the ferment of perestroika has involved little more than heated discussions about these Orwellian 89 "laws." Some Soviet scholars argue, for example, that these "laws" can implement themselves only through the rational, conscious activities of the planners. Others oppose this view with the notion that this approach is contrary to the Marxist Leninist assumption of the independence of pro duction relations (objective phenomena) from the will and mentality of the people (subjective phe nomena). The absurdity of the current situation in Soviet economic science is manifested by the exis tence of a third school, which insists that economic laws can exist but not operate. 3 None of these "sci entific" discussions have helped increase the sup ply of goods on Soviet shelves. Instead the obso lete theories are a significant part of the problem.

Another basic problem is that for the last 70 years, Western economics has been depicted in the U.S.S.R. as "bourgeois vulgar political economy." As a result, the vast majority of Soviet economists are unfamiliar with even its basic tenets. The old and discredited dogmas of Soviet economics are perpetuated by the system of higher education and academic training. The few Soviet economists who taught themselves modern economics have no ac cess to the decision-making process, which is still dominated by economists like my former col leagues Abel Aganbegyan, Leonid Abalkin, and Boris Milner, and other economic advisors to the government, who may pretend to be reformers but still fall within the Marxist-Leninist mainstream. The EconomyDeteriorates All of these factors, as well as the opposition of hard-line apparatchiksto any reforms (even the piecemeal ones), and widespread public confusion caused by the still-prevailing egalitarian thinking,4 have led to the serious deterioration of an already stagnant economy. The command economy was virtually disrupted by 1987,while the market econ omy failed to appear because of the inconsistency of the reforms package.

The most disastrous of all of the proclaimed "re forms" was in the field of labor and wage policy. Begun in September 1986, this reform was aimed at increasing wage differentials and reducing the army of 11.5 million industrial managers. The re form was supposed to establish special relations between wage hikes and productivity. The execution of this reform was assigned to the State Committee of the U.S.S.R. on Labor and So90 THE FREEMAN • MARCH 1990 cial Affairs. The results were quite the opposite to those expected: managerial staff, instead of being reduced, rose by 600,000, while income differen tials increased but with no relation to productivi ty-all the gains were enjoyed by the very same managers whose numbers were supposed to be re duced. At many enterprises, the costs of the addi tional supervisory staff were simply included into the unit labor costs without any explanation or jus tification. The provision calling for linkage be tween wages and productivity was circumvented by false reporting, which is more common today than at any other time in Soviet economic history.

The labor/wage reform succeeded only in dis crediting perestroika and Mr. Gorbachev in the eyes of the workers. The result has been the recent industrial unrest and the demands of the first So viet free trade unionthe "United Front of Work ers"-for Mr. Gorbachev's impeachment. The workers claim that the policy of restructuring was initiated by corrupt party and government offi cials, industrial managers, and liberal-minded, pro-Western intelligentsia who want to launder money they accumulated during Brezhnev's era, to reestablish capitalism, and to enjoy new privileges at the expense of the working class.This labor hos tility was manifested during last summer's coal strikes, when the workers demanded the abolition of all forms of private business, especially cooper atives. Rather than move forward with its reforms, the Soviet government is now trying to forestall social upheaval and reduce labor unrest by introducing rationing of most food items. The latest remedies and prescriptions issued by the Academy of Sci ences of the U.S.S.R. and other government think tanks are testimony to the desperation of the So viet leaders. For example, Academician Georgi Arbatov suggests that the U.S.S.R. must sell its strategic gold reserves to finance perestroika, ar guing that this will immediately produce such pos itive economic results that the gold expended will very soon be replenished. Academician Leonid Abalkin seriously suggested in his speech to the Presidium of the Council of Ministers of the U.S.S,.R. that one of the most important and urgent ways by which to stabilize the disinte grating economy was to construct boarding and lodging recreation facilities for families.

Such construction, in his view, will absorb 20 to 30 billion rubles from the money market and thereby greatly improve the financial situation. s At the same time, bureaucrats with full support from the Academy of Sciences are introducing new prohibitive measures that seriously jeopar dize any prospects for real improvement. For ex ample, on August 15, 1989, new customs duties were introduced that at first sight seemed liberal -duties were reduced for 146 items including foodstuffs, children's apparel, and footwear. How ever, new and heavy levies were imposed on all types of computers, electronics, and most durable goods. According to estimates by the Soviet Academy of Sciences, the Soviet Union's comput er capacity equals that of Thailand, which is 10,000 times less than that of the United States. Lyingwith"Statistics" The lack of sound economic theory is com pounded by an absence of reliable economic and social statistics. Leading Soviet economists use CIA and other Western estimates rather than offi cial Soviet statistics to support their arguments. 6 (And Western estimates are no more reliable when they are based on Soviet data.)? Until re cently,statistics were treated as a form of economic propaganda and as such were used mostly to illus trate the "achievements" of the Communist Party.

Even today, official statistics are frequently based on deliberately falsified reports of the ministries, republics, regions, districts, and enterprises, which are inclined to report economic indices in a way that is beneficial to them. National accounts in the U.S.S.R. are calculated by simply adding up the value of all material outputs at their stated prices. Services and other nonmaterial incomes aren't in cluded. This approach, based on the Marxist con cept of "productive" and "non-productive" labor, leads to some of the paradoxical statements of So viet economics. The dentist, for example, is a "non-productive" individual while the dental tech nician is a "productive" one. In the Soviet Union, where the "market" (i.e., the existing system of distribution) is totally mo nopolized by government ministries and enterpris es, prices do not reflect costs, nor do costs reflect anything except local or departmental bureaucrat ic interests. Centrally planned investment deci sions, as well as government campaigns against the so-called "duplication and parallelism" of the 1960sand '70s, led to a situation where the rate of monopolization of production of most commodi ties is up to 100 percent. Moreover, Soviet prices are distorted by huge subsidies(104 billionrubles in 1989)and heavyindirectturnover taxes (105bil lion rubles). These taxes sometimes constitute from 90 percent (cars) to 95 percent (alcoholic beverages) of the retail price.

Senselesseconomicdecrees and regulationsare being issued by the Council of Ministers of the U.S.S.R.at an accelerated speed of 2,000per year, compared with "only" 500to 700 a year duringthe Brezhnev stagnation years of 1965to 1982.The 18 million bureaucrats employed by the system still determine everythingin the sphere of production, distribution,and consumption.In the current situ ation, when 234 of 277 basic consumer goods in cluded by the U.S.S.R.State Committee on Statis ticsin the "market basket" of the Sovietpeople are nowoutsidethe state distributionsystem,the pow er of these bureaucrats hasn't diminished, as was expected by the advocates of reform, but has in creased enormously.Given such a system,there is no room for hope that in the foreseeablefuture the needs of the customer will influencewhat is to be produced. How BadIs the Crisis? Becauseof the lack of reliable economicdata, it is impossibleto quantifythe depth ofthe economic and socialcrisisin the SovietUnion. Vitalstatistics, which to my mind are the best (although an indi rect) source of information on the real economic situation and quality of life in the U.S.S.R.,show absolutely desperate figures: life expectancy,the infant mortality rate, housing,and nutrition statis tics can be compared only to those of developing countries.This is especiallytrue in the more back ward regions of the Soviet Union-central Asia, the autonomous republics in the northern part of the U.S.S.R.,and Azerbaijan.

As my former supervisor,Deputy Prime Minis ter of the U.S.S.R. in charge of the economic re form, Academician Leonid Abalkin, has said, "If in 1.5 to 2 years the economic situation does not stabilizeand no improvementsare made, a shiftof society to the right [i.e., to Stalinism] will be in evitable. What form this will take exactly,I don't know."8Unfortunately, there are no visible rea sons for such a stabilizationto occur. Moreover, desperate economic adventurism is SOVIET ECONOMIC REFORMS 91 assuminglargerand largerproportions. According to my estimates, the issuanceof paper money un supported by an adequate growth in the produc tion of commodities reached 20 billion rubles in 1989. The devaluation of the ruble (from $1.60to $0.16) in September 1989 is the direct result of decades of arbitrary expansion of cash in circula tion which was not supported by an adequate growth in commodity production. Soviet con sumersjoke that the ruble has come to resemble a lottery ticket more than a currency.An estimated 300 billion "hot rubles" are in circulation-forced savings that would immediately be spent if any thing worth buyingappeared on the market.9 An urgent discussion is now going on in the Westabout howbest to assistthe SovietUnion and Eastern European countries in their efforts to re form their crippled economies.The economiccri sis confronting the U.S.S.R. and Eastern Europe offers the West a unique and unprecedented op portunity to stimulate genuine economic and po litical reforms there. Such constructive leverage can be brought to bear through active,coordinat ed, and disciplined financial and trade policies.

The goals of financial and other economic assis tance to the U.S.S.R.,both on a bilateral and mul tilateral basis,should be the following: 1. In the economicsphere a) Massiveprivatizationof the economy; b) Denationalization of land and abandon ment of the kolkhoz and sovkhoz system (collective and state farms), which is still based on forced labor; c) Massive reallocation of resources away from the militaryto the civiliansectors of the economy; d) Sharp reductions in the size and power of the bloated government bureaucracy, elimi nation of its expensiveprivileges,and limita tion on the share of national income com manded by the state budget (81 percent in 1989). 2. In the politicalsphere a) Creation of a true multi-partysystem; b) Legalizationof free trade unions; c) Establishment of a genuine legal system with an independent judiciary. Continuing present, undisciplined Western lending practices (especially untied loans) serves 92 THE FREEMAN • MARCH 1990 only to postpone the need for genuine economic restructuringin the U.S.S.R.andtherebyincreases the likelihoodof socio-economicchaos. The best formthat Westernassistancecantake is to provide the Soviets with a thorough, dispassionate eco nomicanalysisof their situationand an economic theory of transition to a free market system.The truismthat "nothingis more practicalthan a good theory" is completelyapplicableto the presentsit uationin the U.S.S.R.and Eastern Europe.

So,the mainproblemofSovieteconomicstoday is the lackof understandingthat mere recognition of the crisisisn'tenoughto deal withthe situation. Today it is obvious that no amount of reforms aimed at the "perfectionof the economicmecha nism" can make the Sovieteconomywork unless the very foundations of the system are changed. The answer to the question "What should be done?" is obvious.That requiresthe establishment of a multi-partysystem,privatizationof the econ omy, and denationalizationof land. More specifi cally, the transition to a market economyshould include: • Introductionof employeeshareholdingplans at all industrialenterprisesand most servicees tablishments; •Creationofstockexchangesand provisionfor free trade in shares; • Restructuringof kolkhoz and sovkhoz farms intogenuineindependentcooperativessecuring the rightsof the peasantsto withdrawwiththeir share of land and other commonproperty; • Elimination of state price controls starting with luxuries; • Creation of a nationallabor market by elimi nating residence requirements (propiska) and securingthe rightsto traveland workanywhere in the U.S.S.R.; • Immediatedemunicipalizationof housing; • Drasticcutsin militaryand other government spending; • A LudwigErhard-typemonetaryreform and achievementofcurrencyconvertibilityon inter nationalmarkets; •Liberalizationofforeigntrade and creationof favorableconditionsfor foreigninvestors.

Suggestionssuchas these,unfortunately,are ignored by Soviet leaders because it is obvious to them that the implementationof such a program wouldleadto theirultimatelossofpower.Certain ly, the transition to a market economywould be rather painful, but, to my mind, unavoidable in view of the present situationwhich alreadyis un bearable.As the SovieteconomistO. Bogomolov recentlyadmitted,"The finalchoicein favorofthe market has not been made."10 The time that will allowsuch a choiceis expiring. 0 1. See, for example, Abram Bergson, Planning and Perfor mancein SocialistEconomies:The U.S.S.R. and Eastern Europe (Boston: Boston University Press, 1988); Padma Desai, "Perestroi ka, Prices and Ruble Reform," The Harriman Institute Forum, November 1989,pp.1-8; S. Andreyev, "Struktura vlasti i zadachi ob schestva," Neva,1989,No. 1,pp. 143-173;Rachel Walker, "Marxism Leninism as Discourse: The Politics of the Empty Signifier and the Double Bind," BritishJournalof PoliticalScience,April 1989, pp.

161-89. 2. Also cited in Alec Nove, "The Problems of Perestroika," Dis sent,Fall 1989, p. 463. 3. For an overview, see A. Nekipelov, "Is plena mifov i dogm," Kommunist,1989,No.7, pp. 21-29. 4. During the discussion of the Law on Taxation at the fall 1989 session of the Supreme Soviet, a People's Deputy from Khakassia took the rostrum to declare that behind the new Soviet cooperatives lurk Washington and the CIA. (MoscowNews, 1989, No. 33, p. 7) 5. Yu. P. Chaplygin, "Ekonomicheskaya Reforma: v poiskakh putei razvitiya," IzvestiyaAN SSSR, Ser. Ekonomicheskaya, 1989, No.3, pp.18, 19. 6. Ibid.,p. 21. 7. See, for example, Franklyn D. Holzman, "Politics and Guess work: CIA and DIA Estimates of Soviet Military Spending," Inter nationalSecurity,Fall 1989,pp. 101-31. 8. MoscowNews, 1989,No. 26, p. 12. 9. The WashingtonPost, December 1,1989. 10. MoscowNews, 1989,No. 26, p. 12.