Gorbachev's First Industrial Reform: Lessons Learned for the Next
A Research Paper
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Gorbachev's First Industrial Reform: Lessons Learned for the Next'
A Research Paper
Gorbachev's First Industrial Refdrro: lessons Learned for (be Next' *
industrial rcforrm in Gorbachev's0 economic program
v> plan are the most ambitious the country has
tothe eventual elimination of such pillars of the
mee r.iizod planning, fixed prices, and theorropoly of
the ownership of property, which together tear much of the blame for the
dismal state of Soviet industry.
A previous package of reforms, however, had similar if less far-reaching objectives andailure. Three years after their introductionhese reforms have ledeterioration in industrial performance and widespread confusion among enterprise managers, who continue to founder in an economy governed by neither plan nor market.
An examination of the problems encountered by that reform program suggests some fundamental flaws thai also appear in the new one.
Preservation of Central Powers. Despite its calls for greater enterprise autonomy, the first reform program suffered from theontinued unwillingness to rclinQuisb the reins ofIt rcuincd the^framework of mandatory five-year plans, along with numerous new and old government bodies to help formulate them and monitor their implementation. The resultalfway house of reforms that tried to change incentives but left in place the main elements of socialist central planning
The new program perpetuates that error bytrong "transition, al" role for the central bureaucracy and lockingigh percentage Of centrally dictated state orders until at least the endlthough it calls for the eventual dismantling of the old governmenteorganization plan approved earlier this year made no significantin its size.
Postponement of Price Reform. Reluctance to relinquish Ihe reins of power, combined with trepidation about negative public reaction, ledostponement of the price tcforrm called for in the first reformistake that reverberated throughout the economy and undermined the rest of the program;
Uccause enterprises had no rational price system lo guide thendecisions, the regime had no assurance that lowering state orders would resultudicious mix of output and abandoned its plan to do so.
. Similarly, the supply
without an alternative methcrf-prices-to perform the allocative
. SoTto make the enterprises financully sdf-sumcknt also were doomed as lone as many were forced to sell the if products at the unreasonably low prices set by the center.
In tie new reform program, the regimerices, but it continues to subsidize many basic goodseiathenecessary to make prices responsive lo supply and demand.
Ambiguous Directives. The reforms introducedolitical compromise- Because of leadership differences^about the scope and pace of reform, sensitive issues were glossed over, and the resultm: kg Utetion was full of loopholes and ambiguities that opponents of the reforms were able to use to prevent their implementation
0 program was more radical in its stated aim-"the irtrittonarket economy"-but similarly vague on implementation This time the critical factor was noivided Politburoresident and Siure unable to settle on one of several alternatives. The resultet of vague -guidelines" that also will be subject to interpretation and selective implementation. Where the first program was vague c* the division of powers between the ministries and enierprues. the newone fa.ls to adequately delineate the po^rs of the center and the republics-ar. even Sore critical ambiguity that has become tbe subjectolitical battle
In addition to repeating the errors of the previous rrform-lhAne* programerious mistake of its own: the pol cy of stabilization taJ" In an effort to gain con.rol over galloping inflation and anting consumer shortages, the regime has put some essential reforms on the back burner until the current economic crisis is alleviated
Enterprise managers are already complaining that this new reduces the autonomy of the enterprises and is a
production. Moreover, stabilization by admimstrative edict almosty will prove elusiveime when so many of theommands are he-inn iflnored. The pursuit of this strategy, in our judgment, can only Sc tbirOorbachcvuccessor regime will be forced to rev,sit the issue of industrial teform-this lime under even more dire economic circumstances
1
FlrU Reformn Theory 1
1
Kclurmi in Practice: "Ziaiag Progress"
>
' t 1 i 1' ill it
for Failure
of Central Powers
of Price Reform
Directives Have ihe lessons Been Learned?
of Cenirsl Powers 11
of Price Reform 12
Direqives U
, aa*
Gorbachev's Fust Industrialsons learned for th* Next
One cf Mikhail Gorbachev's greatest challenges hat been ibe cicalioa of an economic avium thai would meet ibe needsodern indottrialiied state The system be in bailed, as be tvai quick to admit, failed to provide the proper signals for industrial production and investment, retarded nsoderruialioe andand encouraged massiveackage of reforms designed to restructure tbat systemntroduced ia stages beginningod amendederies of measures thatroadened and then restricted the rights of Soviet enterprise managers. This paper examines the impact these changes have bad on the modus operandi of those managers and what their response portends for the futureecond generation of industrial reforms now scheduled for implementation over the next IB loonths.
GorkaeaeV* First Reformn Theory
A key element of Gorbachev's strategy to reinsigoratc the economy hasffort to increase the authority aad raponaibility of the IndustrialBy rcasoving the heavy hand of the government bureaucracy, he hopes lo make the industrial sector more "self-regulating" anducb-needed boost to productivity. The package of reforms adoptedentral Committee plenum in7 wastec
Decrease the number of centrally mandated output targets -stategive the enterprises more authority to make their own production decisions.
Reduce the oentral rat toning ef nnplres anda system ofolessle trade between providers and users
Expand the system of economic accountabilitywould allow enterprises toarget percentage of their profits in return for footing more of their own expenses
Revise centrally setboth wholesale and retail -and allow tbe broader use of contract prrees negotiated betaeen enterprises.
Give thereater sense of responsibility for enterprise performance by letting them elect their own rraanagers
Planning
Under tbe guidelines spelled out io7 Law on State Lotrrprites and decree on planning, enterprises were to independently formulate and ratify their own five-year plans and set (heir own targets for each year of the plan. This *ai intended to eliminate the center's aotersoai practice of "planning from the achieved level,'" which ia the past had causedto intentionally underproduce to avoid receiving higher targets the following year. To ensure that tbe naic's retirements were aseu enterprises were to continue to receive "control figures" that would serve as guidelines in ptcparing their plans, as wellercentage of nundntcry sutehe remaining cert ion of theroduct list was to be drawn up by the enterprise itself on the basis of direct links
ai of cmn< hi rei. toxi'swieof wki peofii.imii mrsu.oeaasan af searMiSr sa4
icttuxalotal e (siiMxM
tat USSK Coareil of Minium
"
wiihprocess lhai supposedly would require (he enterprise lo become more responsive io consumer rlemaad IO remain competitive with other eruerperscs-
To make lhe supply system more effideart, the reform pudeltaea cm Bedradual trutsfer from ceatral-Bed allocationorm of wbceceale trade that allowed enterprises to feel; purchase moat Items, including producer goods, from other enterprises, manufacturers' outlets, or territorial organizations of the State Committee for Material and Technical Supply (GcasnabX Eadaded from this system,were "particularly scarcet well as all inputs required to fulfill mandatory state orders.1
Prices
Tbe basic provisions of the reform program also calledradical- rriorm of prices to be completed0 so that tbe new ences could be usedlan. Revised industrial wholesale prices and tariff rates in transportation andwere to take efleeto date was set for the introduction of retail prices, eicent that tbe price reformhole was supposed to be completedontract prices and those set independent I) by enterprises were to become more common but within certain centrally determined
ScH-Fsaaadag
The concept of "selfinancing" wu eventually to be adopted by all Soviet enterprises. Under this system, enterprises would be allowed loargerof their profits in turn for paying more of tbeir owntechnology, recoupment,and so forth. First tried experimentally at plants in Sumy and Tol'yatti. the system wis extendedCO industrial enterpriseso enterprises responsible for more thanercent of Industrial productionnd to all Soviei9
Swreioay. erwSe ail. gas.
ocrai am, rones anil virion fcwiS of uwoaiied eawipnwwi. and greCvcti eiaon. ecfema. and "matte nocas"
Sell-Management
Another Innovation of the law on State Enterprisesrovision calling for the rkmocratk election of enterprise managers. Ualikc) law, wtuch srsrancd the apracantmeai of rmnagers by tuperior organs, the new version ailed for the election of enterprise directors for five-year terms and of lower-level managers for two- or three-year terms atscheduled meetings of lac workers- Between ihese meetings, worken" interests were to beby aa elected council, which was to operate primarily in aa advisory capacity but was also to have some decisionmaking authority in the utilisation of enterprise funds
The clear intent of this "demoorstiatioa" was to give Sovietreater sense cf responsibility for enterprise performance. As liftoted in its editorial, workers would no longer be able to Name their poor performancead leader, "because they wiQ have elected himat Ibe reform abo was designed to improve tbe perforata nee of enterprise managers, who would now face pressure from below (their eleetorolei) at well at from above (the minlstriesk
The Reform in Practice. "Zigzag Progrem-
At ibe time ihey were mu educed. Gorbachev hailed these reformsnajor breakthrough thai would transform Soviet workers Into "absolute masters of production.'* He would later admit, however, that im pie mentation proved far more difficult than be hado helpasternsbc regimearaber ef important "files" designed to further loosen tbe rmtrictsons on
' Daringdlacvaano ofomunve awJawsai ta laly eaed it* 'fccmtcal mitici "Who knew how la act ia
aalal mia< tl It* <ni.
bote I,1Ut "We aaghiercaw a
abewvoeaadpraeOoakcadi
root dawq amn ovkSly varameiaaDy imalanmaeuag
ideaj-
When the reform was tint introduceda ay enterprise directors complained that the niiaistries, tilting advantage of ambiguities in the reformwere adding:equirement* to those dictated by the Slate Planning Commit leelacing unrealistic demands oa the enterprises. In response, the government adopted an* aadremaining yean ofh Frve-Yearsharply reduced theof itate order* aad removed thorn from the control of thelthough the Statute was short on specifies, Soviet oStciali retorted that state orders, which accounted for aboutercent of industrial productionere to be reduced lo aboutercent9 and can back even further'
owever, shortages of food and consurn er gcods threatened to undermine popular support for perr-iioykn. and the regime responded by rcinstaling the orders it had just reduced. For era aspic, it decreed Ihal the productioa of virtually all supplies needed by the agriculturalcombine harvester* to fad androost basic consumer good* would be totally governed by state orders
hen ihe enterprise* behaved in trays ihai bad unimended effects, however, il tightened the teini aiain, backtracking en reform* ihat couldthe focal dilemma, hurt the consumer, and undermine popular support for ptrtttroyka.
State orders were quietly increased in other sectors as8 article by Leonardeputy chairman of Gosplan, Indicated that state orders9 were to be cut fromoercent in the metallurgical sector aad fromOercent in timber and wood ptCKessing. But those planned cuts were evidently rescinded, snd, bytemier Rvidtknv was calbng for State orders ia the same sector* to be reduced toercent*
Phrasing
'hW el bctuadHka-seeacs msanoUiion.ther Oils
gaftSk"tics.influIim ibnui ik<or4e>w* as tmagmmm tfcixt *J
ttw If snaaias auwrten taifostt ikai Onftn aulaord unUi Sad as arsauik (llws aa iu iBnTaknaat at n*un fmakfal
HMaUes. iSa rifnlMi IMaVf.iux orOOTuioaitblc lor otfy .'I paooai af ovd rsoduo^m. manaanl
olltllercent ol Mi rasa.ntor
mr-Boryu.-OO ICQ porem viwordm. Ufilled *'
W" uite ortsrv (tutvl Stan ibcU. Btsssted lo lower ihcti plan ur*a> -
The ctTcct of aucfa incooiiiienciesapooiallyia the area of planning State orders were only briefly lowered and then railed again to leveli that have left many enterprise* with little more room to maneuver than tbey had before the reform. At the same time, that brief brush with freedomenough to undermine Iheontrol androwing number of enterprises to limply reject theirrevolt that, combined with thernejtecttoniim of thea* Wt the central planning mechanism in disarray
The regime's reluctance to reduce iiate orders metixed rctponie from enterprise managers, depending on which hit supplier orwere wearing at the lime aad the particular tircum-stanccs of their enterprise. As Premierpeech last year:
erson appearsroducer, heproclaims ike slogan; Xrive me afree kandl Setaife. (All is beard la ihe first port of oil presentations. As soon as we move on to problems which ihe speakers experience as consumers, il is sold categorically XJive me everything down to ihe last boltf This Is the mentality of prominent economic managers at pet sent.
Some entcrpriicaigh perceacagc of state orders advantageous because it gave them first claim oa reaoorcea Ihat were ia short rappty. Those eater-prises whose products were priced artificially low, however, found state orders less profitable than those that could be sold at negotiated prices. -Still Others ocrrsraaasedigh percentage of state orders gave them leas freedom to make changes in the "sjtortrnentimiting their flexibility to ahift to the production or rnore profitable Iterns.'
The main effect of the regime's rrxoeisaieacser,has been to increase the willingness of Ibe enterprise to challenge those orders it believes will prove unprofitable- la fact, refusal to accept assigned state orders has now become so cornnsossptacc that Gosplan has bad to impose new sanctions oa the offending enterprises. Under rcgtdatioos adoptedirms refusing to accept their state orders face reductions in tbeiroes ted supplies, while those failing to fulfill them have topercent surcharge oa the cost of baak loans. In itill another sign of the times, Ibe government's State Arbitration Boardhich bad refused to handle state orders disputes when the ccrnptaints werefrom the enterprises, has begun to accept those cases now that the state hat become tbe chief com'iar.'
Ironically, as the resistance to centrally dicta ted orders has grown, ibe increased asscrtivetiess of Ibe republics has led republic and local officials to levy their own "state orders" on enterprises, and enterprise managers are finding those (askings even moreto challenge than the center's. As GossrubPavel Mostovoy recently pointed out, when local orders are combined with tbe center's, tbey frequently amount to more than the plant is capable of prodac-ii.k. leading local authorities to resortrimitive lorm of arm-twisting to get their share:
Not only the republic but also ihe obtest and
city authorities dictate their will, far example, ihe executive commlltee of the obtast soviei tells ihe recalcitrant enterprise- 'If you don't want to obey our decisions, all right, well turn off your electricity, heat, and gat. and well stop your food supplies.'
Secret
For some enterprises, therefore, lhe tyranny ol the center hu limply been decentraliied and made even more fearsome at the local level.'
The regime'* failure toubstantial reduction In Kate orden hit been accompaniedlowdown ia the planned traresilion to wholesale trade. Ahhoagh the Siate Committee on Sutauica (Goskomstat)that the volume of wholesale tradelrrscat three times thatt still amounted for leu thanercent of centrally allocated supplies that year, and there hu been no credible evidence of tif niScant progress since. Some Soviet economists privately have labeled useiction,hat virtually all supplies continue to be delivered at the direction of Gosplan or Gossnab or on tbe basis of rsrevionsJy existing at rang en tents.'
Those enterprise managers who do attempt totheir own contracts with suppliers often find themserves at ibe mercy of eaocvocoties that use their positions to cston material and equipment that they needhis desperation for supplies hu converted the wholesale trade concept into what one enterprise manager ha*prirnitrve barter(ice inset> The practice of reinsut-ing stale orders when central supplies of materiaecome depleted also has crested considerableforcing some entcrpnseienege oo previously negotiated contracu to meet their new commitment!.
Irorncally. efforts to reduce the ministries'in enterprise decisionmaking have also reduced their ability to "grease the wheels" to alleviate these supply problems
WkeAetalt Tredel Jtarfrr Is Billet
Am Ineadya ertlcU0 complained:
nterpeisea thatrsonopoly on their type of output continue toolicy ofdiktat, which In someaking on ugly forms,eturn for output, coowmcrs are asked to provide Japanese video equipment, Peugeot cars, or
other goods of thissuppliers arc
demanding that workers be assigned lo ihem or simply that they be provided with detergents.
neoJ lo.ai -tmuaiod bySo-withai found almosiof <b*hl"*ry
offcro) fenMc-mh.-erebyor fewre ciaiw
Prices
A list cf revised wholesale prices for tbe industrial sector wu drttriouied but never implemented as plannedhen the trade unions protested that the new wholesale prices for energy andfirst prices scheduled forreduce enterprise earnings and workers' wages, tbe regime caved in to popular pressure once again and
iK trj
Higher Prices? Blame ihe Sysieml
Three tdodelt af Self'Financsng
tke Law on Slate Enterprises, two models of self-financing were spelled oil. and thethe permission ef ihe ministryselect either on. The first provided for calculation of ihe three enterprise economic funds from profit on the basis of normwtves (rations between an enterprise's profits and ihe deductions taken from those profits}eparate calculation of 'he wage bill on ihe basis of output. The sum of the wage fund and the three economic funds ConsiUwted the enterprise's self-financing income
In the lecond model, wages were calculated on the basis cf mterprue income after repaying material expenditures fromortion of theprofit, determined by normatlves, was allocated to the production development fund and the social development fund, and the residual constituted the combined wage and Incentive funds
A third model, later pushed by the regime, was designed for firms operatingease contract. This model wot similar to the second model in that wages were dlrrttly linked lo profits. Unlike the second model, however, ihe enterprise was no longer fettered by normatives governing ihe distribution of profits.
SeK-naaneJag
Tbe self-financing system, adopted industrywideas supposed io give enterprises the incentive to Increase their profits by making their operations more elTicienl. for enterprise: operating under the so-called second and thirdwage* directly tohas sometime* had that effect (see inset) The reform has proved less effective, however, for the vast miioni) of enterprises still working under the
Inowsb Chairman Voeenin rcnaled Ittai the llhur*lie**resulted in reductions of rriees on IMenu snd forced tho (oienaoes lo forfeit sboul WO mliton rubles In proliisrnod by rsi.ii those ortcei
.SecreT
su.i
first model, which calculates wages on Ihe bsili of output rather than profit and rnTcrt little incentive to red wee expendi tares
The decision tolanned price reform meant that many lupposedly "self-financing" enier-priaea were forced to aell their products at artificially low prices. That and other incquit tea in the enterprises' -luting positions led lo the esublufcmcnt of"nor mabetween an enterprise's profits and the deduction* taken from thosethat allowed the ministries to set favorable deduction rates for the less profitable enterprises aad stricter
' Tha auectai of (niriwilara operating under ihe Hosnd noStl of
Huel Iba end ol IVVS lo more
MOObyt* By Ike end ofik.iaam* beast tr-ait-ag ihe thardlie wjanw acalaa.
Oaahaasstat etcf-prd rrporiiai theef roKr-wwa lhai bad addoUd lhe aorend aaodef. Sy lhe, 2JO0 araarpraei.
reiponiibl*cieeru of ihe overallof tadwlil ouUmii. aere cecritini uader lease eoniracu cases for tbe most profiiable. thus defeating the pur-pcae eaf tbe reform Addiuonal norma lives governing the internal di unbutton of profits also rnacod further limits on enterprise decision making authority.
To help reduce the disincentive these normaresented for the more efficient cauerrrrisca, the regime at fust allowed lhe enterprises to keepercent of their sbcvc-pUo profits. That incentive was rescindedowever. when it became apparent that enterprises were simrdy lowering their planin order to uvcriW.il them. As then Premier Ryihkov explained, "We were urged to leaveercent of above-plan profit for the enterprisesthe enterprises were poor, bat todayhe stale lhat is poor.'*
Wages. Sell finsr had an equally dramaticoa iacorncs. which grewacfa faster rate thanperceni3 percentndercentnstead of building popular support for reform, these increases onlytbe gap between purchasing power and the rusting supply of goods and services. The continuing ibortages of consumer goodi. combined with the failure toore direct linkage between wages and enterprise reotts. also eliminated tbe potential lo Spur labor productivity, -hieft. contrary to the hopes of reformers, has failed to keep pace with the growth cf wages.
The regime'seaction to this wage spiral was to reimpose central contanUjf
urther effort lo control wageaw that became effective in9 established atax on increases of greaterercent in
-'
j^araiA
-Secret
wage fends of all enterprises except those that produce cxxasurrter roods This measure proved iaef-fective, however, as thepressure from disaffected workers and heightened competition from high-paving roopcritivea continuedind ways to increase wages and other worker bersefits:
Some state enterprises twiichcd temporarily tostatu* to avoid being subject to the tax
Others opened new subunitsnterprisecapital expense exempt from the tax on wage growth.
Many simply increased their wages and paid the required taxes from idle enterprise funds.
Some enterprise directors compbed with tbe wsge rnstrktions but offered their workers other financial benefits, such asart men 11
Inrestment By taxing the enterprises' wage funds, the regime was alto hoping to ileer more of their profits into capital investment Although seif-financingenterprise managers toarger share of their own investment, they often hare had Utile
incentive to devote these funds to modernisation and reequiprneat As former Politburo member Yegor Ligscbev once acknowledged
The paradox, you tip. Is inert it it ofien more profitable for an enterprise to work with old technology andarge strict af items than to Involre itself in nusdernlsailon.
Even when the incentive for erscd era nation and ree-quirrrnent has been there, enterprises often have been hatd pressedind (be investment goods they need because so many suppliers' capacities have been taken up with slate orders.esult, Genplio Chairman Maalyukav reported that.oviet erucrprises had accumulated someillion rubles for in>est-ment purposes that they simply were unable to spend.
Self-Manage meat
The experiment in derrwcratiiing workplaceis perhaps the most widely acknowledged failure
jlOfifiaU
Disillmsloament Over the Ubor CaUeesire Council
This excerpttteroviet newspaper expresses the disappointment many workers feel about the role played by the labor collective council:
More [bibyearu electee) to the Ubcr collective council [or ourarriage repairhought tbe coancu ataa socvcthlr^olkctivc manager aad thaiogether wiih the wperviiccs, we would address all the vital peob-
year we arirvoeoced oar lack of cocci
deuce in tbe head ot* the cafeteria, S. Tanaova. Aad? She works as before, and the food ia the cafeteriaKill lousy. Ii turni out we canittle, and the way matleri are decidedow they
willa word. I'm disappointed.ust
confess, doubisI II i. tlie beder of me. Do we even need the labor collect!re councils at all? And if to, what should their role be?
alt the reforms. The planned workerthe decisionmaking process was toil increased the very cynicism amongIt was designed to overcome. Judging from
1 tbe new labor collective councils have played only an advisory role in enterprise decisionmaking and have Utile or no independent authority (seen fact, contrary todvice, the councils often have been headed cither by the enterprise director himself or someone be selected for the post.
favored candidates who promised to make life easier for thenker than those who challenged them to work harder.ravda editorial oomplaiaed:
Workert have elected not the suongest and matt ImelllgeM. but the most convenient, ihe mott obliging, the toft options. And lometimes downright uieletsice guy andll. Whether he was right for the fob never entered into it
Although worker* sometimes complained that mini*-trie* rejected their selections for enterprise director, most of the complaints about the elections came from those who found the process too democratic for the good of the economy (see inset on. In addition to the disruptions caused by the constant turnover in management, they said tbe elections
peech to the Supreme Soviet inremier Ryrhkov openly confessed that the reform had been ul-conccivcd:
At world experienceIt now shows ushead of an enterprise must not be dependent on the changeable moods of the collective under his management.
Secret
ay, *
fiui tke Eltetloa of Etaneptita IMtatmmt
A party tetrttary al iht Kuybythe* Uquor and Vodka Plant itnj tkt following lata ta ikt Central Committee;
A new director look charge of outean ago. Before be armed, tome employbid been Healing product* aad selling ibea on ibe black market. Then ibe new administratoritter struggle against drinking and absenteeism and ihui off aveaoea foe paltering Naturally, ihn did not please (he th.eves Hiding behind dernagegK phrases about democrat nation and glainoti, thia band of "injured and effended iodivlduali' iasislodote be taken oa the director aa well ai tbe beach cf subsections Oar collective bai beentate cf nervous tensiononth bow. We arc weil aware lhat tbe result) of ihe election will not be objective. It lecnii to me that many labor collectives In processing industries, where pilfering is widespread, arc not moral!)to elect (heir own administrators
increases retailing from scaT-hanocing comicoed lo grew faster than planned, creating eicesa purchasing power that caacerbaicd the shortages of consumer goods. While ether factors ethnic disturbances,strikes, and localto industry's decline. It was apparent by Ibe end0 that the reforms on which so many hopes had been riding had become pan of the problem and aot the solution,'
Reasons for Failure
A number of factors contributed to the failure cf Gorbachev'i ftnt package of industrial reforms
Preserve Clean ef Central Powers
Despite its calls for greater enterprise autonomy, the first reform program suffered from the regime'sunwillingness to relinquish the reins of power. It retained ibc frarrsework cf mandatory, "stable" five-year plans, along with auroeroui new and cad government bodies lo help formulaic them andtheir IrrvplemenUtioo. The resultalfway bouse of rcformi lhai tried lo change irwxnuves but
ktf( ia place iha main elements of socialist central
planning.
cf selecting cUreetors byew law on enterprise* calls for the directors cf stateto be nominated by central authorities and then confirmed by enterprise workers.'
Impact an Industrial Output
la sum. Gorbachev's first industrial reforms have done nothing to improve Semct industrial perfor-ma noe. By tho endverall industrialactually was in decline and had slumped almost to the level. when the reforms were initiated.umber of these reforms dearlyto the woes of the Sovietutput of consumer durablesil- far below target and not enough to stock the bare shelves ef state stores. Wage
Tha wahad ot wHaeoaa tk* oWwrwrt wtsad wWri*o or dctesauaed by tie owaan at those mtrrr* hai
loitsoiierneol of Price Reform This reluctance to rcUraquish the reins cf power, combined with concern about negative publicledostponement of tbe pnee reforms called for in the first reformmistake that reverberated throughout the economy and foiled at most every other aspect cf the program
Because enterprises had no rational price system to guide iheir production decisions, the regime bad oo assurance that lowering slate orders would resultudieious mn of output and abandctrtcd its plan to do so.
Similarly, lhe supply system could aot be released from central allocation without an alternativeperform the allocative function.
lv
.nr.-awSsrafeti
was full of loopholes and ambiguities that opponents of ihe reforms were able to use to prevent their srnplcmcniation.
Hare the Lesson* Been learned!
To iu credit, the regime finally cane to recognize that these halfway reforms were (imply inadespsate to the task at hand and.amber of false starts,ew reform program inupplemented by aa "antieriiisIn1 (see inset oa. This second wave of reforms, to be implemented over the coo tie ofoonths,ignificant advance In thinking that calls for the toppling of such pillar* of tbeem as centraliicd planning, filednd tbeonopoly ownership ofcf which bear major *barea of the blame for the dismal performance of Soviet industry
Our aaalysii of the fate of tbe pervious reforms, however, suctetts that the new program contains many of the same weaknesses that eventually made those reforms so ineffectual.
Preservarion af Central Powers The new program perpetuate* the error oftroogole for the central bureaucracy. Despite it* call for increased enterprise autonomy, it lock*igh percentage of centrally dictated slate order* umil at lean the end' Aihougb tbe program would eventually diimanlk theew tcrxgaaiiation planearlier tbii year brought no significantin iuPrime Minister Pavlov described this Cabinet of Minister*lroclnre designed to meet the econoroyi needs during the lixrtsiitoo period. bat he provided no assurances ihst it would be reduced ia uie. much less eliminated, ai ihe end of that period
i Mx Ml bata wrtlaW.
l*SI ustf arsen wnald axrvsv M
t antim eomnwd
uits
Srcaet-
f^rsUrnevi Basic GaideUaet
According to ikt "oarfe guidelines" of ikt program adopted Inconomic Habituation and the transitionarket ceemomy ore to be accom-pllshed In four stages over ike next It toonths
Stageof Ike budget deficit, restric-
tions on tke money supply, andof Ike banking system. Oenatlonalltatlon andprivatization of property. Implementation of land reform.
Phased Increase In wholesale prices.
Stage II Deregulation of tome retail prices.
Introduction of income-Indexing and Other measures to compensate for price increases.
Farther denationalization and privatization.
Stage III PrivaiUaiion of housing.
Further deregulation of retail prices. Establishment of minimum wage Elimination of financial and credit restrictions.
Stage IV Demonopoltsatton of economy: further denaitonoltiaiioa and privatization. Further deregulation of retail prices with "mosl'1 prices to be governed by supply and demand
nd lb* Aaticrtsls Program
Anprogram" issued in1 was described by the rtglme as on elaboration of these basic guidelines In fact, however. It combines both coercive and market -orient ed measuresackage that has drawn criticism from both right and left For example, the program bans political strikes for she rest of ihis year andpecialregime that prohlblls labor strikes la key industrial lectors At the tame time, it calls for market-orirnttd measures that, if implemented, would speed up prlvaiUatlon of tome statebreak up large monopolies, remove moston middlemen, and lowtr the tax rate on high-income entteprrneuri
of ibe implementing decrees of ihe newire bow being iuued by tbe President, but most are Mill being drafted by ihU same bureaucracy. -huhtroog Interest la self-preservation and little commitment to the cause of reform. When an inierviewer recently ashed an enterprise director why the decrees "failed to elicit enthusiasm" amongmanagers, the director tcplied:
Because thtst decrees, as well as government directives, art written by the same people. These people, even If they anee knew kow melal shavings smell, have completely forgotten it by now. They hav -or looked into workers' eyes for eons...
Postponement of Price Reform In Ibe new reform program, the regime finallya number of iiscreases in both wholesale and retail prices, but it continues to subsidise many basic goods and to delay the deregulation riecessary to make those prices responsive to supply and demand.
Ambiguous Directives
Although more radical In iu statedarketnew reform PKkage. like iu predecessor, is vague on implcrneniation. This time the critical factor was noivided Politburoresident and legislature unable to settle on one of several alternatives. The result was a
set ol vagueibai abo will bt subject to mtcrprcutioa and selective trtiptcmcnuiion Where Ibe first pcogrim ni vague onvutoo of powers between (he ministries and enterprises, the new one fails io adequately delineate (he powers cf (be center and tbeeven more critical ambiguity that hu become the subjectootmriing political
bstric
In addition to repeating the errors of the previous reforms, the new programerious mbtake of its own: the policy of "tu bill rationn an effortain control over galloping inflation and mounting consumer ibcetagos, the regime has put many mocft-needed reforms en (he bach burner until tbe current economiclleviated,umber of decrees that would trghten rather than loosen ibe economic reins (sec inset on
Enterprise msnagers already are complaining that this new "itsbilifaiioo first" strategy will reduce ihe autonomy of the enterprises andtaincen-live to increased production. Among the csamples they cite arc:
The freer.ing of all cabling contractual rcbtionships through the end
New enterprise taics (hat set strict limits oa profits aad double enterprise comribuitons to the stale's
social insurance fund.
Dexiccs Emphasize Stabilization at Cost of Reform
Tin Sueerme SiMrl I* Hit0 granted Gorbackey emtrytivy power to time ieereeiroad ranrecoromle mat-
Uti wtihtml tmnttlnt II" tttiilaiurt. Moo of ikeot detrtei mumat lo ttabiliti iht tconamy ty bolacrint central contrail et iht
rxrensr cftt reform
economic (ill btfrc enleryrUel
Aliening twtrprlmrfcrOeit wketttolt prtetut.
orkerontrol Ikt dlnrtbutlen offood
ami cnker tonsumtr goedi
Wrnommalio. ruble notet. Creeling itaailtiationfund.
Allo-nng KGB irfoiwwnlj. and
tdbottleneck! bul will time dewelopenev cf nkoieieie trade, karritirttg formailoH of mew ererryriut. and kinder republic dforti loprtrottit.
Pottttw tup toward rational petting If dimltflked by Imposition of
itaUe-tet pritt gutdelinti and IQXr-eeetett las ontttni pngtu.
Intendedop up ttrttt ntttI hiat rather than allonimg Inttrtti rait! loretpondlochanettg economic
conditio*!.
Attempt to reduce tkejl and lyeeulaitoneturn to oamlnlitm-
tfet control lhai rtfledi Inability cf legal tyittm or matttrform ttt functions.
Attempt io taafiiceit Hack-market prtgUi alio kurt UgtUmoit
tmall emrtyrtneuri who wirea dotumrnl past taerdngt-Effort to tuition Hamilton lo new irtltm ht twtegriitl erptralint
ol aI trill be/trottd primarilytht lucctstful tainprUet;
undermine! etion to/one tnttrprliti la operate maren.nd beeomefiAamlall, tndrpendent
Cgeei lo prevent nonomlraddshe problem! of
imtll huunttiti and ceoptratbrti that lum iieckpiltd won*
tnolrrtili ta piuiettkortotet
wage-leveling device that Outs ill increases in wages above certain limits at tbe same rate as
profits.
Strict limitations on the amount of hard currency earnings the enterprises can retain.
Additional deductions from enterprise fundsew union aide stabilization fund
Moreover, stabilization by the traditional means of administrative edict almost certainly willime when so many of the center's commands are still being challenged by recalcitrant republic
officials and enterprise managers. Tbe continuedoftrategy, in our judgment, will only sharpen the current economic decline and worsen the plight of the Soviet consumer. Unless that strategy is revised and center-republic differences are soonthis year could see CNP fall byoercent. The continuation ofecline would force Gorbachevuccessor regime to reconsider the adoption of more radicaltime under even more dire economic circumstances
_Snerei
Original document.
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