ORGANIZATION AND MANAGEMENT IN THE SOVIET ECONOMY: THE CEASELESS SEARCH FOR PAN

Created: 12/1/1977

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Organization and Management in the Soviet Economy: The Ceaseless Search for Panaceas

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CONTENTS

Pane

Introduction

Dcvrlopmrnts.

Planning

IvconoiTilc

Labor

Capital Productivity

Fulfillment of Delivery Contracts

Quality of Products

Taut Planning

Compuletizalfon

Other

Managr-ment of Rrtearch andand

ImpactManagerial Reforms

Prospects

APPENDIX

Sonne

Organization and Management in the Soviet Economy: The Ceaseless Search for Panaceas

CntftW Intdtl&auv Agcnty NotionalAiwanwni Oil*.

7

Introduction

Over lhe past decade, the USSK has been engaged in an effort, unprecedented in scope and intensity, to improve organization, management, and incentives in the economy. Most or* the measures adopted stem directly from the program of reform outlinedyginther approaches, such as the effort io computerize everything computerizable, are ancillary to it. The efforthole is aimed at raising ccononrC efficiency as measured by labor and capital productivity and improving lhe quality and mix of output.

The wide-ranging approaches may be conveniently grouped under five) incentives, including those for improving quality nfomputerization;iscellaneous programs. The first sections of thiseview developments in each area over the past decade, with particular attention to changesndicate the apparent future directions ai reflected in the Directives forth Five-Year Plannd the generalinal sections assess the success ol tlie overall progiam in achieving its objectives up to now, its likely effects in the near term, and the prospects for effective reforms in the longer term.

Developmentslonning

Kosygin's program called for implementation of his economic reforms strictlyramework of centralized planning, which was. however, to be improved in fundamental ways. First, the role ol long-term plans was to be upgraded To this end, the Five-Year Man Ir'YI'l was made legally binding

iiMiuHoii and llil nf tfwric tctctenttt.hr dpjvndu.

and was toirective for enterprises. Annual plans are now drawn up taking into account tbe annual breakdowns set in FYPs. and incentive arrangements are supposed to allow for the degree of progress toward meeting FYP targets.

In addition. FYPs are being formulated within tbe frameworkYcar.reat deal of work was set in motion to draft this plan. However, the effort was delayed by bureaucratic wrangling over planning methodology and probably also by the sheer magnitude of the task and the difficulty in getting agreement on long-range forecasts.the Academy of Sciences and tbe Slate Committee for New Technology haveComprehensive Program of Scientific-Technicaland Socioeconomic" withowever, the draft of theYear Plan is still in process oflh Congress of the Communist Paily of the Soviet Union (CPSU)rezhnev again stressed lhe importance of long-term plans and the urgent need to improve their finality.

Second, the "scientific basis" for planning was to be radically upgraded. In practice, this has meant tbe more extensive use of mathematical forecasting models, input-output data, and optimizing technique* in planning. Although the traditional plan-formulation process remains intact, these approaches seem to be used extensively (notably in lhe economic research institutes) in preliminary planning work, in testing lhe consistency and balance of various kinds of plans, in calculating plan variants, and in making decisions aboul location, distribution, and mix ul product in particular sectors. TheProgram". which used these techniques, aided the drafting of lhe lOlh FYP, thus allegedly raising its "scientific basis."

Third, lhe syslem of plan indicators was to be directed more specifically toward solving problems of efficiency and product quality.esult, an exhaustive discussion has laken place over the "correct" way lo measure Ihe efficiency of lahor, capital, materials, new technology, computerizedsystems, and much else. While the arguments have raged, the Slale Planning Committee (Cosplan! has introduced many new indicators of efficiency and product quality in national and enterprise plans. The national plannd lhe annual plan7 includeuch targets, and reporting is required iu respect to theirt present, Gosplan is drafting proposals for further revision of these plan indicators to stress the use of long-term norms. Ineorganisation of the planning of wages and inveslincnl on the basis of such norms is under active consideration.

Fourth, some planning authority was lo be delegated to the enterprise level, with lhe aim ol spurring initiative on the periphery To accomplish this

objective, Ihe number of directive targets set centrally for enterprises was initially cul sharply as part of the economic reform However, all important targets were retained; in the process of implementing the reforms, new ones (labor productivity, product quality, contract fulfillment) were added through formal changes in lhe rules; and io'practice the ministries have set many others

Finally, to the end ol "improvingn extensive discussion has taken place concerning so-called "complex"'ystrtn approach" to planning, and tlie "program-goals" approach in planning The discussion seems Io concern mainly the planning of regional complexes (ouch as Baikal-Amur) and ihr planning of integrated programs aimed at fostering scientific-technical progress (such as mechanization ofudgingarrage ol discussion midatisfactory integration of national mid regional planning remains mi elusive goal. Despite the increased role given lo republic and local planning agencies, regional planning seems to amount mostly to adding up thr relevant sectoral plans, which continue to have priority. Much work was done by economists and planners during the Nintho develop "comples" approaches and efficiency calculations for various kinds of regional and functional complexesh FYPumber of such "complexfuel and energy, building materials, development of agriculture and associated branches, the non-Black Soil area, and Eastern regional raw materials The Plan Directives call for further "improvements" in plan formulation via use of lhe program goab andevised set of methodological instructions lo accomplish ihese iiritl I'tliet. plan makingtopublished8 '

Economic Organisation

The Kosygin reform relumed stability and order tn the organizational scene by abolishing the regional economic councils set up by Khrushchev nnd restoring the time-honored ministerial (branch) system ol economicThe reforms jImi icntralizcd key functions in llircc powerful new Stalelor Pricesor Industrial Supplynd for Science and Technologyhanges in the upper levels of the bureaucracy5 have been few and of minor importance but generally in the direction of greater centralization and proliferation of agencies several new ministries, the splitting of several, and the conversion of some (rom union-republic lo all-union status The economic reforms were supposeil io be carriedwithout increasing lhe sree and cost of thr central bureaucracy When both rose substantiallyarty-Council nl Ministers Decree ordered annual reductions in admi nisi rail ve cash, with tin* required annual "savings" automatically confiscated by the slate budgrt Also, annual

3

campaign* have born conducted by ventral and financial agencies to uncover superfluous "links" and supernumeraries everywhere Despite these efforts, employment in state administration (apparat) increased nearlyercent, compared with nearlyercent for state employmentlmlc

A clause in lhe Ktxvygin program (ailed for combining industrialinto large associations and extending khozraschel (economicto the upper levels of the bureaucracy. Little progress was made in carrying out tliese measuresnarty-Council of Ministers Resolution directed the industrial ministries lo submit plans for combining their slaffs and subordinate enterprises and research instilute* Into various kinds ofn general, the main administrations iplavki) of lhe ministries were to be converled into khozrasciiel "industrial associations" wilh many subordinate associations and enterprise* Inteiprises were to be merged into "production association*.'" and research institutes and enterprises were lo be combined Into "science* product son associations" These assorted amalgamations were supposed toariety of efliciency gains, such as economies of scale, increased specialization, reduction in administrative employment and coats, improved incentive structures, and closer lies between research and development and production

This latest "reform by reorganization" has been proceeding with all deliberate speed. The number of production and science-production associ-alions increasedt the beginning3sshereuch associations, producingercent of total industrialf them arc science-production associations After long delays, the reorganization plans of somendustrial ministries have been approved and are in process of implementation andn aulhurilalive source slates that, by the endssociations will account for aboutercent of total industrialhe Directives forh FYP call for the completion of the reoigjuizution in the industrial sector0 and its extension lo Ihe construction sector

The Soviet press reports extensively on the new hems oin tbe one hand, individual production associations claim large gains in efficiency, and ministries report large savings in administrative costs and personnel; such reporting Is remf lhe glowing results claimed lor lhe first groups of enterprises put under lhe economic reform in the. On the other hand, discussion of numerous difficulties in implementing the new schemes isirst of all. tl u. evidentreat variety of organizational arrangements are being created and lhal the situation Is still much in flux Some ministries have abolished branch RUii-ki. but others have not done so. In some ministries, branch nltivki have been renamed "industrial

f which there are now, wilh little oilier change In general, (he new ministerial organizational structures and the behavior of the component unitstriking rcAemblance to past arrangements and conduct. The new industrial associations often manage the same enterprises as before, but now combined into production associations Contrary to the original intent, there has been almost no shifting of enterprises among ministries, so as to create associations wilh similar product lists Exceptew "Hero" associations, the desired specialization of output withinassociations does not seem to be taking place either. Although the number of independent enterprises apparently dropped by. tlie new production associations still contain large numbers of individual enterprises (that is, those operating on an independenthereuch enterprises ashen the average production associationt the beginningeatlyercent of these associations were in the light and food industries and nearly one-ftflh in the timber, paper, and related industries. '* Many associations are quite small (lessnd others are0 employees in the average coal industryhe various kind* of associations have experienced numerous problems in operating under lhe new arrangements, many of them stemming from uncertainty about their rights andTo clarify ma Iters, tbe authorities have published statutes delineating the rights and rnpomibilities of the various types of associations and their component enterprises. "

The reforms called for the industrial bureaucracy ultimately lothe principle of full khiizraschct The principle means lhal lhetheir subuuits would finance all iheir activities from iheir owninvestment and staff salaries, wilh no grants from the statenewly created industrial associations are supposed lo operale onalthough this step apparently has not yet been taken in respectnf themhey are givenunds and bonus plans like thoseassociations andnd their employees are rewardedwith the economic performance of the industrial associations asThey have reserve funds of various kinds lo "even-out" lheof subordinate units. Ministries also have rescue funds to be usedpurposes. With minor exceptions, the ministries remainorganizations. Only one(the Ministry ofMaking. Automation Equipment, and Controlwoorganizations, and several ministries in Betorussia and Latvia"fullVvninn was recently made to add threemachincty ministries to this list, and preparations ire under way lo" Although lhe organization* lhal have operaled iuay forrepoil successes (along wilhhere has been lillle push to

5

extendxperiments. Many ministries, especially those in thr extractive industrics. do nol earn enough profit to fully finance their activities, and substantial price revisions would be needed to yield the requisite profit. Nonetheless, further extension is strongly uiged in the economic literature.

Aj part of lhe advocacy of "comprehensive" ami "program-goals" appioacbes to planning and management, proposals have been made to create "supraminislries" of some kind to oversee groups ol relatedlthough no concrete plans lo do so are yet in evidence. Brezhnev may have had such an idea in mind, when alh Party Congress he called for "resolving" lhe "question of the creation of systems for the management of groups of similar branches (for instance, the fuel and power branch,and lhe production and processing of agricultural products)."

Inccntivas

Theecade haseaseless (and largely fruitless! searchel of plan targets and associated incentive arrangements that would induce enterprises to economize on resources and try lo satisfy customers. The original rules of theixed sales (in place of gross value'ofits, nnd profitability (return on capital) as key plan targetsied managerial rewards lo meeting plans for these targets. As problems with lhe new indicators multiplied and desired benefits failed to he significant, the authorities proceeded lo alter the newly established success indicators by making several changes in the rules for forming enterprise incentivethe principal modllieations being madey lightening controls over lhe site and expenditure of these funds Five principal areas of focus have evolved: labor productivity, capital productivity,of tiintracts, product quality, and an effort to induce erstcrprises to adopt more demanding (taut] plans. Since the atlack on theseareas is wide ranging, it is best to deal with each one separately

labor Pfc-SwthVity

Thb measure of ellkiencyallowed place in the hierarchy of plan targets for ideological reasons, including Lenin's declaration (hat in the final analysis, labor productivity is the main thing, the most important thing for the victory ofside from ideology, stress on lalxir productivity makes senserowth-oriented economy faced wilh declining increments to the working-age population, Although the target for increasing labor productivity was not included nmong those governing incentive funds in the original rules of the reform, It wus added to llie list in2 levislon of (he ruleseterminant nf both the size of bonus funds and the bonuses themselves. This emphasis was retained in6 revisions, when labm pioductivity was

ne nl two obligatory indicators lor determining tor most enterprises the size of incentive funds and managerialpirited debate among planners on how to define the term labor productivity has culminatedypically bureaucraticprovision of6 incentive rules allowinR the ministries lo decide which definition bestthe partkularities of their industries

In addition to these provisions of the general incentive arrangements, the Soviets have beenariety of experiments with schemes to stimulate labor productivity the most famous of which is the Shchekino system, designed specifically to induce savings in labor usage, under this plan, wagerom reduced employment are used in part to reward the remaining employers lor taking on additional work Despite much publicity and high-level l'nrty support, this scheme has not been widely adopted (by onlynd seems to have had minimal impact in reducing the chronic labor hoarding long characteristic of Soviet industry.

Capital Productivity

In the original rules of5 reform, two approaches were used to stimulate more efficient use of capital by producing enterprises. The first was the impositionapital charge generally setercent of total filed and working capital, but with many pxceptions Although Soviet sources agree that the charge is too low and has had little if any incentive effect, no essentia! changes have tsren made in Ihe initialecond approach was to establish profitability (profitsercent of fixed and working capital) as one of the mandatory plan indicators Io which incentive binds and bonuses were linked. This provision was maintained in2 revision ol the rules, but In6 revision the ministries are allowed lo decide whclhci profitability or ihe capital/output ratio or neither one shall Influence the size of incentive funds and bonuses.

Fulfillment of Delivery Contract*

Thr original rules of the reform substituted total sales for Volandatory success indicator and abo provided for greatly expanded use of interfum contracts, both measures being designed lo induce enterprises to improve quality and Io pay attention to customers' needs. In practice, however, sales lurried out to he no better lhan Valtimulant to customer orientation, and contracts proved to be mostly forma list sc and difficult to enforce in the continuing sellers' marketecree was adopted tliat stated thai oul]Mil plans would be considered fulfilled only il all terms of delivery contracts were adlieredhis decree evidently proved difficult lo implement Nevertheless,6 rules build coiiliuct fulfillment into the

7

bask' incentive system by providing that tbe value ol nondeltvcred goods shall be deducted from total sales and that iwenllve funds shall be reduced by fixed percentages related to the extent of under!ulfillmcnt of plans for sales Tins rule applies regardless of whether or not the target for sales or output itself (Vol) is one of the mandatory indicators that determine the size of thr funds;6 rules accord the ministries the right to make that choice Failure to meet delivery contracts is supposed to result in denial of bonuses to managerial personnel, beginning

Ooofety of Product,

The attack on this longstanding problem has been many faceted, some of the measures adopted not being directly related to incentives per se. Of tlie latler. the most significant, perhaps, is the greatly increased emphasis on setting Irchnical standards for products,oncomitant upgrading of the status of the State CCommittee onarty-government decreecallingig effort along these lines, was followedarly Resolution5 excoriating one and all for lootdragging and demanding more action on the quality fronto put teeth inlo tlie efficacy of standards, penalties for violating state standards are imposed by deducting the value of nonstandard products from total sales and profits and by imposing fines lor shipping such outputtandards were revised annually compared0 Inh FYP the standardization effort and the quality rlloil are supposed to be mergedomprehensive "Unified State System for lhe Control ol Productn the meanwhile. Party resolutions have approved loi emulation particular quality control systems introduced in certain enterprises, notably the L'vov system

Tlse effort to lie impnivmirn! in product quality to the general imeiitivt-arrarigements ishere was no direct tie-in in the original rules of5 reform Beginningowever, the ministries were directed to classify all their products into three categories: "Highest" (meets best domestic and foreign standards and is competitive in worldFirst" (meets average doeneslKnd "Second"be ministries also wereet for enterprises annual plan targets for raising tlie share of "H" category goods and reducing the shareategory goods Price markups and discuunls were worked out lor Ihe two catcgnrlcs. Along with alleparale program provided for awaiding the "Stale Seal of Quality" emblems to superior goods: Ihese also have price markups. In lhe lOth"Plan of Fifietency andarrangements have been combined and modified As of now. they are aslate Certificationrather than the ministries) now certifies all products as to quality category (or one to thieell "II" category goods get the Seal ol Quality, which

8

entitles them to increased prices loi two to three years toarkup of SOercent over the norma) rales ofs much asercent of these extra profits may be allocated lo incenlivc funds and lhe rest goes into the stateeeting plans for isiting the share of "H" category goods in total output isandatory soccer* indicator for most enterprises, which directly affects the size of enterprise incentise funds andinistries have reserve funds for rewarding enterprises that performfeats io improving product quality,h FTP callsercent rise in the number of products with lhe Seal ol Quality,00o0pecial incentive arrangements apply to consumer goods, for which prices rise by grade, androducts of certain kinds have special price-related incentive schemes.

Sftlec'ed Soviet Reporting on Product Quality

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ibis hasCull of thehich may even have eclipsed lhe familiar "Cult of thehe Soviet presseritable quality explosion (probably accompaniedrice explosion lhat is hid<len by the official pricehe lable provides some of this reporting The press also reports thai -Tl percent of lhe output of rtie Miniilry of the Automotive Industry4 was "II" category and lhal plans0 call for overercent in lhal ministry.oercent in most machinery Ivancheshole, andercent in the chemicaln the other hand, the share of "II" category products wasercent fur industryhole inercent in construction materials.ercenl in ferrous metallurgy,ercent in light Industry.'" The number of products awarded ihe Seal ol00l the beginning0 products had the Seal oft lhe same

time, there seems In be little diminution in the volume of press reporting about poor quality of individual products, particularly consumer good.v

lout Plorwiing

When provisions ol the5 reform failed to induce enterprises to disclose the alleged ubiquitous "hidden reserves" for adding to production and productivity,2 revisions of the incentive rulesomplex scheme whereby incentive funds were increased In prescribed amounts when enterprises adopted and fulfilled inure demanding plans (calledor output, profitability, and labor productivity than those originally sel for them in their FYPs Despite repeated assertions that the scheme had proved ineffective,6 rules continue the arrangements, with the ministries being allowed lo choose not more than three or four key plan targets out of six prescribed ones, two of which,ule, must be labor productivity and the share ol production in the "H" category. Along with this. Socialist competitions to adopt and overfulfil! "taut" plans were perennialnd evidently will continue to be

Compute" ialion

During the past decade an encrmous amount of activity lias gone into lhe planning and introduction ot su-called automated management systems (ASUs) throughout the economy. This activity has been facihlatcd by an explosive growth in Soviet production of computerserv small base.he annual production of general-purpose computers rose fromo. and lhe total stock5 washe Soviets report the creation4 ASl's of all kindsndomparedver one-third of Ihe total haveinstalled in so-called ASU enlerpriseshich seems to mean lhal al least one computet is used for administrative-type tasks Anotherercent are associated with the computeriration of technology al processes Of the remainder, one-quarter have been installed at regional levels of the administrative apparatus andercent in ministries and departmentsercent aie described as "information processinghich may refer to those in lhe Stale Planning Committeehe Centralm in 1st rationnd similar bodies The lOlh FYP calls for continuation of lhe installation ol such systems, aidedpercenl increase in (he output of computers and software,ripling of the number of computers used in technological processes Inh FYP. simple thud generation computeis of the ft)ad lype are to graduall* replace the primitive second-generation computers of Ihe Minskype

Theitnessed the launchingrandiose project to design andtatewide network of computer centerstatewide

lit

information processing system. Key subsystems are: ASPFtSGS (statisticalSN (data bank (ot storage and setting of technicalSMTSSTsennd ASGN1 (scientificechnicians were set to work to prepare designs and plans, funds were allocated evidently in large amounts, numerousand progress meetings were held, and experiments were conducted. The Soviet press has reported extensively on all thisfter some six to seven years, how do things seem to stand wilh respecthis scheme?

First, except for some of the cyhernelicists, the pressuch more sober approach to Ihe whole project. Second, it is clear that many people scattered throughout the bureaucracy are still engaged in designing, planning, and experimenting with the introduction of parts of lhe subsystems. With respeel lo ASPR, the "firstased onechnology, is being put into Operation; this Stage seems to involve mainly attempts to introduce standard documentation and activity classifiers in Cosplan and its subordinate regional bodies and to work out parts of the annual plan using computers at all levels. Great difficulties are being encountered in respeel lo compatibility of different computers, transmission of data, and obtaining uniformity in approach. ASGS seems to beuite embryonic stale of development. TsSU's computers at various levels arc being tied togetheriew to computerizing most of the current statistical work, but its computer systems and approaches are in many respects incompatible wilhSPHord, the organization in chargeajor subsytem evidently is going its own way, using whatever computers it gets lo computerize small parts of its operation For example, Gossnab has developed via linearationwide system for allocating and distributing ferrous metals and has worked out "optimal" schemes for linking suppliers and customersthe ministries are busily engaged setting up their own "branchhich often are not compatible in timing, hardware, activitydocumentation, and whatever with the systems being developed by Cosplan, TsSU, and other national entities. Allhoughdepartmental" approach is universally deplored, nobody seems to be able to do anything about it. Also, the various bodies are simultaneously engaged in designing Systems to convert from presentechnology to Hyad technology, which they expect to receive in quantitiesndaunted and untouched by all this, people in the various Institutes of Cybernetics continue to design and redesign systems for the planning of systems for the nationwide unified, comprehensive system of the future (OCAS).

The press also reports extensively on problems associated with the use of computers at all levels ol thehe average computerours per day in lhe lirst halfith large variations among ministries and enterprises Hardware is poor in quality, breaks down, and is dillieiilt lo

11

trptiit. Seemingly insuperable difficulties are encountered in designing and preparing standard programs Peripheral equipment seems to be in chronic short supply, of poor quality and design, and unsuitable for the particular computer at hand- Computers are "distributed'" to enterprises, which often do not know what to do with them; conversely, enterprises "overorder" comput-ers and use them inefficiently. There aie local shortages of prograrncrs and trainrd people, especially repairmen, but. on the other hand, some labor may be surplus, for the man-machine ratio foi Soviel computer use is reported toercent of Western norms Timesharing is developingnail's pace.

From such reporting, it seems thai little is going right. Insofar as computerizing management isi opposed to iisdustrial process control) Bul this situation did not present Gosplan fromStandard Melhodology (or Calculating lhe Efficiency of ASLV*tandard investment recoverynd instructing ministries andto include plans for ASLs in iheir FYPs. including expected costor does il prevent the flow of glowing statistics on how much money is being saved by computer use in one or another agency orbillions of rubles" in the Ninth FYP) Finally, numerous proposals are being made for straightening out the computer mew One specialist urges lhe establishment ol an all-umon awenry eli.tre.ed with planning, contracting for. and installing all the computer syslrins in the country, along with lhe centralization of the production of computer-related equipmentingle ministry.h FYP Directives continue the green lighl for"to ensure the further development and improved efficiency of auto-iii.t.anagement systems and computer centers, successively uniting thema nationwide system for the collection ami processing ofhe Plan projects cost savingscomputer use amounting5 bilUon rubles

Meosur**

This section will sketch briefly what has been happening over lhe past decade in lour areas related to5 and subsequent reforms: supply, prices, finance, and management of research and development

Supply

The management ol lhe centralized allocation and distribution of machinery and raw materials lo producer enterprises hashrome problem lor Soviet planners, and tlie malfunctions ol whatever system was adopted hase created continuing difficulties lor enterprises5 reform attacked the problems anew on several fronlsewly created Stale

12

Committee (Gossnab) was given primaiy responsibility for tin- rationing of producer goods; ministerial supply systems were supposed lo largelyButossiiah still handled only aboul half of total wholesale trade in producerany ministries have retained and perhaps even increased their own supply systems, despite distribution costs considerably higher than in the Gossnabhe reform called for extension of direct ties (long-term contracts) throughout industry; at the beginningirect liesuppliersustomers and amounted to some SO billion rubles (outotal wholesale tradeillion rubles)Third. Kosygin calledradual transition to 'wholesale trade in the means ofderationing' This development hai not taken place, if for no other reason thanould eliminate the need for the huge supply bureaucracy Instead, "wholesale trade" is gradually being redefined to mean merely ordinary warehouse supply, plus supply via long-term contracts and sales in small wholesale stores "Cornprehensfve supply" of construction organizationsnstitutes is also expanding under Gossnabs aegis; under this system. Gossnab contracts lo supply all needed suppliesesignated schedule.

Aside from alleviating llie organizational disarray created byregional economic council iSwnarkfuis) system, the reform' in supply has beenhe construction of materialillia .iti,.Pl-d DO luv.liUized wilh0 key products being directly allocated and distributed by Cosplan and Gossnab Press reporting indicates lhat the chronicol llie supply system persist and tolkachi (expediters) abound.In supply continues lo be blamed for difficulties in mastering new technology, developing specialization, improving product quality, andsmooth work routines. Managers sldl seem to consider obtaining needed supplies to lie iheir most vexing problem ('oiitract arrangements are largely fiMniilistic and are often changed arbitrarily by the ministries Fines for violations of contracts are ineffective, for lhe most pari Duplication ol supply networks persists, along with the proclivity of ministries, associations, and enterprises to he their own suppliers through vertical integration.

esult nf complaints aired alh Fatly Congress, the Council of Ministers in6pecial commission toesolution setting forth measures tO put things right in the supply system and toreneral plan for lhe managementhis* The lOlh FYP calb for cotnpletion of the establishment of tons-term "direct ties" for all prodiiceis and consumers of standard, serially produced goods As noted earlier, new incentive rules now provide lor reduction of bonus funds and Isnnuses in the event of failure lo meet contract deliveries inrovision

13

that surely will be difficult tu enforce and will likely have little beneficial effectontinuing situation of excess demand. The project to computerize the entire Gossnab system is now Kick in the "preliminary designhift was made from an "clement by element" approachsystems*

Prices

As envisioned in the original reformv prices were toey "lever" in spurring an improvement in product quality and the production and adoption of new products and new technologyhe general price reformrought enterprise wholesale pr.ee* more or less inh costs and provided greater differentiation. Since then, the newly created price Czar (Gostsen) has been energetically engaged tn administering the priceachinery prices weTe reduced,3 (by an average ofercent; prices in light industry were raisedercentnd prices were revised for ferrous metals, petroleum, timber, reinforced concrete, some food products, and freight transportation In most cases, prices were more finely differentiated by grade and quality characteristicv In machinery, much was done (il is claimed) lo remove the positive correlation between weight and price, which had led to thr production of excessively heavy machines.evised "Metrsadology" was promulgated for setting prices on new products and new technology Tlie main changes involved providing for quality markups and discounts andarger share of startup costs in lhe initial price

Despite all this fine tuning of these transfer prices, complaints aboul then perverse afleels are epidemic, alongariety nl suggestions on how to remove them Attempts tu set "limit" pricesliding" prices seem lo have had undesired effects, and evidently ihey are not much used Complaint* about the system of quality markups are legion- they are ton small, they remain in effect for tooeriod, old products yield more profits than new or high-quality ones, and they do not encourage an enterprise to make small improvements in the quality of old products Despite the tinkering with prices, there tire still "profitable" and "unprofitable" products; enterprises naturally strive tn produce the former ,ind avoid producing lhe latter, irrespective of demand The relationship Isrtwccii price find utility remains tenuous and elusive Io measure IVspite all manner of strictures, prices for machinery are rising, both on the average and per unit ol prixfuctivitv. according tn assertions in numerous Soviet sources- Finally, the process of getting prices and designs approvedass of red tape and much delay, further hampering the effort lo upgrade product quality and introduce new technology.

I i

Finance

5 reforms' provided (or the mote extensive live of "financial levers" lo spur efficiency. This appproachhe introductionharge onelegation of some decisionmaking authority over investment toncreased self-financing of enterprise investment and related activities from profits rather than budget grants,uch more extensive use of bank credit in enterprise financeie early years of the reform, the share of decentralized investmentercent55 percentubsequently, the authorities cut back OO ibis type of investment, and its share declined steadily toercent5 This form of investment has no* been integraied wilh stale centralized investment, and evidently is no longer consideredeparaten industry, much of this type ol investment was supposed lo be financed Irom newly created enlerpiise "production developmenl funds formed mainly from enterprise profitsortion of amoriizalion deductions, lhebeing that enlerprises would tie encouraged to adopt and finance new technology and rationalization measures from their "own" funds. In practice, the fund has become lhe subject of much eonlroversy. both theoretical and practical. The methods for linancing it have been changed several times, and its expenditure has been brought completely wilhin the confines of annual plans- Like so many cases in the past, this is one more instance of decentraliza lion, followed by creeping (or galloping) recentrallzation In any event the fund is small, amounting only to aboutercent of industrial investment6

With respect lo bank credit, lhe aim was In reduce lhe role of stale budget financing of enterprise investment and working capital and raise lhe role of Ivank credits If enlerprises bad to pay interest on eiedits, now trcalcdharge against profits, llien presumably they would use their capital more efficiently Thus, credit was to he still one more of the economic "levers" designed to elicit mote efficient performance.ecade, there seems lo be general agreement that the so-called "financial-crrdit mechanism" lias been largely ineffective, and numerous proposals are laing made on how lo "improve" it The banks have greatly strengthened iheir monitoring of enterprise activities, necessitated because interest rales have been raised and differentiated 'complicated) and the banks have been enjoined to see to it lhal credits are used only for "right' purposes and to help in the process of bringing lo hghl reserve* wilhin enterprises foi increasing output, raising efficiency, or fulfilling whatever campaign is currently in vogue (for example, producing consumern fact, also tbe ioIc of bank linancing of state centralized Investment has Isccn growing very slowly; ils planned shareereercent3eicenthe share ol long-term

l*i

eredii in the financing of total Investment is planned tn1 perceMercent in6he total amount ofannually lor "new technology, expansion of production ofand similar measures" actually declineduch measures can also be financed from enterprise funds

Mc*sogflmerrt of Rtseorch ondond Imovot-on

The general economic reformpecific reform8 made numerous changes in the management of this chronic problem area in the economy. The complexity of the changes precludes anything moreummaryhe major points of emphasis follow: (I) planningas lo be carried outong-term basts, using long-range scientific and technical forecasts, was to be more carefully integrated Into general economic planning; and was to center around key complexes of0 in lhe Ninthctivities were lo be reorganized by integrating institutes working on related problems and by forming science-production associations lo tie HAD more closely lohozratchft status was to be extended in HciI) activity by establishing unified funds at lhe ministry level foi financingfforts were to be made to calculate the economic return onrojects and to set prices and geat the system of rewards to scientists to this expectedhe use of contracting arrangements forrotects was to be greatly expanded All these measures have been inlroduced into practice lo one degree or another Measures related to planning anil lo establishment of science-production associations were considered aboveh FYP. for the first time, is said lo Incorporateumber of coordinated projects, with assignments Irom research to final production speeilied iu detail'" In respect to financingork, contracting seems to have grownindirect evidence Is that lhe share of total science outlays financed by the budget item "Science" dropped fromerceni0 loercent6 Thus far. lhe extension of khtnroKctivities lias entailed (besides connecting) lhe establishment ofunds in five ministries, tn addition to Ihe Ministry of the Klectncal Equipment Industry, which pioneered the experiment Despite glowing reports ot its beneficial affects, this experiment is the subject of muchmethods of financing how to calculate the economic return on projects and embody it in Ibe financial terms of contracts, and how lo structure incentive awards to employees In summary, this massive assault on thend innovation problem is still (afterears) in the implementation stage and veiy muchtate of flux Meanwhile, the piew continues lo provide

In

evidence lhat lhe characteristic fetters on the innovation process are widely prevalent.M

Impoct of Managerial Reform*

Initially,5 economic reforms seemed to entail some measure of decentralization and greater scope for spontaneous and independent action by producers in response lo price and profit signals As Kosygin emphasized, however, the reforms were to be carried outramework of overall central planning, and the implementation of the reforms was turned overtrengthened, highly centralized stale bureaucracy The restoration of the economic ministries and the' centralization of responsibility for some key functions in newly created state committeesositive impact, eliminating the near-chaotic situation created by Khrushchev's organizational innovations The implementation of other aspects of the lefoims, however, has been characterized by considerable recentraIization nl decisionmaking authority, removal of elements of spontaneity, and increasing complexity inrules and related incentives- None of the changes has altered the nature of tbe economic system in any important respect; il remains one of directive central planning, highly centralized administration of producing units, state-fixed prices, rationing uf materials and equipment, and incentives geared lo fulfilling State plans.

The many changes in administrative and economic workingadopted over the past decade, implemented primarily in the nonagri-ciillural sectors, were aimed explicitly at solving several longstandingin the economy. First of all. they were intended lo raise growth rates of prodticlivity of lalwir and capital, which had deteriorated seriously1lthough moderate improvement iu productivity of labor and capital has been achieved in the nonagricultiual sectorsrowth rates for output continue lo decline, and productivity growth is slow compared with Soviet performance0 and with WesternProductivity giowth continued to be sluggish6. growth rates lor lalxir productivity improved somewhat. but the record for capital productivity worsened, and its growth rates continue to be negative. The contribution ol the economic reforms to the moderately better producliv-ily performance, if any, is difficult to assess Relative stability inarrangements surelyositive factor In industry, lhe reform's stress on labor pioductivlty, along with strong administrative pressure, probablyto higher growth rales for this factor (imsidering the scope of the assault of lhe productivity problem, the gains achieved seem small.

Many of the reform measures were designed I" attack chronic problems associated withrocess Research and development has been

IV

conducted wilh inordinate delays, by organization* administratively apart from the production process, and because ol tbe system of economic incentives enterprise managers have resisted innovation and new technology. Thus far. the many-faceted reforms have done little to alleviate this longstanding problem Because rewards are still tied to fulfillment of current plans for production, however measured, managers continue to try to avoid adopting new technology. Because of prevalent aberrations in pricing and incenlives--desplte the manyremain reluctant to produce newew technology frequently proves to be more cosily and less productive than the technology il replaces. Finally,cience-prod net ion associations created thus far can have had little overall impact as yet

Reorganization of tlse centralized system for rationing producer goods along with more effective use of interfirm contracts, was aimed at ridding the system of one of its most intractableinability to supply needed materials and equipment to enterprisesimely manner and in lhe desired product mix While the centralization of supply functions evidently has bad some benefits, supply seems still to be the chief problem for enterprise managers. Contractual arrangements arc proving to be difficult to enforceontinuing environment of taut planning and sellers' markets. An embryonic attempt to do away wilh lhe rationing system altogetherew products was quickly aborted, and there are no signsny intent to move in lli.ii direction. Informal arrangements among enterprises, such as the ubiquitous tolkacht (pushers) are still prevalent, along with chronic complaints about familiar malfunctions in the "reformed" state supply system

Ixiw quality, obsolete style, and poor design have long been typical of Soviet manufactured goods, particularly consumer goods. Many of the reform measures were aimed al alleviating this chronic problem When lhe new pricing arrangements and success criteria of the ungual ltM reforms failed to yield significant improvement, the authoritiesew and more complex set of rules, which were again modified to give effect toh FTP'S label, "The Plan of Kffteiency andhe new approach lo llie quality problem haslurry ol statistics showing remarkable increases in lhe output of superior quality productsumber of ministries Despite ihese claims, poor product quality continues loersistent complaint of ainsumeri and producers alike, and Soviel manufactured goods remain largely unsalable in Western markets

A key aspect of lhe reforms has been the successive revision ol lhe system of success indicators for enterprises and the determinants of managerial irwards. In their efforts to stimulate one or another desned activity and/or lo remove behavioral aberrations created by previous rules, the planners have created an incentive system id incredible complexity Inceniive funds and

18

bonuses ate affected by enterprise performance as measured by many discrete plan targets and underlying variables. In practice, there must be trade-offs among these multiple success indicators, whether formally specified or not. The excessive complexity of incentive arrangements, along with the vagaries of Soviet prices and continued pressure on enterprises to march forward simultaneously on all fronts, severely reduces the efficacy of pecuniary incentives to elicit desired behavior. This factor surelyajor reason for the disappointing results obtained thus far from the many-faceted attacks on the USSR's chronic problems related to efficient use of its economic resources.

All of tliese perennial efficiency-related problems are also being attacked anew via the latest "reform byhe merger o( enterprises into various types of large associations. This program is stilltale of flux, and its impact is difficult lo assess. On lhe one hand, the press reports sizable gains in output and productivity achieved by individual associations,with the average for their industries; on tlie other lutnd, there is much evidence that the whole program is being implemented formalistieally andnail's pace, due lo bureaucratic inertia and resistance Many of the changes seem lo amount, once again, merely to "changing labels onnitially, at least, this latest reorganization probably is creating considerable confusion and uncertainty and putting severe strains on lhe USSR's scarce supply of skilled, managerial talent.

In sum, the beneficial results of the multiple tinkerings withorganisation and management over the past decade have been minimal al best. Predictably, the Party has responded by Stepping up pressure for "discipline" of all kinds, emphasizing "moral" incentives rather than material incenlives, launching Party-directed campaignsccomplish one or another objective (producing more consumer goods, savingtressing Socialist competition and emulation of "progressive" experience, and. finally,its own role in the day-to-day conduct ul economic affairs

Pros peels

Despite the revival of some discussion of economic icform in the Party presshe likelihood of radical changes iu the established system of economic organization and management is remote at piesent In respect to organization, discussions are taking place on the desirability of creating supraininistries of some kind to manage groups of related activities. N'o concrete steps have yet been taken in this direction, and the whole idea is likely to encounter strong bureaucratic opposition The scheme is reminiscent of Khrushchev's piling up of coordinating bodies and. even if implemented, is likely to do more harm than good

19

The leadership seems fully committed to pushing the merger ofunits into ever-larger entities. In the industrial sector, this movement is in full swing and is scheduled to be completedt is unlikely that large gains in efficiency will come from this source. The initiative andof individual producing units will be severely restricted in favor of greater power for the production associations. What is more important, it seems clear that the associations and their components will be operating withm an essentially unchanged economic environment. Hence, their behavior is likely to resemble that of iheir predecessor independent enterprises. Moreover, the associations are likely to receive detailed and tight supervision from the industrial associations, as well as the ministries, which are ultimatelyfor the performance of their sectors and whose powers are actually being strengthened. The ministries are the organizations that administer the system of rewards and penalties for the associations. In agriculture, the giant collective and state farms, which arc coming to resemble one another more and more, will remain the basic form of organisation Sizable extension of the private sector in agriculture and services does not seem likely, even though present policy shows more tolerance toward this activity.

No fundamental reform of economic incentives is currently under active discussion. Ath Party Congress. Brezhnev stressed the importance ol rewarding enterprises and workers for "final" Inet) results, rather than gioss output, and experiments lo lest such measures are continuing. Although further modifications of success criteria are likely, the benefits will be inconsequential, as long as incentives remain tied to fulfilling plans for whatever target or targets. The culling of this Gordian knot is not being seriously advocated, at least in the open press Because rewards are linked directly to fulfilling plan targets, variously delined, the relationships among units in the entire chain of suppliers, shippcis. manufacturers, and distributors are administrative, rather than economic, in nature. The behavior of each unit is oriented loward meeting its own particular plan targets, rather than satisfying its clients. This perverse effect of incentives is reinforced by the fact thai each link also is aware that its clients lack alternative suppliers, shippers, oris no competition

In lhe Directives for the lOlli FYP. the present conservative leadership has opted for conlinuance of the status quo. Although experimentation vvilfi organizational forms and incentive schemes is continuing, ihey do not entail any cwscnti.il modification of the traditional syslem Since the Soviet Union's persistent difficulties with efficiency, technical progress, and product quality are rooted in the nature of the bureau-administered economic system itself, tliese problems are likely to persist and to defy solution through modification of organizational forms and administrative rules These cluonic difficulties will be reflectedontinuing sluggish growth of productivity.

In the long run, radical economic reforms involving the introduction of market arrangements in some form might help alleviate these chrome problems and raise the rate of productivity growth To be effective, such reforms would have lo include abolition of directive plans for enterprises, replacing the rationing of most producer goods with markets, freeing most prices, and introduction of profit-based incentives Transition tomarket socialism" would surely cause serious economic disruptions in the short run, including inflation and unemployment. Moreover,ove would disturb established balances in both political and economicould be strongly opposed by the state bureaucracy, where jobs, careers, and political influence would be at stake, as well as by the Party bureaucracy, whose control over economic decisionmaking and resource allocation would lie threatened. Faced with uncertain long-run benefits, probahle high short-run costs, and certain strongoviet leadership of any foreseeable composition would probably opt against taking such risks. The political leadership probably would consideradical move, only i) lacedevere economic crisis, such as stagnating or declining production or serious popular unrest As long as present organizational arrangements continue to yield modest, even if declining, rates of growth, the leadership will probably prefer lo put up with the familiar deficiencies of the systems, rather than lo launch major changes with unknown payoffs and known political risks

Appendix SOURCE REFERENCES

This paper updates the most recent, comprehensive survey ofin Soviel economic organization and management, which is to be found in Gertrude E. Schroeder. "Recentoviet Planning andn Joint Economic Committee, Soviet Economic Prospects for the Setvnttes, Washington,.

Voprosy ekonomiki..

3 Pianovoye khozyayslvo. No..

Vesinik statistikt. No.. 10

For example:

Phnovoye khozyaystco. No.. Proton,06

Planovoyoe khozyaystvo, No.; No.; No.. No.. No..

6 Plarwvoye khozyaystvo. No.I

0.

Vestnik statistics. No.

ianovoye khozyauslvo. No

Pianovoye khozyayStvO. No.4

The following are typical of recent reporting:

rganizaisiya promyshlennogo proizvodstna, No. 4

o.

Pravda.428 Mav

7

Voprosy ekonomiki.G.; No.. Khimicheskaya promiphleniwst, No

Ekonomhheskaya gazeta.. p. H:zvesUya,

Finrirwj, SSSR. No.i No.; No 2.

. Planovoye khozyaystvo. No.

For evidence lor earlier years seeorlin, "Industrial Reorganization: then Joint Economic Committee, Soviet Economyew Perspective,.

arodnoye khozyaystm2. Vesfnut statistiki. No.

awdnoye kliozyaystvo5

Ekonomicheskaua gazeta,obraniije postanooknniy praoitel'stta soyuza sooeiskikh sotsialisti-cheskikh rcspublik, No.p

SotStaltSticheskaya7

ekonomiki. No. Planovaye khozyaystvo. No. 26

7

Voprosy ekonomiki.o.

Ekonomicheskaya gazeta..

Ekonomicheskaya gazeta.insert).

Praam,

Praulu.or later amendment. >ecgazt:la.6

achestvo, No. 4.

Izvettiya.

A good recent description of the measures lor stimulating the production of better quality goods is given inredit. No.56

Kommunist Sovetskoy Utoii..

24

1

Ibid

Ibid

31 Planowye khozyaystvo. No.6

ejcrativnty zhurnal, setiya ekonomika, No.kononitclu-skaya gazeta. No.5

Sotslalltticheskaua induslriya,6

Narodnaye khozyaystvo SSSR za

Ibid.

The following arc typical of recent reporting on these computer net works:

rganizatstya promyshlennogo proizvodttii. No6

Wonowve khotyaxjstoo. No; No. No. Noo. Nc,

Vooroiy ekonomiki. No. No

Vrstnlk statntlki. No; No.. Ekonomlchrikaya gazeta.o

8-

11 Thr following are typical nf recent press reporting on computrr-related piobleins:

Ekonomicheskaya gazeta. No.

IS.

94

rxunisotslua promyshlennogo pwiscoditoa. No 2.

; No.

Ittmttya.84

Voprosy IJIIIIUIIliU. No; No

Trud.6

Prattla tastoka.6

Sr-lnalntliheikaya5

Planotoye khoiyaysltv. No.p3

42 Plantimyr khozyaystvo. No7

o.. 48

zvestiya.

V. S. Kurotchenko, Material'no-tekhntcheskoueo-vykh usloviyakh

Ekonomicheskaya gazeta.0

etailed description anden la lion of lhe relorms in supply and their results sec Gertrude P. Schroeder. "The 'Heform' of the Supply System In Sovietoviet Studies,

Izcestiya,6

Material no-tekhnlcheskoye snabzheniye. No.

price reform and its consequences arc discussed anddetail in Gertrude E. Schroeder.tudy inower Studies.nd Morris flornstein, "Soviet Price Policy inin Joint Economic Committee, Soviet Economy in aWashington.

This discussion concerns only wholesale prices. Changes in these prices, as well as in agricultural procurement prices, were ellected without changing the relevant retail pricesonsequence, subsidies financed from state budget funds have mounted rapidly. Those on meat and milk products alone are scheduled toillion rubles. Planor.oyr khoiym&lvO. No.. 17

Pinattsv SSSR,nlike previous handboolts. Sa/odnoye khozyayslw SSSR u:etot rcporl dala for <eritr,ilized investment.

manaiy SSSR,

a more complete discussion ol these letrums. sec JosephTTie rnnoiwrion Decision in Sovietnd Uuvan E. Nolling. Theof Scientific Research, Des^lopmeiH and Innovation inUS Department of Commerce. Bureau of EconomicEconomic Report

evestiya,6

26

he following sources are typical of recent reporting:

Kommunist. No. Veprair ekonomiki. No.

ProooV66

Ekonomicheskaya nazeta..;

/.iferaturnaua Rateta,301

Original document.

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