THE LIBERMAN PROPOSAL FOR MANAGING SOVIET INDUSTRY (RR CB 62-67)

Created: 11/6/1962

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LIBER MAN PROPOSAL FOR MANAGING SOVIET INDUSTRY

CENTRAL INTELl.ICKNCK AGENCY Office of Research and Reports

THE LIBERMAN PROPOSAL FOR MANAGING SOVIET INDUSTRY

A proposalevision of the present Soviet system forindustrial enterprisesecently has been receiving widespread attention in tha Soviet press. This proposal, originated in1 by an obscure Soviet economist, Ye.G. Liberman of the Economic-Engineering Institute at Khar'kov. seeks to simplify planning andand to eliminate tbe conflict of interest between the individual enterprise and the central planners. Zl To accomplish these objectives. Liberman proposes that detailed central regulation of individualenterprises be reduced and that central control be exercised by imposing oningle success criterion n which all bonus awards would be based. To provide sufficientfor enterprises to maximize profitability, which ts defined as total profits divided by total (fixed plus working) capital, the size of bonuses would be increased, and bonuses would be determined in proportion to profitability, depending on the size of the enterprise.

Under the Liberman proposal, major production targets wouldto be determined centrally. Although the assortment of goods and delivery schedules would still be determined centrally, directbetween suppliers and consumers apparently would become more significant. Tho meeting of these threo obligations would continue torerequisite for the receipt of any bonus award. Other targets cost reduction, investment, labor productivity, introduction of newand consumption norms for material inputsould be determined by the individual enterprises. Liberman contends that under the single incentive to maximize profitability, enterprises would improve on their present performance in respect lo these targets and that,the present detailed central control would he unnecessary.

Liberman recognizes that present industrial prices must be modi-lied in order lo avoid discouraging enterprises from producing some

products simply because errors in price setting by the central planners make their production unprofitable. He suggests that prices be raised in such instances or that bonus schedules be adjusted in the absence of price changes* He does not envisage, however, that changes in prices will be used by the central plannersajor means for influencing what is produced in industry nor of reallocating resources amongand he in no way is suggesting that individual enterprises be given increased control over tho prices of their products.

Innovations of the Proposal

The Liberman proposal contains four novel features. First, ihe proposal would permit enterprises to plan many of their own targets, thus reducing the inefficient "petty tutelage'1 over individual enterprises now exercised by the central planners. Under the proposal the role of thc central planners would be to determine thc production, assortment, and delivery targets for each enterprise, to determine "large-scale" investment, to coordinate detailed plans initiated by individualand to revise prices periodically lo avoid discouragingof products needed in the economy.

Second, the proposal implicitlyeturn on invested capital by linking bonuses to profitsercent of capital of the This feature, which would encourage enterprises to make more intensive use of their plant and equipment and to minimize their holdings of stocks of new materials and semifinished goods, has not been thcof much discussion in the literature but. to judge from its favorable reception,ecognticd need. Without this feature the new sue* cess indicator in principle would be very similar to the present costcriterion that is now used in some industries.

Third, the proposal would base awards on the excellence ofperformance both in relation to its own past performance and to the performance of other enterprises. The present principle ofbonuses on the basis of fulfillment or overfulfilment of plannedhas been criticised frequently hucausc it rewards enterprises lor making improvements over Lhcir past performance but takes no account

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of Iheir levels of performance in relation lo other similar enterprises. Under the proposal, enterprises would receive bonus awards based on the levels of profitability which they maintain as well as onwhich they may make in these levels.

Fourth, the proposal would reduce the incentive for enterprises to "underplan." Under the present system, which rewards overfulfilment heavily and penalizes underfulf iliment of targets, it is to the interest of the enterprise to obtain asarget as possible. Recognizing this tendency, the central planners endeavor lo force targets as high aswith the result that the final levels set for each target arenegotiated compromises rather than feasible maximums. The Liberman proposal seeks to eliminate this conflict of interest between the enterprise and the central planners. Under the proposal the bonus award for the attainmentiven level of profitability is greater if it results in fulfillment or slight underfulfillmentigh profitability plan than if it results in overfulfilmentower profitability plan. Although Liberman contends that enterprises would no longer seek low production targets under his proposal, it is likely that enterprises might still strive for low production targets because no profitability bonus would be paid unless the production target* were met.

Prospects for Adoption

Prospects appear poor for early adoption of the proposal, at fcasl in the form proposed by Liberman. Comments on the proposal by high-level Soviel economists have ranged from wholehearted support by. Nemchinovo sweeping denunciation by former Minister of. ZveTov. 4/ The bulk of the comment, how--cver. is typified by that of the editors of the Ekonomit heskaya gazcta (Economicrgan of the Central Committee of the Communist Party,ho display considerable skepticism towardingle, universal criterion of success and recommend that the proposal be subjected to careful testing.

The principle of using profitabilityuccess indicator and the method of relating bonus awards to profitability, however, have

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themselves received relatively little public criticism and eventually may be adopted in some industries either in conjunction with other success indicators or possibly alone. Public criticism has centered on Ihc use of profitability as the sole criterion for all industries and on theby the central planners in the amount of detailed regulation of the performance of individual enterprises. Although many of the critics also are opposed to "petty tutelage" over the activity of individualthey are skeptical that the use of the profitability criterion alone will insure satisfactory performance in all enterprises on such targets as volume of production or increased labor productivity.

In view of the cautious reaction to the proposal by most critics, it appears doubtful that tbe principal parts of the proposal will be seriously considered far adoption until after additional discussion and considerable testing. Liberman has announced that the proposal is to be tested soonumber of enterprises in Khar'kov and elsewhere. 6/ Becauseoperation of the revision may depend in partodification of present pricesequirement that cannot be simulated readily under conditions of limited testing the significance of the outcome of these tests is in doubt.

FJvaluaiion

The Liberman proposal appears to bear little resemblance tosocialism" as envisaged by the Polish economist Oskar Lange or as practiced in Yugoslavia. If adopted in its present form, ils incentive features should result in some improvement in efficiency in industry, the extent depending on the degree of decentralization of decision-making actually put into practice and on the degree of incentive provided byrticular bonus schedules used. Tbe precise effects of the proposal, however, cannot be evaluated at present because of its vagueness on these two points and on other critical points (such as pricing policy) and because of uncertainty as to the ultimate form in which il may be adopted

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