Planning in Theory and Practice

1
Planning in Theory and Practice

• Igor Lukashin
• ECN 365 / IBS 394 lecture

2
Organizational Hierarchy

• Communist Party
• Gosplan
• Ministries
• Trusts
• Enterprises
• Principal-agent problem

3
The Communist Party

• General direction control figures, major
  investment projects, general economic policies
• Development of Planning and Finance Organs
  (Central Committee), Branches
• Regional and local party organs Obkoms, Gorkoms,
  Raikoms
• Responsibility in local economy Nomenklatura
• Primary Party Organizations (PPO)

4
State Bureaucracy

• Council of Ministers Republics mimic
  organizational structure
• Gosbank
• Gosplan
• Gossnab, Gosstroi, GosTsen, Minfin, TsSU

5
Ministries, Industrial Associations, Enterprises

• Branch system of ministries information
  providers, resource allocationfund-holders
• Divided into Glavki main administrations
• All-union, union-republic, republic
• Planning on sectoral basis (regional?)
• Basic Production Units
• Predpriiatiie (enterprise)
• kolkhoz
• sovkhoz

6
Planning Theory vs Soviet Practice

• Plan Theory maximization under constraints
• knowledge about economys capacity (production
  technology, resource constraints) gtset of output
  targets gt optimality
• Practice Aggregate Planning
• Ministries gt Gosplan (info)
• Gosplan gt ministriesgtenterprises (control
  figures)
• Input-output analysis (Table 6.1, 6.2, class)

7
Soviet Material Balances

• Limited to relatively small number of commodities
• Simplifying assumptions about technology (linear)
• Gradual revision of plan from year to year
• Results suboptimal but feasible
• 70 volumes, 12,000 pages, 33,000 commodities

8
Soviet Balancing Procedure (Simplified)

• Party establishes targets (for growth)
• Gosplan gets targets, plan fulfillment figures,
  develops preliminary targets for 300 commodities
• ministries are informed help develop full set of
  control figures gt bargaining
• Ministries disseminate plans to enterprises,
  prepare tentative input requirements by each
  enterprise

9
Soviet Balancing Procedure (Continued)

• Feedback to Gosplan defend higher resource
  requests
• Completion of bargaining process Consistency
  check. Cut demand in low priority sectors to
  achieve balance
• Balance gt targets to enterprises (final)

10
Capacity Creation Investment

• Critical Element of Development
• No market signals gt planned
• Budget financing
• Overcommitment delay of fnds

11
Investment Choice

• No interest rate gt no discount factors
• Industrial prices arbitrarily set gt difficult to
  evaluate investment projects
• Interest - not a legitimate cost. Covers only
  expenses of providing credit gt inefficient
  end-usage
• Investment rules cost-savings Book

12
Money and Credit

• Store of Value, unit of account, medium of
  exchange
• Soviet money neutral in economic activity. Why?
• Financial plan deviations as a signal of material
  plan deviations

13
Banking the Credit System

• Market Credit Balances through interest
• Command required, planned AD AS
• Gosbank State Bank
• No commercial paper, open market ops
• Short-term loans for working capital
• Oversees plan fulfillment
• Monitors payments to the populationWhy, how
• Creates money
• Gives credit for specific purposes

14
The Money Supply

• Narrow MS cash currency outside BS
• Gosbank money creation
• Authorize to pay wages w/insufficient funds
• Budget deficit
• Supply controlled, MD- population determined
• Monetary overhang more money than nominal value
  of goods available -What about market economy??

15
Consumer Goods Balance HH

• Need to balance income flow and output of
  consumer goods and services
• PQ WL O - T - R
• AS AD
• Compatibility of consumer goods output with price
  levels and wage bills
• 2 sectors gt D gt S

16
The State Budget

• Consolidated
• GNP through budget 10-30 US, 45 SU
• budget investment, communal consumption is a
  larger share
• Source of funds Tax collected (from?) Table 6.3
• Balanced? 2-8 GNP deficit

17
National Planning Workable?

• Technical Limitations (bounded rationality)
• inadequate information simplification
• Agency Problems Incentive compatibility issues
• Inflexibility of plan How else to perform
  economic activity. Think

18
The soviet Enterprise

• Director Pro staff
• Edinonachalie one-person management
• Plans gt Director
• Director gt rest of enterprise

19
Enterprise Asymmetric Info

• Plan Set of Targets Rewards for fulfillment
• Self-interest u-max by management
• Bounded rationality
• Limited ability to access info
• Agency problems Information asymmetries
• AgentDirector Principal ministry
• Opportunistic behavior by agent

20
Addressing Asymmetric Information

• Reducing Span of control
• Improving nature and availability of information
  computerization
• Adjustment of incentive arrangement Limited?

21
Planning and the director

• Long-term plan, variety of targets
  (annual/quarterly)
• Production value, assortment, delivery
• based on estimate of plants capacity, resource
  utilization
• Plan - general gt managers translate into day to
  day tasks
• Bargaining for input/output targets
• Target compatibility (perfect plan?)

22
Planning Director

• Prioritizing which to sacrifice
• West Profit-max Any agency problems
• SU Gross output

23
Success Indicator Problem

• Gross output plan in physical or value?
• Weight waste of material inputs
• size single large size
• Plan targets based on self-provided info
• bonuses fulfillment of plan
• Ratchet effect (upard plan adjustment)
• concealing info, producing below capacity

24
Managerial Rewards

• Formal Informal Info gt set of priorities
• Time horizon short-term achievement
• No tax considerations (why?)
• Achievement of well-defined objectives
• Non-monetary incentives
• removal
• dacha, car, privileged healthcare, etc.