THE SOVIET CENTRALLY PLANNED ECONOMY

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THE SOVIET CENTRALLY PLANNED ECONOMY
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Preview

• Economic organization
• state sector
• cooperative sector
• private sector
• Planning
• output and supply
• investment
• finance
• foreign trade
• evaluation of planning process

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• Price system
• Enterprise management
• the enterprise plan
• incentive effects
• Labor
• the market for labor
• wages
• non-wage income

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The State Sector

• The state owned all natural resources
• land
• timber
• minerals

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• The state controlled virtually all major
  non-agricultural production
• industry
• construction
• transportation
• communication
• health
• education

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• The state share was smaller but still large in
• retail trade
• about 70
• agriculture
• about 50
• housing
• about 75 urban, 25 rural

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Organizational Chart of State Sector
Regarded as the upper house, the chairman
performs the function of head of state
Praesidium
All levels of government shadowed by the
Communist Party headed by the Central Committee
Council of Ministers
Planning (Gosplan), Material Technical Supply
(Gossnab), Construction (Gosstroi), State
Security (KGB), State Bank (Gosbank), etc.
State Committees
Ministries
Over 50 Union (high priority) ministries and
numerous Republic ministries
Departments
Groupings of enterprises by output or
geographical location
41,000 industrial 27,000 construction 22,000
state farms
Enterprises
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Cooperative Sector

• Collective farms and consumer cooperatives
• Formal ownership by members, but actual control
  by state
• a farms output planned by state
• output required to be sent to state
• prices set by state
• inputs set by state
• workers wages set by state
• Management formally elected by worker-members
  but, in fact, determined by Communist Party and
  government officials

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Private Sector

• Individual could own
• consumer goods
• a house
• livestock
• tools and small farm equipment
• a car
• savings account at the State Bank
• government lottery bonds
• currency

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• Primary productive activity was the private plot
• 1/2 to 3 acres
• produced outputs that could be produced with
  household labor and little capital
• 1/3 of milk and meat consumed in Soviet Union
• 2/3 of potatoes
• 40 of fruit and vegetables
• part consumed by household
• rest sold to state at prices set by state

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• About a fifth of new housing construction private
• materials purchased from state
• labor provided by household
• friends
• moonlighting construction workers
• Moonlighting permitted for
• doctors
• artists and craftsmen
• construction workers

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• Employment of a person by another prohibited
• Any purchase with intent to resell at profit
  prohibited
• Lending at interest prohibited
• Renting apartment from another individual
  prohibited
• Renting a car from another individual prohibited

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Planning

• Council of Ministers and Communist Party
  leadership set broad objectives and approves
  final plan
• Actual tasks of planning conducted by several
  specialized planning agencies
• State Planning Committee (Gosplan) in charge of
  overall coordination and planning of outputs and
  investment
• State Bank in charge of planning and monitoring
  financial flows

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Annual Planning Timetable

• Spring -- Directives
• Council of Ministers and Communist Party set
  aggregate growth targets
• Targets reflect
• goals of current five-year plan
• Gosplans assessment of feasibility
• Directives (tentative plan assignments at highly
  aggregated level) sent to each ministry

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For Example, in April 1985 the plenary meeting of
the CPSU central committee determined that It
is planned to increase the national income used
for consumption and accumulation by 19-22
percent. Ensure that the entire increase in the
national income is reached by enhancing social
labor productivity. Reduce its inputs of
materials by 4-5 percent, power by 7-9 percent
and metals by 13-15 percent.
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• Summer -- Input claims and bargaining
• each ministry makes up separate tentative output
  assignments for each of its departments
• each department makes tentative output assignment
  for each of its enterprises
• each enterprise then requests inputs from its
  department
• each department aggregates input claims and
  requests total from ministry
• each ministry makes its requests from Gosplan
• intense bargaining at each step as lower level
  attempts to bargain with higher level for easier
  output and input assignments

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• Fall -- Balancing
• Gosplan and other planning agencies balance
  revised aggregate assignments into a consistent
  national plan
• Here they use the material balance method and
  input-output analysis, by solving a system of
  simultaneous equations!!! (recall Lange)
• November and December -- Approval
• Plan submitted to Council of Ministers in
  November and ratified by Supreme Soviet in
  December

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• December -- Disaggregation
• Gosplan sends each ministry its plan
• each ministry sends each department its plan
• each department sends each enterprise its plan
• process often bled into January
• After plan approval, State Committee for Material
  and Technical Supply (Gossnab) matches up
  supplying and customer enterprises

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Material Balances

• Major objective to achieve consistency between
  planned supplies and planned uses of each
  commodity
• Thousands of material balances constructed
• each expressed in physical units
• Balance identifies planned sources and uses
  during the period

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For Example , the material balance for steel
(millions of metric tons)
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Investment

• Gosplan and political leadership decide
• investments share of national product
• distribution of total investment by
• industry
• region
• design of investment projects based on cost
  minimization
• true economic costs not minimized because prices
  do not reflect scarcity

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Finance

• No checking accounts
• No credit cards
• Currency used between individuals
• Currency used between enterprises and individuals
• wage payments
• Credit/debit entries at State Bank used for
  transactions between enterprises

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• State Bank responsible for planning enough (but
  not too much) currency for intended transactions
• State Bank serves as control agency since all
  deposits must be at State Bank and all
  transactions between enterprises must be through
  State Bank accounts
• Hard for enterprises to hide transactions

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Foreign Trade

• Planning by Gosplan
• Actual import and export operations carried out
  by more than 60 foreign trade organizations (FTO)
• FTO acts as intermediary
• no direct interaction by a Soviet enterprise and
  a foreign entity

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Evaluation of Planning Process

• Ideal plan would have to be
• consistent
• achieves balance between sources and uses of all
  resources and commodities
• castings from the steel industry to be used in
  the production of machinery must be same in steel
  plan (where it appears as a use) as in machinery
  plan (where it appears as a source)
• feasible
• both consistent and possible
• resources and technologies actually exist to do
  what the plan requires

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• efficient
• must be feasible
• plan efficient if planners cannot reallocate
  resources so as to increase one output without
  having to reduce others (Pareto Optimality in
  production)
• infinite number of efficient plans
• optimal
• the one efficient plan most desirable from
  planners perspective

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• Actual planning process so cumbersome consistency
  never achieved for overall plan
• Those parts that were consistent often turned out
  to be infeasible
• Inconsistent and infeasible plans cannot be
  efficient
• Even if efficiency could be achieved there would
  be no way to try out different efficient plans to
  choose the most desirable

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The Role of Prices

• Measure of value
• aggregation and comparison of outputs
• calculation of revenues
• input costs
• national product
• Played role in distribution of income
• workers paid money wages
• money bonuses
• households spend their incomes on goods and
  services

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• Prices affect allocation in private sector
• Prices affect enterprise behavior
• enterprises supposed to minimize money costs and
  maximize revenue within constraints of plan
• Prices within state and cooperative sectors set
  by state
• reflect political/ideological concerns
• do not reflect supply and demand, relative
  scarcities

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Three Major Types of Prices

• Wholesale industrial price.
• The prices at which firms sold goods to each
  other.
• Planners use this these prices to balance
  intersectoral output.
• Agricultural Prices
• Agricultural procurement prices were set to
  establish the
• terms of trade for the peasants on the collective
  farms.
• Retail Prices
• Prices charged in the state owned retail stores
  and consumer
• Cooperatives.

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Enterprise Management

• Formal organization
• director
• executives in charge of material supply, labor,
  production, accounting, etc.
• superintendents of production units
• foremen
• Communist Party
• head of Communist Party group in enterprise plays
  an important decision making role
• Trade union
• head of unit shares management responsibilities
• eliciting worker discipline, etc.

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The Enterprise Plan

• Soviets referred to an enterprise as being
  economically accountable
• legal entity with own fixed capital and funds
  provided by budget grants
• own account at State Bank and right to borrow
  additional funds from the Bank
• expected to enter into contracts with suppliers
  and customers in accordance with plan
• expected to earn a profit, most of which was
  handed over to Ministry of Finance

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• Enterprise received detailed plan specifying
• quantities of outputs by type and the
  corresponding value of sales at the centrally
  determined wholesale prices
• the assortment
• amounts of materials, components, fuels,
  allocated for which it pays at the industrial
  wholesale prices
• authorized number of workers, distributed by
  major categories, total wage fund, and
  productivity (output per worker)
• profit
• amount of capital investment in construction and
  equipment

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• These plans were very demanding
• It was often impossible to achieve production and
  investment assignments with the resources
  allocated
• Resources allocated often turned out to be
  unavailable

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Managerial Incentives

• Material
• high salary
• prospect of large bonus
• prospect of promotion for good performance
• higher salary and bonuses
• prospect of demotion for poor performance
• lower salary and bonuses
• Non-material
• power
• status
• recognition

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Managers Responses to Incentives

• Full rewards depended on plan fulfillment
• Managers bargained with superiors
• understated enterprise potential
• complained of breakdowns and long repair times
• Tried to stash concealed inventories of outputs
  and inputs
• i.e., hoarding , maintaining concealed reserves
  (Compare to the capitalist economy, a
  profit-maximizing entrepreneur will tend to hire
  workers up to wMPL)

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• Resisted specialization, especially at later
  stages of production
• the more specialized, the more dependant on
  suppliers who are likely not to be able to
  deliver
• Resisted innovation
• innovation introduced uncertainty
• loss of production during installation and
  training
• required more specialized labor which was often
  hard to get
• Resulted in huge, unspecialized enterprises using
  outdated technology
• an unfortunate legacy for transition

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• Used expeditors
• greatest problem was material supply
• expeditors were workers who had connections at
  other enterprises and could barter for needed
  supplies
• black market
• a form of horizontal communication
• illegal but usually tolerated as long as it
  wasnt too obvious

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• Engaged in forms of simulation
• substitution of inputs when unable to get certain
  inputs
• e.g., using a thinner grade of sheet metal than
  that specified in plan
• substitution of outputs when unable to get
  adequate supplies of inputs
• e.g., shirt factory producing more small sizes
  and fewer large sizes to save on cloth
• false reporting
• claiming better results than were achieved
• monitoring by State Bank made it hard to get away
  with simulation
• tends to make subsequent plans harder
• ratchet effect on future plans

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• Approaching deadlines caused
• storming
• last minute spurt of activity as period nears end
• lethargy
• when obvious that targets wont be met

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Labor Market

• All able-bodied adults expected to work full time
  unless they were
• full-time students
• in prison
• Free to find own jobs unless
• drafted in military
• on assignment in return for advanced training
  opportunities

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• Planners had variety of ways to channel workers
  into planned jobs
• system of differential wages
• control of occupational training
• placement services
• residence permits
• control of housing availability
• very short supply
• much of housing stock assigned to enterprises
• a major problem for transition

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• Labor market was subject to some frictional
  unemployment
• unemployment as workers look for jobs
• There was evidence of some structural
  unemployment
• mismatch between skills and employment
  opportunities
• tended to be a greater problem with wives seeking
  jobs in light industry and service sectors in
  areas where most jobs were in mining or heavy
  industry
• No cyclical unemployment

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Wage Structure

• Wages determined by several factors
• occupation
• e.g., engineers wages were double that of retail
  clerks, on average
• skill
• top grade in occupation earns double lowest grade
• compensating differential for difficult
  conditions
• priority of industry
• workers in steel industry earned more than
  workers in retail trade
• Managers competed for workers by manipulating
  scales

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Non-Wage Incomes

• Interest from savings account
• Second economy income
• private plot
• moonlighting
• Transfers
• Publicly provided free goods
• education
• health care

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Transfers

• Major transfer was the pension
• retirement for men at 60 after at least 25 years
  work
• retirement for women at 55 after at least 20
  years work
• Other transfers
• paid maternity leaves
• survivor benefits upon death of spouse
• sick leaves
• child allowances
• income supplements for the poor