2 I. History The Bolshevik revolution 1917. The Bolshevik revolution in 1917 brought the end of the preceding czarist era. In October 1917 Lenin led the Bolshevik to power. Initially the Bolshevik control was largely limited to the capital (St Petersburg) w/ most of the country in dispute. Reunification of the country took 3 years of civil war. Russian econ development in 1917 was at a relatively low level (per capita GDP).2 econ experiments were conducted in the decade following the revolution:War communism ( )to promote recovery from the Russian civil war , implemented by Leninintroduction of state ownership thru massive nationalization,an attempt to eliminate mkt relationships in industry and trade,and the force requisitioning of agri products from the peasants;the econ consequences were a disaster, the economy was in ruinTo instill econ recovery Lenin introduced the New Econ Policy (NEP) in 1921 to return to private ownershipsmall enterprises were reprivatized,some were restituted to former owners,reintroduction of the mkt for resource allocationcontrol of food production was returned to the peasant & mkt relations were reinstituted to regulate the flow of food to the cities,the implementation of tax on agri instead of requision.By 1927, the Soviet economy was recovered from the losses of civil war and war communism. In effect NEP was a form of mkt socialism, w/ combination of state ownership of industry and mkt allocation. NEP was not a planned economy
3 2. At the end of 1920’s Stalinsystem of central planning based on compulsory state & party directives were established (industrial prod. away from consumer goods toward prod goods). Rapid industrialization depend on the availability of agri surpluses to the industrial sector to provide investmentsagriculture were collectivized (a collective farms-kolkhoz were created)Resultsincrease the sate control & to eliminate the rich peasants, kulaks.Individual land holdings were confiscated & the peasants forced into communities.The kulaks were dispossessed, but rather than becoming a part of communes they were internally deported, usually to Siberia. Many kulaks not just lost their livelihoods but also their lives (deaths were in millions)totalitarian system of political governance (Communist party)The ES that Stalin put in place in the early 1930’s was radically different from any prior system.Stalin increased his power over the planning process & extended control into every aspect of economy, centralized price determination, emphasis on heavy industrial growth.During the WWII, the SU lost b/w 20-15% of its population to military action, starvation or exile to the gulag (Soviet corrective labor camps—political prisoners and criminal were sent, 1936—5 million prisoners).Despite the heavy losses, postwar recovery was rapid, the prod exceeded their 1940 levels. Agri was the most difficult area due to the low priority assigned in the planning process, but also b/c of the lack of incentives on the collective farms. Lack of attention & investments led to generally depressed conditions in rural sector. Industry on the other hand enjoyed a high priority in the investment continued a strong performance. (Stalin died in 1953).
4 3. 1985-Gorbachev became secretary general of CPSU. After Stalin, Nikita Khrushchev became the leader.He attempted fundamental change in political and econ life:he drew attention to Stalinist abuse of human rights, put more emphasis on incentives—management was allowed to retain a large slice of difference b/w value of sales and the cost of material (profit) to use to provide material incentives for themselves and their workers; in agri—he put more investments.After a trip to Iowa in 1956 he became a huge enthusiast of corn and decided to introduce it to his country, most of which has an unsuitable climate.After Khrushchev, Brezhnev, Andropov, Chernenko, GorbachovGorbachev became secretary general of CPSU.Many citizens of SU had big hopes Gorbachev wanted to carry out many political and social reforms. Two Russian words were used in the international linguistic usage: glasnost and perestroika, It was divided up into 3 main points:Uskorenie: accelerationGlasnost: opennessDemoktatizatsiia- democracyGorbachev wanted to create a more open society. There should be the right of freedom of the press and everyone was allowed to have an own opinion. The people should have the chance to make a few political decisions and they should understand the economy much better. Gorbachev didn’t want to do away the communist system but he wanted to renew it or save it from a breakdown. First he started with reform of the central planning, gave more freedom and incentives to enterprise managers, the law on state enterprises which tried to put firms on a corporatized and accountable basis. Firms to have self-management and self –finance. Despite the reforms the productivity fell, econ crisis became more intense, shortage of basic consumer goods contributed to the popular discontent with the reform effort.
5 Territory-8.6 mil square miles; Population-290mil; SU-15 republics; II. The SettingTerritory-8.6 mil square miles;Population-290mil;SU-15 republics;Different natural environmentrich resource base, major producer of fish and forest products, minerals; was the world’s largest producer of petroleum, coal and iron ore.
7 III. The Soviet Economy: Political and Economic Institutions Organization of the Communist PartyGeneral Secretary is the most powerful person in societyPolitburo is the most powerful political group of the Communist Party, controlling domestic and foreign policy and appointments to top positions; drafted government policy.Secretariat was responsible for the central administration of the party; directed work of Central Committee departments, which controlled appointments to other high-level positions.Central Committee —about 300 members from national and regional agencies. Conducted the day-to-day business of the Party and the government. Elected Politburo and Secretariat, controlled press organizations, provided forum for communication and debate.Party Congress —supposed supreme body of the Party, provided media event to "elect" new Central Committee and announce policies.
8 The Legislature The Administration Supreme Soviet was "rubber stamp" legislature until 1989The highest legislative body of the SU (elected)Presidium of the Supreme Soviet (smaller and more powerful)Chairman of the Presidium, or President, was ceremonial head of state.The AdministrationPremier (chairman of the Council of Ministers) had direct responsibility for management of the economyThe most important decisions were passed jointly with the Politburo.Some Soviet leaders held Premier and General Secretary positions.Council of Ministers —supreme administrative body.State Planning Committee (Gosplan)—coordinated creation and execution of plans.Ministries and state committees —administered all aspects of the economy, including production, distribution, prices, and wages.Farms and enterprises —handled actual production.
9 2. Decision-making hierarchy —vertical structure The Soviet state operated through gov’t ministries and Communist party
10 3. Mechanism for providing information Highly centralized ES national economic planb) Administrative –command economy mechanism for resource allocation.Council of Ministers and Communist Party leadership set broad objectives and approves final planActual tasks of planning conducted by several specialized planning agenciesState Planning Committee (Gosplan) in charge of overall coordination and planning of outputs and investmentState Bank in charge of planning and monitoring financial flowsc) Planning in Theorythe material balance system were developed to equate supply and demand of key industrial commodities, labor inputs.Consistent plan—only minimal balance in money and prices for resourse allocation
11 d) Planning in Reality Annual Planning Timetable Spring—Directives Council of Ministers and Communist Party set aggregate growth targetsTargets reflectgoals of current five-year planGosplan’s assessment of feasibilityDirectives (tentative plan assignments at highly aggregated level) sent to each ministrySummer—Input claims and bargainingeach ministry makes up separate tentative output assignments for each of its departmentseach department makes tentative output assignment for each of its enterpriseseach enterprise then requests inputs from its departmenteach department aggregates input claims and requests total from ministryeach ministry makes its requests from Gosplanintense bargaining at each step as lower level attempts to bargain with higher level for easier output and input assignmentsFall—BalancingGosplan and other planning agencies balance revised aggregate assignments into a consistent national plan (achieves balance b/w sources and uses of all resources and goods)
12 November and December—Approval Plan submitted to Council of Ministers in November and ratified by Supreme Soviet in DecemberDecember—DisaggregationGosplan sends each ministry its planeach ministry sends each department its planeach department sends each enterprise its planAfter plan approval, State Committee for Material and Technical Supply (Gossnab) matches up supplying and customer enterprisesThe deviation of actual from planed performance was so great, the resources were actually allocated by resource managers in the party and state after the plan was completed. All plans were preliminary and subject to change at any time by virtually any resource manager in the state or party; informal resource allocation; high level of unplanned exchange system among ministries.Material BalancesMajor objective to achieve consistency between planned supplies and planned uses of each commodityThousands of material balances constructedeach expressed in physical unitsBalance identifies planned sources and uses during the period
13 The Soviet Manager: The Principal-Agent Problem Enterprise Management The combination of different objectives and different access to info created classical principal-agent conflict b/w enterprise managers and their superiorsThe Soviet Manager: The Principal-Agent ProblemEnterprise ManagementFormal organizationDirectorIn theory the enterprise manager simply followed centrally-determined plans, in practice he has control over info.Appointed by the CP, has to be a member of the CP, nomenclature apptexecutives in charge of material supply, labor, production, accounting, etc.superintendents of production unitsChief engineer (responsible for coordinating of prod)foremenCommunist Partyhead of Communist Party group in enterprise plays an important decision making roleTrade unionhead of unit shares management responsibilitieseliciting worker discipline, etc.
14 The Enterprise PlanSoviets referred to an enterprise as being “economically accountable”legal entity with own fixed capital and funds provided by budget grantsown account at State Bank and right to borrow additional funds from the Bankexpected to enter into contracts with suppliers and customers in accordance with planexpected to earn a profit, most of which was handed over to Ministry of FinanceState Enterprises were responsible for fulfilling plan targets and Enterprise received detailed plan specifyingquantities of outputs by type and the corresponding value of sales at the centrally determined wholesale prices (e.g. the assortment)amounts of materials, components, fuels, allocated for which it pays at the industrial wholesale pricesauthorized number of workers, distributed by major categories, total wage fund, and productivity (output per worker)profitamount of capital investment in construction and equipmentThese plans were very demandingIt was often impossible to achieve production and investment assignments with the resources allocatedResources allocated often turned out to be unavailable
15 Managerial Incentives Soviet enterprises were responsible for fulfilling plan targets, and managers were motivated within an incentive frameworkManagerial IncentivesMaterialhigh salaryprospect of large bonusprospect of promotion for good performancehigher salary and bonusesprospect of demotion for poor performancelower salary and bonusesNon-materialpowerstatusrecognition
16 Manager’s Response to Incentives Full rewards depended on plan fulfillment. If plans were over fulfilled, bonuses increased slightly. Managers avoided over fulfilling targets (to avoid higher targets in future)The manager was required to fulfill the plan-produce output target and assortment. Only the manager new the true productive capacity of the enterprise and its true needs for materials. The manager’s superiors in the ministry could only guess. This info asymmetry enabled the manager to engage in opportunistic behavior. The manager’s opportunism in the following areas:Managers bargained with superiors during the plan formation stage for easy targets (low output with ample inputs and investment)Bonus system caused managers to misrepresent input needs and production capacity, understated enterprise potential (complained of breakdowns and long repair times)Had to bribe allocators to gain access to supplies.Tried to stash concealed inventories of outputs and inputsThey stockpile materials that are in short supplyResisted specialization, especially at later stages of productionthe more specialized, the more dependant on suppliers who are likely not to be able to deliverResisted technological innovation, which was poorly rewardedinnovation introduced uncertaintyloss of production during installation and trainingrequired new sources of materials more specialized labor which was often hard to getResulted in huge, unspecialized enterprises using outdated technology
17 a form of horizontal communication Used expeditorsgreatest problem was material supplysupply expeditors (tolkachy) were workers who had connections at other enterprises and could barter for needed supplies; arrange unplanned transactions.black marketa form of horizontal communicationillegal but usually tolerated as long as it wasn’t too obviousEngaged in forms of simulationsubstitution 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 simulationtends to make subsequent plans harderApproaching deadlines causedStorming (last minute spurt of activity as period nears end)Lethargy (when obvious that targets won’t be met)
18 All finance transactions are monitored by the bank Ruble control Soviet enterprises operated on soft budget constraint, means that enterprises that failed to cover their costs could count on automatic subsidies from their ministry, which redistributed profits from profitable to unprofitable enterprises, or from the state budget.Unanticipated profits were confiscated by industrial authorities. What kind of strategic behavior would a manager adopt in the face of these constraints. The firm had little incentive to overfill plans/targets or to reveal its true capacity (since next year will have larger output target). It had little incentive to reduce costs since the profits would be grabbed by the ministry. Thus, the behavior of the socialist from was likely to be perverse compared to its private twin in a market economy. While a competitive mkt would reward good and penalize bad performance, the socialist ministry penalized efficiency and subsidized poor performance.Monitoring of Agents-the communist party and the state had their own control commission to punish illegal managerial behaviorAll finance transactions are monitored by the bankRuble controlsurveillance of enterprises by the State Bank to monitor and enforce plan fulfillment.
19 Agricultural Organization The Rural EconomyAgricultural OrganizationKolkhoz—Collective farm, supposedly owned and managed by members, but members had few ownership rights. (Impoverished before 1958 by low prices of compulsory deliveries)Sovkhoz—State farm, organized and operated like an industrial enterprise; huge acreage (12,000). Management was appointed by the government and state workers were paid by a wage and bonus system.Private Plots—Gardens assigned to agricultural or industrial workers. Output could be sold at market prices at farmers mkts. Denounced by Stalin, but supported by Gorbachev (controlled 3 % of the land, but produced 29% of output; stronger incentives).Suffered from all the problems of industryLack of incentivesShortages, supply problems, low fixed prices
20 4. Property rights a) State Sector b) Collective Sector The state owned all natural resources—land, timber, minerals.The state controlled virtually all major non-agricultural production—industry, construction, transportation, communication, health, education.The state share was smaller but still large in:retail trade (70%)agriculture (50%)housing (75% urban, 25% rural)b) Collective SectorCollective farms and consumer cooperatives, operated in rural areasFormal ownership by members, but actual control by statea farm’s output planned by stateoutput required to be sent to stateprices set by stateOnly to cover cost. Thus, each peasant’s share of net farm income would be small, allowing for few purchases of consumer goods.inputs set by stateworkers’ wages set stateIn the supply constraint Soviet economy, consumer goods were in short supply, one way to alleviate shortage was by cutting the purchasing power of the peasantsManagement formally elected by worker-members but, in fact, determined by Communist Party and government officials
21 About a fifth of new housing construction private c) Private SectorIndividual could ownconsumer goods; a house; livestock; tools and small farm equipment; a car; savings account at the State Bank; government lottery bonds; currency/moneyOne area of free mkt activity was provided by granting workers in farms and other enterprises, plots on which to raise their own crops, which could be sold at uncontrolled prices at farmers mkts. Primary productive activity was the private plot1/2 to 3 acresproduced outputs that could be produced with household labor and little capital1980’s:1/3 of milk and meat consumed in Soviet Union2/3 of potatoes40% of fruit and vegetablespart consumed by householdrest sold to state at prices set by state or at farmer’s markets at higher pricesAbout a fifth of new housing construction privatematerials purchased from statelabor provided by householdfriendsmoonlighting construction workersMoonlighting permitted forDoctors; artists and craftsmen; construction workers
22 5. The Role of Prices and Money Employment of a person by another prohibitedAny purchase with intent to resell at profit prohibitedLending at interest prohibitedRenting apartment from another individual prohibitedRenting a car from another individual prohibited5. The Role of Prices and MoneyWhat is the Prices role in mkt economies?Relative Prices guide resource-allocationMoney affects price level, level of real output and employmentThe founders of the administrative-command economy hoped money and prices play only a small role in economy.The Soviet prices are set by administration authorities. Prices were cost based and the demand side had little or no influenceMeasure of valueTo translate physical units into monetary values, prices would be needed as accounting unitsaggregation and comparison of outputscalculation of revenuesinput costsnational productPlayed role in distribution of incomeworkers paid money wagesmoney bonuses
23 c) Households spend their incomes on available goods and services d) Prices affect allocation in private sector (production of fruits& vegetables)e) Prices affect enterprise behaviorenterprises supposed to minimize money costs and maximize revenue within constraints of plan.e) Prices within state and cooperative sectors set by State Price Committeereflect political/ideological concernsPrice policies (subsidies to books, housing, medical care, transportation—low prices; automobiles, vodka—high prices)do not reflect supply and demand (very distorted)wholesale price is equal to the average (not marginal) industry-wide unit cost plus small profit markupenterprises with above-average costs immediately ran losses, requiring state subsidiesProvided little incentive for enterprises to respond to consumer demandRetail prices—initially set to equate quantity demanded with quantity supplied (as controlled by planners) with some adjustments.f) Problems:Shortages, long lines, black-market activities, encouraging corruption and dilution of work incentivesBudgetary problem when many wholesale prices exceeded retail prices.
24 6. Investment 7. Finance Gosplan and political leadership decide The control of savings and investment was a powerful mechanism to promote more rapid capital accumulation, the state directed high investment rate and the state control savings. Since prices and wages were set by the state, the state could determine the savings rate.6. InvestmentGosplan and political leadership decideinvestment’s share of national productdistribution of total investment by industry and regiondesign of investment projects based on cost minimizationtrue economic costs not minimized because prices do not reflect scarcity7. FinanceNo checking accounts; no credit cardsCurrency used between individualsCurrency used between enterprises and individuals (wage payments)Credit/debit entries at State Bank used for transactions between enterprisesState Bank responsible for planning enough (but not too much) currency for intended transactionsState Bank serves as control agency since all deposits must be at State Bank and all transactions between enterprises must be through State Bank accountsHard for enterprises to hide transactions
25 8. Foreign Trade —was a state monopoly Planning by GosplanActual import and export operations carried out by more than 60 foreign trade organizations (FTO) under the Ministry of Foreign Trade.FTO acts as intermediary; exports are sold to FTOs at domestic prices, and sold overseas at international prices. Price differences cause losses and profits for FTOs, which are canceled by governmental taxes and subsidies.No direct interaction by a Soviet enterprise and a foreign entityThe Soviet firms were isolated from world mkts. They did not have the opportunity to profit from foreign trade, not were they exposed to the competition in foreign mkts.In January 1987, the FTO monopoly of foreign trade was broken when 20 ministries and 76 large enterprises were allowed to initiate direct trade and to retain hard currency earnings.Bilateral negotiations-barter
26 9. Labor marketAll able-bodied adults expected to work full time unless they werefull-time studentsin prisonFree to find own jobs unlessdrafted in militaryon assignment in return for advanced training opportunitiesPlanners had variety of ways to channel workers into planned jobssystem of differential wagesWas used to influence the distribution of labor by region, season, professionIt is an attempt to induce appropriate supplies to meet planned demandscontrol of occupational trainingBy profession—higher educational institutions were directed by state control; number of students and majors were determined by the stateplacement servicesresidence permitsHave to carry internal passports and have them stamped by the police before changing places to live.To travel abroad need special permit from the state and currency.control of housing availabilityvery short supplymuch of housing stock assigned to enterprises
27 Labor market was subject to some frictional unemployment unemployment as workers look for jobsThere was evidence of some structural unemploymentmismatch between skills and employment opportunitiestended 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 unemploymentA change in unemployment levels linked to cyclical econ. changeThe price for labor was the wage, the demand for labor was primarily plan-determined. The households were free to supply labor.Wage StructureWages determined by several factorsOccupation, e.g., engineer’s wages were double that of retail clerks, on averageSkill, e.g. top grade in occupation earns double lowest gradecompensating differential for difficult conditionspriority of industry, e.g. workers in steel industry earned more than workers in retail trade
28 Non Wage Income Other transfers Interest from savings account Second economy income (private plot, moonlighting)Doctors have private clients for higher feesSale person would set aside quality merchandise for high tipCollective farmers would divert supplies to his private lotIn mid 1980’s, 20-25% of the transactions were illegalTransfersPublicly provided free goods (education, health care)The Soviet elite received superior medical care in secret facilities closed to the masses. Members of CPSU, senior econ managers enjoyed not only higher salaries but also more comfortable apartments, better recreational opportunities, access to luxury goods and foreign travel.Major transfer was the pensionretirement for men at 60 after at least 25 years workretirement for women at 55 after at least 20 years workOther transferspaid maternity leavessurvivor benefits upon death of spousesick leaveschild allowancesincome supplements for the poor
29 10. Income Distribution and Poverty Inequality persisted, as income rewarded plan fulfillment, skill, and high-priority professions.Inequalities reduced through price subsidies, public goods, and small wage differentials.
30 IV. Centrally-Planned Economy (CPE) The objectives of a Centrally-Planned Economy (CPE)To built socialism as quickly as possible:Rapid growth in the econ.IndustrializationHeavy industry was a priorityActivities that do not contribute to material productivity such as services would be limited and within industry, priority had to be granted to heavy industry, which laid the foundations for socialismCentralization of decision making and control2. Key Elements of the CPEState ownership—seen as a primary means toachieve rapid growthmaintain centralized controlCPEs are command economiescentralized, bureaucratic management of economyCPEs are pressure economieshigh rate of forced saving (no consumer goods)planning ofoutputsinputsinventories
31 CPEs are priority economies planning based on priorities reflectingpolitical criteria and socialist ideologyResources were channeled away from consumer into investments in order to achieve a high investment rateCPEs rely on extensive developmentgrowth and industrialization through massive increases in resourcesthe alternative is intensive development—growth through productivity increasing innovationCPEs are closed economiesforeign trade suppressedCPEs are shortage economies