The Political Economy of
Soviet-Style Central Planning

I.     Why Study Planning?

A.  Historical significance for one-third of world population.

B.  Example of broader class of command economies in Egypt, Mesopotamia, Middle America, Nazi Germany.

C.  Background of market transitions in Central Eurasia and China

 II.    Ownership

A.  Dominance of state ownership for productive resources, lesser role of collectives, cooperatives, and private ownership.

B.  Individuals could own personal items, a house (but not the land beneath it), and savings.

III.    Political and Economic Institutions

A.   The Communist Party

1.   "Leading and guiding force of . . . society"

2.   General secretary—most powerful person in society.

3.   Politburo—board of directors of the Party, controlling foreign and domestic policy and appointments to top positions.

4.      Secretariat—directed work of Central Committee departments, which controlled appointments to other high-level positions.

5.      Central Committee—about 300 members from national and regional agencies. Elected Politburo and Secretariat, controlled press organizations, provided forum for communication and debate.

6.   Party Congress—supposed supreme body of the Party, provided media event to "elect" new Central Committee and announce policies.

B.      The Legislature

1.   Until 1989, Supreme Soviet was "rubber stamp" legislature.

2.   Presidium of the Supreme Soviet—smaller and more powerful.

3.   Chairman of the Presidium, or President, was ceremonial head of state.
 

C.      The Administrative Branch

1.      Premier, or prime minister, had direct responsibility for management of the economy, and usually introduced new five-year plans and major reforms.

2.   Council of Ministers—supreme administrative body.

3.   State Planning Committee (Gosplan)—coordinated creation and execution of plans.

4.   Ministries and state committees—administered all aspectes of the economy, including production, distribution, prices, wages.

5.   Farms and enterprises—handled actual production. Had little formal autonomy, but had a modicum informal authority.

III.    Central Planning

A.  Interlocking time periods—longer-term plans had less detail.

B.   Production and Distribution Planning

1.   Preparation

a.   Priorities - Set by political leaders.

b.   Control Figures - Rough draft prepared by Gosplan.

c.   Disaggregation / Bargaining - By ministries and enterprises.

d.   Material Balances - Prepared by Gosplan and others to impose consistency.

e.   In practice, many targets derived from the achieved level—a markup over this year's production.

f.    Approval - By Supreme Soviet to give the plan force of law.

2.   Implementation of Inconsistent Production Plans

a.    Storming - Enterprises typically waited until last days of plan period to meet pro­duction quotas.

b.    Tolkachy - Agents who located supplies of raw materials and arrange unplanned transactions.

c.    Vertical Integration - Self-supply.  Reduced efficiency because it encouraged small scale production and dis­courages specialization.
 

C.      Investment Planning

1.   Political Priorities - Determine the structure of output, and the structure of output determines the required structure of capital stock. 

2.   Economic Criteria - Used to choose technology after decision to invest is final.   

D.      Agricultural Organization and Planning

1.   Kolkhoz - Collective farm, supposedly owned and  managed by members, but  members had few ownership rights. Impoverished before 1958 by low prices of compulsory deliveries.

2.   Sovkhoz - State farm, organized like an industrial enterprise. Huge acreage. Management was appointed by the government and workers were paid by a wage and bonus system.

3.   Private Plots - Gardens assigned to agricultural or industrial workers.  Output could be sold at mar­ket prices. Denounced by Stalin, but supported by Gorbachev. Controlled 3 percent of the land, but produced 29 per­cent of output. Explained in part by stronger incentives and al­so because they produce high priced goods.

E.   Foreign Trade Organization and Planning

1.   State Trading - Under traditional Soviet system, exports are sold to FTOs under the Ministry of Foreign Trade 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.

2.   Weaknesses of Planned Foreign Trade

a.    Unpredictable - Foreign conditions change rapidly; cannot be planned; requires flexible and decentralized management. Long-term trade agreements, designed to stabilize trade with socialist countries, were often broken.

b.   Product Choice - Impossible to make rational import and export deci­sions based on controlled prices and exchange rates.

c.   Incentives - Quantitative output orientation discourages production of high-quality goods that can be sold overseas.

IV.    Finance, Incentives, and Prices

A.  Finance system played secondary role in economy based on physical output targets. Profit-oriented planning could conflict with political priorities.

B.  Control by the ruble—surveillance of enterprises by the unitary State Bank to monitor and enforce plan fulfillment.

C.  Financial Planning   

1.   Household Sector - Planned value of consumer goods provided to the pop­ulation must be roughly equal to planned disposable income, adjusted for saving. 

2.   Business Sector - Enterprises receive sufficient income to cover payroll and cost of production.  Failing business are subsidized and successful ones are highly taxed.

3.   International Sector - Reflected in the balance of payments. 

4.   Balance of the Government - Planned in the state budget. Business profit was the largest revenue source and business subsidies were the largest expenditure source.

D.   The Incentive System

1.   Coercive and moral incentives were used extensively, but relative importance of material incentives grew through the years.

2.   Wages and Salaries - About 70% if income. Higher authorities determined the number of workers and the average wage that an enterprise could hire and pay.

3.   Bonus Income—about 30% of income.

a.   Payment - Depended on plan ful­fillment. If plans were overfulfilled, bonuses increased slight­ly. 

b.   During Planning - Bonus system caused managers to misrepresent input needs and production capacity and bargain for easy targets.

c.       During Plan Fulfillment - Managers avoided overfulfilling targets (to avoid higher targets in future).  Also, system encouraged management to hoard labor, equipment and resources, engage in small-scale pro­duction, and sacrifice quality for quantity.  Discouraged tech­nological innovation, which was poorly rewarded, interrupted production schedules, and required new sources of materials.

E.      The Price System

1.      Prices set by State Price Committee, changed infrequently.

2.      Prices interacted with managerial incentives through value-based plan targets and financial balances.

3.      Wholesale price = average (not marginal) industry-wide unit cost plus small profit markup related to capital intensity.

a.       Enterprises with above-average costs immediately ran losses, requiring state subsidies.

b.      Provided little incentive for enterprises to respond to consumer demand.

c.       Poor guides for investment and foreign trade decisions.

4.      Retail prices - Initially set to equate quantity demanded with quantity supplied (as controlled by planners), with adjustments to redistribute purchasing power from the rich to the poor.

5.      System-wide problems:

a.       Shortages, long lines, black-market activities, encouraging corruption and dilution of work incentives.

b.      Budgetary problem when many wholesale prices exceeded retail prices.

VI.    The Second Economy

A.      Unplanned production and exchange.

B.      Partly legal, but, even after 1987, Soviet Union forbade:

1.      employment outside family

2.      production of fur hats, jewelry, weapons, and copiers

3.      operation of amusement rides or games;

4.      teaching courses not offered in public schools and colleges

5.      organization of entertainment activities.

C.      Some illegal activities were massive, requiring bribes and corruption.

D.      System provided benefits and costs, and represented between 10 percent and 20 percent of GNP.  Lingering effects on entrepreneurial skill and legal culture.

VI.    Performance of the Central Planning System

A.      Plan Fulfillment and Economic Growth

1.      No clear evidence of accelerated long-term growth, compared to the pre-Soviet era (1885-1913).

2.   Bergson found that four socialist countries utilized resources 25-34% less efficiently than capitalist competitors.

3.   Soviet authorities claimed achievement of actual growth nearly equal to planned growth, but conceded that long-term agricultural growth was less than half the planned average.

4.   Western estimates indicate that none of the Soviet medium-term national income plans were fulfilled, that average growth rate between 1929 and 1990 was little more than half the planned average, and that shortfalls were largest in agriculture.

5.      Frequent plan revisions caused many to question whether Soviet Union was, in fact, "centrally planned." Still, the plans set and communicated national priorities.

B.      Growth Slowdown

1.      During 1960s, caused entirely by a deceleration of factor productivity. During 1970s and 1980s, caused equally by slower input growth and negative productivity growth.

2.   Slower factor productivity;

a.   Diminishing returns to capital.

b.   Depletion of accessible natural resources.

c.   Slower growth of technological progress.

d.   Aging capital stock

e.   Strain on central planning in larger economy and more complex environment.

C.      Industrial Performance

1.      Industrial development had high priority beginning in late 1920s, with initial success in many sectors, contributing to military superpower status.

2.      High priority of heavy military-industrial production postponed development of agriculture, industrial consumer goods, services, and housing.

3.      Emphasis on quantitative plan targets provided little incentive for product quality or technological sophistication.

4.      Central planners encouraged creation of very large, monopolistic enterprises:

a.       to draw world attention to achievements of socialism.

b.      thinking that large factories were more efficient

c.       to simplify to coordinate the construction of a smaller number of big factories.

d.      to simplify formulation and monitor execution of economic plans.

D.      Agricultural Performance -- perhaps the worst failure of Soviet-style system. Problems:

1.      Low priority for agricultural infrastructure.

2.      Climate, inferior to American corn belt.

3.      Inflexibility of central planning.

E.      Employment and Labor Mobility

1.      Low unemployment.

2.      Indeed, the system generated apparent labor shortages, overstaffing, and "unemployment on the job."

3.      Stalin-era restrictions on labor mobility, reduced after mid-1950s.

F.      Income Distribution and Poverty

1.      Inequality persisted, as income rewarded plan fulfillment, skill, and high-priority professions.

2.      Inequalities reduced through price subsidies, public goods, small wage differentials.

3.      Morrisson found that Czechoslovakia had most equal distribution of income in the world. Former USSR had more uneven income distribution than its neighbors in central and eastern Europe; its level of inequality was comparable to the average level of inequality of the OECD countries.

G.      Financial Stability

1.      Before 1970s, high stability, low inflation.

2.      Starting in 1970s, problems in reform-oriented Yugoslavia, Poland, and Hungary.

H.      Foreign Economic Relations

1.      System prevented trade based on comparative advantage.

2.      Poor incentives for high-quality export production.

I.       Natural Environment

1.      In principle, planning should allow environmental protection.

2.      In fact, degradation caused by:

a.       Growth priority.

b.      Tragedy of the commons

VII.  APPENDIX: Input-Output Economics

A.      Transactions Matrix—Each row shows how the gross output of a particular sector was distributed through the economy

B.      Technology Matrix—Obtained by dividing the inputs in the first three columns by the gross outputs of the sectors that use them, we obtain a matrix of direct input coefficients, denoted by the letter A:

C.   Result - Provides gross outputs that are necessary to provide a vector of final demands to consumers.

D.   Limitations

1.   Ideological and political opposition.

2.   Tables were not compiled with sufficient frequency or detail.

3.   Computer limits.

4.   Built inefficiency of past into plans for future.

5.   Provided for consistency but not optimality.