The Political Economy of
Soviet-Style Central Planning
I. Why
Study Central Planning?
A. It
continues to be the predominant economic system in some
countries, such as North Korea and Turkmenistan.
B. It
continues to coordinate a substantial part of the economy in
China.
C. Ruslan
Grinberg (see assigned reading), the Scientific Director of
the Institute of Economics of the Russian Academy of
Sciences, suggests that Russia should revive some aspects of
central planning, but he believes that the plan targets
should be indicative rather than mandatory.
D.
Historical significance for one-third of world population.
E. Example
of broader class of command economies in Egypt, Mesopotamia,
Middle America, Nazi Germany.
F. 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
- three branches, but not equal
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
including heads of ministries and state committees - 109
members in 1979.
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.
Sources |
Uses |
Production
Imports
Initial Stocks
TOTAL |
Productive Uses
Exports
Personal Consumption
Ending Stocks
TOTAL |
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.
V. 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.
4. Western
estimates suggest 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.
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.
Foreign Economic Relations
1.
System prevented trade based on comparative advantage.
2.
Poor incentives for high-quality export production.
D. Natural
Environment
1.
In principle, planning should allow environmental
protection.
2.
In fact, degradation caused by:
a. Growth priority.
b. Tragedy
of the commons
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