SOVIET INTEREST IN INDUSTRIAL REFORM IN OTHER COMMUNISTS COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000300850002-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 2
• Publication Date: September 1, 1986
• Content Type: REPORT

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~`"~+~~ Directorate of
f7 ~ Intelligence
Soviet Interest in Industrial Reform
in Other Communist Countries
SOV 86-10043X
September 1986
Copy 3 `; J
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Directorate of Secret
Intelligence 25X1
Soviet Interest in Industrial Reform
in Other Communist Countries
This paper was prepared by Office 25X1
of Soviet Analysis. Comments an queries are
welcome and may be directed to the Chief,
Domestic Policy Division, SOVA, 25X1
Reverse Blank Secret
SOV 86-10043X
September 1986
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Soviet Interest in Industrial Reform
in Other Communist Countries ~~ 25X1
predict the outcome of this debate.
General Secretary Gorbachev has stimulated debate in the USSR over how
to improve Soviet economic performance. Soviet officials appear increas-
ingly inclined to look at the experience of other Communist states in their
search for ideas. This paper examines Soviet commentary on developments
in China, Hungary, and East Germany-focusing especially on the Soviet
assessment of the strengths and weaknesses of these countries' industrial
reform efforts. While the Soviets' assessment contains hints on the type of
changes the commentators would like to implement in their own country,
their discussion of Chinese, Hungarian, and East German industrial
reforms is only part of an even broader and more controversial debate
about the need for change in the USSR. This paper does not attempt to
Secret
SOV 86-10043X
September 1986
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Summary
Ipjormation available
as o./' 9 September l 986
was used in this report.
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Soviet Interest in Industrial Reform
in Other Communist Countries~~ 25X1
Soviet commentary on Hungarian, Chinese, and East German industrial
reforms has increased under General Secretary Gorbachev. Statements
and actions by regime spokesmen suggest that this increase reflects the
leadership's heightened interest in assessing the benefits and costs of these
reforms with an eye to their potential application within the USSR:
? In Hungary, the regime's decentralization of industrial management and
planning and enhancement of the role of market forces, although poorly
implemented, have improved product quality and increased efficiency,
but industrial growth has generally been slow, and social and political
tensions have been fueled by the inflation and widening income dispari-
ties reform has brought about.
? China's more recent and more rapid moves toward decentralization and
its opening of industry to market forces have led to skyrocketing
industrial growth but also to overinvestment, serious breakdowns in
quality control, inflation, a widening gap between rich and poor, and
widespread corruption among economic officials.
the Chinese and Hungarian reforms.
? East Germany, unlike Hungary and China, has given little play to
market forces but has opted for a streamlined version of Soviet-style
central planning that has contributed to increases in industrial growth
and productivity while avoiding the political and social risks inherent in
Although all three programs have won positive comment from some Soviet
observers, Moscow's assessment of the Hungarian and Chinese approaches
demonstrates its strong concern about the potential loss of centralized
political control through economic decentralization. Most Soviet observers
of the Hungarian scene are more impressed with the ideological unortho-
doxy, political risks, and economic disruptions inherent in Budapest's
policies than with the economic gains they may bring about.
And, while Soviet commentators note
the impressive economic achievements of China's reform efforts, the major 25X1
focus of their analysis is on the "negative phenomena"-inflation, unem-
ployment, graft, loss of central control-stemming from the reforms.
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Soviet assessments of East Germany's industrial reorganization efforts, in
contrast, are uniformly positive. Moscow's attraction to the East German
system-which maintains tight central control over economic activity-is
manifest in Gorbachev's own public statements extolling the achievements
of the East German approach.
The obvious Soviet preference for the East German "model" mirrors the
caution that characterizes measures adopted by the Gorbachev regime at
home. Gorbachev and his colleagues still believe the present system can be
made to work better. Change in the system-whether based on Communist
reform models or other ideas-will in all likelihood come slowly and in
piecemeal fashion when the leadership becomes convinced that shifts in
investment, better management, and increased discipline will not get the
job done:
? Soviet commentators have suggested that Moscow may pick and choose
various aspects of the East German, Hungarian, or Chinese experiments
rather than adopt an entire program.
? Most Soviet commentators realize that the conditions that have made
some of these reforms successful cannot necessarily be duplicated in the
USSR. Some Soviet economists acknowledge, for example, that East
Germany's success is due, in part, to the smaller size of its economy and
the German work ethic. Similarly, Soviet sinologists have pointed out
that the types of reforms introduced by Beijing have been possible only
because China is a relatively new socialist country.
Gorbachev has, nonetheless, dramatically increased the pressure to im-
prove industrial performance and appears to be much more inclined to
measure it by results than adherence to ideological orthodoxy and past
practice. He clearly is pushing his managers to accept more responsibility,
exercise initiative, and innovate-features of the reform efforts in the three
Communist countries examined. The boldness Gorbachev has shown in
changing the style of leadership, opening up cultural expression, making
personnel changes, and putting forward new foreign policy initiatives
suggests that he will boldly look for ways to achieve similar economic
results in the Soviet Union.
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Given the cultural and systemic differences between the Soviet Union and
East Germany, Hungary, and China, the experience of other Communist
countries will probably be no more than instructive for the Soviets; the
answers to Soviet economic problems will probably-as party secretary
Dobrynin reportedly said recently-come from within. But, despite the
problems accompanying industrial reform in Eastern Europe and China,
the successes achieved in other Communist states in promoting growth,
increasing productivity, improving quality, and pushing technological
modernization will bolster the arguments of those in the USSR who favor
change and push the leadership to find solutions that put the Soviet Union
again in the forefront of socialist development.
vii Secret
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Summary
v
Gorbachev's Industrial Agenda and Soviet Interest in Reform
1
Potential Contemporary Models
1
Hungary
1
China
3
East Germany
4
Soviet Commentary
4
Mixed Feelings About Hungary's Approach
6
Strong Reservations About China's Reforms
8
High-Level Praise for the East German System
9
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Soviet Interest in Industrial Reform
in Other Communist Countries ~
Gorbachev's Industrial Agenda and
Soviet Interest in Reform
General Secretary Mikhail Gorbachev has frequently
stated that the improvement of Soviet industrial
performance is among his most important domestic
policy goals. In particular, Gorbachev has called for
an acceleration of industrial growth, an upgrading of
industrial technology to world standards, an across-
the-board improvement in product quality, an expan-
sion of industrial exports, and a sharp increase in the
productivity of the industrial labor force. In an effort
to attain these ambitious goals, he has launched a
"human factor" campaign to tighten labor discipline
and has embarked upon a costly program to modern-
ize industrial plant and equipment. In addition, he has
pledged to "reform" the industrial economic system.'
Although the General Secretary has provided few
specifics on his plans for reform, his statements and
actions strongly suggest that he sees the reform
experiences of other Communist regimes as a useful
source of guidance:
? Gorbachev himself has publicly praised East Ger-
many's management of its economy and has stated
that the Soviet Union could learn from Hungary's
experience with economic reform.
? The Soviet leader has urged the members of the
Council for Mutual Economic Assistance (CEMA)
to draw upon each other's experiences in the eco-
nomic sphere and told the 27th Soviet Party Con-
gress that such exchanges are crucial to the develop-
ment of socialism.
? Soviet media have ended their near silence on
China's economic reforms and have increased the
objectivity as well as the frequency of their report-
ing about them.
? Candidate Politburo member Nikolai Talyzin, for-
merly deputy chief of a Brezhnev-era task force on
"socialist management in the fraternal countries,"
has been appointed to head an economic commission
with a charter that includes the study of foreign
management experience.
As Soviet officials and economists have responded to
Gorbachev's encouragement to examine other social-
ist models of industrial reform, they have focused
their attention on the changes in management and
planning already made or under way in Hungary,
China, and East Germany. Soviet commentators have
given little indication that Bulgaria, Czechoslovakia,
Poland, Romania, and Yugoslavia are regarded as
potential models for the USSR, probably because the
first four are seen as having accomplished little or
nothing with reform and Yugoslavia has pushed
changes that would be considered beyond the econom-
ic and political pale.
Hungary
Among the reform models that have been the object
of Soviet scrutiny, Hungary's has been uniquely long
lived, albeit with temporary retrenchments. In 1968,
under the leadership of Janos Kadar, the Hungarians
introduced a "New Economic Mechanism" designed
to increase industry's productivity, boost industrial
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exports, and make industrial enterprises more respon-
sive to their customers' demands for new and better
products. Under the terms of the NEM:
? Enterprises were to move toward aself-financing
and self-regulating regime, with their managers
given greater responsibility for raising investment
funds and greater control over wages.
? Industrial prices were to be made more reflective of
actual production costs, and foreign exchange rates
were to be made more realistic.
? Some enterprises were to be allowed to engage
directly in foreign trade and retain a portion of their
hard currency earnings.
? The scope of central planning was to be greatly
reduced and enterprises required to generate profits
by responding to market signals. Overall output
targets, however, were still to be determined by
central planners, and investments in infrastructure
and defense industries as well as CEMA trade
obligations were still to be established at the center.
Resistance to the reforms from party bureaucrats and
workers and Soviet skepticism about decentralization
led Kadar to pull back from his reform drive in the
early 1970s. Recentralizing moves to solve such
emerging problems as excessive labor turnover and
overinvestment, along with the shocks of oil price rises
and the Western recession later in the 1970s, further
set back the NEM.
By the end of the 1970s, however, the reintensification
of pre-NEM problems renewed interest in reform. A
"new phase"-intended to increase enterprise inde-
pendence, spur competitiveness, and enhance market
forces-was inaugurated at the April 1984 Central
Committee plenum. The new reforms stressed the
need for expanding enterprise powers to determine
commodity mix and engage directly in foreign trade;
continued the selective breakup of large, inefficient
enterprises into smaller units; provided for workers in
some industrial enterprises to participate in the selec-
tion of enterprise directors and the formulation of
investment plans; and began decentralizing the bank-
ing system to foster competition and improve capital
allocation. In addition, the ministerial bureaucracy
was streamlined by melding three industrial minis-
tries into one; the price structure was further rational-
ized by reducing subsidies and turnover taxes; regula-
tions on price formation were liberalized; and
incentives for individual workers and enterprises were
enhanced by tying wages more directly to profits.Z
According to Western observers of the Hungarian
scene and some Hungarian commentators, Budapest's
implementation of these "new phase" reforms, as well
as of the original 1968 reforms, has been superficial
and unfocused, and the country's industrial perfor-
mance has reflected this. Industrial output grew an
average of only about 2 percent from 1975 to 1985. In
addition, the economy still suffers from low labor
productivity and other problems that prompted the
1968 reforms and is saddled with large debts to the
West and 7-percent inflation (according to official
Hungarian figures for 1985). To secure abalance-of-
payments surplus for servicing Hungary's foreign debt
and maintaining its creditworthiness, Budapest has
cut back on imports and investment, which has con-
tributed to a stagnation of living standards and a
consequent rise in social tensions. In the judgment of
some Western observers, political dissidence has also
increased as a result of the disappointment of popular
expectations that the reforms aroused.
At the same time, the expanded independence of
industrial enterprises to compete with each other for
profits at home and abroad is credited by most
Western analysts with markedly improving the com-
modity mix and the quality of manufactured goods.
Greater responsiveness to the market has brought
supply and demand into better balance and contribut-
ed to efficiency by reducing waste; competition, effi-
ciency, and financial discipline should be fostered
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further by the bankruptcy law that took effect on
1 September, allowing the liquidation of chronic loss-
making companies. Western visitors to Hungary also
note a general atmosphere of energy and initiative
among industrial managers that contrasts with the
caution and "business-as-usual" approach character-
istic of their counterparts in the other, more tightly
controlled, East European regimes.
China
Of all the Communist models of industrial reform
available to the Soviets, China's is the most far
reaching and the one that has enjoyed the greatest
recent success. Launched in the late 1970s, the Chi-
nese reform drive initially focused on the agricultural
sector. Some experiments with decentralized, profit-
oriented industrial reforms, however, were begun in
selected Chinese factories in 1979, and "special eco-
nomic zones" were established to encourage foreign
investment at three (ultimately four) Chinese trading
centers. Encouraged by the success of these initial
industrial reforms, the October 1984 Plenum of the
Communist Party formally approved the following set
of measures aimed at ensuring continued improve-
ment in industrial performance:
? The scope of central planning was to be reduced and
market forces were to be allowed gradually to
determine more economic activity; economic stabil-
ity was to be maintained by means of monetary and
fiscal policies.
? Enterprise managers were to be given more author-
ity over planning, marketing, wages, and investment
to improve efficiency, productivity, and product
quality; vertical monopolies were to be broken up;
and competition was to be encouraged among eco-
nomic units. The state, however, was to continue to
control the production and distribution of essential
commodities and major investment decisions.
? The role of the government and party in day-to-day
business operations was to be reduced.
? While administered pricing was retained for key
products, prices of many other products were to
fluctuate within bounds set by the government, and
prices of nonstaples and minor consumer goods were
to be determined by supply and demand alone.
China's industrial reform effort has achieved impres-
sive rates of growth, but the results are disappointing
and even disturbing in other respects. Figures on last
year's economic performance released by the State
Statistical Bureau show 18-percent growth in indus-
trial output. The growth in industrial output in the
first two quarters of 1985 was so high, however, that
it threatened to overwhelm the existing transportation 25X1
and commercial systems, which had already been
seriously strained by skyrocketing agricultural pro-
duction. In addition, investment spending has been
excessive, increasing 35 percent in 1985 alone. Chi-
nese media commentary suggests that Beijing, while
convinced that rapid growth is proof that industrial
reforms are working, is concerned that accompanying
economic and social tensions ultimately could under-
mine the reforms. Media reports also indicate that
industrial efficiency and product quality may be
harmed by rapid growth.
This success in boosting growth already has had
negative side effects. The yearend statistical report
acknowledged 9-percent inflation (triple the rate in
1984) and a record $15 billion trade deficit. The drive
to make the economy more efficient has resulted in
widening income disparities and consumer grumbling
over rising food prices. Relaxing economic controls
and opening up the economic system to foreign trade
and investment have, by the admission of the Chinese
themselves, sparked widespread graft, bribery, and
other types of economic corruption. 25X1
Earlier this year, in recognition of these problems, the
regime decreed that the reform drive be slowed to
allow the economic system to adjust to the reforms
already introduced. Beijing has made it clear, howev-
er, that further reforms are in the offing, perhaps
within a year. The session of the Sixth National
People's Congress that ended on 12 April endorsed
further ambitious reforms to be implemented from
1987 to 1990, reflecting the continued political
strength of proreform leaders
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East Germany
East Germany, which launched the "New Economic
System" in 1963-two years before the Soviets'
"Kosygin Reforms" and five years before Hungary's
NEM-was the first country in the Soviet Bloc to opt
for decentralizing reforms. In 1971, however, the new
Honecker regime abandoned this reformist course,
among other things, for not having achieved rapid
growth and high living standards. East Berlin instead
embarked upon a recentralizing course, and over the
next several years developed a version of centralized
industrial management and planning that is much
closer to the Soviet system than to the systems that
exist in contemporary Hungary and China. Problems
with that system also emerged, however, and since the
late 1970s East Germany has made a number of
primarily organizational changes designed to improve
economic performance
Under the current East German variant of socialist
industrial management and planning:
? The centralized decisionmaking structure is re-
tained, with extensive use of administrative regula-
tions to direct the behavior of enterprises.
? Industrial enterprises are grouped into "combines,"
which provide greater focus on specific production
tasks, promote economies of scale, reduce admini-
strative redundancies, and streamline decisionmak-
ing. Combine directors are granted broad powers to
manage the operation of their enterprises, within
centrally imposed guidelines, and are personally
responsible for their performance, including the
accelerated introduction of new technology.
? Many foreign trade enterprises are linked directly to
combines to improve coordination and promote ex-
ports to hard currency countries.
? New performance criteria designed to cut costs,
boost efficiency, and stimulate exports have been
introduced.
? New positive and negative financial incentives have
been implemented, including increased bonuses and
steep wage taxes imposed on combines to reduce
wasteful use of labor.
Although its industry remains inefficient by Western
standards, East Germany has recently scored impres-
sive productivity gains. According to our estimates,
for example, industrial labor productivity increased
nearly 6 percent last year. The government also
reported that production costs fell sharply.
In recent East German writings, the introduction of
industrial combines or Kombinate (see inset) is ac-
corded much of the credit for the industry's successes.
In the judgment of East German officials and econo-
mists, the combines represent a successful attempt to
secure the benefits of partially decentralized opera-
tional management without relinquishing central con-
trol over basic policy and resource allocations.
By "rationalizing" centralization and thus reaffirm-
ing it as a principle, rather than calling it into
question with decentralizing reforms, the East Ger-
mans have avoided the ideological and political debate
currently under way in China and the social tensions
fed by Hungary's decentralized, but in many respects
poorly performing, economic system. According to
Western analysts, consumer grumbling, while com-
mon in East Germany, is not a serious problem for the
regime, and in recent years East Germany's industrial
policy has not been politically contentious.
The Soviet leadership has always been sensitive to
developments in other Communist countries, particu-
larly those within the Soviet orbit. For the most part,
Soviet interest has been driven by concern that modi-
fying the fundamentals of socialist practice could
endanger political control, serve as a bad example for
other Communist states, erode Soviet influence, and
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East Germany's Industrial Combines
Industrial combines, or Kombinate, in East Germany
link enterprises that produce the same or similar
products, use similar technologies, or represent vari-
ous stages ctJ'the production cycle.
The major functions of a combine are:
? To combine in a single entity all the phases of
.production from research and development to sales.
? To give constituent enterprises access to larger
investments and better management services than
an individual enterprise might be able to secure on
its own.
? To achieve economies of scale, centralization of
somelunctionsfor greater e~"iciency, and pooling of
managerial talent.
? To speed the flow g1'irtformation both toward the
center and horizontally among enterprises and com-
bines, facilitating coordination.
Combines are directly subordinate to their respective
industrial-branch ministries, which delegate some
planning activities to the combine director general but
which retain considerable power to intervene at the
provide a possible propaganda windfall to the West.
The Soviet regime has used public and private com-
mentary on such developments to signal its concern,
reinforce internal opposition to such changes in these
countries, and possibly limit the scope for greater
experimentation.
While these motives still underlie some Soviet com-
mentary, the Soviet leadership has become more
interested in the results of Communist reform efforts
as the Kremlin's own economy has lost momentum.
Because Moscow has tolerated some tinkering with
the standard Soviet formula in Eastern Europe, this
experience has become a source of quasi-legitimate
ideas for proponents of reform and a practical testbed
for them. But, given the fierce opposition in some
combine and even enterprise level. Enterprises within
a combine retain their status as distinct legal entities
and maintain their own management structures and
cost accounting (khozraschet), but many management
responsibilities that werelormerly the domain c31'the
enterprise director now lie with the combine director
general. Usually, a particularly large, e?~icient, or
technologically advanced enterprise will be the head-
quarters for its combine, and that enterprise's direc-
tor will be the combine's chief executive. Relieved 41~
some of their former responsibilities, central planning
agencies can concentrate on broader strategies for
economic development, a refocusing Gorbachev has
called for in the Soviet economy.
Combines draw up their own annual plan proposals in
line with indicators provided by the State Planning
Commission, but it is unclear how much i~uence a
combine director actually has, as distinct lrom that
of his minister, on details of the final plan for his
combine. In addition, East German industry's incen-
tive system lags the combines' progress in allocation
c~1'decisionmaking authority and improved irtforma-
tionflow.
official Soviet circles to change, Soviet commentary
on this experience and its results has become an arena
for jousting over internal reform.
Gorbachev's calls for "radical reform" and "revolu-
tionary change" have intensified this battle of ideas.
Western visitors to the Soviet Union and Western
embassy officials in Moscow have reported that Soviet
officials and economists have grown increasingly will-
ing to discuss these reforms in private as well. Propo-
nents and opponents of change know that the ultimate
winners of the current debate could gain the upper
hand in shaping the evolution of Soviet policies. Even if
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these experiences are not suitable for replication in
the USSR, the assessment of their success or failure
could spur or retard the search for solutions to the
problems that plague the Soviet economy and, more
important, affect the pace and direction of change in
the Soviet Union.
Mixed Feelings About Hungary's Approach
Although the Soviets have generally acquiesced in
Hungary's experiments for almost two decades, their
public commentary has long suggested that they have
done so only grudgingly. While applauding Hungary's
efforts to increase productivity and its success in
making its products competitive on international mar-
kets, the Soviets have indicated concern that the
decentralization of economic decision making and
encouragement of private initiative might weaken
Hungary's Communist character. During Gorba-
chev's tenure, the Soviets have continued to react to
Hungarian reforms with a mixture of admiring inter-
est and distaste.
Gorbachev himself evidently is of two minds on
Budapest's reformist policies. During his visit to Hun-
gary in June 1986, he expressed approval of Buda-
pest's official policy of economic renewal and encour-
aged further efforts to overcome remaining problems.
He did not, however, give Hungarian economic re-
forms the endorsement the Kadar regime almost
certainly had hoped for, or single out measures that
could be applied in the Soviet Union or elsewhere in
the Bloc (see inset).
This is not the first time I have been in Budapest; and
the latest meeting in your beautiful capital and
acquaintance with the factory are grounds for saying
that the country is living at a good working pace.
Here, with you in Csepel, one feels that atmosphere
that I know so well from meetings with Soviet labor
collectives, of taking an interest not only in the affairs
of one's own enterprise, but also in those of the
country. The desire to work not in the old way, but as
the present time requires, is apparent.
The Soviet Union's course is clear. It has been
approved by the congress, by the whole party, by the
people. But the tactics, methods, and forms of imple-
mentation of the course mapped out are still to be
finally developed and specified on the basis, of course,
of everything that has been verified in practice in our
country as well as in the fraternal countries. The
countries of the socialist community have one more
source of acceleration that our party intends to use,
and to a fuller extent. This is the exchange of
experience in building up socialism. The CPSU re-
gards with attention and respect the search for solu-
tions to difficult economic and social tasks that is
being conducted in your country, in Hungary, and in
other socialist countries. We are glad to see achieve-
ments of friends and try to take everything that is
useful and suitable for our country. It goes without
saying-and we know it from our own experience-
that nobody is completely ensured against failures and
miscalculations. But we Communists have a decisive
criterion of the justification of the experiment, of its
rightness. This criterion is the strengthening of social-
ism in practice, in all spheres-economic, political,
and spiritual.
Address at Csepel Machine
Tool Works, Hungary,
9 June 1986
To judge from both public and private Soviet com-
ment, many Soviet officials and economists are much
more impressed with the ideological unorthodoxy and
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Vladimirov.
political risks inherent in Budapest's industrial poli-
cies than they are with its potential economic benefits.
In June 1985 a Soviet political commentator using the
pseudonym "O. Vladimirov" attacked "revisionist,
nationalist concepts" such as economic decentraliza-
tion and greater use of the market mechanism. The
article was widely interpreted by Hungarian officials
as an attack on Budapest's policies. The Hungarians'
concern grew when, several days later, Yegor Liga-
chev, the number-two man in the Soviet party leader-
ship, sounded the same themes in a speech. Soviet
officials reportedly reassured the Hungarians subse-
quently that the Vladimirov article was not an author-
itative statement of Soviet policy. Further, in October
in the Soviet journal Kommunist, the deputy Secre-
tary General of the Hungarian party published a
lengthy article on Hungary's economic successes that
was seen by some in Eastern Europe as a rebuttal to
Nonetheless, some Soviets have continued to voice
sharp criticism of Hungary's reforms. For example, in
~terview last October in the Italian Communist
1'~. [y newspaper L'Unita, Leonid Abalkin-then
head of the Political Economy Department of the
CPSU Central Committee's Academy of Social Sci-
ences and now head of the Academy of Sciences
Institute of Economics--castigated Hungary's_en-
couragement of small, even more market-oriented
enterprises as a "resurgence of capitalism." 0
that the Hungarian
system had fa[~improve living standards and had
allowed an unconscionably high level of inflation.
Socialist System (IEMSS) told
Some Soviet officials and academics have also criti-
cized the Hungarian reforms on strictly economic
grounds. A senior official of the Academy of Sciences
International Institute of the Economics of the World
Hungary's reforms, however, continue to have enthu-
Significantly, Soviet media have praised Hungary's
economic achievements in those areas in which the
Gorbachev regime sees room for improvement in the
Soviet Union. In August 1985, Izvestiya, for example,
described the Hungarians' success in putting their
scientific research institutes on more of a self-financ-
ing basis, thereby saving state funds and promoting
the application of scientific and technological ad-
vances to industrial production. The Soviets adopted a
similar approach to research self-financing at about
the same time as the Hungarians but evidently have
either been unable or unwilling to implement it
consistently.
Moscow also has commended Budapest's successes in
raising industrial efficiency. In late December, a
yearend review article on Hungary in Pravda praised
Budapest's efforts in reducing resource use. An article
in Izvestiya last April cited a Hungarian official
approvingly for urging further technological progress
as an important path to resource conservation.
The Soviet press has also had some recent praise for
Hungarian enterprise independence. In a lengthy
article in the Soviet journal Socialist Industry in
early June, a "special correspondent" hailed the free-
dom of Hungarian enterprises-"greater than in our
country"-to determine their own economic activities,
respond to market signals, and satisfy consumers'
demands. Even the right of enterprises to help choose
their own directors and the refusal of the government
to subsidize chronically inefficient and unprofitable
enterprises were noted approvingly.
Some Soviet economists and academics have willingly
speculated that aspects of the Hungarian reform
experience could have application to the Soviet
Union-almost always, however, portraying Hunga-
ry's reforms as a collection of potentially transferable
units rather than as an indivisible system. The Soviets
also acknowledge that differences in size and culture
between the two countries most likely would impede
the Soviet Union's borrowing from Hungary. The
Hungarian economy is so small, for example, that
there are only a few enterprises in many branches of
production, and the process of decentralization thus
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has proved to be controllable. In addition, Soviet
sociologists have noted Hungarian workers' willing-
ness to put in long hours and extra effort to improve
their lot, something these sociologists contend the
"average Russian worker" is unwilling to do.
Strong Reservations About China's Reforms
Moscow's public comment on China's economic re-
forms has grown markedly since Gorbachev came to
power and has been even more frequent since the
recent Soviet party congress. Although due, in part, to
the Soviets' desire to affirm a strong interest in
improving political relations with Beijing, this in-
crease in commentary probably also is a response to
the new regime's efforts to encourage domestic discus-
sion of possible paths to Soviet economic reform.
Soviet media regularly have noted the impressive
growth figures racked up by Chinese industry. In mid-
March, Pravda, for example, recited China's official
figures for 1985 output, productivity, and average
worker's income, and noted that "(plan) targets were
mainly fulfilled or overfulfilled." Outspoken support-
ers of the Chinese reforms, such as journalist Fedor
Burlatskiy, have published enthusiastic reports on the
booming economy and the happier and more prosper-
ous Chinese population
Usually, however, Soviet commentary focuses on in-
flation, unemployment, graft, and the other "negative
phenomena" produced by Beijing's sweeping econom-
ic reform drive. Widening income disparities have
figured particularly prominently in Moscow's apprais-
als. The Soviets have also noted the economic costs of
China's pursuit of rapid growth. An article in Ekono-
micheskaia Gazeta in June criticized the "poor quali-.
ty of output, low economic efficiency, and recurrences
of disproportionate pursuit of higher growth rates and
expansion of the scale of capital construction to the
detriment of improved structure of production and
with no consideration for society's financial and mate-
rial potential." The Gorbachev regime, which is itself
intent on boosting growth, may see particularly dis-
turbing lessons in this aspect of China's recent experi-
ence with reform.
In appraising the Chinese scene in their media, the
Soviets employ the familiar tactic of quoting indige-
nous critics rather than expressing criticism them-
selves. Last September, for example, TASS was able
to cite Deng as well as Chen Yun, a critic of the
reforms whose outspoken comments on Beijing's poli-
cies the Soviets often quote: "Deng Xiaoping in his
speech noted `phenomena of bourgeois liberalization,
degradation, and decay,' which appeared as a result of
the abuses that came in the wake of economic re-
forms. Chen Yun in his speech noted the spreading
`harmful craze which undermines the party's
prestige.' "The Chinese leadership's willingness to
permit open debate on economic and ideological issues
provides Soviet critics with much grist for their mill.
The private views of Soviet officials, economists, and
scholars on the Chinese reforms cover a far broader
range than those presented in the media. Some ex-
perts echo the economic, political, and ideological
concerns expressed in the press. A senior researcher at
the USA Institute told US Embassy officials last
November that China's attempt to find a middle road
between the "two extremes"-that of central plan-
ning, as exemplified by the Soviet economy, and the
free play of market forces as in the United States-
was doomed to failure and that Beijing ultimately
would have to choose one or the other. Shortly after
his appointment in July 1985, the new director of the
Academy of Sciences Far East Institute (IFE) told a
visiting US official that China's new economic poli-
cies were promoting social instability and discontent.
Other Soviet observers, however, have been more
enthusiastic about the profound changes taking place
in China, and some have been openly hopeful that the
Soviet leadership may be inspired to undertake simi-
larly broad reforms. In early February, the head of
the Far Eastern Department of the Institute on
Scientific Information in the Social Sciences told a
visiting US sinologist that the Chinese economic
reforms were "reasonable and healthy," and IFE
scholars assured the same visitor that an abiding
commitment to socialism underlay the reforms.
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In the period just after the October 1984 Chinese
party plenum,
Moscow was studying the new reform measures with
an eye to their possible application to Soviet economic
problems. The Soviets have evinced particular interest
in Beijing's alleged success in gaining access to West-
ern technology. Soviet discussions with the Japanese
in the spring of 1986 about possible joint ventures
and-according to Chinese media-hints at Soviet
willingness to establish free trade "special economic
zones" may, in part, have been inspired by well-
publicized Chinese efforts in these areas.
the scope, speed, and nature of the changes in Chi-
na-the world's most populous Communist state-
and the attention given these changes by foreign
media must make Beijing's reforms appear a more
formidable challenge to their own economic model
and to their role as the leading Communist state than
Hungary's struggling 20-year-old reform program.
The possibility that the Chinese could make a great
success of their experiment, not only discrediting
Moscow's more measured approach but also building
up even more formidable economic and military
strength and moving closer to the West, almost
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Most Soviet experts willing to discuss the applicability
of China's reforms to the Soviet economy, however,
have discounted the prospect of Soviet emulation of
China, stressing the gulf between the two countries'
respective levels of economic development.
Cultural and historical differences make it even less
likely that the Soviets would be willing or able to
follow the Chinese path. A prominent Soviet journal-
ist told US Embassy officials shortly after Gorba-
chev's accession that the type of reforms introduced
by Beijing was possible only because China was a
"relatively new socialist country." The political impli-
cations of China's "mad rush into an unmanageable
economic mishmash," as one Soviet sinologist has
described it, are also disturbing to the Soviets
The Soviets clearly are unwilling to make the psycho-
logical leap of according China's reformed economy
the status of a "model" that they or other Communist
countries might emulate. From the Soviets' viewpoint,
certainly is disquieting to the Soviets.
High-Level Praise for the East German System
Since Gorbachev's election as General Secretary, the
Soviet attitude toward East Germany's management
and planning system and its industrial performance
has been one of unqualified approval and encourage-
ment. Gorbachev himself has publicly praised the
East Germans' management of their economy (see
inset).
In addition, the Soviets have provided the East Ger-
man leadership with a forum in which to sing its own
praises. In October 1985, for example, Honecker
expatiated in Pravda on his country's economic per-
formance in an article so lengthy and detailed it
appeared that the Soviets were holding up East
Germany as an example to other socialist countries.
More recently, on the eve of the CPSU party con-
gress, Politburo member and Party Secretary for
Economics Mittag was permitted to hold forth at
equal length on East German economic success in an
article in Izvestiya. Honecker also delivered a speech
to the Soviet party congress that emphasized the
accomplishments of East German industry.
Much Soviet commentary on the East German econo-
my, like statements by the East Germans themselves,
credits the combine system with "rationalizing pro-
duction" and generally improving industrial perfor-
mance. In April 1985 in Izvestiya, Otto Latsis, an
economist at the institute International Economy of
the World Socialist System, called for increased
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Mikhail Gorbachev on the East German Economy
In 1966 I went with a party delegation to the GDR to
study the experience of work on the party bodies'
management of economic reform. I was greatly im-
pressed by what our friends had accomplished even
then (emphasis added). In all the main directions of
their output, they determined where-in what coun-
try-the highest indices and the best quality were,
and they set themselves the task of surpassing them-
and in productivity, too-in order to become more
cheaply competitive, but-and this is the main
thing~n reliability and quality of articles as well.
You know, this set everything in motion. Each factory
and each association should know the indices and the
achievements for their products in the advanced
countries.
Speech in Leningrad to Party aktiv,
17 May 1985
Many people remember that at one time, when the
[Soviet] associations were being organized, instruc-
tions were given that they should be set up on the
basis of enterprises, irrespective of the departments
and territorial units to which these belonged. But, in
fact, associations were created not even within the
framework of ministries for particular industries, but
within the framework of all-union production associa-
tions. Under limited conditions like those, naturally it
was not possible to form a rational and effective
network of associations. Now the formation of
interindustry associations must be supported in every
way. This is a promising thing, as is shown by the
experience of the fraternal countries, and first and
foremost that of the GDR.
Address to Conference on Scientific
and Technological Progress,
11 June 1985
It is with close attention that (the Soviet people) have
listened to the SED Central Committee's progress
report delivered by Comrade Erich Honecker and
familiarized ourselves with directives on the plan for
the GDR's national economic development in 1986
through 1990. They are convincing evidence that the
cause of socialism on German soil is making confident
headway. Your plans are challenging but realistic
because they are based on the tangible results
achieved both throughout the history of this republic
and over recent years. Intensive methods have made it
possible to ensure a steady pace of national economic
advancement. Your experience of merging science
with production, making rational use of material and
manpower resources, and applying the achievements
of scientific and technological progress deserves wide
praise.
Address to East German Communist
Party (SED) Congress, 18 April 1986
power for production associations (organized groups of
enterprises analogous but not identical to the East
German combines), citing the success of such organi-
zations in East Germany and elsewhere in Eastern
Europe. An article in the September 1985 issue of the
Soviet trade union journal described the combine
system as "a dialectical unity of independent econom-
ic enterprises and centralized planned management."
The Soviets have openly discussed the combine system
as a model for Soviet industry. In two articles in late
summer 1985, Gorbachev's reported economic advis-
er, Abel Aganbegyan, advocated the regrouping of
enterprises into large new "science and production
associations" explicitly modeled on East German
combines. The Politburo in mid-December did, in
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ture and functions remain unclear.
fact, announce the formation of interbranch science
and technology complexes, but their ultimate struc-
In early January, Pravda noted East Germany's
success in "improving production relations," not only
by means of the combines, but also through the set of
supplementary economic indicators introduced in ear-
ly 1984: net output, output of consumer goods and
services, output of goods for export, and net profits.
Soviet commentary has also focused on East
Germany's ability to reduce its use of energy and raw
materials. Overall, Soviet media find East Germany a
"highly, dynamically developed economy which is
constantly augmenting its economic potential."~
any political costs.
The Soviets' concern about the possible loss of politi-
cal control through economic reform-apparent in
Moscow's attitude toward Hungary and China-is no
doubt one of the reasons the East German "model" is
so appealing. The fact that centralization has not only
been reaffirmed but also strengthened by East Ber-
lin's efforts to streamline and improve its economic
management mechanism probably gives Moscow hope
that it can achieve the same results without paying
Soviet counterparts.
In private discussion of the East German approach to
industrial management, Soviet economists have ech-
oed Moscow's public praise and described East Ber-
lin's methods as having applicability to the Soviet
economy. Still, although full of praise for the East
German system and willing to speculate about the
.adaptation of certain East German methods, many
Soviet economists and other academics have ex-
pressed skepticism about the success of a total trans-
figuration of the Soviet economic system along East
German lines. Most of this pessimism has focused on
the respective levels of skill, dedication, and individual
enterprise of German workers and managers and their
Prospects and Implications
In light of such expressions of skepticism-and the
even stronger Soviet reservations about the applicabil-
ity of the Hungarian and Chinese reform programs to
the USSR-the Soviet Union is unlikely to opt for the
wholesale adoption of any other country's approach to
the improvement of its industrial management and
planning system. As a Soviet commentator recently
told a Hungarian television audience, the Soviets
"intend to solve their own problems starting out from
their own experiences."
Still, as the same commentator also suggested, the
Soviets evidently see merit in what might be termed a
"smorgasbord" approach to reform: borrowing and
adapting specific measures to address specific eco-
nomic problems, rather than adopting a new economic
system wholesale. To judge from what Gorbachev
himself has said, the foreign socialist management
innovation that the Soviets are most likely to emulate
is the East German system of industrial combines.
Less authoritative Soviet commentary also suggests
that Moscow might imitate Hungary's and China's
moves to strengthen the financial independence of
industrial enterprises and to promote industrial joint
ventures with Western firms. In each of these cases,
however, it is doubtful that the Soviets would be able
or inclined to reproduce the conditions that have
contributed to whatever success these measures have
enjoyed in East Germany, Hungary, and China.
Even if East Germany's industrial management struc-
ture could be duplicated in the USSR, for example,
the great difference in size between the Soviet and
East German economies could prevent replication of
some of the more successful elements of the combine
system. One important means by which the East
German leadership ensures the effective functioning
of the two-tier, ministry-combine structure is semian-
nual meetings in East Berlin with all the combine
directors in the country. An equivalent convention in
the Soviet Union would be so huge that it would be
unmanageable. The Soviet leadership would have to
fall back on its traditional methods of addressing
large gatherings and disseminating written directives,
which preclude the very sort of input from below that
distinguishes the East German system.
Another likely constraint on Soviet success with the 25X1
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from the unique matrix of political expectations,
social aspirations, and cultural predilections in which
they developed, East German economic methods
could have unpredictable results or wither entirely.
The Soviets could theoretically improve the basic
education of their work force and establish an appren-
ticeship system to train it more thoroughly, as the
East Germans have done. They could also, as seems
likely, press forward with their "human factor" cam-
paign. But the question remains whether they could
make workers less corrupt, better disciplined ...more
Soviet efforts to strengthen the financial indepen-
dence of industrial enterprises along Hungarian and
Chinese lines would also be likely to encounter prob-
lems. To judge from
accounts in the open press, Soviet officials and econo-
mists have been favorably impressed with the positive
impact that enhancing enterprise financial indepen-
dence has had on industrial performance in Hungary
and China alike. The Soviets have had particular
praise for Budapest's success in reducing wasteful use
of equipment, labor, and materials by requiring indus-
trial enterprises and scientific research institutes to
finance their own operations and a portion of their
investment and allowing them to retain much of what
they save from economizing on resources.
At the same time, the Soviets have expressed reluc-
tance to accompany such an expansion of enterprise
responsibilities with an expansion of enterprise rights
in such areas as the setting of prices and the firing of
unneeded personnel-moves that are an important
part of Hungarian-style self-financing. The Soviets'
reluctance to do so is understandable, for such moves
run the risk of contributing to inflation and unemploy-
ment. Still, in the absence of such accompanying
measures, Soviet emulation of Hungarian efforts to
enhance enterprise independence from central plan-
ners would be unlikely to yield comparable resource
savings.
Similar problems would cloud the prospects for Soviet
emulation of China's mixed experience with special
economic zones (see inset) and joint ventures between
its industrial enterprises and Western firms. Soviet
leaders recognize the potential benefits for the Soviet
Union in the implementation of such ventures, and
feelers have been put out to some Western firms.
Moscow almost certainly would find the prospect of
direct legal access to Western technology and exper-
tise appealing. It is highly unlikely, however, that the
Soviets would be willing to concede to potential
Western partners the rights and status they enjoy in
joint ventures with the Chinese.
loath to cede any control over the operations of an
enterprise on Soviet soil.
The Soviets' obvious preference for the East German
approach mirrors the caution reflected in the mea-
sures so far adopted at home. Gorbachev and compa-
ny apparently believe that more can be done with the
current Soviet system.
The boldness Gorbachev has shown in changing the
style of leadership, opening up cultural expression,
making personnel changes, and putting forward new
foreign policy initiatives, however, suggests that he
will aggressively look for ways to. improve Soviet
economic performance. He is pushing his managers to
accept more responsibility, exercise initiative, and
innovate-features of the reform efforts in the three
Communist countries examined. Given the cultural
and systemic differences between the Soviet. Union
and its Communist neighbors, the experience of the
other three Communist countries will probably be no
more than instructive; the answers to Soviet economic
problems will probably
socialist development.
,dome from within. Still, the
successes achieved in these other Communist states in
promoting growth, increasing productivity, improving
quality, and pushing technological modernization will
bolster the argument of those in the USSR who favor
change and will push the leadership to find solutions
that put the Soviet Union again in the forefront of
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China's jour special economic zones (SEZs) were
established in 1979 as the.flagships of Deng Xiao-
ping spolicy of "opening to the outside. " By far the
largest ojthe SEZs is Shenzhen, initially a small
fishing village bordering Hong Kong that has grown
in the past six years into a city of more than 250,000
residents.
The SEZs were designed to act as "windows"
through which the Chinese could study advanced
Western production technology and management
methods, while keeping out undesirable aspects of
Western culture. More than simple export processing
zones, the SEZs are cities with special administrative
status in which the Chinese allow a hybrid of capital-
ist and socialist systems to exist. The Chinese expect-
ed to attract investment in the SEZs by Western
manufacturers through a combination of tax breaks,
reduced redtape, and modern infrastructure. After an
initial period of Chinese investment in infrastructure,
the SEZs were to generate foreign exchange for the
Chinese by catering to the export market.
Mounting problems, however, forced Deng to publicly
admit in early 1985 that the SEZs had not yet turned
out the way he had hoped:
? Despite great expenditures to develop infrastruc-
ture, the SEZs have attracted little Western manu-
facturinginvestment. China's hopes of gaining ac-
cess to Western production technology through the
SEZs have remained largely urtfuUilled, outside of
a few showcase projects.
? Instead of generating foreign exchange, the SEZs
have become net drains on China'sloreign exchange
reserves: in 1984, roughly two-thirds of Shenzhen's
production was being sold in China's domestic
market.
? The zones have become centers for black-market
currency speculation, smuggling, and otherforms of
corruption, much of it carried on by Chinese
o.~cials.
Problems with the SEZs have provided a rallying
point for critics of Deng s "opening to the outside. "
Some Chinese o,~cials have used these problems to
express their discontent over the inequities of China's
recent foreign trade policies and have charged that
Beijing has lost control over foreign trade by granting
too much trade autonomy to localities. Deng himself
withdrew his wholehearted support from the SEZs.
China will not abandon the SEZs, but the zones no
longer enjoy the privileged status of a few years ago.
State fundingfor zone development has been frozen
or cut back, and plans to develop export processing
zones in 14 coastal cities have been scaled down. SEZ
leaders are under the gun to produce concrete results
in developing exports, controlling corruption, and
attracting the right kind ojjoreign investment. Al-
though SEZ leaders are claiming improved results in
developing exports and attracting investment, the
zones face tough going as these leaders attempt to
justlfY Beijing's input of both funds and political
support.
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